Taking it to the banks

If this year’s Mobile World Congress highlighted a looming free-for-all between carriers, device manufacturers and application developers/vendors, it’s fair to say that the mobile financial services landscape looks set to become a microcosm of the kind of power play you get when pretty much everyone involved believes they should be the ones divvying out the spoils.

Wherever you look, someone’s talking about Near-Field Communications (NFC), embedded SIMs and who-knows how many m-wallets, platforms and solutions. With Informa research projecting mobile financial services revenues of $5.4bn by 2013, the biggest challenge right now seems to be finding and fine-tuning a business model.

For real money to be made, it’s becoming clear that success hinges on the capacity of a very broad spectrum of service providers and carriers to play nicely together. And when you consider that at least two of these players—the banks and the carriers—have historically viewed customers (and the revenue they generate) as ‘theirs’, it’s hard not to foresee a rocky road ahead as the telcos in particular look to achieve and retain a toehold in what promises to be a very lucrative market.

Datamonitor analyst Gilles Ubaghs describes the recent upsurge in new carrierbased services as a “land grab.” Pointing to ISIS—a mobile payments joint-venture between AT&T, Verizon and T-Mobile in the US—and Orange’s recent Orange Cash contactless payment service in the UK, Ubaghs says that such initiatives are indicative of carrier efforts to mould the market to suit their own interests. “Carriers and manufacturers are shouting that their mobile market and technical knowledge makes them critical players,” he says, adding that financial services providers have a similar view of their importance in a burgeoning market. “Neither,” he says, “is likely to get very far without the other.”

Clearly, the mobile financial services market is highly fragmented. The state of play is mixed in most markets, with no clear structure or market leaders, and with no single player holding a dominant position: As Ubaghs says, no universally agreed business model exists. Indeed Pankaj Gulati, CEO of mobile financial services player MoreMagic, believes part of the problem is that, in developed markets at least, there are even question marks over the demand. “This may be an extreme statement, but in the developed world, mobile payment is a technology that is waiting to define a problem. It’s struggling to find something it can be a solution for,” he says.

Things are different in the developing world, where mobile banking and payments services have become the poster child for what’s possible. And here, most observers believe that the carriers have stolen the march on the banks. Phil Sorrell, mobile business development director at banking software developer Temenos, says they’ve achieved this “largely through their ability to effectively assign an account to a mobile phone and also through distribution outlets.” For Sorrell, banks in developing countries “have probably been a little bit arrogant,” requiring relatively large sums of money to be deposited before a new account is opened. Now that they’re losing float money to the carriers, he says, “they’re starting to look at how they can compete against this and it’s a challenge.”

The key opportunity for carriers in developing countries has been their ability to manage the Know Your Customer (KYC) process in a branchless environment. With Safaricom’s sector-defining M-Pesa service, for example, everyone proves their identity using ID cards and an address. “Instead of just buying a pay-as-you-go card, they’re doing KYC on everyone who’s a Safaricom customer. That’s very powerful,” says Sorrell. Banks launching mobile services in the branchless environment still face the KYC challenge when people who aren’t customers want to transfer money.

The developing world: where the mobile financial services action is

When it comes to mobile financial services, the developing world is leading the way on the innovation front, in many cases offering carriers a ready-made blank page that neatly allows them to sidestep the banks’ traditional dominance of the ecosystem. MTN’s Mobile Money solution, rolled out in partnership with Fundamo, has been deployed in 20 countries globally, many of which had little infrastructure. M-Pesa, meanwhile, has become the mobile bank of choice for over 6 million Kenyans who conduct 2 million transactions a day via Vodafone affiliate Safaricom. BICS – a joint venture between Belgacom, Swisscom and MTN is collaborating with the Microfinance International Corporation (MFIC) to extend the pair’s payment networks using BIC’s HomeSend global hub, which allows operators to offer international remittance services to bank accounts in 90 countries in the developing world using only mobile phones and any type of funds, from airtime to cash.

By way of contrast, leading US m-banking provider Bank of America currently has 1.5 million subscribers. The numbers in America are expected to grow to 86 million by 2015, with 115 million European users signed up by the same time. According to Datamonitor, European m-banking is very much in the early stages, driven largely by convenience and value-add rather than revenue generation.

In developed markets, where mobile financial services are something of a scratch looking for an itch, it seems that the humble SIM card represents carriers’ best chance of pulling back ground gained by traditional providers like the banks and card issuers. Pankaj Gulati believes initiatives like ISIS are six to eight years off the pace, leaving the carriers involved with a lot of ground to make up in the US mobile financial services market, where innovation has been hindered largely by the inability of the banks and carriers to agree to share the customer.

With banks arguing that it was already their payment customer and the carriers clinging to the security aspects of the SIM, the formation of the ISIS m-commerce network by AT&T, Verizon and T-Mobile last year had “It’s my ball and I’m going home” written all over it. The carriers partnered with Discover Financial Services and Barclaycard USA to roll out their own national payment infrastructure based on NFC technology in an effort to play the banks—many of which had been piggybacking on handsets using microSD cards—at their own game.

In the absence of any clear business model, contactless payment using NFC is sitting very high on the mobile financial services agenda, particularly for carriers trying to re-assert their importance in the food chain. It’s even received the blessing of industry body the GSMA; this year’s Mobile World Congress was awash with NFC-related announcements. But the problem with seeing NFC as some kind of secret sauce that can help keep the carriers relevant in the mobile financial services world is that it’s based largely on the assumption that the secure elements of the technology will be embedded onto the SIM card—about the last place left in the mobile money landscape that the operators can hope to control.

