When a Telco becomes a better bank…

The announcement that the Canadian carrier Rogers Telecom has applied for a banking license should hardly come as a shock to the retail banking fraternity. There is already a plethera of mobile carriers fully engaged in mobile payments right now, from Safaricom in Kenya, Orange (with Barclays) in the UK, the ISIS collaboration in the US, LG Telecom in South Korea, and the list goes on. Everywhere you look right now, there are carriers trying to muscle in on the mobile wallet and payments space.

Should Banks be Worried?

They should be terrified.

The fact is that it makes perfect sense for mobile operators to start thinking about offering banking products and services as we dispense with plastic and start using our mobile phones as payment devices. Increasingly, banks are being detached from the end consumer by a technology layer. Let me prove it.

PayPal reinvented the customer experience layer around payments, and in doing so set the benchmark by which Peer-to-Peer payments are made. Sure there are banks at the back-end of PayPal, but today I can take out my phone or get online and send you money and all I need to know is your email address or your mobile phone number. This is compared with the average wire transfer which requires account number, account name, bank name, bank address, SWIFT Code/ABA Routing Number or IBAN, etc, etc. Now we’re all wondering why it’s simpler, and in many cases cheaper, to use PayPal than a wire transfer through our traditional bank. Why go back to complexity and friction?

Today, if a bank wants to allow their customers access to Mobile Banking they have to go through a layer of technology called an App Store (or Marketplace). Sure, there is HTML5 and mini-browser mobile sites, but the fact is that if you want best-in-class interaction and engagement, you need to go App. So today, a bank must ask Google, Apple or RIM for permission to have clients access their bank via a smartphone.

Mobile Carriers are a significant threat to day-to-day banking

Are Telcos a Threat to the High Street Bank?

Well, yes and no.

If you look at broader offerings of financial service products, then mobile operators really don’t want to play in that arena. What most of the mobile operators are looking to do is play in the payments space, taking control of the wallet on your phone or offering pre-paid debit card type services.

In 2008 about 17% of the US mobile subscriber base were on prepaid deals, but since the GFC (Global Financial Crisis) approximately 65% of net new subscribers are prepaid users. In emerging markets like India and China 90%+ of the subscriber base is prepaid, and the same counts for sub-Saharan Africa, and broadly across Eastern Europe and Asia. So what does this have to do with banking?

Prepaid subscribers for mobile phones generally speaking are more likely to be at the lower end of the scale for retail banking (less profitable, underbanked) or even in the unbanked segments. These are customers who don’t have extensive multi-bank relationships, and who increasingly are moving to products like prepaid debit cards to facilitate their day-to-day banking needs.

So guess what happens when you combine a prepaid debit card with a prepaid mobile phone? It’s a marriage made in heaven! What’s the difference between making a telephone call, an ATM withdrawal or a debit card transaction at a merchant – they are all just transactions from a value store.

It’s likely that as Telcos figure this ‘secret’ out that they will be aggressively going after that marginal layer of customers that are underbanked, and promising utility that a bank can’t provide in the payments space. The combination of prepaid phone deal with a prepaid debit card will likely result in the loss of around 10% of the retail banking consumer market in developed economies in the next 5 years in my opinion, as they migrate to this type of modality.

So What? We can Afford to Lose a Few Marginal Customers!

This will be the justification for lack of action from many retail banks; that the loss of these less profitable customers is not a bad thing. There’s two problems with that logic.

Firstly, this shift will create momentum behind changing payments behavior that will fragment day-to-day banking for many customers. Increasingly even your best, most profitable customers will be abandoning the old ways of payments to go for the utility of a combined mobile phone and payment device. Once I am managing your day-to-day spending activity, I can start to influence your decisions, spending and choices for more complex financial products too.

Secondly, the fact is that even these ‘marginal customers will likely be extremely profitable for Telcos, because to them it is just new revenue, and they don’t have all the expensive infrastructure that banks have around the very traditional (some would say antiquated) retail banking system.

The implications for banks is that they lose touch day-to-day with customers, and the day-to-day retail front-end of banking becomes owned by telcos, App stores, social networks and marketing organizations. The bank becomes the back-end manager of risk and the product manufacturer, with the lowest margin of the whole value chain.

Comments

  1. Petervan says:

    Brett,

    Great post. Some remarks:

    - it looks we see emerging two categories of customers: customers for “banking” services and customers for “transaction” services (“making a telephone call, an ATM withdrawal or a debit card transaction at a merchant”)
    - IMO bigger banks are not interested in the unbanked. Even if it would be possible to set-up a no-frills account at dramatically lower cost, they would see this as a way to fatten their margins rather than offering a solution at low price for that target market. I have nothing against the choice of fattening margins, but it is a conscious choice by banks
    - It looks to me that banks have a distribution challenge to make the last mile. Almost like Telcos delivering broadband… That’s why i have seen some greater openness from banks to team up with telcos to cover that last mile, as the telcos ARE already in the hands of customers
    - I also suggest you read – if not already done so – Mark Pesce’s essay on Hypereconomics, which is so relevant to this discussion. Here is the link http://blog.futurestreetconsul.....economics/

    Best regards

    @petervan

    • bank2book says:

      Peter,

      Thanks for the feedback. I’m worried that utility will push banking into something that is a lot less defined as ‘only through a bank’, that the functionality of banking will become more embedded in mobile phones/tablets, etc and integrated into so-called third-party apps and experiences. I’ve given examples of this before, but typically buying a car, a home, travelling, shopping, etc where you don’t go to the ‘bank’ to get the product or service, but it is integrated into what you are trying to accomplish. In this way, I don’t think this issue of separating the front-end of banking from the back-end “BANK” is limited to payments and unbanked – I think the risk is much broader and disruptive.

      Thanks for your thoughts.

      Brett King
      Bank 2.0

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