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EQUITABLEGROWTH,FINANCE&INSTITUTIONSNOTES

InsolvencyofMobileMoneyFirmsinDevelopingCountriesOverviewforPolicyMakers

AndresF.Martinez,WillPaterson,and

JonathanGreenacre

©2023InternationalBankforReconstructionandDevelopment/TheWorldBank1818HStreetNW,WashingtonDC20433

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Acknowledgments

ThisnotewasauthoredbyAndresF.Martinez,WillPaterson(Finance,

CompetitivenessandInnovationGlobalPractice,WorldBankGroup),and

JonathanGreenacre(BostonUniversity).Theauthorsthankthosewhoprovided

comments,inparticular:HoltiBanka,HarishNatarajan,AhmedTawfikRostom,

MatthewSaalandGynediSrinivas(WorldBankGroup);StefanStaschenand

PatrickMeagher(CGAP);TeresaRodriguezdelasHerasBallell(Universidad

CarlosIIIdeMadrid);andtheFCIGlobalInsolvency&DebtResolutionTeam.

TheauthorsarealsogratefultoWorldBankcolleaguesJeanPesme(Global

Director,Finance),MaheshUttamchandani(formerPracticeManager,EFNFI)

andNirajVerma(actingPracticeManager,EFNFI)fortheirguidance.

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Contents

Acknowledgments3

Overview5

Addressinsolvencyintheregulationofmobilemoneytoprotect

5

usersandtheeconomy

1.TheTreatmentofMobileMoneyFirmsinDomestic7

InsolvencyFrameworks

2.MajorRiskstoFundsasaResultofInsolvency10

2.1LossofValueRisk10

2.2IlliquidityRisk11

3.MitigationTools12

3

.1TrustModel12

3.2Custodian13

3

.3SpecializedRegimes14

4.

Conclusion15

Appendix

16

Endnotes

18

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Overview

InsolvencyofMobileMoneyFirmsin

DevelopingCountries

ThisNoteprovidesanoverviewofthechallengespolicymakersmayencounterwhenamobilemoneyfirmbecomesinsolvent.Suchfirmswouldlikelybesubjecttocorporateinsolvencylaws.Existingmitigationtoolsmeanttosafeguardcustomers’fundsmayfacelegalandlogisticalproblemsunlesstheyarecoordinatedwiththecountry’sstandardinsolvencysystem.Customersmaylosefundsand/ornothavequickaccesstothem.TheNotealsohighlightsseveralareasrequiringfurtherresearch.

Addressinsolvencyintheregulationofmobilemoneytoprotectusersandtheeconomy

E-moneyservices1havebecomeincreasinglypopular,particularlyindevelopingcountries.Theseservices,offeredbyprovidersotherthantraditionalbanks,enablecustomerstodeposit,store,transfervalue,and,insomecases,converte-moneybackintocash.Akeye-moneyserviceismobilemoney.2ForthepurposesofthisNote,thetermmobilemoneyreferstoanelectronicpay-mentservice,providedbynonbankentities,thatenablespeopletodeposit,store,transfer,andwithdrawelectronicfundsbackintocash.3Thetermmobilemoneyfirmreferstofirmsprovid-ingmobilemoney.Dependingontheregulatoryframework,thesefirmsincludemobilenetworkoperators(MNO),subsidiariesofMNOs,andfirmsunrelatedtoanMNO.Firstlaunchedin2004,mobilemoneyaccountsnownumberoveronebillionin95developingcountriesandprocessacombinedUS$2billionintransactionsdaily.TheCOVID-19pandemicacceleratedtheuseofmobilemoneyandothere-moneyservices,asmanycountriesloweredtransactioncostsandincreasedlimitstoincentivizecontactlesstransactions.

Mobilemoneyhasgreatlybenefittedmillionsofpeopleindevelopingcountries.Theservicehasbeenespeciallyimpactfulwherecustomershavelessaccesstotraditionalbankaccountsandmobilephonepenetrationishigh,providinguserswithanalternativewaytostore,transfer,andpaywithmobilemoney.Atthesametime,therapidgrowthofmobilemoneyraisessomeregula-

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toryconcerns.Theserviceisbeneficialaslongascustomerscanquicklyandreadilyaccesstheirfunds.Butwhatifamobilemoneyfirmbecomesinsolvent?Willcustomersstillbeabletousefundsduringthefirm’sinsolvencyprocess?Dotheyrisklosingfunds?

