29 August 2014

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Raj Subramaniam - Fundtech

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Banks New Frenemy: Threat and Promise of Telecom in Payments

29 January 2014  |  1676 views  |  0

Banks have seen a number of challenges over the past few years and now find themselves facing a brand new, unexpected challenger in the payments marketplace: the telecoms! Can telecom service providers give banks a run for their money in providing payment services to customers? That may be the case, as evidenced by the success of pioneering initiatives like M-Pesa, the mobile based money transfer system from Kenya, or Pakistan’s wireless network, Easypaisa, and bKash in Bangladesh, where the transaction rate is in the region of USD 3.5 - 4 billion annually. The Airtel Money and Vodafone M-Pesa business has also commenced in India. In these emerging markets, telecom firms are offering empowering customers to make payments via the mobile network without the direct involvement of a financial institution. While bank customers in more developed countries look to the mobile platform merely as a means of convenience for financial transactions, consumers in some developing markets can bypass the financial institution all together. Fortunately for financial institutions, in the more established markets like the U.K. and U.S., customers favor specific solutions over generic applications. In these markets, financial institutions still have the opportunity to collaborate with telecoms to devise payment solutions that significantly enhance the customer experience.

 

The fact that telecoms are facilitating the transfer of funds is not a threat to banks in and of itself. Telecoms provide a platform for branchless banking, allowing banks to penetrate previously untapped markets. On the other hand, telecoms get an opportunity to attract new customers and to increase revenues as a result of the remittances business. In the M-Pesa experience there is the concept of e-float. When a customer deposits money at an M-Pesa outlet an “e-float” or  "cash in" transaction is completed. The “cash out” transaction is when a customer exchanges the e-float for cash at an M-Pesa outlet. The circulation of the e-money between users between the cash-in and cash-out makes it an alternative to real currency.

 

There have been vast improvements in the use of technology, both in the financial services and telecom sectors. Now we see the benefits of new technology being harnessed to improve reach and increase the level of service offered to customers. Telecoms will have the ability to cross-sell to customers in a more cost-effective manner. Likewise, banks can support telecoms by managing their payment solutions without having to develop software outside their core competency and at a high cost.

 

According to Forrester Research[i] there will be more than two billion smart phones globally in 2014. Business models will need to be adapted to reflect the change in the way people live their lives and make their payments.  There is already enough evidence to show that customers have adapted to using their mobile devices to enable financial transactions. It offers an opportunity for banks to further reduce costs stemming from branches and call centers, and to tap into analytics to cross-sell bank products via the telecom network. If financial institutions can move past viewing telecoms as a potential competitor, there are clear synergies to be realized through cooperation between the two industries.

 

And let’s not forget the customer. They will enjoy increased convenience and better, more effective customer service. This is a triple ‘win’.

 

[i] http://www.forrester.com/Predictions+2014+Mobile+Trends+In+eBusiness/fulltext/-/E-RES111301?isTurnHighlighting=false&highlightTerm=mobile

 

 

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Raj Subramaniam

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Global Product Strategy Cash Management

company name

Fundtech

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2012

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Bangalore

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Advising Global Product Strategy for the Cash Management business unit at Fundtech.

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