Analyst Angle: M-banking – today's explosion and tomorrow's challenges

Editor’s Note: Welcome to our weekly feature, Analyst Angle. We’ve collected a group of the industry’s leading analysts to give their outlook on the hot topics in the wireless industry.
The utility of mobile phones has long since expanded beyond the concept of simple voice communications. Among other emerging applications, mobile technology is now being used to support a multitude of financial transactions. The concept of mobile banking, also known as m-banking, enables a wide array of services and takes mobile technology and devices to new levels of utility. M-banking has become an increasingly important topic in the mobile ecosystem, and is particularly flourishing in the developing world.
Simply put, m-banking refers to the provision of banking and financial services through use of a mobile device. This includes touchless or contactless payments, which allow a mobile subscriber to make financial payments by scanning their mobile phone at a point of sale, subway turnstile or vending machine. Such technologies are growing in use, notably in some Asian markets. According to the Korea Information Society Development Institute, for example, contactless payment systems in that country have grown in value from $3 billion in 2007 to $10 billion in 2009 and are projected to surpass $52 billion by 2012.
Perhaps the most transformative application of mobile banking is funds transfer, enabled by even the simple SMS-capable handsets that are common across the developing world. Since its launch in February 2007, the M-Pesa service in Kenya has attracted 6.2 million users and is currently enrolling approximately 11,000 subscribers per day. In just over three years, M-Pesa has transferred $1.73 billion. In the Philippines, approximately 7.2 million m-banking customers use the “Smart Money” or “G Cash” services.
This explosion in use is largely driven by the fact that mobile devices, and particularly those using prepaid services, remain the primary source of connectivity in the developing world. Developing countries generally have large “unbanked” populations, those who cannot or do not use traditional financial service institutions, often due to the lack of bank branches in rural areas. Mobile operators recognized the opportunity presented by the popularity of mobile phones, under-developed financial infrastructures, and low levels of banking adoption, and have developed systems that allow handsets to serve as a substitute for both wallet and bank. The m-banking services enable subscribers to pay bills or send money without traditional banking services, which are often non-existent. The vendor of prepaid credits has thus been transformed into a provider of banking services, accepting and disbursing cash transferred via mobile networks.
Despite the rapid growth in m-banking in developing countries, however, there has been considerably less uptake in the United States and other developed nations. It may seem strange that consumers in less-developed countries have embraced m-banking while many wealthier economies have largely ignored it, but the factors that have led to the mobile banking explosion in developing countries are absent or less-pronounced in the United States, and mobile operators and commercial banks have been slow to embrace mobile banking offerings.
There may be a number of reasons for this. First, while the United States does have a prepaid mobile market, it is significantly smaller than the postpaid market. And with the prevalence of electronic funds transfers and automated transfers to replenish their mobile accounts, far fewer Americans are likely to need to directly interact with their mobile provider or associated vendor on a regular basis compared to lower-income and unbanked populations in developing countries. They simply do not have the constant contact with their operator or airtime vendor that, in other countries, has made the agents who sell prepaid mobile credits such an ideal fit to provide additional retail services. In addition, with the greater prevalence of brick and mortar banking institutions, consumers in the developed world may simply have less need for a mobile banking solution.
As a result, most mobile banking efforts in the United States have been primarily bank-driven, and have focused on replicating current services on mobile devices. The mobile banking offerings from major U.S. banks allow customers to check balances, transfer funds between their existing accounts, pay bills to preconfigured payees, and locate branches and ATMs. Touchless payment systems, such as those seen in Japan and Korea, have not seen widespread adoption in the United States. Perhaps most importantly, most U.S. m-banking offerings do not provide the capability to easily send payments to individuals or businesses on demand, as is often the case with m-banking offerings in the developing world. In short, current offerings do not add any significant new core functionality that is likely to attract users, but rather are usually complementary to existing banking services.
As mobile banking continues to expand in the developing world – and perhaps makes inroads into the United States, where an estimated 10% of households do not use traditional banking services – it will continue to face new challenges. How the challenges and questions are addressed by stakeholders and regulators will be crucial to determining the sustainability and future growth of the m-banking industry.
In an industry that straddles the line between finance and communications – and sees mobile operators offering services that compete with traditional banks – there is likely to be a need to reconsider regulatory frameworks, as well as to monitor competition and consumer protection efforts. It is worth noting that so far – whether by design or coincidence – developing economies have not seen m-banking stymied by banking or telecommunications regulation.
The biggest challenge for m-banking in the developed world may be to identify services that will attract customers who already have basic banking services. Perhaps the developed world will see greater success with retailers and service providers leveraging mobile technology to simplify purchases, promotions or services. Services that allow handsets to pay for coffee, receive coupons, or check in for a flight, are becoming more commonplace, but it is still too early to gauge their success.
Jeffrey Bernstein is Senior Business and Policy Analyst for TMG. Bernstein can be reached directly at jeff@tmgtelecom.com. Amy Zirkle is Senior Economic and Regulatory Expert for TMG. Zirkle can be reached directly at azirkle@tmgtelecom.com.