Insight # 60 : Navigating the Twists and Turns of Disruption

Managing the Business of Mobile Money

By Merryn Horneman

In Kiambere, Kenya the owner of a duka -- a small market -- pays a driver for his delivery of tea packets via clamshell phone using the M-PESA network. In Irvine, California a young professional flashes her Samsung smartphone to charge her breakfast via Starbucks' mobile app for Android. In London an executive pulls out his iPad, brings up the Lloyds Bank mobile app and transfers funds from savings into his personal current account. Each of these is an example of mobile money services -- mobile payment, mobile commerce and mobile banking, respectively.

Mobile money has become -- no pun intended -- big business. The value of global payments via mobile devices is expected to reach $507 billion this year, a rise of nearly 40 percent year-on-year, according to mobile research firm Juniper. The number of "contactless" transactions via mobile handsets will exceed 9.9 billion globally by 2018, up from just over 3 billion in 2014, according to the same source. And Juniper projects that annual retail payments on mobile handsets and tablets will reach $707 billion by 2018, representing nearly a third of all digital retail by that time, up from $182 billion last year, when mobile accounted for around 15 percent of "e-retail."

Yet big business itself -- particularly, financial services -- is struggling to figure out how to fit mobile money into its core operations. This report examines the challenges mobile money presents to entrenched organizations and offers guidance for choosing approaches that are likely to succeed.

Mobile Money Disruption from Outside

Disruption in the financial services is surging from two directions. First, there are the startups -- companies like Uber, a service that allows a person to find a ride and pay via an app, and Seamless, a mobile and web food delivery ordering service. These are small and medium businesses looking for ways to cut out the traditional forms of financial transactions -- no cash, no check, no credit card; just an app -- and operating outside of the purview of regulation.

Second, there are the brands that dominate online, including Facebook, Google and Apple. All of these companies are drilling in the mobile money landscape. As the Financial Times recently reported, Facebook is "weeks away" from getting government approval in Ireland to offer a service that would let users store money and exchange it through the social networking site.

Google for its part is continuing to make inroads with Google Wallet, which some experts expect will surpass PayPal in the United States as the top mobile payment service. This app lets the user shop in physical stores and online and send and receive money. For its part, PayPal isn't taking the competition sitting down; a visit to its home page shows multiple images of mobile transactions; nary a laptop in sight.

Finally, Apple is expected to introduce "iWallet" later this year, which will allow for secure contactless payment via Bluetooth low energy. That introduction could expand the "awareness pie" among consumers for NFC, near field communications, which enables transactions to happen with a smartphone bump or near proximity.

The surge that's missing here is the one originating from most mainstay banks and asset management firms. Right now mobile features from those companies are primarily offered up to bank customers as a convenience more than a necessity. Mobile banking apps dabble at the edge of services as if they're afraid they'll flood too far onto the fabric of their own operations.

Dennis Jones describes the current ecosystem for payment transactions as a "complex" one dominated by banks and "suffering from a lack of innovation." Jones, the CEO of Judo Payments, is in a position to disrupt standard operating procedures. His UK company provides a user-friendly online service that allows a business to do transactions with mobile device users. Just as important, it acts as a one-stop shop, cutting out the services that a small business might traditionally go to a bank to set up. Judo provides a merchant account, a gateway service and PCI compliance as well as help in fitting its software within an existing online merchant's website. There's no contract, no fee to start the service, and the pay-as-you-go model currently charges a flat 2.4 percent plus £0.20 for each transaction.

Jones believes that the smartphone will ultimately change consumer behaviors in ways that go beyond the standard PC-based e-commerce experience. "The power of the phone is the immediacy," he states. Now, when people leave their homes, they make sure they have their wallet, keys and phone. One day soon they could simply require their phone. "If you're not dipping your toe in the water of mobile then you're in trouble. We are at the turning point on the hockey stick. It's all happening now."

