Why banks struggle for success in mobile money/payments

Written by on August 23, 2015 in Features with 2 Comments

woman with bank application phone in the parkTimes 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 a mobile network operator (MNO) dominated model. This change has brought about financial inclusion to most marginalised citizens and has greatly brought efficiency in the payment industry and, as a result, banks will have great difficulty competing with MNOs.

Accessibility is a critical success factor for any service. Informal institutions providing financial services to members of the community rely on easy accessibility to banking services whereas a bank has traditionally relied on a wide are branch network of fully branded brick and mortar banking halls with all the necessary staffing and security systems.

The setup and maintenance costs of these are high and to recoup investment the bank has to pass on the cost to the ultimate consumer. MNOs on the other hand, particularly those in emerging markets, have embraced the concept of an extensive agent network at minimal cost. MNO agent networks are usually dense with at least one agent for every 1km radius.

Usually the cost of setup and signage is borne by the agents as they bid to be more visible and to attract more customers. Their revenue is highly dependent on the volume of low cost transactions they can make. A subscriber does not need to travel long distances to make a physical, agent-centred transaction.

Due to the nature of this business, MNOs have excelled in the “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 even for those who have utilised technology there are still limitations across country borders and money laundering regulations. The MNO makes money on transactions but banks traditionally earn interest by lending out money retained in accounts, account keeping fees and only more recently by charging for transactions.

In order for any business to thrive, it has to observe a wide cost to revenue ratio. Banks are subject to a high customer acquisition cost estimated at anywhere between $10 and $100 per customer whereas MNOs stand at $2 to $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. The MNO’s interest in retaining a subscriber is greater than banks and they do this by giving ‘better’ service and running promotions to win the back errant ones.

Many people in emerging economies are living on a hand to mouth basis. Banks go against the economic tide by encouraging savings (which is ideologically correct and benefits the national economy and each person’s life) while MNOs encourage spending. There is little savings and investment in these 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.

However, the MNO model has helped boost GDP by helping people with the will to startup their own business and grow with free consultation and support and a “You Grow – I Grow” philosophy. The MNO distribution network mimics the distribution of cigarettes, food and water thorough local agents; and creates the flexibility and expanse banks never thought of creating. Agent networks are the MNO’s key success factor – for MNOs the whole game is on volume and for bank its value creation.

Most regulators impose stringent KYC (know your customer) 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.

Similarly, banks have a restrictive approach when it comes to onboarding 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 onboarding 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 Africans.

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. Banking 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 & 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.

In conclusion, banks need to take a radical change from their current modus operandi in order to beat MNOs in the field of mobile payments.

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Vinod Sharma

About the Author

About the Author: Vinod has worked in the mobile payments, mobile financial services (MFS) & telecom industry across domains like Network, Prepaid charging & Billing, IT and Value added services for over 15 years, Vinod has provided his insights and product knowledge to various initiatives across four continents. He currently holds senior roles in MNO in the IT, BSS and Mobile financial services space. In past he helped the founding and set-up of several start-up business units. He is currently based in Harare, Zimbabwe. There is only one goal: create value for society & industry by innovating and building mutually beneficial products, businesses and world. .


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  1. Avatar Ramon says:

    Well done Vinod, as this is highly insightful and also educative. It is fit the Band driving Mobile Money use case of Nigeria, where the service still struggles to make the intended impact.



    • Vinod Sharma Vinod Sharma says:

      thanks and I hope that will happen as I have my latest post on same – “Even God Pays Cash Here” – https://www.linkedin.com/pulse/achieved-power-mobile-payments-vinod-sharma [Focused on changes in Indian Market] ……. but my response as on date is its too early and can be compared with witty remark as “If the Earth starts rotating 30 times faster that does not mean it will start bringing you the salaries 30 times a month or every day so in a nutshell, such changes are good and always bring benefits for society but we need to be patient enough before we start milking the cow.” …. Again my brother these are my own views and I would love to be wrong for betterment of people out there.

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