“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.
Future Prospects
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.
Conclusion
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.
Bibliography
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 pgp12047.thousif@iimraipur.ac.
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