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The Mobile Banking Tussle

06 Oct, 2013 12:55 IST

The Mobile Banking Tussle

Banks, telcos and tech companies are vying with each other to grab a lion’s share of the nascent m-banking space in India

Raghu Mohan


In January 2009, Barclays Plc did something that would soon become part of banking folklore. The UK bank decided to club its OnePulse credit card, which also carries Transport of London’s Oyster ticket, with mobile phones sporting near-field communication (NFC) facilities. That essentially meant customers could do a three-in-one job with the plastic — avail credit card facilities, travel on e-ticket and tap to pay. OnePulse heralded the coming of age of mobile banking, or ­m-banking, globally.

Six months earlier, in July 2008, online startup Wonga had given m-banking a new dimension by introducing a loan app on the iPhone. In 15 minutes flat, the app would get a short-term loan of up to £1,000 credited to your account. ­Around the same time, in faraway Kenya, Vodafone-backed mobile operator Safaricom was experimenting with m-pesa, a money transfer and micro-financing service that works on mobile phones.

Cut to India. And the story is starkly different. The country has about 880 million mobile users — more than the 600 million lying outside the ambit of banks that vend through over 100,000 branches. But almost half of those without a bank account own a mobile phone, and m-banking is a cheap way to wire them all up: it costs banks just 2 per cent of what they spend on branches and about 10 per cent of the spend on automated teller machines (ATM). You also get to play off tablet-sluggers, smartphonies, and GenY (who consider it a stone-age practice to drop by at a branch).

Let’s look at the math. A semi-urban or rural branch costs Rs 40-45 lakh per annum. It can be as high as Rs 2 crore (for 2,000 sq. ft) in a metro; an ATM costs Rs 3-4 lakh a unit plus rental — ranging from Rs 12 lakh a year (100 sq. ft) in a mall to Rs 4 lakh a year in Kakinada, Andhra Pradesh. A branch transaction costs anywhere between Rs 50 and Rs 65; in an ATM, about Rs 20. What is common is the tech backbone — it’s agnostic to how a bank uses it to service branches or alternative ­channels — and that variable costs such as staffing, power, rentals and marketing cannot duck inflation.
Nitin Chugh, Head, digital banking, HDFC Bank ‘M-banking is just like the Web... needs time to evolve’
The Boston Consulting Group projects that fees from m-banking will exceed $4.5 billion by 2015. Another study by industry body Assocham and consultancy Deloitte says annual m-wallet and retail transactions will hit $410 billion; that’s a potential pool of $8 billion — of which $5 billion will be in direct fees (when someone uses a mobile to make a purchase or person-to-person payment) and $3 billion in indirect fees (usage of voice, network and other services over the mobile).

A larger game plan is below the radar: a unified payment architecture to hook up banks, telcos, business correspondents, the postal department, credit cards, ATMs, point-of-sale units, and the Internet. Further, you have the National Payments Corporation of India (NPCI), with all retail payment systems under its canopy. A series of legislations and reports also cover the field: the Information Technology Act (2008); the draft framework for mobile governance; the report of the inter-ministerial group on a framework for delivery of banking services via mobiles with linkage to Aadhaar; along with a triad of policies to drive a national agenda for ICTE (information and communications, technology and electronics).

Even the new Reserve bank of India (RBI) governor, Raghuram Rajan, wants to tap the mobile. “We will set up a technical committee to examine the feasibility of encrypted SMS-based funds transfer using an application to run on any type of handset, get banks and mobile companies to cooperate...,” he told media after taking charge. “It can be a game changer both in the financial sector as well as to mobile companies.”

A little less than a per cent of bank customers now use m-banking. The RBI says over 53 million use m-banking in India; volumes are a mere Rs 6,000 crore. It does not mean there is no money to be made or is already being made. For instance, you pay Vodafone’s m-pesa Rs 80 per Rs 5,000 for the m-wallet; Rs 180 to remit to a bank account — the cost at 1.6 per cent and 3.6 per cent of the transaction works out to be much higher than at a branch or an ATM, which are not priced on the ticket size. As on date, m-banking is expensive to you, profitable to the hawker. And just how the pie is carved out between the bank, telco and the distributor is a puzzle.

Nitin Chugh, head of digital banking at HDFC Bank, says 2 per cent of his customers transact over the mobile, but expects it to equal net banking transactions in four years. “It is just like the Web... needs time to evolve.” Srinivas Nidugondi, head of mobile financial solutions at mobile solutions firm Mahindra Comviva, leaves you stumped: “There is growing evidence that those who use m-banking do not use Internet banking”. But what’s dished out now as dog’s dinner is really a dog’s breakfast.

