[From Center for Financial Inclusion blog, 19 January 2012 (with Claire Alexandre)]
A policymaker’s dilemma: how to pursue a policy of access to a bank account for everyone, while at the same time erecting regulatory barriers to the opening of those accounts to prevent their misuse. It’s like pushing the accelerator and putting on the brakes at the same time. This is not to belittle law enforcement concerns, chiefly the need to prevent or detect money laundering. But as we argued in a previous blog post, neither financial inclusion nor law enforcement are well served by keeping the bulk of the population away from modern digital — and hence, inherently more traceable — payment systems.
These objectives can be easily reconciled by making account opening trivially easy at first, and tightening the requirements for documentation and record-keeping progressively as the accounts become larger and more active. With this approach, everyone wins. New-to-banking customers can learn about how to use the account before they are asked to submit to onerous Know Your Customer (KYC) obligations. Banks don’t need to put in place costly KYC processes for customers that are not yet profitable. And law enforcement agencies can get relevant information on accounts commensurate with the risks involved.
In 2011, the Mexican authorities implemented such a scheme, a world first in its breadth and clarity. The scheme is also a model for inter-agency coordination, as it involved the relevant departments at the central bank, the ministry of finance and the banking regulator.
The authorities created four tiers of accounts based on the value of transactions. Level 1 accounts are anonymous, and no account holder data needs to be captured at the point of sale or subsequently. The restrictions are that the cumulative value of monthly deposits cannot exceed U.S. $280, and customers cannot transfer funds to others from the account. For level 2 accounts, customers must self-report some basic information, but verification of the data can be delegated to third parties and no paperwork needs to be exchanged with the bank. The cumulative value of monthly deposits is capped at $1,160, and there are no restrictions on money transfers. For level 3 accounts, customer information must be verified through face-to-face meeting with bank staff, but no hard copies of customer documents need to be kept. The cumulative value of monthly deposits is capped at $3,860. Level 4 accounts are full-fledged: the customer data requirement is the same as for level 3, but the bank needs to file copies of ID, proof of address and tax ID.
Indonesia is implementing a similar regulatory logic, although it applies only to e-money (rather than bank) accounts. E-money accounts do not require recording of customer identity as long as their balance does not exceed about $110.
The Haitian authorities are enabling easy account opening through selective authorizations rather than broad regulation. To accommodate the nascent mobile money market, the central bank has allowed Tcash and Tchtcho Mobile to offer entry-level accounts without face to face registration and identification requirements. These accounts are capped at $62 and subject to transaction monitoring.
There is huge pent-up demand for savings accounts among the world’s poor, and we need to make it as easy as possible for them to opt into the financial system, which has become such an essential element of participation in modern commerce and society. Law enforcement risks only come from use of the account, so let’s peg the severity of law enforcement requirements to the use of the account. That’s not only fair but also efficient.