Banking Review

Carry on banking?

Telecommunications carriers trying to muscle in on the mobile wallet and payments
space are obtaining banking licences left, right and centre

BY BRETT KING

The announcement that the Canadian carrier Rogers Telecom has applied for a banking licence should hardly come as a shock to the retail banking fraternity. There is already a plethora of mobile carriers fully engaged in mobile payments right now, from Safaricom in Kenya, Orange (with Barclays) in the UK, the ISIS collaboration in the US, LG Telecom in South Korea, and the list goes on.

Everywhere you look right now, there are carriers trying to muscle in on the mobile wallet and payments space.

Should banks be worried?

They should be terrified.  The fact is that it makes perfect sense for mobile operators to start thinking about offering banking products and services as we dispense with plastic and start using our mobile phones as payment devices. Increasingly, banks are being detached from the end consumer by a technology layer. Let me prove it.

PayPal reinvented the customer experience layer around payments and, in doing so, set the benchmark by which peer-to-peer payments are made. Sure, there are banks at the back-end of PayPal, but today I can take out my phone or get online and send you money and all I need to know is your email address or your mobile phone number. This is compared with the average wire transfer, which requires account number, account name, bank name, bank address, SWIFT Code/ABA Routing Number or IBAN, etc. Now we’re all wondering why it’s simpler and, in many cases, cheaper, to use PayPal than a wire transfer through our traditional bank.

Why go back to complexity and friction?

Today, if a bank wants to allow its customers access to mobile banking, it has to go through a layer of technology called an App Store (or Marketplace). Sure, there are HTML5 and mini-browser mobile sites, but the fact is that if you want best-in-class interaction and engagement, you need to go App. So today, a bank must ask Google, Apple or RIM for permission to have clients access their bank via a smartphone.

Are telcos a threat to banks?

Well, yes and no.  If you look at the broader offerings of financial service products, then mobile operators really don’t want to play in that arena. What most of the mobile operators are looking to do is play in the payments space, taking control of the wallet on your phone or offering pre-paid debit card type services.

In 2008, about 17 per cent of the US mobile subscriber base was on prepaid deals, but since the Global Financial Crisis approximately 65 per cent of net new subscribers are prepaid users. In emerging markets like India and China, 90 per cent plus of the subscriber base is prepaid, and the same counts for sub-Saharan Africa, and broadly across Eastern Europe and Asia.

So what does this have to do with banking?

Prepaid subscribers for mobile phones, generally speaking, are more likely to be at the lower end of the scale for retail banking (less profitable, under-banked) or even in the unbanked segments. These are customers who don’t have extensive multi-bank relationships and who are moving increasingly to products like prepaid debit cards to facilitate their day-to-day banking needs.

So guess what happens when you combine a prepaid debit card with a prepaid mobile phone? It’s a marriage made in heaven! What’s the difference between making a telephone call, an ATM withdrawal or a debit card transaction at a merchant – they are all just transactions from a value store.

It’s likely that as telcos figure this ’secret’ out that they will go aggressively after that marginal layer of customers that are under-banked, and promising utility that a bank can’t provide in the payments space. The combination of prepaid phone deal with a prepaid debit card will likely result in the loss of about 10 per cent of the retail banking consumer market in developed economies in the next five years, in my opinion, as they migrate to this type of modality.

So what? We can afford to lose a few marginal customers

This will be the justification for lack of action from many retail banks; that the loss of these less profitable customers is not a bad thing. There are two problems with that logic.

First, this shift will create momentum behind changing payments behaviour that will fragment day-to-day banking for many customers. Increasingly, even your best, most profitable customers will be abandoning the old ways of payments to go for the utility of a combined mobile phone and payment device. Once I am managing your day-to-day spending activity, I can start to influence your decisions, spending and choices for more complex financial products, too.

Second, the fact is that even these ‘marginal customers’ will likely be extremely profitable for telcos because, to them, it is just new revenue, and they don’t have all the expensive infrastructure that banks have around the very traditional (some would say ‘antiquated’) retail banking system.

The implications for banks is that they lose touch day-to-day with customers, and the day-to-day retail front-end of banking becomes owned by telcos, App stores, social networks and marketing organisations. The bank becomes the back-end manager of risk and the product manufacturer, with the lowest margin of the whole value chain.

Brett King is an advisor to the financial services sector, blogger and author of the best-selling
book Banking 2.0. This article was first published at banking4tomorrow.com.