UNITED STATES OF AMERICA AND MOBILE FINANCIAL SERVICES

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CHAPTER 4 BANKING, PAYMENTS, MFS AND REGULATION

Overview

As noted in the previous chapters, many of the services in Mobile Financial Services (hereafter MFS) are said to approximate to ‘banking’ services such as receipt of funds from users, the enabling of payments and remittance-type services.¹ However, as time passes, a precise indication of the scope and role of banks becomes more uncertain as it has evolved continuously over time from the basic deposit to sophisticated financial services, and this makes it difficult to answer the seemingly simple question: ‘What is a bank?’ or as it is usually phrased, ‘What is the business of banking?’ The core activities of a ‘bank’ also become less clear.
This question infers a following question: ‘Is it accurate to say that Mobile Financial Services Providers (hereafter MFSPs) or Mobile Network Operators (hereafter MNOs) are engaged in ‘the business of banking’? This will be analysed below by examining the characteristics of a ‘bank’.
The role, and types, of payments instruments will also be explored, both at the national and the private levels.

Banking

Nature of Banking: An Overview

The concept of a bank has evolved from the original ‘bank’ of the 17^th century when merchants turned to goldsmiths to provide – or ‘deposit’ – their valuables for safekeeping and for pecuniary advantage. Loans were also provided and allowed for payment to third parties based on orders given to the goldsmith by the depositor.
This safekeeping of valuables and payment methodology was known as the ‘law merchant’ (lex mercatoria) and was ultimately absorbed into the English common law from which English banking law emerged.³ What could be regarded as modern banking emerged from the activities of organisations that collected savings from the general public in Europe during the mid-1800s, when large limited liability commercial banks were established in many countries.⁴ The resulting increase in deposit-taking activity led to the gradual increase of account transfer-based payments at the expense of currency and coin.⁵ Other credit institutions such as savings banks, credit cooperatives as well as postal banks were established during this time and later around Europe and the United States of America (hereafter USA).
Modern incarnations of banks can be said to encompass a large range of financial institutions and activities that provide services beyond those of just deposit, payment and loan activities.⁶ The nature of their customer profile also varies, from small depositors to so-called private banks that cater to high net-worth individuals.
While the provision of credit alongside the handling of deposits, cash and cheques has traditionally been the purview of banks, technology and regulation have allowed banks to enter new and profitable, but sometimes extremely risky domains. As such, the modern bank provides traditional deposit, credit and payment facilities alongside the complex financial structures they create and participate in.⁷ These may include entities that focus on niche markets and generalist banks that offer anything from bespoke payment, deposit and lending services to real estate services, stock broking, derivative trading, life assurance, and even telecommunications and mobile products.
The reality then is that shifting business models that may encompass variants such as merchant banks, clearing banks, cooperative banks, mutual banks and building societies, as well as policy imperatives may at a particular time and place give varied answers to the question of whether an entity is a bank, such that there may evolve and exist a lacuna between banking (common) law and banking practice.⁹These variants beg the question of whether an entity whose main venture is not banking can be classed as a ‘bank’ engaged in the ‘business of banking’.¹⁰
While common law definitions¹¹ of banks may augment any statutory lacunae where there are attempts to define a bank, there is no consistent common law definition that provides an answer to the seemingly simple question: ‘What is a Bank?’ Further, as disembodied technological advances bring traditional banking services into the home, the local store or mobile handset, the traditional concept of a physical bank with local branches dealing with customers face-to-face to provide core retail banking services seems somewhat dated.
But whatever the new form of access and activities a ‘bank’ may allow and provide, it is important to get to the pith and marrow of the question of ‘what is a bank’ because of the implications of the appellation ‘bank’ at common law and statute. These implications relate to, for example, what have been termed the ‘unique’ relationship between a ‘bank’ and customer rather than any other entity that is not a bank, such as establishing a fiduciary duty of care. Further, a ‘bank’ enjoys some unique privileges, both legal and practical.¹³ In addition, at a prudential level, banking is also one of the most regulated and supervised of economic sectors with numerous regulations¹⁴ and an elaborate system of constant supervision.¹⁵
With this plethora of activities, the statutory definitions of the activities that would determine whether there is a ‘business of banking’ are at play. However, statutory definitions of a bank or the business of banking may not necessarily provide comprehensive answers to doubtful cases or new business models as to whether an institution is a ‘bank’.
The enquiry becomes pertinent in determining whether those engaged in MFS are engaged in the ‘business of banking.’
Common law views of banking, as they stand, would have to be sought to determine any statutory lacunae. Three general principles can be used in the determination of whether an entity is engaged in the business of banking and which may, therefore, be classed as a bank. First of all, bank activities can change over time as they take on new business models, becoming multifunctional entities.¹⁶ Secondly, an entity engaged in the ‘banking business’ in one place is not necessarily considered a bank elsewhere¹⁷ and, thirdly, an entity’s reputation may influence the determination.¹⁸