Whose Call Is It?
“You have a sharp divide between what an iPhone and Android wallet with an e-wad of cards can do in a mall, and what basic phones with prepaid or no cards at all can offer to the less affluent parts of the world,” says Arindam Mukherjee, manager of regional sales (BFSI) at Cisco (India & Saarc). Adds Ritika Basu, director of programme management at digital agency SapientNitro: “The tech-savvy urban dweller would look for functionality beyond simple remittances. The unbanked will look for ease of transacting over simpler ways (like SMS).” You can’t be all things to all comers, and still have the luxury of a gated residency.

Sriram Jagannathan, CEO, M-commerce, Bharti Airtel ‘There’s a misconception that telcos are interested in becoming banks’
On that cue, it’s easy to fathom why Munish Dayal, partner, Barings Private Equity, says he has been told “m-banking will be the next big wave for the past 15 years. But I am yet to see a good model to put money on it.” Or when Piyush Singh, managing director of Accenture’s financial services, quips: “When bank CEOs say they don’t want to be the first-mover in m-banking, well, there’s no such thing. You have to be in it or you will be finished.” If nobody’s got it right, blame it on the blurred lines. M-banking is a partnership exercise of sorts. For a Google Wallet, for instance, Citibank provided the cards, MasterCard the network, First Data processed, Sprint offered the mobile network, and Google gave handsets. “It was a partnership of equals, though some were more eq­u­al than others with Google seeking to own the customer’s information and, so, the relationship,” explains Mukherjee.

In m-banking, you don’t have to ‘own’ a product, bankers will tell you; it’s evident when they sell for a third-party — it’s the customer relationship that matters. But who ‘owns’ the customer? “Nobody owns as such. It’s a bouquet of partnerships,” says Suresh Sethi, head, m-pesa at Vodafone (India). HDFC Bank’s Chugh is categorical: “It is the bank for the banking relationship; the telco for the mobile connection.” Shrihari Bhat, managing director of FIS Asia PSG, adds: “The answer could be different for different countries.” For K.V.S. Manian, group head of consumer banking at Kotak Mahindra Bank, “All of this is true in a given context.”

To the extent that the RBI says m-banking customers have recourse to the Banking Ombudsman the matter may appear to be settled. Not really. Assume a telco and a bank decide to terminate a relationship, what is the former to tell the customers it has acquired? Says Pradeep Sampath, COO-MMPL, an arm of Tata Teleservices: “It depends on the engagement with the bank and how this is defined between partners. There is no readily available definition for this.”

In India, m-banking follows a bank-led model; the telco relays the service to the customer. When Axis Bank says it’s tied up with Airtel Money, it’s an extension of a channel. You visit ‘Airtel Money-Axis Bank’ outlets to open an ‘Airtel Money Super Account’, a no-frills account to deposit cash or withdraw from the outlets and remit funds to other users. But m-wallets work only on a given telco’s network: inter-operability is a no-no.

“If the closed m-wallet is made open, it can give it a leg up,” says Accenture’s Singh. “You have to link it to the larger payment ecosystem, retailers and across telcos to get volumes. Or you will have islands,” feels Jose ­Thattil, head of sales and marketing, ElectraCard ­Services, an e-payment solutions company. “One way is to link it to a physical plastic so that you can access a larger base of merchants and pay for more goods and services,” adds Vikas Verma, head, MasterCard (South Asia). An aside: you can’t help but contrast it with number portability.

It’s unlike the telco-driven model where you go to an outlet, pay cash and get e-credits stored on the mobile. You can use it anyway you want or swap it for cash (at the outlet) or ‘cash out’ as it’s known. That’s how it works with m-pesa or G-Cash of Global Telecom in the Philippines. But the runaway success of m-banking in Kenya has led to it being seen as coterminous with or being confused with the telco-led model. The jury is out on what works best: bank or telco-led models or a mishmash of the two. But it has already led to a ­series of concerns.

Identity Crises

“Banks worry telcos want to be banks; telcos worry banks want to become telcos,” says Mukherjee. “Neither is right.” He says the RBI does not have enough regulatory authority over mobile payment firms. “Entry into the banking space has to be on open, transparent and contestable criteria. It may not be prudent to allow mobile operators privileged access to banking through the mobile route,” former RBI governor Duvvuri Subbarao had noted. It’s suggestive that Mint Road suspects such ambitions lurk even if telcos are dismissive of the same.

K.V.S. Manian, Group head, consumer banking, Kotak Mahindra Bank ‘Cash out is capped at Rs 10,000 now. But this can go up’ (Photograph by Umesh Goswami)
Telcos argue that the m-banking licence is given by the RBI, not telecom watchdog Telecom Regulatory Authority of India; that they have no interest in becoming banks. The m-wallet is funded by cash or by a credit card; and as in prepaid plastic, funds have to be kept in a bank’s escrow account. “We can’t use it for our treasury business. There’s a misconception that telcos are interested in such floats,” says Sriram Jagannathan, CEO, Airtel MCommerce.

