Will Banks Ever Be Successful in Mobile Payments / Financial Services

Vinod Sharma, Chief Technology Officer at Econet Wireless Zimbabwe

03.10.2016 11:30 am

payments

Abstract – This article is only meant for discussion and healthy arguments, its not a conclusion by any means this is just an assumption and current picture focused on African & few other markets. Today payment industry can be compared with either payment war, payment jungle or even just payment storm. On the other hand how Mobile Financial Services have brought FinClusion (financial inclusion) to millions of people that have no access to traditional methods of banking. In many parts of Africa, there simply exists no bank infrastructure for people to be able to bank in the traditional way. Even where they do exist, people do not dare to enter into the big bank halls due to killing charges, KYC requirement equivalent to climbing the mount everest and time to travel miles to go or even time to stand in long queues or have the patience to go through the bank’s processes. Where MFS providers in the name if FinClusion have done wonderful job by cutting all these barriers in one single shot. So the question here is "Will banks ever be successful in mobile financial services" with their hundred year old mind set and business rules.

This article is focused on high level discussion, a polite and respectful attempt to show case what is happening in payments, financial inclusion(Finclusion) and cross border remittance (Domestic and International) industry and contribution / impact by MFS providers or non bank companies (MNO’, 3rd Party payment or wallet companies and finclusion drivers) and Banks well known campuses for all type of payments i.e mobile, internet, paper, plastic cards and even vouchers. This article can help but only on high level understanding. Readers who are interested to know some more details on each one of them are suggested to read them separately and get complete insight. Experts in any form of payments like mobile, Internet, paper or card should not get disappoint after reading this as said its not meant for detailed or deeper understanding. In case needs detailed information or deliberation is needed on any part please feel free get in touch directly. Read about Author at : About Me

Introduction – If we had any global ministry of innovation for regulation and control then for sure on date cash will be only the single king. In a country like Germany, heart of Europe still heavily rely on Cash where America’s more then 55% payments are non cash. This is where the mobile financial services come in. These financial services or banking services (Not necessarily from banks) should be treated and actually it is; “A basic human right”. Have to allow small-scale farmers, low income community, financially excluded community to be able to send, receive and spend their earnings on time and with safety (Transaction without Cash automatically exclude 50% risk). As on date (still many places across globe) people have to wait overnight in queues to access cash which they get in return of hard work. As soon as cash comes in their hand second worry starts which is security & safety as they travel with the money. Through services like mobile money, mobile payments, savings etc people are now able to access their money from their mobile phones, receive payments, make transactions and even send their relatives money.

In the changing banking (Led by non Bank financial service providers) landscape, whilst banks are trying and in with full frustration enforcing their financial husbandry, they are merely making any effort to engage on how to deal with the impact of Fintechs. Fintechs majority of them fall under one of the two categories - Payments or Lending. Given that these have been the strongholds of financial services institutions, long term sustenance of the institution would depend on addressing these twin areas effectively. Having their focus on the long term stability of the institution, FinTechs increasingly need to take steps to evaluate the following. Convergence is the new language of money. Money needs to follow you and not the other way round like the traditional brick and mortar channels.

Main Story – Time have changed and with change comes opportunity and this is where non-banks like MFS providers have swooped in with their higher rates of innovation. Interestingly almost all of them are coming or have came out of financial or payment industry. Security relative stability and trust in the consumers' eyes, more efficient and transparent cost structures and exciting new models of banking (Not related to Bank) are on their agenda as master success keys. However, to say when banks will be successful against non bankers seems a bit difficult. Banks are believed that they can, but only if first they accept the change (50% problem solved here), secondly radically innovate and change their business models. But this is where the catch or show gets stop as well and its not all easy. The task at hand is quite monumental (Yes monumental meaning about to be historical) to get answers for our main question; “Will banks ever be successful in Mobile Payments or Mobile Financial Services”.

