Towards a unified framework for mobile banking

A recent article described the mobile banking and payment industry as "confused". I tend to agree with this observation, especially after I read the article. (Read here). The article attempts to identify the different models used in offering mobile banking solutions and comes up with nine. The interesting thing is that I don't think that this is even close complete. One probably could describe another five more (especially considering emerging markets). This means that one can do mobile banking in at least fourteen different ways!

This diversity in how the problem is approached and solved is extremely problematic because it can lead to many problems:

• Developing interoperable solutions will be difficult because different systems operate in a different way. While the need is big to inter-operate (Read here), it would be difficult with many different approaches to consider.
• Evaluating different solutions (for instance for a RFP) is difficult because different vendors may approach the solution in different ways. It would then be difficult to compare the solutions and get to the best answer.
• The problem with skills will be propagated. As it is, we do not have enough skills in the industry. When staff move from one company (having applied mobile banking in one way), to another company (with a different model) productivity gains will be slow.

In short, it would be beneficial if we had a unified framework for mobile banking. It is not clear how this will be achieved, though and who will take responsibility for this.

Massive growth in mobile banking usage in South Africa

A recent survey of mobile banking usage in South Africa shows significant growth in usage of this service. (Read here). This survey published about two weeks ago, shows that the number of subscribers now using mobile banking has almost doubled (up from 27% to 44% in one year). The growth in transaction services was also healthy with purchasing airtime and bill payments the biggest penetration. A substantial percentage (12%) are now sending money from one phone to another.

What is interesting about the South African mobile banking landscape is the number of players providing a viable services. Most of the banks (if not all) provide mobile banking services, the two largest mobile operators have launched mobile money services and many independent providers are also growing strongly (Wizzit, Pocit, MiMoney, to name a few). This shows that a market can develop well with healthy competition and a number of independent players. While this does not lead to one spectacular success, this is probably more sustainable and will lead to a healthy and sustainable growth.

Ericsson's push into financial services

Another strong telecommunications brand recently announced their push into mobile financial services. Ericsson is one of the new players in this market. The announcement was made just in time for Mobile World Congress. (Read here). Reading the many press releases on this announcement and having some insight in the industry myself, the announcements are somewhat confusing to me.

According to my understanding, it is Ericsson's intention to compete with Western Union and get a "reasonable share of the market". The intention (it seems) is to not offer a service to consumers, but to rather work "with financial institutions, mobile operators and other service providers". This is an interesting strategy and according to my evaluation unlikely to succeed, predominantly because of the following reasons:

• Western Union will remain competitive, primarily because they have a major distribution network. It does not seem as if Ericsson wants to compete with Western Union in this. This means that Western Union would have a huge and unassailable competitive advantage.
  
• Connecting money remittance sources with targets is a very crowded market with many new entrants. Many have tried and failed to enter this as a new player. Competition is often on the basis of price and margins. It is not clear what Ericsson's competitive advantage will be in their new venture.
• Ericsson's strength: their telecommunication infrastructure solutions cannot necessarily be leveraged to provide mobile financial services. Banking systems and telecommunication systems differ in many ways.
• In emerging markets, mobile financial systems have only been successful with solutions targeting subscribers and with sophisticated agent management solutions. It is not clear if Ericsson intend developing these solutions themselves, or plans to work with existing suppliers.

While I have immense respect for Ericsson as a company and what they have done for the telecommunication industry, I would be surprised if they can make a major jump into financial services without an experienced partner with a proven track record in this complex industry called: mobile financial services.

Fact: Emerging markets will grow faster

Andrew Burns (World Bank Manager of the Global Macroeconomic Trends), recently hosted a one hour Q&A session. (Read here). He touched on a number of issues, but quite telling for me where his prediction that growth in developing countries to be more than double that of high income countries (more than 6 percent in each of 2011 and 2012 vs 2.4 and 2.7 percent for rich countries).

We all knew this intuitively, but here is some hard evidence: Emerging markets will out-perform first world countries during the next two years by far. This, coupled with the fact that very little payment infrastructure exists in emerging markets is an indication of the importance for mobile payments. It is critical that mobile payments be launched on the back of this growth trend.

We will have to postpone first world mobile payment deployments for a while, as we attend to this major growth opportunity.

Mobile Payments are in no ways like Social Media

I suppose there is fundamentally a big difference between paying some-one for something and talking to them. Clever sayings can be given away freely and you get richer by giving it. This is why platforms like Twitter and Facebook is so addictive. If you are innovative enough, you can keep on giving and the more you give the more you get (status, followers, friends etc.)

Payment systems are much different. The more you give, the less you have. You only get more, if someone gives you money specifically - if it is specifically targeted for you. The behaviour and the need to do transaction (or to contribute to the community) is very different. The systems and the psychology of creating a vibrant community is different. The need for support, guidance, privacy etc. are significantly different.

