Abstract – This post was originally published on 26-December-2014 on Linkedin (click here). This article is not a conclusion by any means this is just an assumption and current picture focused on African markets. Today payment industry can be compared with either payment war, payment jungle or even just payment storm. This article is focused on high level discussion and showing what is happening payment industry and contribution /future impact by MNO & 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.
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. 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. 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.
Main Story – Times have changed and with change comes opportunity. Over the past few years, the face of financial payments in most developing countries has taken a radical change from a bank model to an MNO 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 can never out beat MNOs mobile money 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. 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.
MNOs on the other hand have embraced the concept of an extensive agent network at minimal cost. MNOs agent network is usually dense with at least 1 agent 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. 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, MNOs have excelled in “24×7, 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 MNOs. 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. MNO makes money on transactions but banks earns on money remain in account. 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 MNOs 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. – MNO’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 MNOs encourage spending. There is little savings and investment in most countries hence most citizens spend whatever they earn on basic survival requirements. MNOs 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 – MNO 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 can do easily with flexibility and Banks never thought of creating Agent networks where MNO’s Key success factor is Agent Banking only, on Limits side MNO Finical services limits set on upper limit and for Banks its on lower values. So MNO whole game is on Volume and Bank only wants value
A small study on Informal Financial System of Indonesia depicts very clearly; there are three products/services which are key in Indonesian market “Savings, Loans and Remittances(Domestic & International)” which are also a key products for banks but due to bank mind set of playing with BIG/LARGE figures this will never rise up well and if Reserve Banks, Regulator and offcourse MNO plays well then this market size can grow up to approximately for about billion USD a month and can grow to even much higher. Following few crisis, most countries have increased monitoring and regulation on banks. It is believed that the formal banking system was used to transmit funds which were used for these attacks/crisis most regulators have set up anti money laundering laws which intensify regulation on players in the payment industry.
Most countries have slackened regulation on MNOs while banks are subject to stringent regulation by respective central banks and deposit protection bodies. Banks were known to be the centre of most economies financial transactions and in order to ensure stability to economies, most governments maintain a close watch on transactions in the formal payment system. Relaxed regulation allows MNOs to diversify and tap into financial services while banks find it difficult to venture into any other industry outside the usual core financial payments.
Most regulators impose stringent KYC requirements for account opening on banks. These requirements form a wide spectrum spanning from proof of residence, copy of ID, confirmation of employment to assure source of funds and a passport sized photo. Most citizens fall short on some of these requirement and failure to meet any one of the above immediately makes one ineligible to open an account. This places banks at a disadvantage because most people operate outside the formal employment system hence lack part of the account opening prerequisites. The relationship between customer and bank is a relationship of trust, any customer deposit held by the bank is a liability which has to be honoured whenever it falls due. Some banks have failed to manage liquidity risk resulting in them being placed under curatorship by the respective regulators. Such a move has catastrophic effects of disrupting the banks ecosystem as bank hold cross investments with each other.
Banks have a restrictive approach when it comes to on boarding customers. When one approaches a bank with a request, be it a new account opening or a loan request, they are subjected to rigorous checks and processes which frustrate would be customers. This “who is eligible to be my customer” approach results in a low on boarding rate for banks. MNOs on the other hand use a “please be my customer” approach which proves to be a hit as they on board multiple subscribers daily. For this reason, MNOs are more inclined to tap into both the formal and the informal sectors of the economy while banks concentrate on the formal sector. Informal sectors prove to be more profitable than formal sectors because they push high volume, low value transactions. MNOs through underlying banks, have started giving instant loans using online credit rating systems basing on credit data, transactional data, tenure with the MNO, daily spend and other conditions.
Banks take days to approve loans as they have a low risk appetite. The informal trade market size is estimated to be worth around $7.4 billion for most African countries(Based on assumptions and reading on internet articles). The telecoms business is also characterised by a high rate of churn as subscribers switch operators looking for favourable deals. Some countries have adopted number portability where subscribers maintain their number when they switch operators. Banked customers on the other hand have a lot of thinking and clearance to do before changing banks because a number of financial services like loans, investments and mortgages are coupled to their bank account number. MNOs run exhibit a high affinity to retain subscribers than banks. This is observed by the multiple promotions which may or may not be revenue generating and encourages customer win back. An MNO can run as much as 3 promotions per quarter while banks could go for a year without any activity simulating promotion.
Banks have generally been found lacking in the areas of innovation, technology utilisation and adoption. A typical bank will review the architecture of their banking system once every 5 years while MNOs employ solution architecture who work hand in hand with their product development and innovation arms to deliver efficient and relevant solutions which meet the needs of the market. Suppliers of core banking systems have kept the system eco system as complex as rocket science which makes integration to other systems a nightmare. This is in opposition to the open API approach adopted by MNOs.
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 MNOs in the field of mobile payments.
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. The so-called “haircut” imposes comes along the way that helps in worsening the problem in negative smiley way.
Your views and comments are welcome…
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