But there is a subplot. “You can cash out at a telco’s outlet (if it is a business correspondent) only for Rs 10,000,” says Manian of Kotak. It’s his way of telling you e-cash may well be a substitute for cash as you now know of it; you cannot predict how regulations evolve.

In the Philippines, Global Telecom’s G-Cash and ­G-Xchange can be cashed in or cashed out (technically a deposit function) at its outlets; some companies even use it to pay salaries and bonuses. It does not offer you saving or lending functions as yet. But m-pesa is a virtual bank. “Cash out is capped at Rs 10,000. Over time, this can go up. To the extent, you are not using a banking channel — and however limited it may be now — banks will have to keep their eyes open. Who’s seen tomorrow,” asks Manian. But the debate appears to be settled at the central bank. RBI deputy governor K.C. Chakrabarty puts it eloquently: “Just as you cannot have telemedicine without a doctor, you cannot have mobile banking without a bank.”

Braves In The New World

Today, a trend is gathering steam, something those with interests in m-banking cannot ignore — Big Data. But banks and telcos view it from the point of storage. “You have the three Vs of Big Data — volume, velocity and variety. There is a huge opportunity to leverage Big Data for sustainable business growth and improving customer engagement and customer intimacy,” feels G. Padma­nabhan, executive director, RBI. He adds that banks have to learn about innovation from the likes of Amazon, Flipkart, Google, Twitter, Facebook, Nintendo Wii or a Microsoft Xbox. The question, he says, is: can banking in India become the ultimate customer experience?

That calls for linking m-banking with retailers or malls. “The next stage is digital wallets. The mobile will be the store for payments, identification and loyalty, basically one that will convert the wallet in the back pocket to the front... onto the mobile,” says Nidugondi. You can then not only do ‘remote’ deals like book a movie or a train ticket, but also pay for ‘proximity transactions’ with NFC or a QR code. Even real-time offers can be pushed with the use of location-based services. “The use of geo-fencing (a GPS-aided program that defines geographic boundaries) as a strategy can help banks and retailers push context-aware and segmented offers to consumers. You can enhance consumer stickiness,” he adds. “What you have is something that allows you to access a bank’s portal from the mobile or via an app. It is a cut-paste of what you see on the Web. M-banking is much more than that,” says Accenture’s Singh. He isn’t impressed with ‘apps’ per se. “My son is six years old now. By 11, he too will develop an app.”

  • A business correspondent can be appointed only within a 30-km radius of a bank branch
  • This limit needs to be relaxed to meet the objectives of financial inclusion and higher serviceability
  • Alternatively, the 30-km radius rule should be extended to 100 km to create meaningful rural penetration
  • Currently, as a prepaid wallet issuer, telcos are unable to offer ‘cash outs’. Enabling low value cash outs from the wallet will enable telcos to offer an end-to-end proposition to the customer
  • Transaction limits on the wallet are Rs 5,000 per transaction with a monthly limit of Rs 25,000. The limits have to be raised
  • People are becoming more mobile – and banks are paying for it
  • This year, 590 million mobile phone users globally will use their device for banking purposes. In 2017, that number will exceed 1 billion
  • Worldwide, banks will spend $118 billion on technology and mobile banking in 2013
  • 81 of the top 100 US financial institutions currently offer some form of mobile banking
  • 48 per cent of mobile customers would like mobile banking tailored to location and their personal shopping habits
  • Younger consumers are more demanding: of the 26-34 age group, forty-nine per cent will change banks for a better mobile experience
  • In 2016, there will be 448 million mobile payment users in a market worth $617 billion
  • nUS mobile commerce sales will reach $86.9 billion by 2016
  • nBy 2017, worldwide purchase volume over mobile devices will reach $1 trillion
Source: The 7th Annual Mobile Banking and Commerce Summit in Miami

Generations X and Y have made apps for writers, SMEs and even painters, but not many for ­e-com­merce platforms; they are just the staging rooms that guide you to a website where the final order is placed through secure gateways. “With ­smart­­phones, banks can’t ignore apps as a means of ­financial inclusion,” says Nikhil Sama, founder of app maker Snaplion.

For an app to be developed for a bank, you first have to tackle the security of phone and banking data and “meet the bank’s technology needs because all these projects are large”, adds Sama. But there are issues. For one, hackers have moved to phones now. “Today’s malware is very intelligent; it lies dormant and gets active when there is a piece of important information to steal,” says Mohan Sundaram of Red Force Labs, a software security firm. Banks may ring-fence back-end servers and gateways, but your network gateway can be broken into.

“The loss of a device with payment information is the most common reason for not trying m-wallet. Smartphone users are more concerned about it, and they are more likely to be keen on m-wallets than basic phone users (63 per cent),” says Nitish Asthana, executive director at First Data Corporation. According to consultancy EY, smartphones get exchanged or resold every eight to 12 months and with it go customer data which is monetised in the grey market.