The Common Law and Banking

Sources of Banking Law

Common law views of banking and what is termed the ‘business of banking’ are based on judicial decisions, the evolution of business processes and the influence of related statutes. Banking as a construct of law, however, is a relatively recent evolution and has been more the domain of English law and has been incorporated into South African law over time.¹⁹ It is constantly evolving.
The sources of South African banking law are based on primary and secondary sources.²⁰ One clear primary source that is part of the tapestry of laws and precedent that comprises a common law view of banking would be municipal banking legislation, while secondary law – such as banking law and precedents in other, similar jurisdictions – would be law used by South African jurists to assist in elucidating South African law where it may be unclear, underdeveloped or not developed at all on a certain point.²¹
While English banking law as a secondary source has influenced South African banking law, in many respects Roman law has remained pervasive and equally influential in both commercial and private law aspects.²² It has been noted that the essential Roman law character of South African banking law has been retained because of the critical private law components of banking, in particular the law of obligations and the law of things, including personal and real security which manifest particularly in the banker-client relationship.²³ Further, ‘deposits’ have been subject to Roman law classifications.²⁴
Beyond acknowledging the basic financial intermediation²⁵ that banks commonly engage in (specifically the receipt of deposits), English law has not arrived at an exhaustive (common law) definition of banking, in particular one that assists in elucidating the ostensibly descriptive term, the ‘business of banking’.²⁶
As has been noted, banking is not a technical or legal term but a loose popular term, comprising activities carried on by those who, likewise popularly, are called bankers²⁷ and that ‘to construct a definition which would embrace the whole of it is manifestly impossible’.²⁸ However, it has also been noted that the peculiar status of bankers, their importance at the centre of the financial community, the expectation of the public that it can grant them implicit and utmost confidence has led, given the uncertainty of substantive tests, to various methods to identify or recognise banks and banking by way of formal and institutional means and tests.²⁹ With the traditional, core ‘business of banking’³⁰ effusing into other commercial strata, the common law has thus adopted a practical approach to defining what this is, in part by listing what may be regarded as the core characteristics that seemingly constitute the ‘business of banking’.³¹
Along with statutory guidelines, these may be considered as formal and institutional tests and are discussed below.

