It might, in some circumstances, be better for both the banks and their customers if they let someone else deal with payments – leaving banks free to concentrate on core business.
In Edward Castronova’s excellent book “Wildcat currency – how the virtual money revolution is transforming the economy” he makes, to my mind, a succinct and penetrating observation on the regulatory environment for our industry. He says
Money has become tangled up in the banking system and this has created a management issue: sustaining confidence in the value of money requires keeping banks healthy.
That is a terrific phrase, isn’t it? “Tangled up” is exactly the right way to describe the relationship between money and banking. The role of commercial banks in money creation has become a matter of renewed interest (I saw Ben Dyson of PositiveMoney gave a super presentation on this at the recent Meaning Conference in Brighton) and their role as money transmitters should be subject to similar renewed scrutiny. Or, to simplify, I think we should ask why it is that banks are tangled up in payments as well. There is, as far as I can tell, no reason for this.
Back in 1999, the Federal Reserve Bank of New York Economic Policy Review said that “Economic theory on the operations of commercial banks cannot, by itself, explain why they provide payment services on such a large scale”.
Also way back at the turn of the century, I made a note on a comment by the economist John Kay in The Financial Times (it was in June 2000 but googling hasn’t led me to the original). He said:
“Banks engage in a collection of activities linked by historic accident”
So if we put all of this together, we can see a “back to the future” roadmap where banks go back to savings and loans and the “pooling” functions needed to support a modern economy, non-state actors provide money and — and most importantly in the short term — third-parties provide payment systems. In Europe, the regulatory wind is already in these sails. Pretty much an organisation of a certain size can obtain a Payment Institution (PI) licence — Facebook already has — and once the regulatory framework has changed to force banks to allow these PIs direct access to accounts then the ability of organisations to move money between accounts will power all sorts of new products and services.
It’s easier to see this future in outline by looking at the emerging markets. It’s a little lazy to reflect back on the well-known example of M-PESA but look what has happened in Kenya because of the activities of the regulator there. A non-bank provides a payment system used by more than two-thirds of the adult population and as a direct consequence of this, the number of savings and loans accounts in commercial banks is now vastly greater than before. Why? Well, as has been transparently obvious for several years, the transition to mobile as the central channel for banking is cheaper for the bank and for the customer.
There is a strong case for Mobile Banking ROI. On the costs side, a call center transaction costs the bank $3.75, an IVR transaction costs $1.25. A transaction through the mobile channel costs the bank $0.08. So more frequent use of the mobile channel will reduce calls to the call center and IVR thereby reducing costs.
Or, in others words, if you are a financial institution and you don’t have a mobile strategy then, to quote that Google chap, you don’t have a strategy. I think I’m right in saying that for the financial institutions we work for, “mobile first” is the core strategy in retail and speaking personally, I have to say that my use of mobile banking has been transformed over the last few years. When my bank, Barclays, first came out with a mobile application it was some kind of miniature window into web banking and was a bit of a pain to use. Since I was reasonably happy using the web to deal with the bank, it didn’t bother me. I would stack bills, payments and whatever and then sit down at the weekend with a cup of tea and catch up. But the subsequent versions of the Barclays application were terrific. And now I use it all the time. And since I can use it to instruct FPS transfers — 97% of which are to members of my immediate family and domestic subcontractors — I take of things where and whenever. I love it. Mobile banking rocks. And that’s great for banks, because no-one else can do it* .
But should banks develop their own platforms or could they share one from a provider such as SWIFT? After all it is all just about sending a message securely across a mobile network.
The platform for mobile banking is richer than simply mobilising bank products and services. It may be, for example, that integrating services more specifically evolved for the mobile environment is a better option for a bank than using its own products or, indeed, any bank products at all. An interesting example to look at here is Tigo Pesa in Tanzania (which is in itself an interesting case study because of the competitive mobile money environment there) where the non-bank provider has been able to use its leverage (by pooling deposits for the bank) to create returns for account holders in excess of what they might expect if they were bank customers.
According to Tigo, for the past three and a half years the Tigo Pesa trust has been able to achieve a return of between 5 and 12 per cent- and aims to achieve a competitive rate in future. Tigo plans to return all of this money back to its customers. With inflation in Tanzania running just over 6%, this represents a significant return on customers’ investment in mobile money.
The point here, again, is that this is not bad for the banks in Tanzania at all. Quite the reverse. It gives them a substantial deposit to work with without the costs of acquiring and managing the funds themselves. Which brings us back to the M-PESA case study. Four years ago it was clear that banks were benefitting from the payment system that they did not own or control.
21 percent of M-PESA users in Kenya now use the service simply to store money and earn interest. The savings service – branded as M-KESHO and in partnership with Kenya’s Equity Bank – has effectively set-up 750,000 new bank accounts in Kenya since launching in May with deposits totalling KES900 million (US$10.7 million).
Scatchamagowza, as I said at the time. The non-bank payment system led to nearly a million new bank accounts in its first few months and a long-term doubling of the number of bank account holders. Far from taking customers away from banks, M-PESA was bringing customers to them. As far as I can see, this is pretty conclusive proof that banks are wrong to lobby regulators to insist that mobile payments can only be provided by banks and that regulators are wrong to listen to them. There is no need for banks to be tangled up in payments at all.
(* not actually true in all respects)