ThisNoteprovidesanoverviewforpolicymakersoftherisksofnothavingrobustmechanismsinplacetodealwithmo-bilemoneyfirminsolvency.Abroadperceptioninthemarketisthatmostoftherisksassociatedwithsuchinsolvenciesaremitigatedbyregulatorymeasures,knownasfundsafeguard-ingrules,imposedtoprotectfundsprovidedbycustomers(“funds”).Thecloseranalysisprovidedhereshowsthatacoun-try’spolicymakersmayconcludethatcurrentriskmitigationarrangementsmaybeinadequate,especiallywhenevaluatedinthecontextofthenationalcorporateinsolvencysystemsun-derwhichthesearrangementswouldbeactivated.ThisNotefocusessolelyoncorporateinsolvencyissuesrelatedtomobilemoneyfirms;itdoesnotanalyzeotherrelevantareas,suchasfinancialsupervision,severalofwhicharealsoimportantandcouldbethesubjectofaseparatestudy.

Inmostcountries,nospecificlawsorregulationsaddresstheinsolvencyofamobilemoneyfirm.Bydefault,then,ifthesecompaniesbecomefinanciallydistressed,theirinsolvencies(includingpossiblereorganizationofviablefirmsandliquida-tionoffirmsthatcannotbesaved)wouldfallunderthedomes-ticcorporateinsolvencylawofthecountryinwhichthemo-bilemoneyfirmisincorporated.4Critically,therefore,foreachcountryinwhichmobilemoneyfirmsoperate,theinsolvencyrulesmaynotfullyrecognizetheassetsegregationoffundsafeguardingrulesnorgiveprioritytomobilemoneyaccountholdersrelativetootherliabilities.Thiscouldresultinalossofvalueandlossofliquiditytotheaccountholders.

TherecentinsolvencyoftheBritishe-moneyfirmIpagooinwhichUnitedKingdomelectronicmoneyregulationswereputtothetest(exploredfurtherbelow)illustratesthis.Domesticcourtsaddressingtheinsolvencyprovidedguidanceonfundsafeguardingrules,findingthatcertainprotectionstheregula-

torsaidwereinplacewerenotproperlyconstituted.5Shortlyafterthiscase,theUKestablishedspecificregulationsad-dressingtheinsolvencyofe-moneyfirms.

Inadevelopingcountrywheremobilemoneyplaysacriticalroleinservicinglow-incomepopulations,theinsolvencyofane-moneyfirmlikeIpagoocouldcauselossordelayinaccesstofundsforthosewhoneedthemthemost.Inseverecases,suchaninsolvencycoulddamagethecredibilityofthemobilemoneysystemandtheeconomymorebroadly.Whilewearenotawareofamobilemoneyfirminsolvencyinadevelopingcountry,itisimportantforpolicymakerstoputinplace,review,and,wherenecessary,strengthenfundsafeguardingframe-worksthatensureadequatecoordinationwithapplicablein-solvencyrules.Ideally,policymakersshouldreviewfundsafe-guardingrulesbeforeamobilemoneyfirmbecomesinsolvent.Waitinguntilaninsolvencyoccurswouldlikelycompoundlossanddisruptionforcustomers.Thisisbecausetheremaybeanextensivedelaywhilecourtsandotheractorsclarifywhatpro-tectionsareavailableandhoweffectivelytheyoperate.

Severaltoolscommonlyusedtoprotectfundscanserveasstartingpointsforanalyzingtheeffectivenessofacountry’sfundsafeguardingframework.SeetheAppendixforalistofquestionspolicymakerscanusetobeginthereviewprocess.ThisNotedoesnotproviderecommendationsonwhichtoolstouse,nordoesitexhaustivelycoveralltheissuesthatmayarisefollowingtheinsolvencyofamobilemoneyfirm.Further-more,apolicymakershouldconsiderthespecificoperational,regulatory,andlegalcontextofthecountrywhenexaminingtheproblemsraisedbelow.ThekeyissuesintroducedbythisNoteare:

1.Theimportanceofreviewingthetreatmentofmobilemoneyfirmsunderacountry’sinsolvencyframework;

2.Majorriskstofunds;and

3.Keymitigationtoolstosafeguardfundsandthepossiblelimitationsofthesetoolsvis-à-visthecorporateinsolvencysystem.