This is why I believe one should also think about the eco-system differently. The platform providers, the distribution and the business models are different. It is unfortunately not a case of "building it and they will come". It is not a case of the more we give it away for free, the richer we will get. The sooner we take the social media hat off when we debate payment systems the better.

Should we take Facebook currency seriously?

Yes, Facebook do have their own currency, you can buy it and use it for things within the Facebook walled garden. This is a typical loyalty scheme that one sees provided by merchants often. Sometimes it is refered to as credits and it is usually limited in how widely it can be used and most importantly, one cannot turn it back into money... it is a one way street. We never take these schemes serious, we never think that they will take over the world, so what is the big fuss about facebook's currency?

It is the size of course. If all of the Facebook subscribers were to open a facebook account and fund it with a substantial amount of money, this may just become a self-sustaining economy. And this is where we have to do some numbers. How big will a self-sustaining economy look like. I am sure that there are economists that will be able to guide us in this, but my gut tells me it is something like twenty million accounts (at least), with an average balance of $500 to $1000. Anything substantially less will not have critical mass.

Unless the value proposition of Facebook credits are much bigger than what it is currently, I cannot see that these numbers would ever be achieved. Should we take Facebook currency seriously? Depends what Facebook comes up with that will entice me to keep a few hundred dollars in my account... which I have not yet opened.

Nigerian mobile payments landscape during 2011-2012

I received a lot of positive feedback on my previous blogs on the Nigerian mobile banking landscape. The e-mails and comments were very informative for me and I must thank readers for this. It was clear that a lot of attention is focused on this exciting market. I thought that I would try my hand at predicting what will happen in the next two years.

The following realities should be taken into consideration when thinking about the future of the mobile money market as it relates to Nigeria:

• This is a huge country with many people. Very few (if any) deployments can claim to reach such a vast country with so many potential subscribers. (Many of the deployments in India are still regionally focused and have not yet been made available through a country-wide agent network).
• The Nigerian people are very industrious and entrepreneurial. Viable business propositions are usually embraced and developed to grow spectacularly. Propositions that do not work (on the other hand) are quickly discarded.
• Doing business in Nigeria is expensive. Infrastructure, transportation, electricity and many more basic ingredients to run a business are often in short supply and very expensive.
• The use of physical cash is ingrained into the fibre of society. Niara notes are not just used as tender, but play a role in a number of ceremonies (for instance weddings). Getting rid of or reducing the dependency on cash will be difficult. The value proposition of mobile money will have to be huge in order to reduce the dependency on cash.

Keeping the above in mind, the winners will have to be able to scale fast with a clear (or preferably more than one) value proposition. Winners will be companies that provide a proposition that hits the spot immediately, and they will have to be well capitalised. Success in Nigeria will be very beneficial, but will cost a lot of money.

Migration of platforms after realising "mistakes"

The cost of deploying a system is much less than replacing a system not delivering on its promise. The migration of systems from old versions to newer versions are always an expensive exercise. Even just stopping a roll-out process to consider a decision and review alternatives can be costly. When organisations realise that they have made a "mistake" it is even sometimes to late to convert to better solutions.

In a relatively new industry like mobile banking, where clear leaders have not yet emerged and requirements are still dynamic, the selection of a technology solution will often be re-visited. During the past year, this re-evaluation of platform decisions occurred in many of the established deployments. A lot of effort was spent on evaluating alternatives (even after lengthy deployment projects have completed). Many banks have realised "mistakes" and re-tooled (requiring major investments and leading to very long delays in getting services ready). I am sure we are all aware of many such cases.

The mobile banking industry would have been much more advanced if it was not necessary to throw out systems to be replaced by better solutions. This would have been (and can) be eliminated if companies choose platforms with robust architecture based on a proven track record.

How to value mobile financial services ventures

One of the best quality reads on mobile financial services ventures and how to invest in them is a blog maintained by Tom Noyes (Read here). The information is well researched and Tom is very direct in his opinions - no beating about the bush. He recently wrote a lengthy article on guidance for investors in mobile money (Read here).

While I do not agree with all his conclusions it is definitely worth a read. Some of the frameworks presented by him is an indication of the companies that have briefed him on the industry. It is clear that he has not yet had briefings from a sufficiently large sample of the industry.

What I do find insightful is his conclusion (and I think he is particularly accurate with this). He warns against past transactions and state that big players in the US must still act and that when they do, will impact every mCommerce company. He is of the opinion that one should be looking for companies with an existing sustainable value proposition and a capable management team.

Providing mobile banking apps for the banking industry

One day everybody is on the NFC band-wagon the other day mobile apps. It must be difficult keeping up with the hype. This is a sample of some of the "mobile apps is the next big thing" announcements, that I read during the past week:

• Fiserv announced working with WorkLight to help banks "to more easily develop services for a proliferating variety of online and mobile platforms and devices." According to Erich Litch from Fiserv: "... helping our clients provide financial services in new ways, through new channels, and to go quickly to market by building and managing rich applications." (Read here)
• Based on research done by Forresters , mobile banking lacks "any clear differentiated functionality" (interesting!) and the conclusion is that "U.S. banks will need to enhance today's functionality significantly." (Read here). In the same report a very important conclusion is reached: "...that consumers are still struggling to figure out exactly how they will use mobile banking." (also interesting!) (Read here)

Help me, because what I take away from this is that, we must develop more functionality to help banks differentiate themselves from one-another. At the same time consumers don't know what they want to do with this thing call mobile banking. Surely this is madness? Surely we must figure out what customers want, what they would like to pay for and buy and the things that will make their world work better. This hype-talk is making me tired.

