People around the world are holding an instrument for economic empowerment in the palm of their hands - but some of those who could benefit most from mobile money are facing a lock screen.
Mobile payments have emerged as a key tool in the fight against global poverty. People in poor and rural areas of countries like Kenya and India are already using cell phones to send and receive funds and pay bills. Microsoft founder Bill Gates highlighted a broad range of possibilities at the Sibos banking conference in Boston early this month, describing how mobile payment applications can help people in developing countries receive vital aid, set aside money to buy fertilizer for next year's crops, save for tuition fees and build credit scores that give them to access to affordable loans.
But while mobile payments have major potential to help people in underserved areas, their growth has been curbed by regulations aimed at rooting out money laundering and terrorist financing activity. Customer-identification and record-keeping requirements - as well as the threat of major fines for compliance violations - have kept many banks and financial firms out of the arena. A similar predicament has stanched the flow of remittances to Somalia, where many people depend on money sent by relatives and friends living abroad to buy food and other necessities.
"At what level of transaction or transaction type will the government insist on [detailed] records being there and being available to them, and then what transaction types are simply allowed on anonymous basis?" Gates said during a question-and-answer session at Sibos. "We need the U.S., which sets the tone for these things, to think about that." He went on:
We've got to make sure that regulations actually don't favor the dark economy over this world. There is a little bit of uncertainty, for say, correspondent bank relationships that facilitate low-cost remittances-will people feel the risk level is such that they basically get rid of that and you end up either in banks that are not connected with the U.S. financial system or simply cash transfer activity.
This problem has a fairly simple solution, according to Gates, whose charitable foundation is working to increase global access to digital financial services.
"You can have escalating ID requirements as the size of the transactions gets large," he said.
Gates is far from the first person to suggest that a risk-based approach to anti-money-laundering rules could be a way to check criminal activity without causing inadvertent harm to people in underserved areas. The Financial Action Task Force, an intergovernmental policymaking group, recommended this strategy in a June 2013 report. Adjusting customer due diligence requirements to the size of transactions is one way to help countries "focus their efforts in the most effective way" and "mitigate financial exclusion," the report says.
Hank Uberoi, chief executive of the cross-border payments technology firm Earthport, agrees that a risk-based approach is the right way to go.
"Because of the recent history of regulation, banks have not surprisingly and not unfairly become quite risk-averse," Uberoi said. "The only way around it is for regulators to create a carve-out for certain types of transactions."
"The purpose of [AML] regulation is not focused on the $80 transfers," Uberoi continued. "So somehow somebody's got to help figure out how to find a balance between what the regulation is intended to achieve and the impact it's having."
Scaling identification requirements to transaction size runs the risk that criminals could attempt to evade detection by "smurfing"-sending money in smaller amounts. To that end, Uberoi says regulatory requirements should also be tailored to the frequency of transactions and the amount performed in a given period of time, among other factors.
As Gates pointed out in his speech, governments trying to stay on alert for suspicious activity should actually welcome the prospect of widespread mobile payment systems. After all, digital money transfers are much easier to track than cash.
"When somebody has a mobile phone in Africa," Gates said, "you can see who they've called, where they're located, you can see their whole transaction history. We have that on record. Would you rather have that or just have these $100 bills that the U.S. chose to print and hand out all over the world?"
Later, he added, "Attributed [i.e. auditable] payment systems that most people will be willing to use, these are extremely advantageous systems for many governmental reasons."
This point is echoed by technology consultant Dave Birch.
"If money is going around in cash, you can't trace it," Birch said. "Is it more important that you can see I'm sending $10 every fortnight to a cave in Bora Bora, or is it more important to know exactly who I am? I would argue the former. That's more important than knowledge of identity."
The traceable nature of mobile payments has other advantages. Charities and governments can use digital tracking systems to ensure that money transfers reach their intended recipients, as Gates pointed out, thereby reducing the risk that corrupt authorities will siphon off funds for their own purposes.
In this and other ways, mobile payments can help to facilitate economic empowerment. Given the impact that the technology could have in conjunction with a broad range of anti-poverty measures, it's essential that regulators, along with policymakers, nonprofits and companies in the private sector, work together to expand its reach as quickly as possible.
"Digital payment systems can do more for equality in poor countries than they can do anywhere else, and we would like them to emerge there even if it takes longer in richer countries," Gates said. "We're not waiting for it to trickle down as we do for many advanced technologies. That's not good enough."
Here's the complete video of Gates' appearance at Sibos:
Sarah Todd is American Banker's deputy editor for BankThink. The views expressed are her own.