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TheTreatmentofMobileMoneyFirmsinDomesticInsolvency

Frameworks

Akeyregulatorydifferencebetweenbankingandmobilemoneyistheinsolvencyregimetowhicheachissubject.Theseusuallybreakdownasfollows:

•Banksaresubjecttospecialresolutiontoolsthatmaintainaccesstoservicesduringtimesoffinancialdistressandprovideaspecialregimeforcustomers.

•Mobilemoneyfirmsaresubjecttoacountry’sregularcorporateinsolvencyregime.

1.

Giventhatthemobilemoneyindustryisrelativelynew,mostcorporateinsolvencylaws6donotcontainspecificprovisionsregardingtheinsolvencyofamobilemoneyfirm.Mobilemoneyfirmsareuniqueamongnon-bankbusinessesinthattheyreceiveconsiderableamountsoffundspro-videdbycustomerswhothenrelyonthefirmstoprovidefunctionalitytocompleteday-to-daytransactionsthroughservicessimilarinmanywaystothoseprovidedbythebankingindustry.Likefundsheldinabank,apersoncandeposit,store,transfer,and,insomecases,withdrawcashfromtheirmobilemoneyaccount;insomeinstances,mobilemoneyaccountspayinterest.7How-ever,whilebankshavespecializedinsolvencyresolutionregimestoaddressthespecificneedsofdepositors,mostmobilemoneyfirmswouldcomeundergeneralinsolvencylawsthatdonotgivespecialstatustoaccountholderssimilartothatgiventobankdepositors.Mobilemoneyaccountholdersarelikelytobeclassifiedasunsecuredcreditors(despitetheissuer’smobilemoneyaccountnominallybeingbackedbycashorsecurities),unlessstructurestosafeguardfundsexistandareenforceableunderthegeneralbankruptcylaw.Forthesereasons,itisimportantthatregulatorsproperlyunderstandthedynamicbetweentheircountry’scorporateinsolvencysystemandwhatevermechanismsareinplacetomitigatethenegativeimpactsoncustomerscausedbytheinsolvencyofamobilemoneyfirm.

Despitethesimilaritiesnoted,banksandmobilemoneyfirmsareregulateddifferently,8includingwithrespecttotheapplicableinsolvencyregime.Inmostcountries,defaultofabankistreatedconsiderablydifferentlythandefaultofamobilemoneyfirm.Banksareusuallysubjecttoarangeofemergencyregulatorytoolsthatexemptthemfromthecorporateinsolvencylaw.9Suchtools

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usuallyincludeacombinationofdepositguaranteeschemes,emergencyliquidityassistancefacilities,andspecialresolu-tionregimes.

Whiletodatenomajormobilemoneyfirmhasbecomeinsol-vent,firmsprovidingothere-moneyserviceshavefailed,dem-onstratingtheimportanceofclarifyingfundsafeguardingrules.Onesuche-moneyfirmisIpagooLLP(“Ipagoo”),thesubjectoftherecentEnglandandWalesCourtofAppealcase10ReIpagooLLP(InAdministration)(2022)EWCACiv302,inwhichthefundsafeguardingrulesapplicabletoe-moneywereputtothetest.Thecasehighlightedakeylesson:ifane-moneyfirmfails,anditisnotsubjecttobankregulation,itwilllikelybesub-jecttoacountry’sregularcorporateinsolvencylaw,exposingcustomers’fundstoarangeofrisks.