Characteristics of Banking

Modern tests for the ‘business of banking’ are based on the institutional characteristics identified in the locus classicus United Dominions Trust Ltd v Kirkwood³² (hereafter UDT) where the nexus between deposit-money and payments was defined.
UDT were trying to prove that they were acting as a bank and as such had a common law right to claim back a loan given to Kirkwood.³³ Kirkwood’s defense was that UDT was an unregistered moneylender, and so the loan it had provided was not repayable because of that alleged illegality. This posed the question:
Was UDT doing the ‘business of banking’, a determination which if answered in the affirmative would allow them to claim back the funds owed, this right being a feature of those rights that accrue to bank?³⁴
Denning MR (at 446) in the majority, said of the criteria for determining the nature of ‘business of banking’:
‘There are, therefore, two characteristics usually found in bankers today: (i) They accept money from, and collect cheques for, their customers and place them to their credit; (ii) They honour cheques or orders drawn on them by their customers when presented for payment and debit their customers accordingly. These two characteristics carry with them also a third, namely: (iii) They keep current accounts, or something of that nature, in their books in which the credits and debits are entered.’
In essence this nominalistic approach defines bank activity in terms of its functions, the enumeration of which in UDT is still held as the locus classicus in defining the ‘business of banking’.³⁶ Specifically, the ‘business of banking’ is defined beyond ‘mere’ (direct) deposit-taking to include additionally the collection of cheques for customers and the honouring of cheques drawn on them by customers and the keeping of current accounts.³⁷ Also required is something beyond these enumerated functional aspects: the institution’s reputation as a banker.³⁸ Holding oneself out as a banker – through actions or services – may provide the impetus for the acquisition of the reputation.³⁹ Thus in UDT, it was held that UDT – although it had not succeeded in proving that its business, as distinct from its reputation – was effectively a banking business, had discharged the onus of proving that it was a banker because it had established, that for a long period of years it had been accepted as having the status of a banker by the banking community and government departments.
However, as noted above, banks nowadays engage in multifunctional, diversified activities, and even exclude potential clients who do not fall within their required class or value of assets⁴¹ from participating in their banking business. Similarly, banks are moving away from cheques to electronic Means of Payment (hereafter MOP), these core activities, it is submitted, may be outmoded and do not present, contextually, a useful modern metric for deciding what defines the essence of the ‘business of banking’.⁴² Further, even though the presence (or absence) of some (common law) practical characteristics may point to the existence (or absence) of the business of banking the entity is engaging in, there may be other characteristics that override these practical core attributes, such as the reputation of the entity in the commercial world of doing the ‘business of banking’.