But even that’s looking shaky. At the time of writing, RIM was reportedly ready to lock horns with the carriers over its rumoured plans to embed vital payment information onto the Blackberry phone itself, sidestepping the SIM and, indeed, the operators in any transaction. Reports that Apple won’t ship the iPhone5 with NFC, as had previously been anticipated, are adding to concerns that yet another big money maker is going its own way. And having struggled for years to find a way around the Mountain View behemoth and its revenue-hogging ways, carriers aren’t likely to be cheering the advent of NFC-enabled payments from Google.

Or a Google-developed wallet, both of which have sparked ‘discussions’ between Google and the major card issuers as well as some of America’s larger banks.

With the first Android NFC smartphone (Samsung’s Nexus S) already on the market and sporting both an embedded chip and support for NFC apps on the SIM, it remains to be seen how things will pan out once the APIs for NFC card-emulation mode (not yet part of Android) start shipping. Similarly, the reality that many American banks are already stepping around carriers, using mircoSD cards to carry the secure aspect of mobile financial services looks ominous.

Bank of America is trialling a Blackberryonly microSD NFC card that works wherever Mastercard’s PayPass system is running.

Visa’s head of Mobile Bill Gajda, previously chief commercial officer at the GSMA, said his new employer took a similar microSD route with manufacturer DeviceFidelity because “we didn’t see handset manufacturers committing to volume and we wanted to get people started using existing handsets.”

For MoreMagic’s Gulati, the carriers’ biggest problem is a lack of creativity: “New billing relationships are being set up and operators are going to have a very hard time clawing their way back to relevance.”

If NFC can effectively turn a handset into a credit card, there’s still the issue of sorting out who makes the money on transactions—a riddle wrapped inside the broader enigma of mobile advertising revenues, which are the real killer app for NFC technology. If the carriers have spent the broadband years battling to work out a way to inveigle themselves into the lucrative content and advertising space, the location-based possibilities opened up by NFC look set to be a nightmare, especially if the likes of RIM, Google and Apple get to call the shots.

Google and Apple are unlikely to be looking to launch their own payment or financial services programmes, but by making themselves the key brokers of any relationship between consumers and merchants, it’s almost certain that the carriers will be the ones who get sidelined. Small wonder, then, that former CEO Eric Schmidt waxed lyrical at the MWC 2011 about the “mega-scale opportunity” that NFC-enabled smartphones represent.

For the operators, it looks like learning to accept a smaller role based around convenience fees (in addition to revenues they can generate through issuing their own cards or loyalty schemes) will play a significant role in how they can survive in a mobile financial services environment. Visa’s Bill Gajda says that when an operator adds value to a transaction, they should be compensated, whether by allowing space on a secure SIM card, adding specific security elements or even location-based services.

“Operators had to get over the notion that distribution and user numbers somehow entitled them to gain from a transaction, even when they’re not involved at all or adding any value,” he says. “They’ve come to the realisation that the SIM rental model can be well established and if they can add value around transactions or create their own services around payments, that’s really how they’re going to make money from mobile financial services.”

Given the amount of money that carriers have had to invest in rolling out the infrastructure that makes these services possible, the opportunities inherent in the kind of customer data that only carriers have access to is an area for growth. Gulati believes operators need to start looking at the value of each bit, whether it’s a money transfer or a ticket purchase. “In each of these cases, there is a unique and separate opportunity for the operator to participate in the value of the transaction.” It’s fair to say that the operators have largely woken up to this reality. Whether they’re too late to join the financial services party remains to be seen, but 2011 looks set for a major tussle for control.

O2 takes the e-money licence plunge

In the UK, O2 has announced that it will definitely be applying for an e-money licence, which will allow it to act as an independent financial services provider, sidestepping any need to partner with a bank. Following on the heels of the carrier’s O2 Wallet and O2 Money initiatives, MD of Financial Services James le Brocq says that licensing is “the next step in us recognising that we have the capabilities to bring mobile financial services requirements in-house and do them ourselves.” O2 entered the prepaid card market in partnership with RBS NatWest in 2009 and claims that over 800,000 customers use their financial services offering, which includes device and travel insurance.

Le Brocq says that the e-money licence “would give us greater control over the prepaid payments value chain, giving us the flexibility to create propositions and products for our customers without having to go to a third party and ask them if it’s all right.”

O2’s application has not yet been submitted because the Financial Services Authority (FSA) is not currently accepting applications under the second e-money directive, but le Brocq says that the regulator is fully aware of the carrier’s plans and they have been in communications with them. O2’s intentions are clear: having previously taken the bank partner route with RBS NatWest, le Brocq says that the banks’ need to focus on core strategy rather than “nascent financial services opportunities with mobile operators” gave the O2 the impetus to think differently about their own financial services strategy, part of which includes expanding an already 30-strong financial services team.

While the operator waits for its licence, le Brocq says it will put in place a sponsorship-type arrangement: “I have an organisation in mind that can do that for us, which is not necessarily a high-street bank.” Be that as it may, O2 isn’t looking to completely cut itself off from the banks. “The vision for the O2 mobile wallet is one that absolutely welcomes having the cards of other banks and issuers,” says le Brocq.

The O2 Wallet will hold money in a virtual wallet, allowing users to make purchases or send money to others using their mobile phone. The carrier will be hedging its bets on the installation front: “We’d be looking to pre-install it,” says le Brocq, “but equally, I think it needs to be available as a download.” O2’s contactless payment strategy is slated for commercial launch in the second half of 2011.