Thoughts on Mobile Banking business cases

I was close to some of the early projects that launched the first Internet banking services in South Africa during the middle of the nineties. None of them had any business cases. Banks deployed these services because it was unthinkable to have a bank without allowing clients to access their bank accounts via the Internet. Today all Internet banking divisions have solid revenue targets and (in most cases) good ROI business cases.

However, things have changed. It is now impossible to deploy products without a solid business case and strategic motivation of why it must be done. Mobile banking initiatives are often subjected to such requirements and this frequently delay decisions, but seldom stop them. It is thus important to think about the business cases for mobile banking. While each initiative differs in terms of investment, potential penetration and impact on financial metrics, it is possible to categorise the business benefits in three categories:

• Direct revenue benefits exist and is usually one or a combination of the following (transaction fees, monthly subscription fees, commission on goods sold, differential on interest and others - like interchange fees). It is my experience that these should generate revenue of at least $1 per month in order to build a revenue-based business model.
• Cost savings should also be considered. The different benefits that can be achieved by the deployment of mobile banking are savings on less complex business processes, cutting banking staff out of the process and savings on capital expenses.
• Many indirect benefits exist. Some can be quantified, while it is difficult to do it with others. I have seen some of the following actually happen during mobile banking deployments and I believe it is important to include them in business cases too.Mobile banking increase stickiness, brand loyalty and impulse buying without a doubt. Enough measurements exist to back this up. I have seen large increases in voice ARPU for instance if mobile banking is depl0yed by mobile operators. One should also not ignore defensive imperatives in markets where other players have launched mobile banking.
  

Sources of Remittances

When thinking about about money remittance solutions, it is important to consider the different sources of remittances money. The mechanism utilised by the payer to trigger the transaction could have major implications on a number of factors of a remittance transaction. Some of the implications can be:

• The degree of conformance to banking regulation
• The involvement of third parties and their role
• Risk and fraud considerations
• The liability profile of the operator and/or the payer
• And of course as always the cost associated with performing the transactions

The different mechanisms that can be employed in triggering a remittance payment are the following:

• Cash (typically via an Agent)
  
• Bank account (usually via the Internet)
  
• Credit card (or other cards) (via the Internet)
• A mobile wallet via a mobile phone

One should consider the registration process, the confirmation, the dispute mechanisms and reversals or refunds for each of these different mechanisms when designing money remittance solutions.

Money remittance and mobile payments meet

I stumbled on a very interesting website from a money remittance perspective. Mondato (Read more here). The company provides a mechanism to compare money remittance options from one country to another. As is stated on their website, "We offer a consumer search function to enable people to find options for money transfer...". No doubt, the intention is to provide services in the money remittance space.

Now click on the newsletters in the bottom left hand corner. The company provides a regular newsletter with well researched information. Some of the topics:

• Android and Mobile Value Transfer
• Hey, that phone owes me $50
• Opportunity assessment: Mobile financial services market
• Obopay and the evolution of global, mobile money

It seems that people that provide information to assist workers to find cheaper mechanisms to remit money are extremely interested in mobile payments...

Implications of HUB deployments

With so much talk about the deployment of mobile remittance hubs (Read here, here and here), I think it is important to consider some of the implications of establishing these "hubs". The migration from a one-to-one then many-to-one and ultimately many-to-many creates a lot of additional complexities previously not visible. Deploying one-to-one mobile remittance solutions are difficult enough, yet I have seen many solution providers already talking about their many-to-many remittance solutions.

Some of the difficulties that must be considered (and solved) in this regard are:

• Financial risk because of non-availability of funds, also because exposures may not be as visible or tools to take action if the system is exposed may not exist.
• Lost transactions and thus the need for reconciliation, with all the added complexities when dealing with many nodes.
• The challenges associated with the routing of clearing transactions between different systems (that work in different ways) and the need for different message-protocols or convergence.
• The contractual and commercial complexities in working with different parties with different needs and expectations.
• The implications of failed or disputed transactions (both in terms of business process and customer support)

I am sure all of these (and others that I can't think of right now) will be solved, but it will take baby steps first and dedication and hard work.

Fake Credit Card Factory

Mobile banking and payments, in some ways, are about changing a physical world of payment instruments into a virtual world. The need to issue physical payment instruments (like credit cards) will ultimately be replaced by digital tokens stored on a device carried by individuals. The mobile phone is this device for now.

A virtual, digital token, held by a subscriber and secured by a private key is of course much more secure than a physical token. It is much more difficult to copy and to re-produce, while it is (at the same time) much more easy to cancel and to re-issue.

It is within this frame of mind that I find articles about the manufacturing of fraudulent card of interest. One such case was recently uncovered in South Africa (Read more here.) According to this article, the sophistication of the fake credit card factory was quite high. How many fake credit cards are in circulation in the physical world? And, will banks tell us, knowing that it could lead to a major breakdown in trust?

Cross border payments

With more and more cross border payment mechanisms being deployed, most of these electronic solutions, one should be aware of the implications. Mobile payments are being touted as the catalyst to ensure that more people can participate in electronic transfers in multiple currencies. A more efficient and less expensive mechanism will definitely lead to bigger volumes in both transactions and value. Cash based (and illegal transactions) should reduce as subscribers start to experience the benefits of electronic transactions.

This would lead to an increase in monitory flows across borders.

What I have found interesting in thinking about this future, is the secondary impact that this will have on the macro-economy. I am not an expert in economics, but I feel it would be interesting (and prudent) to build some economic models to look at the following impacts of an increase in exchange rate based transactions:

• The impact on exchange rate movements and market dynamics that can influence these indexes. I am sure that a more competitive and transparent market would look to different behaviour in terms of how exchange rates behave.
• I am also sure that higher volumes of remittances and transactions that can respond to changes much faster, will have a marked impact on local economies. On the one hand this could potentially stimulate individual economies, but I am sure, will also react to instability and political shenanigans much more quickly.
• The impact on and the effect that this much more dynamic financial world would have on regulatory dispensations would be interesting. One thing is for sure, it would become much more difficult to control financial behavior by means of direct interventions.
  

Mobile banking and Remittances

Since the time that the GSMA announce their MMT (Mobile Money Transfer) program and Western Union established their mobile remittance division (able steered by Matt), many mobile-based remittance projects were launched. Some were more successful than others, yet the majority have not yet been deployed. Some of these projects are faced with very complex problems and challenges to make it work.

In order to stay focussed, it may be of interest to look at the primary reason for Mobile-based remittances - define the objectves (without limiting ongoing innovation). I am of the opinion that mobile-phone based money remittances intend meeting the following objectives:

• To eliminate (or at a minimum reduce) cash as this is the most costly element in the remittance ecosystem. Mobile remittance systems should always keep this in mind. While understanding the cultural, practical and social implications, the aim should always be to have as little as possible cash in the system.
• To increase the speed of fulfilling a remittance transaction (to clear it immediately). This objective can be achieved by making use of the phone as a tetrminating device.
• To increase the auditability and legality of money remittance systems
• To empower poor subscribers to become more financially inclusive. The objective is to ensure that money received via this system is put to good use. It would be great if these systems could assist poor people to budget better and to be able to have more direct control over their finsncisl ditution.