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Mobile Payments: Is Your Bank Putting Its Best Foot Forward?

As mobile communication becomes more and more affordable and user-friendly, mobile banking is gaining increasing acceptance globally. With innovations such as Near Field Communications (NFC), mobile wallets, virtual personal financial assistants and a slew of new and customized applications being developed and adopted, the mobile banking landscape is undergoing a rapid and irreversible transformation, to an extent that monetary transactions are no longer restricted to banks and traditional financial institutions.

Do you know your competitors?

According to a 2012 world bank report on financial inclusion, out of a world population of 7 billion, over 5 billion or 70% have mobile phones and only 2 billion or 30% have a bank account. The huge unbanked population presents a significant window of opportunity for banks. However, banks have not been swift in latching on to this opportunity. Instead, it is the mobile service providers and other non-traditional players who have been the first movers in this space. Mobile airtime providers offer services that allow customers and businesses to use their mobile device to make payments without even having a bank account. Applications such as MPass allow smartphone-to-smartphone payments using only an account and a phone number. Many applications also allow users to transfer money between two mobile phones armed with prepaid wallets. Electronic payment service providers such as Square have taken the concept of mobile wallets a step ahead by tying up with retailers such as Starbucks. Starbucks offers a virtual card to its users, which can be integrated with the Square wallet to facilitate reloading of credits on to the Starbucks card. By simply downloading the wallet on their Android or I/OS smartphones, customers can pay for their purchases by just tapping ‘Pay’ on their mobile devices. As more and more non-traditional service providers start offering p2p transactions and digital wallets, banks face a threat of becoming redundant in the mobile money transfer landscape. The threat has become even more pronounced as mobile network operators, who were initially offering the facility only in domestic markets, have started targeting cross-border transactions as well. For instance, Vodafone Money Transfer in Qatar allows its subscribers to conduct money transfers to ten countries. Card companies such as Visa and American Express are also offering international p2p services.
Do banks really own their customers anymore?

A typical monetary transaction with a mobile device involves three key players responsible for delivering the service to the customer: the bank, the payment gateway and the mobile airtime provider. In case of mobile banking and mobile commerce, such as bill payments and online shopping, the device essentially acts just as a channel enabling the transaction, and the roles of the bank and the telco are clearly defined and demarcated. However, in the case of p2p transactions, the lines between these three entities are often blurred. Such a scenario raises a very pertinent question: who owns the customer?

In today’s era of big data and predictive analytics, owning customer data has assumed considerable significance. As you try to adapt to the emerging ecosystem and deliver a context-aware user experience, you will need to start revisiting customer data, which is growing at an exponential rate. Banks that will be able to use their data effectively and appropriately incentivize the customer for data usage will maximize their chances of trumping the customer ownership conundrum.

Where Banks Still Hold an Edge

Though a slew of competitors have made a foray into the mobile money transfer arena, banks still hold an edge on multiple counts. Take for example the fact that for non-banking service providers, building a remittance corridor can be a cost-intensive exercise with limited revenue potential. The multiple costs associated with managing regulations and compliance will place further pressure on margins. Consequently, businesses for which mobile payments is not a core service may reassess their presence in a sector wherein they may not be owning the customer directly. For banks, on the other hand, the pressures of regulations, interoperability, and technology upgrades would anyway be accounted for in their operating models.

The issue of customer ownership and the ambiguities surrounding regulations and interoperability have resulted in banks adopting a cautious approach towards mobile money transfers. However, as mobile devices become ubiquitous and the preferred channel for financial transactions, you will need to work towards becoming the prime movers in developing and owning a global mobile payments eco-system. Technology has certainly changed the rules of the game by lowering the entry barriers into banking and if anything you do need to worry about which of your non-traditional competitors might soon start shopping around for banking licenses!

I would love to hear your views on how banks can address the challenges presented by this new ecosystem. Please put across your perspectives and suggestions; I’d be more than happy to respond to your comments.

Mobile Payments: Is Your Bank Putting Its Best Foot Forward?

Comments: (4)

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 29 May, 2013, 19:10Be the first to give this comment the thumbs up 0 likes

@TusharC: Nice to see you on Finextra Blog! As I'd highlighted in my op-ed piece in JIBC, virtually every nonbank / mobile payment method in existence today uses banking rails in one form or the other - as a funding source, for executing the transaction or for cash in / cash out process. Carrier Billing is one rare exception, but for reasons I'd outlined in Banks Have Nothing To Fear From TELCOs, they don't seem to be headed for mainstream adoption anytime soon. Furthermore, with increasing regulatory scrutiny over Liberty Reserve et al, the outlook for alternative payment systems doesn't look so rosy any longer. If I were a bank, I'd surely keep an eye on the new kids on the blocks but spend far more time and money on improving my current electronic / mobile payment products so that they enjoy greater adoption. In short, evolution, not revolution.

A Finextra member
A Finextra member 03 June, 2013, 23:32Be the first to give this comment the thumbs up 0 likes

I agree with Ketharaman that banks have nothing to fear, especially when it comes to money-out. It is our experience at Tipalti that the majority of mass-payments to affiliates, publishers, developers, and other suppliers, are using traditional banking systems. When a payment amount exceeds a few hundred USD, more than 90% of payees will choose to be paid via Global-ACH (Local Bank Transfer), wire transfer, or paper check. The usage of eWallets, such as PayPal, is limited to those receiving smaller payments. Payees chose these "traditional" payment systems as they guarantee safe and secure funds delivery and can be used in all day-to-day business transactions.


Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 04 June, 2013, 06:43Be the first to give this comment the thumbs up 0 likes

When it comes to how payees wish to get paid, our experience mirrors that of @EranK. That said, payees don't always have a say. In my personal blog post Why B2B Suppliers Should Accept Credit Cards, I've cited a real life example of why the payer (i.e. buyer) only wishes to pay by credit card and the seller will lose the deal if s/he doesn't accept credit card. In such cases, nonbank alternatives like SQUARE and PayPal muscle their way into the transaction. But, and this is my real point, banks are still present in the transaction. Payee accepts credit card payment, bank collects its regular interchange fees, nonbanks receive an additional fee (from the payee) for extending a merchant account to the payee who wouldn't have got one from bank. In a nutshell, even in transactions frontended by nonbanks, banks don't lose any fees, just that payee bears a higher transaction processing cost.

Ritesh Agarwal
Ritesh Agarwal - On My Own - Bangalore 13 March, 2014, 06:33Be the first to give this comment the thumbs up 0 likes

Highly optimistic people do feel that banks are safe in this scenario. No way can banks save their position in times to come. Banks would end-up becoming just a financial record-keeper for a meagre fee to pass the funds. Anyone who is unable to see it coming is only suffering from mypoic vision.

It is just an adoption cycle which needs some time to build confidence in people and for them to start using more of mobile or alternate payment channels...diminishing need of a bank. Even credit cards underwent an adoption phase. Earlier people used it for small amounts but now people swipe it for any amount. Guys...wake banks are at significant threat.

I always laugh when people refuse to acknowledge an incoming.