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Tech & TradingJanuary 3 2012

Are banks failing to fulfil their mobile potential?

The potential of mobile devices in payments, banking and financial services has yet to be fully realised, despite the fact that mobile technology is bringing a profound shift in the way that the world’s population interacts and transacts.
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Are banks failing to fulfil their mobile potential?

The world now takes mobile phones for granted and has moved a long way beyond just using them for talking to friends or sending text messages. The ubiquity and connectivity that mobile technology brings is transforming the way in which people across the world experience and access all kinds of financial services. 

For years, discussions in the banking industry have focused on what is possible and how mobile has the potential to change the way that people interact with money. But those changes are already happening. “Will mobile change the world,” asks Ed McLaughlin, chief emerging payments officer at MasterCard. “It already has.”

Anne Bouverot, director-general of the GSMA, the industry body of mobile operators, notes that 90% of the world’s population has access to mobile phones. “I am not sure that we have completely realised the impact of that,” she says. 

Attitude shift

The convenience and the access that mobile phones provide have brought about a shift in how the banking industry conceives what banking is, and who it is for. The paradigm shift could be compared to the industrial revolution, which used tools to transform lifestyles, or the internet revolution, which connected people and information. Ms Bouverot argues that it is not so much thinking about mobile in terms of a revolution, but as a means of connecting everything that is already out there. It is a shift, she argues, to the concept of “connected economies”. 

Mobile devices, whether they are basic phones or smartphones, are so useful because people carry them all the time. “It is the first thing they touch in the morning and the last thing at night,” says Mr McLaughlin. And because of this mobility, the device is a tool that can be used for all kinds of financial interaction. “Never before have we had a device near the consumer that we can communicate with them, before, during and after a transaction,” says Mr McLaughlin. 

Tomasz Smilowicz, global head of mobile solutions at Citi Global Transaction Services, argues that mobile technology is transformative because of the increasing proportion of the world’s population that has a mobile phone. He adds that such phones open up opportunities to increase economic activity. “Mobile phones are not only used to identify business opportunities, they are a tool for settling the transaction as well,” he says. 

Mr Smilowicz says that this technology has the potential to drive future gross domestic product (GDP) growth. He points to World Bank research that indicates that an extra 10 mobile phones per 100 people in a developing country boosts GDP growth by 0.8 percentage points. 

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Productivity boost

Abdul Rahman Awl, a board member of Dahabshil Bank International, which is part of the group that operates a money transfer network in Africa, argues that the biggest impact of mobile phones is in terms of productivity. He gives the example of small business owners in Somalia now trading with companies in Dubai; these people were only able to do one or two transactions a year through traditional payment mechanisms. “With mobile, because they can transfer money instantly, the volume of their business increases tremendously,” he explains. 

Not only does mobile have the potential for fostering economic growth, but also for raising the speed at which money moves through the economy. Mailing an invoice for payment in 30 days, writing a cheque, posting the cheque, paying in the cheque and waiting for the cheque to clear are all stages of a traditional transaction that can now be removed. For example, when goods arrives at a grocery store, the shopkeeper can sign for the delivery on a smart device, such as a tablet, and that signature is taken as the authorisation for payment so that the funds are immediately transferred to the supplier’s bank account. 

Such developments are taking place in South Korea, a market that has a high penetration of smartphones. Citi has introduced a mobile collections solution that is now being used by Coca-Cola’s South Korean bottling partner, which removes the need for cash transactions and streamlines payments.

Such an example is just one of the ways in which mobile can be used. Mobile payments, mobile money, mobile banking, mobile financial services are some of the ways of classifying what is possible with mobile devices and money. And given the diverse ways in which mobile can be used across the world, there are many ways of categorising what is possible and what is already being used. 

Breaking it down

Francesco Burelli, a partner at Value Partners Management Consulting, is one expert who has tackled the task of creating a typology that encompasses the vast range of how mobile can be used. 

Broadly, he explains mobile payments can be divided into three main types: money transfer services – payments from account to account within a person-to-person context; remote payments – the purchase of goods and services through mobile; and proximity m-payments – near-field communication (NFC) payments that use a mobile to tap against a reader.

Back in 2005, NTT DoCoMo in Japan partnered with Sumitomo Mitsui Card so that payments from mobile phones were possible. As of September 2011, 16 million people in Japan were using their phones to make payments

There are numerous combinations in how these can be developed and used. “These three payment types are taken to market as a standalone proposition or as an add-on to mobile banking propositions,” says Mr Burelli. There are differing degrees of the sophistication in how mobile can be used in banking, whether it is simply checking the bank account balance, making account-to-account transfers, or a full mobile platform. 

Many make the distinction between how mobile is used in developed and developing markets. In developed markets, for example, mobile can be viewed as an improvement on internet banking or a replacement for credit cards, but often in developing countries the only alternative is cash. 

Mr Burelli notes that in developed markets, mobile is positioned as an additional service. By contrast, in developing markets “mobile has provided a practical solution to the challenge of providing basic financial services at low cost in geographical areas in which internet and bank branches are not available”, Mr Burelli says. 

Mobile is often viewed as a replacement for cash, and Ms Bouverot at GSMA notes that in developed markets a significant use has been for public transportation. In South Korea and Japan, for example, NFC technology has been added to mobile devices so that passengers can tap their phone on the turnstile at subway stations. 

Back in 2005, NTT DoCoMo in Japan partnered with Sumitomo Mitsui Card so that payments from mobile phones were possible. As of September 2011, 16 million people in Japan were using their phones to make payments, and more than 12 million of them were using them as mobile credit cards. 

