According to McKinsey, there are two billion individuals and 200 million small businesses in emerging economies lacking access to formal savings and credit, forcing them to transact exclusively in cash. At the same time, smartphone and mobile phone ownership in such areas is exploding. Recent surveys conducted in emerging and developing countries show the vast majority of adults in these areas own, or have access to, a mobile phone.
These two converging trends – large numbers of unbanked and underbanked persons combined with greater mobile phone access – creates a perfect storm for the rise of digital financial services. Suddenly mobile carriers have an opportunity to participate in the provisioning of financial services.
These services are impressively profitable. Some even qualify them as “extracting activities” because of a very high fees that apply especially to small transfers and remittances. Fees of 10 percent or more are not uncommon in many countries, including those with large portions of underbanked people. In 2014, a GSM Association study showed that mobile money businesses can be expected to generate profit margins greater than 20 percent for mobile operators in mature deployments.
Beat them, join them, avoid them?
Mobile carriers have many advantages when it comes to financial services provisioning. First, they have vast agent networks where subscribers can top-up their mobile phones. Such networks can easily be converted into cash-in and cash-out points. Also, there are far fewer mobile operators than banks, since wireless frequencies are a limited resource; this means that a typical mobile operator often has more customers than a typical bank. So, mobile operators can offer financial services to people with lower expenses, charging higher fees.
This is why banks’ first and perhaps natural reaction was a staunch opposition: in many countries, the industry sought regulatory protection to defend their ground. In some places, like Pakistan, this succeeded - mobile money providers cannot operate there without a banking partner. In others, like Kenya, the world's leader in financial inclusion via mobile financial services, it didn’t. The first attempt towards forcing mobile money pioneer M-PESA into becoming a licensed banking institution was defeated in 2009: regulators deemed M-PESA a compliant retail money transfer service and closed the case.
The story isn’t over though: ten years later, in April 2019, Kenyan Parliament launched another investigation to determine whether M-PESA and other mobile money services in the country should be separated from their telco parents, and licensed as financial institutions instead.
From a traditional bank’s perspective, what are other possible ways to counter this threat apart from trying to block it? There are mainly two:
1) Collaborate with mobile carriers to offer bank-based mobile financial services solutions. Right now, carrier-dominated or carrier-led mobile financial services have a bigger user base, but this doesn’t have to stay this way.
2) Also, a symmetric answer is possible. While emerging mobile money players attempt to degrade the banks into a mere utility or circumvent them altogether, banks can collaborate in many cases to create telco-free instant value transfer systems accessible from an app, via text message or USSD interface. In this case, the mobile carrier, rather than the bank, becomes a low-value utility.
Weak points of telco-led financial services
The most vulnerable point of mobile financial services is, surprisingly, the banks’ strongest. It is regulatory compliance. Even though initially many mobile money projects could operate in a gray zone, this is not going to last forever.
For the most part, carriers don’t yet enjoy the reputation that banks do in the financial services industry. A field study conducted by several Ghanaian universities shows that mobile money users see the service as complementary to both traditional banking and cash, and conclude that mobile financial services do not (yet) constitute an existential threat for the banks. The study reveals that, irrespective of income, people won’t leave larger amounts of money for a longer time on their mobile wallets. Respondents cite mobile network failures and lack of available cash at agents’ location as a principal disincentives for mobile money usage.
Also, in many countries mobile money deposits do not earn interest, which puts a non-bank mobile financial services in disadvantage.
Tips for a bank-led mobile financial services deployment and planning
When choosing to collaborate with an existing mobile player, approach carriers offering a revenue sharing-based partnership. Mobile operators have a lot to gain from such partnerships; we have seen that operators offering mobile financial services have 15-30% better consumer retention rates. This benefit comes on top of additional revenue streams that mobile financial services present for the operator.
Have in mind that most carriers are facing the threat to become a thin-margin utility or will start facing it very soon. Their revenues are often in free fall, and mobile financial services are a feasible solution for them to mitigate this. If it weren’t for the financial compliance, they would be offering them already. Having a licensed bank as a partner would be a win-win, if market conditions permit that. Even if you’re a mid-sized or small bank with a mobile financial services solution in place, you have a great value proposition for potential carrier partners.
In some cases, it may be feasible for a bank to launch its own MVNO - a virtual mobile operator that provides mobile financial services under the bank’s brand. There are specialized companies that provide a turn-key service of launching and running MVNOs; it is not expensive or overly complicated anymore.
Make as many utility, phone and telecom companies bills as possible available for payment through the service.
Whenever possible, facilitate retail payment with mobile phone, ideally with no POS equipment, to accommodate even the most modest merchants.
Don’t over-rely on apps, offer USSD and SMS interfaces however antiquated they may seem - especially in countries with low GDP per capita. Consider messenger apps as a channel, too.
For a quicker time to market, consider a third-party managed platform to actually implement the service. There are many on the market, with some even available on revenue-sharing basis, without an upfront investment.
Gartner predicts that by 2030, 80 percent of heritage financial services firms will either go out of business, become commoditized or exist only formally, not competing effectively as fintech companies and other non-traditional players gain greater market share. Financial services firms face dramatic disruption from upstart competitors and their ability to survive and thrive will require them to dramatically change their approach.
More specifically, banks should look at the huge market for unbanked and underbanked people through a different lens. They must be willing to collaborate and compromise in order to take advantage of mobile carriers’ scale, while bringing their own unique strengths (regulatory acumen and operations) to the equation.
Partnering with non-traditional players in this way will help banks solidify and build their global presence at a time when their long-established business model is being challenged from numerous sides.