Mobile Money Innovation from Inside

Amit Pau, director of investment firm Ariadne Capital, is advising clients that mobile payments are still in the "embryonic stages." That gives the "Goliaths" of the financial services industry some time to prepare themselves against the disruptive stones of the "Davids."

Some financial institutions have figured out how to stay upright on the mobile money wave by acquiring innovators with proven track records. Earlier this year, Spanish banking group BBVA, with $820 billion in assets, acquired Simple, a four-year-old online and mobile banking startup with $1.7 billion in transactions and 100,000 customers. While the larger concern is allowing its acquisition to function as a separate business within its corporate structure, the two co-founders of Simple say they're "excited" about the prospect of jointly gaining "complete end-to-end ownership of the customer experience, from our mobile apps all the way through the core banking stack." One interpretation could be that Simple's innovations will in short order influence the lifeblood operations of BBVA like a vaccination.

BBVA Chief Executive Francisco González hinted as much in an editorial for the Financial Times published before the acquisition was made public: "Some bankers and analysts think that Google, Facebook, Amazon or the like will not fully enter a highly regulated, low-margin business such as banking. I disagree. What is more, I think banks that are not prepared for such new competitors face certain death."

In "two or three years," González wrote, "only five percent of consumer interaction will be through branches. The rules have changed and a new league of competitors is emerging."

(Of course, the company is also hedging its investment bet. In partnership with Google, BBVA recently announced a challenge for developers with prizes worth €40,000 to come up with new, cool productivity applications for businesses. A lone $9,000 prize will go to the best application that can be used by the bank's own employees with "special consideration" being given to mobile apps.)

The Back Office Complexity of Mobile Money

While consumers are seeking simpler ways to spend, move and manage money, behind the scenes the market seems to be going in the opposite direction. Every segment -- banking, online, even cellular providers -- is making a grab for its share of transactions. According to a global mobile money adoption survey by GSMA, an association of mobile operators and related companies, 208 mobile payment companies had launched worldwide by 2013, more than half in Sub-Saharan Africa. The result: a great deal of geographical splintering and functional complexity.

In that kind of fragmented maelstrom, how does an organization set a strategy that will help it weather the jostling that's bound to happen as the industry evolves and solidifies?

For now Pcubed recommends three strategies:

  • Stay close to the customer;
  • Monitor standards and take advantage of interoperability; and
  • Prioritize to put laser focus on the most high-value projects.

In each of these areas, mature organizations may have an advantage over the upstarts.

Understanding the Mobile Money Customer

When the Simple news came out, Jim Marous, senior vice president of corporate development at direct marketing firm New Control, told American Banker magazine that the $117 million purchase has enabled BBVA to "[leapfrog] the competition in a quest to respond to the needs of the digital consumer."

The behavior of that digital consumer is currently igniting the explosive growth of mobile money. "Understanding your consumer on mobile is the most important thing you can do," advises Judo's Jones.

One pattern of behavior that's tough to ignore is the continued growth of mobile payment transactions, including bill payment, money transfers, ticketing, prepaid "top-ups," digital purchases and merchandise purchases. In a whitepaper on mobile money IBM cites trends from IE Market Research predicting a near-doubling of the gross value of those transactions between 2014 and 2015 in North America, Western Europe, Eastern Europe, and Asia Pacific.

Yet security concerns among the general population continue to be a hot spot. Consumers are shutting their virtual pocketbooks against organizations that suffer data breaches involving their personal information. According to Reuters, Target, which had seen the theft of 40 million credit and debit card records and 70 million other kinds of records in December 2013, reported a 46 percent drop in net profit over the holidays and reported $61 million in costs related to the breach (most of which were covered by insurance). The share price dropped by 11 percent, though it has since recovered some of that value.

Here's where financial services operations can benefit from their maturity. Customers know that banks maintain their sensitive data securely. They trust in policies and procedures that are intended to protect that personal information; what they need to do is transfer that level of trust. That requires banks to educate consumers about how they go to great lengths to ensure the security of the apps they provide. They also need to promote consumer security practices, such as using a cellular network rather than a public Wi-Fi network when performing secure transactions and locking their mobile devices by whatever means available, whether through a PIN, a pattern or a thumbprint.

