Mobiles:
The next banks?

The rapid rise of the mobile challenges the role of banks, reports WILL CAIN, as mobile operators become ever more active in the payments arena.

The soon-to-be-launched iPad 2 and Blackberry mobile phones have become the most recent devices to feature near-field communication (NFC) chips, adding more weight behind the commercial push into m-payments in 2011.

Blackberry’s parent company, Research In Motion, and Apple, which owns the iPad brand, both announced their new products would come with NFC chips as standard. Last year, handset manufacturer Nokia became the first to say its next generation products would feature NFC capability – a technology which works in the same way as contactless-enabled cards.

These developments all point to the growth of mobile as a banking channel and also as an alternative medium of payment. Mobile phones with NFC chips allow consumers to download the same information onto their phone that is typically stored on a credit or debit card. They can then make payments at point of sale terminals where contactless payments are accepted.

The rapid rise of the mobile has put into question the role of banks, which face potential disintermediation by mobile operators which are becoming more active in the payments area.

So far, most of the financial initiatives run by telcos have been done in partnership with banks. Mobile operator O2 ran a high-profile campaign last year with a prepaid Visa card called O2 Money offered in conjunction with RBS. Supported by a big marketing spend, it was one of the most successful financial products of the year, attracting millions of cardholders and attracting new customers to the company.

James le Brocq, a former Barclaycard and Alliance and Leicester banker, is head of financial services at O2. He has signalled the telco will soon apply for an e-money licence which would allow it to offer certain payments services without the need for a bank partner.

This process is being made easier by the implementation of the Payment Services Directive (PSD), which is opening up the payments markets to new entrants in an attempt to promote greater efficiency and more effective cross-border payments within Europe. Some in the payments industry argue that banks are no longer best placed to provide payment services, particularly after the financial crisis when essential payment mechanisms were at risk. This promotes the case for a type of “narrower banking” which does not include payments, according to Dave Birch, a director at digital money specialist Consult Hyperion.

He says, “The business of banking could focus more on its core of lending and borrowing, while payments would become more of a low-margin, high-volume commodity service.” Much of the payments infrastructure is outsourced already, he says, pointing to companies including Equens, Vocalink, First Data and PayPal.

“The introduction of the PSD means that telcos can get a licence to provide payments – this is what Spain’s Telefonica is doing, for example – without being a bank,” adds Birch.

“This is a good thing, I think. Banks should be focused on ‘narrow banking’ stuff – other people can provide payments more cost-effectively and efficiently.”

Mary Carol Harris, head of mobile development at Visa Europe, says she has “no crystal ball” to predict future business models and how the dynamic between banks and telcos will evolve. Harris was previously head of O2’s mobile banking project and now, at Visa, works with both banks and telcos on promoting the uptake of mobile payments.

“Do I think mobile operators will become banks? Who knows?” she said.

“We have seen it happen in the case of retailers. Tesco, Virgin, among others, have moved into banking. The current situation is we are seeing them partner with financial institutions in order to leverage their brand more effectively.” Harris believes banks have played an important role in the development of mobile banking and will continue to do so in the future. She says people only need to turn on their TV sets to see how banks are developing their mobile propositions.

“Lloyds Banking Group, RBS and Barclays are really starting to integrate mobile into their TV campaigns to communicate to their consumers that they can access their banking information on the move,” she says.

“That’s an interesting trend we’re seeing. Once it hits the above-the-line campaign level is when it starts to hit mass market usage.”

Research conducted last year by the Mobile Marketing Association (MMA) shows that 14 per cent of UK consumers used their mobile phone for banking purposes in 2010. This was through a combination of SMS alerts, smartphone applications and access through a web browser. Harris says that figure reached 25 per cent in the early part of 2011. MMA figures suggest m-banking penetration in the US was slightly higher at 30 per cent.

“We’ve seen an explosion of apps, mobile web usage and SMS messaging which gives you more control of your spending,” declares Harris.

“That’s because technology is improving, more and more smartphones are coming out and consumers are curious about what they can do on their phones but also because of a change in the economic environment. Consumers are using m-banking to keep an eye on their balances so they know when they’re overdrawn.”

One of the main challenges hampering consumer uptake of mobile banking and payments is concern over security. A mobile phone security expert interviewed in Chartered Banker’s last edition said NFC was one of the most secure forms of mobile payment, but there were still some difficulties in securing the process of downloading payment card details onto an NFC chip on a mobile phone.

“When we’ve done [consumer] trials and looked at attitudes and perceptions at the beginning and attitudes and perceptions at the end, you can see that with time and usage trust is built,” says Harris. “The reality is that the technology we use for contactless within the handset is as robust as chip and pin.”

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