DEDICATION
THESIS SUMMARY
KEY TERMS
ACKNOWLEDGEMENTS
DECLARATION
TABLE OF CONTENTS
CHAPTER 1: SCOPE, STRUCTURE AND RESEARCH METHODOLOGY
A. Overview Of Thesis
1.1 Introduction
1.2 Structure of the Thesis and Brief Summaries
B. Research Scope
1.3 Research Methodology and Sources
1.4 Comparative Jurisdictions
1.5 Periods Covered
1.6 Terminology
1.7 Reference Style
C. Problem Statements
1.8 Overview
CHAPTER 2: OVERVIEW OF MOBILE FINANCIAL SERVICES (MFS)
2.1 Introduction
2.2 The Rationale for MFS
2.3 The Scope of MFS
2.4 Services Available In MFS
2.5 Structure and Participants in MFS Schemes
2.6 Comparisons with other Systems and Internet E-Commerce
2.7 Current and Future MFS Schemes
2.8 Summary and Conclusions
CHAPTER 3: OVERVIEW OF MONEY
3.1 Introduction
3.2 What is Money?.
3.3 Initial Analysis of The Doctrines & Perspectives Of Money
3.4 Evolution of Money
3.5 Role of the State and Central Bank in Money
3.6 Money and Currency: General View
3.7 Modern Forms of Money
3.8 Economic and Legal Views of Money
3.9 Orthodox School
3.10 Claim School
3.11 Interplay Between ‘Money’ Theories
3.12 Legal View
3.13 Money in South African Law
3.14 Summary and Conclusions
CHAPTER 4: BANKING, PAYMENTS, MFS AND REGULATION
4.1 Overview
4.2 Nature of Banking: An overview
4.3 The Common Law and Banking
4.4 Deposits
4.5 The Banker-Customer Relationship
4.6 Summary And Analysis
4.7 Evolution of Payments
4.8 Modern Payment Systems, Instruments and Regulations
4.9 Application to MFS
4.10 Summary and Conclusions
CHAPTER 5: MOBILE TECHNOLOGY AND MOBILE FINANCIAL SERVICES (MFS)
5.1 General Overview
5.2 Mobile Network Technologies
5.3 Mobile Technology Access Techniques
5.4 Mobile Network Operator (MNO) Billing Systems
5.5 Mobile Phone Technologies
5.6 MNO and MFS Transaction Types and Values
5.7 Security Aspects of Mobile Technology and Application to MFS
CHAPTER 6: MOBILE AND MOBILE FINANCIAL SERVICES COMMERCIAL MODELS
6.1 Overview
6.2 Relationships Generally in the Mobile Ecosystem
6.3 Relationships and Types of Models in the MFS Ecosystem
6.4 Licensed Bank-Led Mode
6.5 MNO-Led Models
6.6 Independent MFSP Models
6.7 MFS Models: Summary And Conclusion
CHAPTER 7: LEGAL NATURE, CHARACTERISTICS OF MOBILE FINANCIAL SERVICES
7.1 Introduction
7.2 Contracts
7.3 Payments in General
7.4 Trusts
7.5 Summary and Conclusion
7.6 Conclusion
CHAPTER 8: ADDITIONAL OVERSIGHT RELATED TO MOBILE FINANCIAL SERVICES
8.1 Overview
8.2 Philosophies Behind Regulation
8.3 Types of Regulation Foci
8.4 Financial Regulation
8.6 Telecommunications Laws and Regulations
8.7 E-Commerce Laws and Regulations
8.8 Consumer Protection-Type Laws
8.9 Conclusion
CHAPTER 9: THE EUROPEAN UNION AND MOBILE FINANCIAL SERVICES
9.1 Overview of MFS in The European Union
9.2 Overview of the EU and the European Economic Area
9.3 Institutions of the European Union
9.5 The Prudential Landscape for Financial Products and Services in the EU
9.6 Payment Systems and Governance
9.7 Use of Agents and Other Outsourcing Partners
9.8 Payments Industry Self-regulation: SEPA
9.9 Application to MFS
9.10 Anti-Money Laundering, Terrorist Financing and Customer Due Diligence Laws and Regulations
9.11 Telecommunications Laws and Regulations
9.12 E-commerce and Associated Laws
9.13 Consumer Protection-Type Laws
9.14 The EU And MFS: Conclusion
CHAPTER 10: KENYA AND MOBILE FINANCIAL SERVICES
10.1 Overview
10.2 Prudential and Financial Services
10.3 Anti-Money Laundering, Terrorist Financing and Customer Due Diligence Laws and Regulations
10.4 Telecommunications-related Laws and Regulations
10.5 Electronic Commerce
10.6 Consumer Protection
10.7 Kenya And MFS: Conclusion
CHAPTER 11: UNITED STATES OF AMERICA AND MOBILE FINANCIAL SERVICES
11.1 Overview of MFS in the United States of America
11.2 The Prudential Landscape for Financial Products and Services
CHAPTER 12: SOUTH AFRICA AND MOBILE FINANCIAL SERVICES
12.1 Overview
12.2 MFS Implementations in South Africa
12.3 The Prudential Landscape for Financial Products and Services in SA
12.4 E-Money And Stored Value
12.5 Competition Commission Enquiry into Banking and Payments in South Africa
12.6 Conclusion: Banking And Payments
12.7 Anti-Money Laundering, Terrorist Financing and Customer Due Diligence Laws and Regulations
12.8 Telecommunications-related Laws and Regulations
12.9 E-Commerce Laws
12.10 Consumer Protection Laws
12.11 Consumer Protection And Loss Allocation With Respect to Payments
12.12 South Africa: General Summary and Conclusions
CHAPTER 13: RE-EVALUATION OF MONEY
13.1 Introduction
13.2 Core Orthodox Economic Characteristics
13.3 Legal Characteristics And The Orthodox School
13.4 Analysis and Application to MFS
13.5 Core Economic Characteristics
13.6 Legal Characteristics Based on the Claim School
13.7 Analysis And Application to MFS
13.8 Potential Effects of New Forms of Money and Payments
13.9 Summary and Conclusions
CHAPTER 14: RESEARCH SUMMARIES, CONCLUSIONS AND RECOMMENDATIONS
14.1 Thesis Summary And General Conclusions
14.2 Overview Of Mobile Financial Services
14.3 Payment Methodologies And Characteristics
14.4 Aspects Of Regulation
14.5 Issues Of Money And MFS
14.6 Applicability And Impact Of Financial Regulation To MFS
14.7 Contractual, Agency and Payment Aspects of MFS
TABLE OF ABBREVIATIONS
BIBLIOGRAPHY
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LEGAL AND REGULATORY ASPECTS OF MOBILE FINANCIAL SERVICES