Wallet replacement

Industry executives often comment that the ubiquity of the mobile phone means that people will not leave home without it, along with their keys and wallet. The convergence of the payment cards in their wallet with their mobile phone has been developed in recent years. At the most basic level, tapping a mobile phone against subway station turnstile could be seen as having the same function as attaching a regular public transportation card to a mobile phone. And the introduction of NFC technology to bank cards and credit cards means that ‘tap-and-go’ payments can be made from a regular bank or credit card account. Contactless cards are viewed by many as the intermediary stage to mobile phones being used for these proximity payments, and eventually doing away with the need for cards – and a wallet – altogether. 

This kind of mobile wallet, or ‘osaifu-keitai’ as it is known in Japan, has been developed by NTT DoCoMo and is now the norm for many Japanese people when making payments. 

There are signs that this idea could be adopted more widely by other markets where payment cards have been a regular way to pay. In September 2011, Google launched a payment application in the US that replaces plastic cards with smartphone technology. The Google Wallet stores a virtual version of a payment card and uses NFC technology so that the handset can be tapped against a terminal to pay for goods. So far there is limited use of the technology, but it is an indication of what is possible and the way in which consumers’ experience of payments is being transformed. 

Mr McLaughlin points out that the significance of mobile is that it is not just about individuals making payments to companies; mobile is also a tool for anyone to receive payments. “Every mobile is a commerce device,” he says. Mobile phones allow individuals, from plumbers to street artists, to accept payments. “This gives merchants access to electronic payments, which they never had before,” says Mr McLaughlin. 

This also applies to e-commerce, where a smartphone can be used to research products, shop for them, and complete the transaction. Mr Awl at Dahabshil Bank International likens the changes that mobile will bring to other major shifts in world history. “Mobile will do for e-commerce exactly what banking did for global trade in the 17th century,” he says. 

Mr McLaughlin argues that the shift from plastic to mobile is “not throwing out what we already have”. He explains that in markets where there is still a legacy card infrastructure, it might be more convenient for a consumer to pay with a card in a restaurant, but to tap their phone when getting out of a taxi. While MasterCard has ‘card’ in its branding, Mr McLaughlin explains that the company is not about cards: it is a payments network. He argues that the plastic card is a convenient way of storing account information that gives access to that payments infrastructure. And that payments network can be just as easily accessed with a mobile phone. 

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Varied usage

How mobile is used varies greatly across the world, and there might be more similarities in how it is used in capital cities rather than in national markets as a whole. Mr McLaughlin argues that the categorisation between the use in developing and developed markets “is too blunt a distinction”. 

In some respects, South Korea could be viewed as a developing economy, but in terms of its use of mobile and smartphone technology it is highly developed. And in the US, which has a developed economy, the potential of mobile has not been realised in terms of checking bank account balances or receiving SMS alerts. 

By contrast, in emerging economies such as Kenya, mobile technology has been used to leapfrog the traditional payments infrastructure of ATMs and bank branches so that phones are used for payments in a more advanced way than can be found in many developed countries. 

Kenyan money transfer service M-Pesa has been the poster child of what can be achieved with mobile payments. In October 2011, M-Pesa was processing more payments in Kenya than the money transfer network Western Union did globally. Safaricom, which operates M-Pesa, has now formed agreement with Western Union so that its mobile payments network in Kenya could be extended internationally. Such developments indicate the opportunities that can be exploited in the remittance business of migrant workers. 

A means to fight poverty?

The ability to connect people that have been geographically isolated and excluded from financial services will have a significant impact on people’s ability to be economically active. 

Dr Tilman Ehrbeck, CEO of the Consultative Group to Assist the Poor (CGAP), argues that mobile technology has the potential to transform lives in the developing world and has a key role to play in alleviating poverty. “The poor in the informal economy and micro enterprises need a broad range of financial services,” he says, adding that it is even more critical for the poor to have access to credit and savings as their incomes tend to be more irregular. 

Mr Ehrbeck explains that this requires a whole ecosystem of providers, whether it is for remittances, credit, savings or insurance. “A low-cost retail payments infrastructure is critical to enable all of that,” he says, describing it as the “backbone” of the financial ecosystem. 

An example of where mobile is used to financially include a large unbanked population is in Pakistan, where Tameer Microfinance Bank and the commercial bank UBL have launched separate mobile initiatives. In the case of Tameer Microfinance Bank, which is majority-owned by the mobile operator Telenor, it has introduced the ‘easypaisa’ money transfer service. The remittances do not rely on people needing a bank account, or even mobile phone, to make transfers, as they can access the service through easypaisa’s network of agents. By July 2011, easypaisa had processed 23 million transactions with a total value of $500m. 

Changing the world?

Services such as these signify the potential of how mobile can be used for payments, banking and financial services, and changes the way in which people think about what banking is and who it is for. “Mobile brings the bank to the people, rather than the other way round,” says Mr Awl. 

Whether these developments challenge the traditional view of what banks are for is a source of heated debate. Mobile money – and mobile payments – are still distinct from the intermediary functions of banks, but the use of mobile technology offers so many options in how those services can be delivered. 

Mr McLaughlin comments on the question of whether mobile changes notions of what banking is: “It enhances the view of banking, whether you are moving, holding or lending money,” he says. “We are not creating an alternate universe.”

In this sense, mobile is not an end in itself but a tool to connect what is already out there and make it more efficient. And the creation of these 'connected economies' has the power to transform the way in which people across the world interact and transact. 

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