Shrihari Bhat, Managing director, FIS Asia PSG ‘State banks have been slow to launch comprehensive m-banking (Photograph by Umesh Goswami)
That said, can startups pull off a banking app? “It ­involves a lot of integration of software and hardware, large teams and contracts that last for lengthy periods,” says Alok Mittal, MD, Canaan Partners India, a venture capital firm. Meaning, only the top five Indian software ­services firms can do this. “In the US, you have apps that track usage of your debit card and send reports on how to become intelligent with spending money,” says Mittal. AdNear, a location-based advertisement, maps you on call tower signal codes and  pin-points the location when you use an app. The rate is Rs 5- 6 per impression and the revenue is shared  in a 60:40 ratio with the brand. Says Priyanshu Gupta, associate vice-president at Lok Capital: “App-based financial inclusion is under experimentation. But there are many barriers. You have to make the smartphone easy to use and then there are trust issues.”

Adds Rahul Chandra, managing director of Helion Venture Partners: “There is an ecosystem of firms building apps for bank customers, but these are early days.” The ­app challenge to banks is two-fold — the spaghetti-style complexity of integrating ­islands of apps over time and integrating them with its core banking system. “A middleware is important to manage the cost and complexity of building apps. Strong knowledge of core banking is required to provide rapid ­integration without disrupting bank operations,” says Chandra.

Even such apps get challenged by state-of-the-art browsers and standalone mobile app platforms. It is only a matter of time before you get an Android, iOS or Windows-compatible app,” says Kedar Sohoni, president of Informate Mobile Intelligence, which maps mobile behaviour. He debunks the notion that smartphones are for the elite. A smartphone, he says, uses an identifiable open OS supported by third-party apps written by a notable developer community. They can be installed and removed, and they can be created for the device’s OS and application programming interfaces (APIs, a set of tools and rules for developing software programs).

Alternatively, developers must be able to access APIs through a discrete layer such as a Java platform. The OS must back a multitasking environment and a user interface to multiple apps simultaneously. “But a few years down the road, smartphones will penetrate across all social strata and even a feature phone will have the capability of today’s smartphone,” adds Sohoni.

Fellow Travellers

Make no mistake, it is not just about banks and telcos. The European Financial Review (March 2013) says by 2015, over 900 million people may transact $1 trillion in m-payments. Enter big-time retailers and silicon. Walmart, Target, and Best Buy have joined hands to create their version of an m-wallet, the Merchant Customer Exchange, to gain a foothold in payments (combined, these retailers’ total customer spend is $1 trillion). So too Google Wallet and Apple Passbook. Then you have Facebook Credits with money transmitter licences in more than 15 states in the US and Twitpay for Twitter-based fund-raising. It’s anybody’s guess as to how the entry of big retail into India and the rise of social networking will shape the topography even if it is the RBI that decides the rules on payments.
Piyush Singh, MD, financial services, Accenture India ‘Can you service the customer acro ss channels? That is the point’(Photograph by Umesh Goswami)
In the case of local banks, multiple systems have been built over a period of time; integration with the mobile leaves a lot to be desired. “Banks are ensuring the mobile channel has a focus for various bearers — client app, SMS, Unstructured Supplementary Service Data (USSD, a technology used for sending text, mostly real time); an integrated mobile middleware to interface various backend systems,” says Nidugondi. “State-run banks have been slow to launch comprehensive m-banking and while most have launched a mobile service, they have had limitations that restrict their utility,” says Bhat. Outsourcing to technology providers is also a strong trend. Over 800 banks and credit unions in the US (including more than a third of the 50 top banks) use Florida-based FIS’s outsourced m-banking offering. The fast pace of evolution of mobile and device platforms makes it unsustainable and disruptive for banks to manage on their own. They have to reach out.

Says Ravi Jagannathan, vice-chairman of eMudhra and director of mobile wallet YPayCash, “If one were to look at the US, players from different industry segments have come together to create JVs and consortiums. ISIS has been formed with banks, card companies and telcos coming together.” But irrespective of the model, the key is how well products are designed, how much additional value to customers and merchants is being given by say, integrating shopping-related parameters to payment and, finally, having a revenue model at a unit level so that it is sustainable. “Square, m-pesa and PayPal attest to the fact that they have had sustainable margins at a unit level along with product features which have addressed either a customer or merchant need,” says Jagannathan.

But it is Accenture’s Singh who hits the nail on the head. “It is not about technology. Sooner or later, it will get created and adopted. Just what is the proposition that m-mobile presents to the customer? M-banking is just another channel. Can you service the customer across channels? That is the point.”;;

(This story was published in BW | Businessworld Issue Dated 21-10-2013) ]]>