Monday, September 27, 2010

The challenges of a young industry

According to most accounts, the mobile financial services industry will grow to be huge. It is likely that it would have a major impact on social trends and macro economies in most countries (but specifically in emerging countries where the biggest global growth will occur and where the majority of people live). In human terms we are potentially looking at a giant with a lot of capacity.

However, the industry is still only a toddler (at best). As is the case with humans, the industry will still have to go through many phases, face many problems and (hopefully) be exposed to the right influences. It is critical years - right now - as many of the things that will be pivotal later will get established now.

In looking at the industry at this stage of the development, I have many worries about how it is developing and what some of the characteristics are that are starting to evolve in this young toddler. I believe it is important to recognise the bad behaviour and eradicate it now in order to ensure that the industry can grow into its full potential and deliver on its promise.

Some of the worrying traits that I see emerging are the following:

This is an industry without a clear identity. At best, the industry can be described as schizophrenic. We have different views of what the industry stand for and what the objectives are. We lack a crisp message. It is often my experience that external people only "get it" after a long description and explanation. It would be much better if we had a much more clear identity.

The industry is not honest with itself and with others. Wild claims and misleading statements are often made. It seems as if it is more important to project information so as to benefit specific individuals rather than considering the well-being of the industry. I am not naive in thinking that this should not be happening, but when it turns into standard practice and with no cross checks and balances, I say we have a problem.

Are these signs of an industry in distress or should we just bear with the growing pains of a young industry?

Thursday, September 23, 2010

What can go wrong with mobile banking deployments

In some team-sports, an average team can do well if they have a star-player in the team. In these instances one could say that the team is as good as the best player. In other sports, a team could easily loose if one of the players are not up to scratch. This is a situation where the team is as good as the worst player.

The problem with mobile banking deployments is that so many things must work in order for the service to be delivered. If any of these things are not in place or working, the total mobile banking solution would be disfunctional. Mobile banking deployments are a team sport that is dependent on all components working, and this means that if any thing goes wrong, all will not work.

For instance, even if the software on the handset work, the connectivity is in place, all the registrations and the routing through the firewalls are sorted and the connection to the bank and the security server are operational, a bill payment transaction will fail if the connection to the bill-payment server is slow, times out or is not available. It is insightful to sit down and trace all the transactions and the many number of elements that are touched in order to deliver a simple transaction. And what makes it worse, is that the service is as good as the worse component.

Monday, September 20, 2010

Nick Hughes - the real person behind mPesa

It is often the people behind the scenes that make things happen. Not always in the spotlight and not trying to be famous, but focused on the issues - these people are the real heroes in life. This is also the case with mPesa. Many people contributed to it being so successful, but the driving force behind the concept, the guy that conceived it initially and drove the project till completion is Nick Hughes.

Nick recently left Vodafone and started Signal Point Partners (Read here). What I find really satisfying (and another reason why I will keep on reading the Economist) was that Nick (with Susie Lonie) will be receiving the Social and Economic award for their outstanding contributions in the field (Read here). I think that this is well deserved. One should applaud the Economist to find and recognise the real people behind the success stories.

Thursday, September 16, 2010

How to Kweeka respond to mPesa

I have been a Absa Bank client for the best part of thirty years. I am therefor exposed to their approach to mobile banking as a client more so than others. In the past, I have been direct in my comments of them, but it is all meant in good spirit. (Read here, here and here).

It is common knowledge that mPesa recently launched their mobile banking solution in South Africa. Other players in the market are responding to this initiative with their own offerings and others are likely to respond later. For instance, one of the larger banks were quick to announce their own mobile money remittance product. (Read here). As a matter of fact, FNB beat mPesa in announcing this a week before the mPesa launch.

Absa bank responded with a marketing exercise of note. It is called Kweeka. (Read here). As soon as I became aware of this new "product" I started analysing it to understand the features and benefits. The more I read, the more I got confused. This is not a product, this is a collection of everything that Absa conjured up during the past three years, neatly packaged with a new slogan: "You can do it Kweeka!". It almost feel like meeting an old friend with a new funny hairstyle. You think you know him, but something is not right... you feel like laughing, but nothing is funny.

