“Banking is essential to a modern economy. Banks are not.”
—Edward Furash (1993)
Much competition in telecom sector has reduced the Average Revenue per user for mobile service providers. Inorganic Growth is costly in this sector as it is very capital intensive. This has led Mobile Network Operators (MNO) to find new avenues of growth. Mobile banking proves to be the next big opportunity for mobile phone carriers. Even though many banks provide some or other forms of mobile banking solution, the penetration of mobile banking is still in nascent phase in many economies around the world. Mobile phone carriers can fill this gap by providing a portfolio of banking services. In addition to it, mobile banking by MNO has the potential to bring basic banking and financial transactions services to unbanked consumers in the world.
Mobile Phone Operators as bankers
Most of the action in Mobile Banking is happening in developing countries. Mobile banking has huge potential in developing countries where a major part of the population belongs to the unbanked sector. The high penetration levels of mobile phones and low transaction costs involved in mobile banking will fuel the growth for these services. Philippine’s Smart Communication Inc and Kenya’s Safaricom are front runners in mobile banking.
Smart Communications, Inc. (Smart) is a leading wireless telephone services provider in the Philippines and is a subsidiary of Philippine Long Distance and Telephone Company (PLDT). Smart has been widely appreciated for its role in product development targeting the people at the bottom of the pyramid (BOP) market. Smart Communication Inc.’s launched Philippines’ first mobile banking service called Smart Money in 2000. However, the service witnessed widespread adoption only in 2003 with the introduction of micro-payment and money transfer. Today, Smart Money provides basic current account facilities and is jointly operated by Smart in alliance with Banco de Oro (BDO), one of the Philippines largest banks. In this joint venture, Smart Communications acts as a transport system and hosts around 20 million mobile customers, while BDO’s role is that of a retail bank providing normal transactional services to its subscribers using the full range of cash and debit card services. Smart’s major source of income in mobile banking is from the SMS charge that is levied for each transaction.
The Smart Money service is provided with a personalised card issued under the MasterCard banner, that could be used anywhere a normal debit card could be used. The customers’ mobile prepaid account is coupled into a bank account held by Banco de Oro so that the user is effectively operating a BDO account using the phone as the transaction medium. Customers can deposit money into his account at any of the Smart or BDO offices or with a range of accredited retailers who had agreed to take deposits. Deposit had to be completed with an acceptable ID. The customer could withdraw from a bank or Smart cashier or accredited retailer in exactly the same way as depositing cash. For retail purchases, the user has two options. One is to use the debit card, in which case the shopping is done similar to purchase of product using debit card. The other alternative is when the retailer initiates a transaction request through a Smart mobile phone terminal. The customer will receive an authorization request via SMS. Once the authorization is done, the retailer and customer accounts are updated and the customer receives an acknowledgement of the transaction via SMS. Finally, Smart Money also allows the transfer of a credit balance from one customer to another. The customer initiates a text message indicating the amount to be transferred and the Smart Money customer to whom the transfer is directed.
The mobile phone carrier Safaricom is a leader in mobile banking in Kenya. They have changed the rule of game by providing banking access to anyone who are their customers, irrespective of whether the person holds a bank account or have a permanent address. The revolutionary Mobile Money Transfer service known as M-Pesa or mobile money was launched in 2007. The cost for transferring money using M-Pesa is significantly low compared to traditional transfer process. It costs only 42c to transfer $500 through M-Pesa. The success was almost immediate, as $100,000 was transferred within two weeks of the launch of the program. By 2010, fifty percentage of Kenya’s population had used it.
M-Pesa depends on a network of small shop-front retailers, who registers to be m-Pesa agents. Customers come to these agents and pay them cash in exchange for loading virtual credit into their phone. Virtual Credit can be swapped and transferred between mobile users with a simple text message and a system of codes even if the receiver is not a subscriber of Safaricom. The recipient can take her mobile phone to the nearest outlet to cash in whenever she wants by swapping her text message code back for physical money. Success of M-Pesa has lead to opening up of more m-Pesa agents in Kenya and these shops now outnumber the bank branches in Kenya. The success of Safaricom in Kenya underlines the fact that Mobile phone operators can be the new age bankers.
Currently, in different parts of the world, Mobile phone carriers or Banks are either going solo or they are going hand in hand in providing the mobile banking solutions. In the long run, Carriers going alone might face problem because they can’t provide the full fledge banking service as they are limited by banking licences. They might also face stiff competition from mobile phone carriers who have partnered with bank as the partnership helps them to provide a portfolio of services which the solo mobile phone operator can’t provide.
On the other hand, banks going solo can provide more services by allowing the consumers to download third party software for mobile banking. It is more practicable compared to the former approach because it allows the introduction of compelling new value propositions to end-users without involving mobile network operators. Similar to Carriers going solo, the banks going solo will face competition from banks who have partnered with mobile phone carriers which will provide them greater cost-savings and foster innovative new services.
The future of mobile banking clearly lies in the partnership between the banks and MNO. There are two options for the banks and MNO- either they can go for an exclusive partnership or an open partnership. In exclusive partnership, banks and MNO enter in to a joint agreement to provide mobile banking and payment services. This partnership greatly reduces the coordination costs and improves the user experience by providing expanded menu of services. However, an exclusive partnership between banks and MNO results in targeting a very limited set of subscribers as the intersection between subscribers of the mobile company and customers of the bank involved in an exclusive partnership is very low. It is not sure whether the cost involved in forming partnership can be recovered from this model. In open partnership, a large number of mobile carries and banks partner with each other to provide services in a shared platform. By forming an open alliance the banks and carriers, can save the cost involved in investing in infrastructure and developing proprietary software.
Cross-industry convergence between mobile carriers and banks can transform existing businesses and provide compelling value proposition to the customers. While each of the models has its own merits and demerits, open partnership between mobile carriers and banks will result in sustainable long term growth in the future.
Jamie Anderson, (2010),"M-banking in developing markets: competitive and regulatory implications", info,Vol. 12 Iss: 1 pp. 18 – 25
Divakar Goswami, Satish Raghavendran, (2009),"Mobile-banking: can elephants and hippos tango?", Journal of Business Strategy, Vol. 30 Iss: 1 pp. 14 - 20
"Article was published in Issue 1 Volume 18 of Finance magazine of IBS Business School "The Financial Bulletin" and also in Issue 2 Volume 4 of NITIE's finance magazine In-Fin-NITIE."
"This article is written by Thousif Mohammed A. He is a PGDM student of 2012-14 batch of IIM Raipur. He has a work experience of 2 years in TCS. His areas of interest include finance and technology. He can be reached at firstname.lastname@example.org.
in and can be followed at https://twitter.com/ thousifmohammed "