Mobile payments are a hot topic in the financial industry and a top priority for banks, and with good reason. Such services are a strategic opportunity for banks, both as a defensive play against new entrants, and as an opportunity for growth by converting cash into electronic transactions.
There are five billion mobile phones worldwide but only two billion people have a bank account. Consumers are using their mobile phones to make payments in over 130 deployments with 100 more planned and several new initiatives are announced each week. This is a growing market predicted to increase to 900 million users and $1 trillion in transaction value by 2015, according to a recent white paper published by SWIFT, the global financial services provider.
SWIFT says it sees three areas of strategic opportunity for banks:
- Mobile banking — using a mobile phone to access a bank account and make payments — can provide more convenience to customers. Banks should actively invest in and expand this channel now, in particular for corporate treasurers;
- Mobile commerce — using a mobile phone to buy products — is driven by e-commerce companies looking to uplift their product sales and generate revenues from advertising. This is more a 3- to 5-year play as the customer/retailer value still needs to mature. Banks should partner with these companies to learn and offer their financial services as part of the shopping experience;
- Mobile money transfers — using a mobile phone to send money to someone — can provide a basic payments service to the un/under-banked in a developing country by converting cash to electronic transactions. Such services are currently often run on a domestic basis by mobile network operators, but they are now interconnecting to capture the higher-margin international person-to-person remittances. Here, SWIFT recommends banks individually set up a joint venture with a telco as well as collaborate to launch their own global mobile money transfer services.
Many banks have launched a mobile payments service or wallet, but this opportunity also brings challenges. There are many new entrants — mobile network operators such as Vodafone, e-commerce companies such as Google, retailers such as Carrefour, payment service providers such as PayPal, as well as money transfer operators and card companies — all investing heavily in mobile payments.
This is still an immature business where only a few initiatives have succeeded in attracting a significant user base. And there is still an unclear business case for many banks whose management may wonder what is the up-sell for them when a payment becomes mobile and who may see little value in a telco-led model, according to the SWIFT white paper.
This is also a complex market, one in which legal frameworks are not yet harmonized, and technology is still evolving, and where banks may feel they lack expertise but have to jump in anyway.
Almost every day seems to bring an announcement of a new mobile commerce trial. Most involve some variation on a smartphone equipped with a near-field communication (NFC) module enabling customers to pay for goods and services without physical cash or cards.
Yet, it is fair to say that in developed regions none of these schemes has yet enjoyed mass acceptance. “Putting mobile commerce in perspective, out of a hundred transactions that happen in the retail space well over 90% happen at a physical point of sale terminal using a traditional card and have nothing to do with mobile,” says Samantha Ghiotti, director of Anthemis Group, a consulting and investment firm focusing on financial services innovation. “About 8% of transactions happen online. Just 1% or less of the universe of transactions happening today could labeled ‘mobile transactions’.”
That said, “I think a number of banks are beginning to realize just how immense the potential is in terms of transforming the way businesses interact,” says David Sayer, global head of retail banking at KPMG International. “There are a number of drivers. All banks want to have loyal customers. But they have had business models where they’ve tried to attract disloyal customers from other banks. They’ve offered the best price for savings or short-term loans. So they get a lot of customers who are attracted solely on price, then leave them for a few basis points. What we’re finding with mobile and digital offerings is that you can attract loyal customers.”
Banco de Chile, for example, offers an app to its customers which identifies discounts for them at restaurants and retailers. “The impetus here is that it’s one of the few areas where banks have an opportunity to win quality business with sustainable relationships,” says Sayer. “The bank that comes up with applications that really tie in with mobile commerce systems has the potential to attract quite a high volume of customers and people are beginning to realize that.”
Wim Raymaekers, SWIFT’s head of banking markets, predicts that banks will increasingly open up their APIs for third-party developers to develop payment services. The APIs can stimulate creativity as part of an effort to make sure that, at the end of the day, it is the bank that is used for the payment, he says.
Even if banks are proactive and appear well-positioned they can not afford to be complacent. New entrants can be surprisingly nimble. KPMG’s Sayer sounded a word of caution for banks and card issuers. “A Chinese bank asked me: ‘If Steve Jobs had gone into a bank instead of Pixar when he left Apple, how would any bank compete with that bank now?’ That absolutely applies in this mobile and e-commerce space,” he says. “[New entrants] can produce something that is just so much more convenient, quicker, gives more management information and is more reliable than any alternative.”
–Jennifer L. Schenker contributed reporting to this story