Tuesday, September 14, 2010

Why Basel III is good news for mobile banking

With the recent turmoil on financial markets the banking industry was quick to respond with more relevant guidelines for banks. The new Basel III, recently announced, is all about the amount and quality of capital held by a bank. Capital (in effect) is the amount of assets a bank must hold to be able to withstand drastic changes in the environment. The new rules dictate different levels of capital adequacy as well as capital with more liquidity. (Read here).

Banks not meeting these guidelines have a number of options. The most obvious is to get the capital from their shareholders (either by raising additional capital, or retention of dividends). This is of course not an attractive option as it would ultimately lead to a reduction in valuation - something that neither executive management, nor shareholders really want.

The other alternative is to get more capital from clients, preferably capital that remains liquid. This means (in effect) that banks would want to ask their clients to deposit more money with them (but not in fixed high-yielding deposits). This also seems unlikely in an environment where fewer clients have capital that they could deposit, and they would definitely not like to do this in low (or no) interest bearing accounts.

The solution is actually painfully simple: banks should provide effective mechanisms to their clients that they can do payments without using capital-hogging instruments (like cash and cheques). In a recent study, it was found that Ireland could save EUR 1 billion annually if cash and cheques where to be eliminated from the system (Read here). This saving and the fact that cash will be reflected as capital on deposit with the banks, would help them comply with Basel III more easily. By implementing mobile payment solutions and making it easier for clients to embrace these electronic payment schemes (thus eliminating cash and cheques), banks will become more compliant without having to ask their shareholders to carry the can.

The importance of payment infrastructure to support aid activities

Our world has been rocked by a number of natural disasters of which the earthquake in Haiti and the floods in Pakistan are some of the most recent ones that spring to mind. The individual suffering and hardship of poor people are severe in such instances. Luckily, many aid organisations exist that offer support into disaster areas.

These organisations are dependent on many aspects and resources that are critical in the delivery of aid: transport, personnel, food, equipment, medical supplies. Without these and many other things, it would not be possible to offer support. If these things are not available in the stricken countries, it is possible to ship them from other countries. It may take some time, but after a few days, supplies can be landed in the disaster areas and aid can proceed.

One of the most important resources, required by aid organisations to be effective is a good payment system. Payment systems are required to distribute monetary aid, to pay local suppliers and to pay staff. (Read here). Substituting payment systems with cash leads to many types of inefficiencies and sometimes even to fraud and corruption.

Important components of existing payment systems are often also destroyed in disasters: ATM's and bank-branches washed away, connecting lines down, no electricity etc. Furthermore, payment systems cannot be flown in quickly or miraculously established in a few days. Payment systems requires many components that must work in harmony with each other and that cannot just be switched on overnight. This is why payment systems based on mobile communication, using simple handsets and not requiring expensive infrastructure are so well-suited for emergency work. Countries with well-established mobile payment infrastructure are in a much better position to respond in instances when they are confronted with disasters.

In search of the holy grail of mobile payments

Most mobile payment solutions are designed to allow their subscribers to perform payment transactions with each other seamlessly. It is often difficult to pay some-one that have not yet subscribed. At best, mobile payment solutions offer crude integrations to other payment providers. This is usually achieved through complex integration and often with confusing rules and procedures.

Establishing a mechanism that will allow subscribers of different systems to transact with each other easily is often seen as the holy grail of mobile payments. This feature is referred to as interoperability or interconnectedness (See one of my previous posts). Many attempts have been made to establish such a mechanism or platform, but with no success. The most notable attempts have been camouflaged as "hubs", the designers of these payment hubs trying to get many different operators to connect to their infrastructure.

Up to now, the integration of mobile payment platforms to other payment streams have been done on a case by case basis - often only supporting one-directional payments (either sending or receiving of money). Very few mobile payment operators have been able to offer a clean and open interface to other payment operators that have been accepted en masse. What is the route to this holy grail and how will it get established?