InAugust2019,Ipagoobecameinsolventandwentintoad-ministration.11TheUKElectronicMoneyRegulations(2011)(“EMRs”),whichimplementedtheEuropeanUnionElectronicMoneyDirective,requiredIpagootosafeguardthefundspro-videdbycustomers.ItwasnotpossiblefortheAdministratorstodeterminewhetherthefundswereproperlysafeguarded,andIpagoowaslikelyinseriousnon-compliancewiththeEMRs.12OnceIpagoobecameinsolvent,it,likeothere-moneyproviders,wassubjecttotheUK’sregularcorporateinsol-vencyregime.TheAdministratorsofIpagooaskedtheCourtforguidanceonhowtodistributethefundsandwhethertheEMRscreatedastatutorytrustthatwouldsegregatethefundsprovidedbycustomersfromotherassetsofthecompany.OneofthekeyissuesfortheCourttodecidewaswhethertheEMRs’insolvencyprovision13wouldbeapplicable,ratherthantheregularcreditorpaymentprioritiesestablishedbythecorporateinsolvencylaw.Ultimately,reviewsatthetrial-andappeals-courtlevelswererequiredtoclarifythepreciseop-erationoffundsafeguardingrules,causingatwo-yeardelaybetweenIpagoo’sinsolvencyandthefinaldecisionregardingdistributionoffundstocustomers.14

TheIpagoocasealsoinvolvedtwoEuropeanUnion(EU)di-rectivesrelatedtoe-money:ElectronicMoneyDirective(EMD)(2009/110/EC)andtheSecondPaymentServicesDirective(PSD2)(2015/2366/EU).AswithallEUDirectives,thesepro-visionshadnotimmediatelybeenmadepartofthedomesticlegislationofthemembercountries:eachmembercountryisrequiredtotransposethemtonationallegislation.Thee-moneyDirectivesrequiredEUMemberStatestoestablishna-

tionallegislationtosafeguardfunds,includingprovisionsthatthefundsnotbecommingledwithotherfundsprovidedbye-moneyusers.Further,thatthefunds“shallbeinsulated...againsttheclaimsofothercreditorsofthepaymentinstitu-tion,inparticularintheeventofinsolvency.”15UltimatelyintheIpagoocase,theEMRswere“construedasameanschosentoimplementtheinsulationprovisions.”16TheCourtfoundthattheEMRsandtheEUDirectivesprovidethate-moneyholdersaregrantedrightsinprioritytoothercreditors;e-moneyhold-ersare“intendedtostandapartfromthenormalinsolvencyregimeandshouldonlybearthecostsassociatedwithdis-tributingit.”17Further,eventhoughnotnecessaryforthefinaldecision,theCourtfoundthattheinsolvencyprovisionsintheEMRs,giventheirstatusoftransposinganEUDirective,18couldhavethepotentialtochangetheprioritiesinthecorporateinsolvencylaw.19Akeyconclusionfromthecaseisimportanttohighlight:theapplicationoftheEUruleshadtheultimateeffectofprotectingcustomerswhoprovidedthefunds.HadtheEUlegislationnotbeenapplicabletotheIpagoocase,thesolutionwouldhavebeendifferent.Itislikelythattheprovisionscon-tainedintheUK’sEMRwouldhavebeeninsufficienttoensurethatthefundsweresufficientlyprotectedinthecasethatIpa-goodidnotmeettherequirementtosegregatethosefunds—whichiswhathappenedinpractice.

SinceIpagoowentinsolvent,theUKhastriedtofixthisproblembyintroducingnewregulationsforthisindustry:aninsolvencyprocedure(called“specialadministration”)forpaymentinstitu-tionsandforelectronicmoneyinstitutions,whichisdiscussedbelow.20Manyothercountries,particularlyinthedevelopingworld,havenotintroducedspecializedinsolvencyregimesformobilemoneyfirmsorupdatedtheirbasicfundsafeguardingrules.Thiscouldputfundsatrisk.Forexample,KenyaandTan-zania,twocountrieswithmajormobilemoneysectors,havenotamendedtheirfundsafeguardingrulessince2014and2015respectively,despitesignificantgrowthofthisserviceanditsimportancetothecountries’economies.21AlthoughbothKenyaandTanzaniahavearangeofprotectionsagainstlossofvalueandilliquidity,asexplainedbelow,itisunclearhowsometoolswilloperateinpractice,suchasacceleratedfundsdispersal.