Banks have to start playing catch-up to the non bank’s banking services providers. But it can be done (So not impossible), as we have excellent example shown by Equity Bank of Kenya which launched an MVNO solely to have a new and efficient distribution channel for its banking products. Over the past few years, the face of financial payments in most developing countries has taken a radical change from a bank led model to non bankers dominated model. This change has brought about financial inclusion to most marginalised citizens and has greatly brought efficiency in the payment industry. This article will focus on why banks mobile banking will struggle to come at par with non-banker (FinTech) mobile financial services suite and happy to get feedback in agreement or against with reasons as these are pure my own views.

Accessibility is a critical success factor for any service. Financial technology will make banks more vulnerable and less profitable. But there is neither a capability nor a will as on date to kill them off.The role of informal institutions in providing financial services to the members of the community, and concludes by highlighting the opportunities these are present for formal financial service providers but in order to ensure accessibility of banking services, a bank has to have a wide branch network of fully branded brick and mortar marble banking halls with all the necessary security systems. The set up costs of these are so high and to recoup the same, the bank has to pass on the cost to the ultimate consumer.

Non-bank financial services providers on the other hand have embraced the concept of an extensive agent network at minimal cost. Non-bank’s agent network is usually dense with at least 1 to 3 agents for every 1km radius. Usually the cost of setup and signage is borne by the agent itself in a bid to be more visible and to attract more customers as revenue is highly dependent on the volume of transactions pushed by the agent. This is another key factor of success where others have very high interest in your business as part of their business.

A subscriber does not need to travel long distances or fork out any money access an agent and perform agent centred transactions. Due to the nature of business, non-bank’s have excelled in “24x7, around the globe, use me” phenomena. This assures timeless and borderless access to services which provides for ease of use, more transactions and higher revenue for the non-banks. Banks on the other hand have limited operating hours and for those who have utilised technology by diffusing access to service from banking halls have a great limitation of country borders. Non-bank financial service providers makes money on transactions but banks earns on money remain in account (Traditional Banking Model, may be different know in diffrent countries).

In order for any business to thrive, it has to observe a wide cost to revenue ratio, however banks are subject to a high customer acquisition cost at $10 to $100 per customer whereas non-banks stand at between $2 and $10. This acquisition cost has a ripple effect on the charging structure throughout the life cycle of the relationship between the bank and the customer. Naturally, when the cost of customer acquisition is high, the resultant transactional cost will follow the same trend. The cost of transacting on a banking platform is very high compared to transacting on a Mobile Money platform. Non-bank’s interest in retaining subscriber is more then banks by giving service which may or may not generate revenue and always try to run promotions around same to win back.

The world is currently facing an economic crisis and most people are living on a hand to mouth basis. Banks go against the economic tide by encouraging savings (Which is correct and required for country economy and betterment of each person life) while non-banks encourage spending. There is little savings and investment in most countries hence most citizens spend whatever they earn on basic survival requirements. Non-Banks were quick to realise this and enabled ease of payment for most commodities through merchant payment facilities and payment for most utilities and bills through bill payment services.

In case of New Start up – non-bank helped boost GDP by helping people with the will to startup their own business and grow, free consultation and support – “You Grow - I Grow” philosophy. For distribution channels money distribution should be treated as distribution of cigarettes, coke & water bottles; which MNO’s can do easily with flexibility and banks never thought of creating Agent networks where non-bank’s key success factor is agent banking only, on Limits side mobile money services limits set on upper limit and for banks its on lower values. So non-banks financial services whole game is on volume and bank only wants value.

MNO and few other companies (Later known as Mobile Financial Service Providers) saw the difference and jumped in between banking and bank and successfully got them divorce or at-least manage to find their relationship with banking. Unfortunately most bankers are still not convinced that these scenarios will play out. These bankers are hoping that their retirements hits before they have to make a decision. The board of directors of a lot of community banks feel that they are the pillar of the community and the relationship will continue to be the answer. Bankers must face facts and learn what is going on outside of their four walls. They may wake up to late.