Ariadne's Pau believes the "winners" in mobile money will be those companies able to "secure and harness data accurately."

Mobile Money Interoperability

One area that's essential for the continued growth of mobile money is a robust set of interoperability standards that will help banks and other organizations to overcome what GSMA calls "walled gardens." As the association's report, "The case for interoperability," lays out, "In an interconnected environment, a customer affiliated with one operator's mobile money service would have the ability to send money electronically to the wallet of a customer affiliated with another operator's service." GSMA points to the payment card networks set up by Visa and MasterCard as examples of the value of open architecture among competing players.

Among the different types of interoperability described are those that address platform-level communications at the payment network level, the cross-institution level and the cross-border level. These are primarily IT projects that enable a customer of one service to interact with another on some level. Right now, according to GSMA, it's nearly impossible for a person using one mobile money service to send money to an account held by somebody else on another mobile money service.

Companies should expect shortly to be asked to immerse themselves in multiple interconnectivity schemes. They need a way to research which ones make financial sense -- just as they do with any IT project.

As management develops a strategy for addressing interoperability, Pcubed recommends avoiding investment in projects that address specific devices or the latest popular services used by consumers. The lion's share of work at this stage should emphasize the common services that run the back end and in many ways reflect current investments: cash management, settlement, reconciliation and the like. (Wherever possible, collaborate with other companies and adopt services to expedite experimentation and piloting of new solutions.) New approaches that highlight these areas can promote self-service -- a mandate of the mobile era -- and have the added benefit of addressing the needs of both consumers and commercial customers. Analysis of financial and other data will uncover a lot of possibilities for the types of services people need and want.

Prioritize Mobile Money Projects

Executives in financial services organizations that stay close to their customers and seek to build up the mobile capabilities of their back office operations will find themselves facing a plethora of potential projects. Pcubed advises prioritizing projects in the same way all projects are ranked -- through a methodical process of business case valuation and alignment with business strategy.

Some projects -- those related to compliance -- will be must-do's. Government in many parts of the world has been slow to set up regulation of mobile money operators, leaving it primarily to telecommunications operators to monitor mobile activities. But that's bound to change, as headlines such as those generated by the bitcoin debacle capture legislators' attention. Where government sets its gaze, regulation in some form is sure to follow. Here's where mature organizations can exploit their legacy. They know how to engage with regulatory bodies to address oversight measures.

Other projects -- tied to innovations -- need to remain focused on delivering a collection of essential services that cater to consumer and commercial customer demand for anywhere-anytime banking. 

With either type, because so much is in flux regarding mobile money, review of projects will need to be amplified to weed out those that could suddenly turn overnight from potential hits to near-misses.

The Urgent Need to Move Quickly

Entrenched financial services organizations are rapidly losing their traction among Gen Y, the digital native generation born between 1980 and 2000. A recent survey by Capgemini found that retail banking customers reported fewer positive customer experiences for the first time in three years. That puts banks at risk of losing both customers and profitability. Researchers found that customers with positive experiences are three times more likely to stay with their bank than customers with negative experiences. The former group is also three to five times more likely to refer others and to purchase other products from their banks.

As the report states, Gen Y's expectations of how banks should serve customers, particularly via digital platforms, are significantly higher than those of the general population due to their prolific and sophisticated use of technology. The expectation is that the influence of "Gen Yers" will only grow.

BBVA's González expresses the urgency of the work ahead. As the importance of systems that are 30, 40 or 50 years old dissipates with the arrival of their digital replacements, the financial institutions themselves will undergo a transformation of technology and corporate culture. "This is a matter of survival," he writes. "Banks are losing their monopoly on banking. It is up to each one to rise to the challenge of offering the information services (banking or otherwise) that people need."

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