The attention given to mobile banking (m-banking) has grown enormously in the past five years. It doesn’t seem to be ona par with the hype that mobile payments (m-payments) received 10 years ago, but there is a more profound interest and belief in the opportunities that the mobile infrastructure could bring to financial services.
One of the main focuses of m-banking is creating access to financial services for the un(der)-banked population in emerging economies. The geographical focus of m-banking is therefore mainly on developing countries in Asia, Africa and Latin America. Research conducted in 2009 by Signals Telecom Consulting predicts that 35% of the mobile subscribers in Latin America will use m-banking services by 2014.
Various existing programmes to stimulate investigation and investment in this area support this belief. The Inter-American Development Bank (IDB) provides several funding programmes for m-banking initiatives: infoDev, a World Bank global grant programme, and Consultative Group to Assist the Poor (CGAP) offer dozens of research reports and some toolkits to further investigate market opportunities for m-banking.
Emerging Markets Payments Infrastructures
Typically, existing payment infrastructures in emerging economies are underdeveloped and modestly used. Even where an automated clearing house (ACH) or similar system is present to facilitate inter-bank transactions, then the volumes processed are generally very low in comparison to western Europe. There are a number of reasons for this situation. First, society in these countries is very cash-oriented, due to limited access to banking services and distrust of the financial system. The main alternative to cash is the cheque, which is not (or only partially) processed electronically and can’t be regarded as an efficient and secure payment method. Second, the payment services that make use of electronic channels, such as internet and mobile channels, are often mono-bank solutions offered as additional services to existing customers. Co-operation between banks to jointly offer payment services to the general public, which allows for inter-bank transactions, rarely occurs.
Third, in most countries the number of mobile network operators (MNOs) that operate in the market is significantly lower than the number of commercial banks serving the market. In many cases, a single MNO has a dominant position, often due to previous state ownership. Additionally, the regulation for the financial market has a longer history and is more developed than the regulation for the telecom market, and co-operation between regulators is lacking and much remains unclear.
The market coverage of MNOs in emerging countries is significantly larger than that of banks: only 20-30% of the populace have bank accounts, whereas more than 80% of the population has a mobile phone. It is obvious that MNOs have easier access to the market, as they already own the relationship with the client and can offer them additional services. Moreover, MNOs control the phone’s SIM and the mobile network. So, whether a SIM toolkit or unstructured supplementary service data (USSD)-based services are used for m-banking, the MNOs are responsible for both, which puts them in an even more powerful position.
Banks Must Co-operate in Order to Gain Market Advantage
Now where does this leave the banks? There are some bank services offered that involve mobile, but these remain mono-bank solutions and in many cases a single mobile operator is involved. These initiatives are certainly sub-optimal, and provide limited benefits to the end user. Moreover, they are mostly aimed at providing additional services to existing customers.
A primary goal of the m-banking movement is about banking the unbanked: getting new customers to use banking services versus moving customers to a new channel. So most of the mobile services that banks offer nowadays do not embody what IDB, the World Bank and CGAP envision with m-banking. Moreover, many banking services, such as payments, are by nature a two-sided market and therefore will only be successful when they can benefit from the network effects. Large, collaborative networks are essential for this to happen.
In order to be competitive in the m-banking market, the banks should seize this opportunity to work together and create an efficient and inclusive banking infrastructure with broad reach. By doing so, they can potentially enlarge their client base by a factor of four and all participants would benefit. Moreover, co-operation between banks will strengthen their position relative to the MNOs and ensure that all operators take part in their system, instead of the other way around. One of the reasons that may prevent co-operation is the existing financial regulation that could prevent banks from working together on this scale. But if they jointly create a new, common payment infrastructure, where all banks can continue to provide unique services, it will be difficult to prohibit. Alternatively, banks could combine existing ACH services with their mobile financial services and effectively make use of all existing infrastructures, lowering both investment and transaction costs.
Huge potential exists for banks to use the mobile communications infrastructure to provide both basic and advanced financial services, particularly in emerging economies. But in order to seize the full potential, co-operation between banks is crucial. Both financial regulators and central banks can play an important role in facilitating and stimulating banks to create a common infrastructure and protocols for m-banking. If this is not realised, competition on an infrastructure level will occur, unnecessarily increasing costs that will benefit no one.
The resulting association of co-operative banks will then need to work together with the mobile network operators to jointly agree on business models and service levels that allow each party to create its individual value proposition. If the banks do not collaborate, the MNOs will remain in the lead.
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