As banking by mobile telephone takes off in the developing world, should banks be wary or welcoming of this progress?

Lengthy discussions about mobile telephony take place at almost all banking and payments conferences these days. The banks talk about a mobile payments ecosystem and how they have to work closely with carriers, handset manufacturers, retailers, merchants and more to achieve a share of this new, burgeoning marketplace. And yet, the more this goes on, the more sceptical some become of the banks’ approach and more supportive of the opportunity for non-banks.

This is because many financial institutions have yet to see the threat of the non-banks. The threat is that mobile carriers don’t care a jot about what banks think and will do whatever they want to do that makes sense. This is because the marriages between banks and mobile carriers and handset operators are purely marriages of convenience. If one partner can see greater benefit by taking a larger slice of the cake and killing the other, then so be it. This strikes a chord as there have been two or three big things that have been happening lately.

First, the well-worn story of M-PESA – Vodafone's mobile-phone based money transfer service – and Kenyan mobile network operator Safaricom. It is widely known that M-PESA has been a runaway success in Kenya, so much so that M-PESA is now a bank. It has tie-ups with Western Union and has pushed into other territories, such as Iran, although with less success so far. 

The new kings?

But what might happen here? Could Vodafone and other carriers and mobile telephony firms gain experience through these services that they could then apply elsewhere? Could the launch of peer-to-peer payment services via mobile in unbanked territories lead to peer-to-peer payment services via mobile in banked territories? Could the experience of becoming a large-transaction financial processor in an emerging economy give the operator the knowledge to become a large-transaction financial processor in another?

Yes. Over time, the mobile carriers and handset manufacturers working to engage the unbanked and underdeveloped economies will find the experience invaluable in taking over large slices of banking capability in banked and developed economies. Why? Because this is the classic innovator's dilemma, which says that the incumbents become fat and lazy, and focus on features and functional enhancements rather than disruption. 

The new entrant then comes in with an offer that the incumbent sees as no threat and can be ignored because it focuses on the wrong thing. This is because the new entrant is not focusing on the evolution of the current system based on feature and function, but is trying to do something completely different. In many cases, the new entrant is offering a cut-down offer that is incredibly cheap and easy. That’s what mobile carriers and handset manufacturers are doing with payments and, over time, banking.

Potential game-changer

These developments account for why Nokia and others are gearing up heavily to get into core mainstream finance. In fact, the interesting tie-up between Nokia, Microsoft, Skype and near-field communication services (NFC) appears to be a key here, as the link between payments and mobile is now undeniable. Therefore, we should not discount the importance of Google, Apple and Microsoft building in NFC contactless services into their next-generation services. This will be disruptive. It is why Google is hiring payments people – about 400 so far – and why Apple’s 200 million credit card holders on iTunes are a potential game-changer.

A while ago, telecommunications company O2 ran a series of ads in the UK to launch its card services in partnership with Royal Bank of Scotland subsidiary NatWest. Two years later, O2 has announced that it is moving into a fully fledged wireless payments service in the UK, licensed by the regulatory authority and managed by bankers. Banks must take these developments seriously. After all, as mobile carriers and handset manufacturers learn the business of banking, do we really think that they will leave the business of banking to banks?

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