I believe that this will only be possible if such a schema is established by an entity without profit motivation. I do not believe it will be easy to establish such an inter-connected platform as a commercial endeavour.

Monday, September 13, 2010

Key players to trigger the mobile banking revolution

I don't think we always realise that we are witnessing a major revolution. We are living in the middle of a period in which the definition of money is changing, and this is happening in a very short span of time. When looking back on inflection points in the history, it is easy to see that it happened, but not so clear when you live during the time that it is occurring.

We are quick to look at the role that mobile operators play in this revolution, and also banks in many countries, but are they the most important catalysts? If it is clear which players trigger the growth of transformational banking, it would be easier to replicate it. It is still early to be able to be absolutely accurate on who these players are, but I would like to take a stab at it.

There are only two players that hold the key to making mobile banking happen. If these two do not play, the road will be long and bumpy and will probably turn into a cul de sac. The one player is the regulator and the other the supplier of sufficient capital to carry the initiative to critical mass.

Tuesday, September 07, 2010

The "will-be-able-to" index for media releases

It is amazing how many mobile banking articles announce intentions rather than achievements. I read a lot of articles especially with reference to mobile banking solutions and I am convinced that this a trend that we see more in our industry than anywhere else.

Take for example the following recent article on a mobile banking service to be launched in India (read here). Careful scrutiny of the article will show that the word "will" has been used seven times in an article of three hundred and forty words. In other words 2.1% of the words are "will". I would propose that we define the "will-be-able-to" index as 21 basis points in this case. The higher this index is, the more speculative an article would be on what will happen in the future, rather than what is possible right now. It is my contention that the average index for our industry would be higher than most.

I believe that this is because of a combination of
a. projects being extremely difficult to do and
b. high excitement about what is possible.
This leads to a situation where statements are made about what will be (or better may be) available in future. One should take articles with a low "will-be-able-to" index more seriously.

The need to feed the agents of mobile wallets

Making mobile banking deployments work is like connecting the dots in a big economic jigsaw puzzle. Only if all players in the complex eco-system win does mobile banking take off. If the economic benefit to key players are not clear, then they will not support the solution and it will go nowhere.

In most deployments, agents and the agent-network are probably the most critical element for the whole thing to work. It is therefore absolutely essential that agents benefit from running the system. As a matter of fact, the more they benefit, the more they will push the solution. It is in the interest of the operator of mobile banking services, to pay the agents as much as possible.

Often, mobile payment consultants urge operators to make the service as affordable as possible. They argue that subscribers will use the system if it is really cheap. If one were to make the fees zero, people would really use the system... WRONG!

If the operator does not generate sufficient revenue from subscribers, they will not be able to offer agents a big enough incentive to sign up customers and to motivate them to use the system. It is more critical to feed the agents, and not as important to feed the subscriber.

Utilising competitive forces in regulating for mobile banking

Financial regulators have a difficult balancing act to follow. They have the responsibility, on the one hand, to ensure that the monetary system work, while also making financial products available to as many of the population as possible. A very restrictive regulatory dispensation would probably be the safest approach to protect the monetary system, but would lead to exclusion for a large percentage of people.

It would also be irresponsible to just have an approach of "everything goes". While this approach may ensure that more people have access to financial services, this would put the whole system at risk.

Financial regulators in general follow a very prescriptive approach in the way that they regulate. Their view of the world is that some rules exist and that if an institution can demonstrate that they can (or intend to) conform to those rules that the institution would receive a license. It is almost a case that any institution has a right to a license if they can demonstrate that they comply.

Another approach would be to limit the number of licenses and only offer licenses to a select (pre-determined) number of institutions in a specific sector (say mobile payments). These institutions would be carefully selected, so that a highly competitive market gets created. In this way, proper market forces would keep the industry in balance. This is a novel way of looking at regulations with many pros and cons, but worth considering.

It is my impression that this approach (of creating a competitive environment for mobile banking/payments through only licensing a limited number of players) is being considered by more than one country at the moment. The most recent announcements from CBN (Central Bank of Nigeria) and RBI (Reserve Bank of India) seems to encapsulate some of this thinking.