Forseveralreasons,inadequatefundsafeguardingruleswouldlikelycreatemoreseriousproblemsindevelopingcoun-triesthantheIpagooinsolvencycreatedintheUK.First,mo-bilemoney,byenablingpeopletouseitasaformofsavings,hasawiderfunctionalitythanIpagoo’sservice.Further,mobile

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moneyservicesnormallyhaveanetworkofagents,whichen-ableuserstoconvertmobilemoneyintocashwithouthavingatraditionalbankaccount.InSub-SaharanAfrica,15percentofadultshaveusedamobilemoneyaccounttosave.22Thisisbe-causesomemobilemoneyservicesenablecustomerstostorefundsintheiraccountsandeventoobtaininterest.23Thiscouldmeanthattheinsolvencyofamobilemoneyfirmcancausepeopleinthesecountriestoloseaportionoftheirlonger-termsavingsinadditiontotheirtransactionfunds.

Second,inmanydevelopingcountries,regulatoryandlegalframeworksforinsolvency,andtheirimplementation,oftenfailtocomplywithexistinggoodinternationalpractices,suchasthosesetoutintheWorldBankPrinciplesforEffectiveInsol-vencyandCreditor/DebtorRegimes.24Thismeansitisevenmoredifficultforpolicymakerstopredicthowacourtandre-latedbodieswillresolveafailingmobilemoneyfirm.Inturn,thismeansitisdifficulttopredicthowfundsafeguardingruleswilloperate,particularlyregardingtheextenttowhichtherulesprotectfunds.Evenincountrieswheretheinsolvencysystemworkswell,issuesmayariserelatedtotrustlaworthewaythat

thespecifictrust(orfund-separatingmechanism)hasbeenestablished.25

Third,mobilemoneyplaysamoresignificantroleintheecono-miesofmanydevelopingcountriesthaninthoseofdevelopedcountries,tothepointthattheservicemayrepresentaformof“systemicrisk.”Thismeansthatfailureofoneormoremobilemoneyfirmsmaysignificantlydamagethefinancialandwidereconomicsystemofadevelopingcountry.Forexample,by2014,M-Pesaprocessed66.56percentofthevolumeofna-tionalpaymentsinKenya.Collapseofthisservicewouldthere-forehaveacomparativelybiggerimpactinKenyathanitwouldinjurisdictionswheremobilemoneyislesswidelyused.Whilenomobilemoneyfirminadevelopingcountryhasbecomeinsolvent,occasionalshort-termoutagesofe-moneyservices(rangingindurationfromonetotwohourstothreetofourdays)haveoccurredinseveralcountries,andeachoftheseoutagesimposedsignificantcostsontheaffectedcommunities.Theextentofsuchcostssuggeststhattheinsolvencyofamajormobilemoneyfirm,whichmightcauseadisruptionofsever-alyears,couldbeseriouslydamagingtolocaleconomies.26

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MajorRiskstoFundsasaResultofInsolvency

2.

Acountry’scorporateinsolvencyregimecanexposefundsprovidedbycustomerstotwotypesofrisk:lossofvalueandilliquidity.27Theserisksdependonhowthedomesticlegalframeworkclas-sifiesthecustomerswhoprovidedthosefunds,particularlywhethertheyaretreatedascreditorsoftheinsolventdebtororremain“outside”thecorporateinsolvencyproceeding.Thisclassifica-tionwilldependonarangeofdomesticfactors.28However,withoutanyregulatorymechanismsinplacethatdealwiththesecreditorsspecifically,itislikelythatmobilemoneycustomerswillbeclassifiedasunsecuredcreditors.29Theextenttowhichtheinsolvencyregimecomplieswithgoodinternationalpracticesalsoimpactsthescaleoftheserisks.30

Manycountrieshaveimplementedmitigationtools(analyzedinSection3below)designedtoad-dresssomeoftherisks.Thediscussioninthissectionfocusesonthepossibledifficultiesthattheapplicationofthecorporateinsolvencylawcouldgenerateintheabsenceofanymechanismtosafeguardthefundsprovidedbycustomers.