Considering the age distribution of subscriber population

One of the more thought provoking articles of the week highlighted the huge difference in age distribution between first world markets and emerging markets. (Read here). According to the article as much as 50% of the population is younger than 15 years. These people, while part of the population are unlikely to have a mobile phone and have very little income or wealth. This is significantly different by factors to first world countries.

This is particularly important from a mobile banking perspective for emerging markets for some of the following reasons:

• The spectacular penetration rates of mobile banking in emerging markets are actually even more impressive. A high penetration rate for the population is even higher if one considers the real addressable market.
• The future market for mobile banking is big in these countries and can be reached as they mature if the products are designed to be relevant. By offering the right financial products for youngsters, suppliers of mobile banking will catch the future market as it matures.
• One should develop a separate distribution strategy aimed at teenagers with different needs and affordability.

Looking at the markets in Africa through a lens that is age sensitive, one will see many different aspects.
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Summary of some high profile NFC payment announcements

Its official, if you do not have a NFC story, you are probably not serious about mobile banking. Since the announcements of Google and the implications of what Apple may be doing, NFC temperature has increased with quite a few degrees. I decided to look at the announcements during the past fortnight and group the media under high on the "will be able to index" and actual achievements. First the media releases talking about what will be done:

• Barclays with Orange and T-Mobile to launch NFC system this summer in the UK (Read here) and probably also with Everything Everywhere (or are Baclays going to do two launches this summer in the UK) (Read here)
• LG to launch NFC system in Europe next year (Read here)
• Speculation on having NFC chips on iPhones and iPads (Read here)
• VISA and Wireless Dynamics partners to do pilots in the UK and Turkey (Read here and here)

And the releases talking about things that have actually happened.

• Softbank and Gemalto trialing NFC payment in Japan (Read here)
• Futurestore in Germany tries out NFC payments and other transactions (Read here)

Still only just pilots, but at least something is running.

The challenge of activating registered customers

A large number of mobile money deployments in emerging markets now show spectacular penetration. In understanding the success of these deployments, it is important to define three definitions of penetration:

• Target market refers to the number of possible subscribers that can be registered. For instance, if the service has been deployed on a specific mobile operator network, then the target market size is equal to the total active SIM cards for this mobile operator.
• Registered subscribers are the number of customers that have been registered on the mobile money system. In other words these subscribers have a valid account on the system and can receive money from another subscriber.
• Active subscribers are subscribers that actually transact on a regular basis. The definition of active subscribers differ from one installation to another, but boils down to subscribers actually using the service.

Generally, registered subscribers can be as high as 75% of the target market, but this is rare. Penetration rates of 35% are good, whereas 15% are achieved frequently. One should expect to have more than 50% of registered customers active, but this is sometimes quite low (5-10%). Installation with higher active subscriber penetration rates are usually profitable and sustainable. It has become more and more important for operators to get this percentage higher.

Various strategies exist to entice registered subscribers to become active. This would include special offers, promotion campaigns, new features etc. The penetration rate often start climbing above a critical mass when the network effect kicks in. Unfortunately, it requires investment to ensure that the percentage of active subscribers grow and keeps on growing (until critical mass has been reached). A good article on some of these considerations has been published by CGAP. (Read here).

The backlash of the back-office for mobile payments

While it is somewhat complex, it is rather easy to make one phone send an instruction to move money from one account to another and for another phone to receive confirmation of the transaction having completed. Any competent student fresh out of university can probably get such a system working in a week or two. This is why the mobile payment industry is blessed with so many pilots and concept deployments. This is why industry veterans are frequently confronted by some company that "can do it at a much lower price-point". (Obviously without appropriate experience.)

It is only after a fair amount of subscribers and some transactions are being delivered that organisations typically realise the necessity of relevant and robust back-office support. I call this the backlash of back-office. To only realise the need for sophisticated back-office systems (at exactly the wrong time)... when the solution starts picking up traction. It is often then too late.

Mobile money systems should be designed and constructed with back-office support central to the architecture. The low cost, small value environment requires a decisive and efficient back-office... very much different in design and process than existing banking systems. These systems must be able to cater for on-line subscriber queries and requests, while at the same time monitoring large volumes of transactions. The back-office must be able to cater for unavailability of certain components and enabling call centre staff to manage adverse (and sometimes unpredictable) situations. The pressure on support staff and the demands from clients lead to complex business imperatives that can only be supported with extremely sophisticated and specialised back-office systems.