The so-called "haircut" imposes comes along the way that helps in worsening the problem in negative smiley way. Solution that is hastily designed to fall with large sums in offshore accounts can be avoided very well with MFS. Mobile Payments expected to explode beyond 3 trillion euros by 2020 , Mobile Money save 2 billion USD for few African countries , Mobile Money is not just cash in , cash out via agents any more or P2P money transfer Africa have given new and very different dimension and speed of like blink of eyes , getting Money from UK , US or any where in the world within seconds around 24X7 directly to your wallets , all bill payments , merchant payments , loans , insurance …. and never stopping or ending story.

In order to improve profitability and gain relevance in the mobile payment space, banks should invest more in market research and gather the requirements of the markets they operate in. this is easily achieved by setting up a dedicated R and D division and allocating an adequate budget for this cause. Basing on the closed nature of core banking systems, banks can separate a mobile money system from the core banking system to achieve the flexibility required from a mobile payment system. The restrictive KYC requirements can also be applied in a tiered approach depending on the value at risk and the transactional volume of the account. A number of banks in Africa have embarked on agency banking to increase their footprint in the operating countries. Banks need to take a radical change from their current modus operandi in order to beat non-banks in the field of mobile payments.

Fintech’s also known as banks lunch-eaters. FinTech services are really new phenomenon that is fundamentally different from the previous 4000 years of banking. The forces moving this revolution ahead are also known to almost every single bank which are consumer needs, speed, less complex KYC and customer demand “Give me what I want” and “Stop pushing what you have and repainted for me”. Identifying the services as hotspots is daily FinTech activity. Which areas of banking do Fintech covers as on date; most likely retail banking.

Most interesting scenarios to observe is to see how do major global banks reacting to this (Like HSBC, Citi, Santander and others). To see how these major institutions are reacting to FinTech. We need to learn about cooperative-competitive techniques and take a specific look at innovation labs and dedicated FinTech VC arms run by major banks.

The Fintegration (financial services integration) and delivery of fin-services are changing and coming out as service and platform which can house new channels, products, partnerships and opportunities . Banking as a Platform (BaaP) and Banking as a Service(BaaS) are new alternatives. Strategies around BaaP and Baas require a different approach to architect business and services. Most of the innovations in financial services including Insurance are coming through leaders who are very new to the industry or come from out side the industry. Saas (Software as a Service), IaaS (Infrastructure as a Service) and PaaS (Platform as a Service) might give birth to industry specific services and platform in future such as Baas and BaaP (Banking as a Platform).

The correlation between income and access to formal financial services is still very strong; however, this landscape is now changing with incumbents and mobile/internet innovators now integrating with the main-stream banking system & support through central banks relaxed regulatory frameworks i.e self regulation upto an extend by FinTech service providers really pushing hard to change the world; entrepreneurs are leading a pack of disrupters, most of them raised in the shadow of companies like PayPal, who wants to change business relationship to money forever.

Conclusions: Running on unknown path without roadmap or direction with due respect running like a headless chicken often result in disasters. I personally have seen and taken part in programs to build my experience or hands on mastery in such situations where Mobile Payments or Mobile Wallet based Cross Border remittances support country economy and proven in 100% confidence level that when it came to the crunch, many countries including Greece, Cyprus & Italy had no choice but to accept rescue terms that affected not only bank bondholders and shareholders - but many thousands of private deposit holders. Their cash or savings were simply scalped and went to help fund the closure of one bank and the propping up of others.

BaaS came as friend for all such companies to break Banks attitude as they were long seen as a highly technical, highly complex with rocket science technology using industry, employing Finantists (Financial Scientists), highly regulated industry dominated by giant banks that were only doing one thing that was to resist disruption. Banks should take back seat as clerk for reconciliations and accounting units and regulator should allow MFS companies to innovate and bring new solutions and products in no time and make customers life easy , less costly and much faster. Your views and comments are welcome.