2.1LossofValueRisk

Themostlikelyscenario,intheabsenceofspecificrulestopreventit,isthatcustomersthatpro-videdfundstothedebtorwillbetreatedasunsecuredcreditors.Inmostcountries,insolvencylawcontainsprovisionsgivingunsecuredcreditorsashareinanydistributionofthedebtor’sassetsonaproratabasis,afterdistributiontosecuredcreditorsandotherprioritycreditors.Thiscreateslossofvalueriskbecausesuchunsecuredcreditorsfaceapotentialwrite-downinthevalueoftheirfundsduringinsolvencyproceedings.31

Customersholdingmobilemoneyhave‘purchased’thosebalancesbyprovidingfunds,usuallyviasomecash-inmechanism(agentnetwork,banktransfer,etc.).Themobilemoneyissuerissupposed(incertainlegalsystems)toholdthosefundsinadedicatedbankortrustaccount,matchingsoundassetsinthecompany’strustaccountagainstthecustomerliabilityrepresentedbythemobilemoneybalanceincustomeraccounts.However,evenwherethemobilemoneyac-countisbackedbyassetsheldinabankorinvestmentaccount,unlessthatassetandthepairedmobilemoneyliabilitytocustomersissegregatedorsetasidefromtheoverallbankruptcyestate,inaliquidationscenario,someorallthefundsprovidedbycustomers,maybecomepartofthein-

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solvencyestate.Ifthemobilemoneybalancesandtheassetsbackingthemarecommingledwithotherliabilitiesandassetsofthecompany,theavailableassetsmaybeusedtorepaydebtsowedbythemobilemoneyfirmtothirdparties,includingsecuredcreditors.Sinceinmanyinsolvencyproceedingsthetotalliabilitiesexceedtotalavailableassets,therewouldnotbeenoughassetstorepaymobilemoneyholdersinfull.

Professionalandotherfeesthatcustomersincurinmakingtheirclaims,aswellastheusuallysubstantialexpensesofinsolvencyproceedings,mayalsoreducethevalueoffundsultimatelyavailabletocustomersinaliquidation.

InEastAsiaandPacificcountries,forexample,theaveragecostofaninsolvencyis20.6percentofthedebtor’sestate.32Delaysindistributionmayalsomeanthatassetsdepreciate,leavinglessavailableforcollectivedistribution.Theaveragere-coveryrateforsecuredcreditorsinsub-SaharanAfricais20.5

centsoneverydollarrecoveredduringinsolvencyproceed-ings.33Thismeanscustomers,whenclassifiedasunsecuredcreditors,wouldbelikelytorecoverlittle,ifany,oftheirfunds.34

2.2IlliquidityRisk

Customersalsofacedelaysinreceivingtheirfundsbecauseofthetimeittakestoconcludeinsolvencyproceedings.Inmostdevelopingcountries,corporateinsolvencyprocedures,unlikebankresolutionframeworks,takeyearstocomplete.Illiquidityriskarisesbecausemostcorporateinsolvencyregimescon-

tainarulesuspendingenforcementactionagainstassetsheldbythedebtorwhileinsolvencyproceedingstakeplace.Thesuspensionprovidespartieswithtimetothoroughlyexaminethedebtor’sfinancialandmanagementsituation.Inthiscase,mobilemoneycustomers,asunsecuredcreditors,wouldbesubjecttosucharuleandthusunabletoobtaintheirfundsuntilinsolvencyproceedingsconclude.Suchadelaybeforefinaldistributionofassetscanbeconsiderable,spanningthetypi-caltimeframeforacivilorcommercialjudgetobeappointed,35andanyhearingsheld,motionsconsidered,claimsreviewed,beforeadecisionismaderegardingarestructuringplanortheliquidationtobeperformedandfinalized.

Illiquidityriskcanbeparticularlyproblematicindevelopingcountries;judgesandotherlegalprofessionalsarenotusuallyspecialistsinhandlingcomplexinsolvenciesandareunlikelytobeabletoprovidethekindofsupportrequiredfortheeffectiveandefficientinsolvencyofamobilemoneyfirm.

Infrastructureproblemsandcustomers’lackoffinancialex-periencecouldmakethisdelayevenlonger.Asignificantpor-tionofmobilemoneycustomersinthedevelopingworlddonothavebankaccountsandhavehadlittleexperiencewithfinancialdocumentationandprocedures.Manyliveinruralareas,farfromthephysicallocationofcommercialcourts.36Thismeanscustomersmayexpendsignificanttimep