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An article relating to this blog post on Finextra:

Canadian wireless carrier Rogers files for banking license

Canadian telco Rogers has filed for a banking license so that it can issue its own credit cards and mobile wallets to its nine million-strong customer base.


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The Real Threat of the Telco-Bank

The announcement that the Canadian carrier Rogers Telecom has applied for a banking license should hardly come as a shock to the retail banking fraternity. There is already a plethera 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, 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 their customers access to Mobile Banking they have to go through a layer of technology called an App Store (or Marketplace). Sure, there is 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 the High Street Bank? 

Well, yes and no. 

If you look at 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% of the US mobile subscriber base were on prepaid deals, but since the GFC (Global Financial Crisis) approximately 65% of net new subscribers are prepaid users. In emerging markets like India and China 90%+ 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, underbanked) or even in the unbanked segments. These are customers who don't have extensive multi-bank relationships, and who increasingly are moving 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 be aggressively going after that marginal layer of customers that are underbanked, 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 around 10% of the retail banking consumer market in developed economies in the next 5 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's two problems with that logic.

Firstly, this shift will create momentum behind changing payments behavior 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. When I manage your day-to-day spending activity, I can then start to influence your decisions, spending and choices for more complex financial products too.

Secondly, 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 this becomes owned by telcos, App stores, social networks and marketing organizations. The bank becomes the back-end manager of risk and the product manufacturer, with the lowest margin of the whole value chain. 

Telcos are more of a threat than banks realize
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Comments: (6)

Keith Richbell
Keith Richbell - eftpos Payments Australia Ltd. (ePAL) - Sydney 12 September, 2011, 03:04Be the first to give this comment the thumbs up 0 likes

An excellent assessment in my view. I would also add to Brett's conclusions that the loss of consumer day-to-day interaction with a bank will make it much more difficult for that bank to take risk and pricing decisions. Whoever controls the phone will become the intermediary that provides the consumer with all those other "regulated" products - and banks will have to share their margins in future with these new "distribution partners".

A Finextra member
A Finextra member 12 September, 2011, 06:41Be the first to give this comment the thumbs up 0 likes

Brett, very nice article - I totally agree with your conclusions.

An interesting trend here in Italy are banks who - understanding the threat - are trying to expand their reach to mobile operations.

One example is Poste Mobile (http://www.postemobile.it), an ESP-MVNO subsidiary of the Italian Postal Bank (http://www.posteitaliane.it).

Being an ESP (Enhanced Services Provider), Poste Mobile adds a number of mobile banking services laid on top of Poste Italiane's services and they have full control on pricing (they are both part of the organization) and customer data (customer sensitive information is stored in a separate area of the SIM card). The carrier simply operates as a transport layer for their banking services.

Alessandro

Brett King
Brett King - Moven - New York 12 September, 2011, 06:48Be the first to give this comment the thumbs up 0 likes

Keith,

How do you see Risk being redistributed?

BK

 

Alessandro,

Thank you for the local Italian examples!

BK

Kosta Peric
Kosta Peric - Bill & Melinda Gates Foundation - Seattle 12 September, 2011, 07:00Be the first to give this comment the thumbs up 0 likes

Very good article Brett! 

This subject was discussed a lot in the Innotribe@Mumbai ("Connecting the unbanked") back in June this year. The main conclusion was that the p2p payments ecosystem needs all the players (including banks) to collaborate and build an inter-operable cross-border infrastructure. A noble goal!

As in the example that Alessandro mentions in Italy, banks should jump on this passing train.  

Keith Richbell
Keith Richbell - eftpos Payments Australia Ltd. (ePAL) - Sydney 12 September, 2011, 07:59Be the first to give this comment the thumbs up 0 likes

Brett,

The point I was making was less about Risk being redistributed and more about the lack of transactional data that banks currently use to assess credit risk and transactional risk. If banks no longer "see" card transaction data, for example, how do they profile customers? Its the same problem banks will have in future with the personalisation of products, cross selling and upselling. There is of course another problem over the horizon, the monumental shift in where retail funds end up. When salary payments start going directly into iTunes accounts the banks will see $billions move out of their balance sheets.

Keith 

A Finextra member
A Finextra member 14 September, 2011, 11:26Be the first to give this comment the thumbs up 0 likes

This assessment is fine when it comes to transactional activity, i.e. making payments.

However, I don't believe providers such as mobile companies and the like will supplant banks, simply because of the costs, etc. that they would be taking on with regard to e.g., management of bad debt, reserve assets/capital, etc., if they were to become fully-fledged deposit takers in the same mode as the banks.  Why would I arrange for my entire salary to go to a mobile company (or to iTunes!)?  Do they provide the same deposit guarantee?  Are they really as 'safe' as a bank?

What I think is more likely is that these people will provide (as they already are to some extent) alternative payment mechanisms for 'mainstream customers' and more likely challenge organisations such as Visa and MasterCard for their business in moving money about.

Yes, they may well provide basic banking to the fringes that banks don't want, and they may move a little up that value chain, but unless they become a bank, they can't provide 'banking' to many people as they understand it and need it.

It's a big leap for 'mainstream customers' to switch to a mobile phone company, from a mainstream bank, for their main banking requirements.  Maybe it will happen, but I'm not holding my breath.

Brett King

Brett King

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Moven

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This post is from a series of posts in the group:

Innovation in Financial Services

A discussion of trends in innovation management within financial institutions, and the key processes, technology and cultural shifts driving innovation.


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