WASHINGTON — Banks have increasingly turned to cellphone devices in helping them to reach customers. But cellphone companies may soon be trying to offer financial services of their own.

In recent years, the country’s largest cellphone carriers have begun to experiment with new financing options for smartphones and other devices. And that could be just the tip of the iceberg.

Some cellphone carriers have already expressed interest in the fintech charter being developed by the Office of the Comptroller of the Currency, according to Mark Atherton, the group vice president for financial services at the software firm Oracle.

"The wireless carriers have a lending relationship now with tens of millions of U.S. consumers," Atherton said. "Extending into other lines of banking [could] become interesting." For instance, he said, "they may pull in some deposits and have a digital wallet."

John Legere, CEO of T-Mobile
John Legere, the CEO of T-Mobile, began the switch to cellphones' embrace of installment loans in 2013, decoupling payments for the cellphone and network. Bloomberg News

While no plans have been announced, at least one small cellphone company has publicly supported the OCC's efforts. IDT Corp., a lesser-known telecom company that specializes in servicing cheap phone calls through broadband internet, praised the OCC's fintech charter in public comments last year.

James Raanan, the firm's general counsel, argued that the separation of bank and commerce was an impediment to the advancement of fintech. (IDT already owns a money transmitter subsidiary in the U.S. and a bank licensed in Gibraltar.)

“Refining these rules … could open up the possibility of the special purpose charter to fintech companies with larger businesses that have other assets that can be brought to bear, but are not necessarily dedicated to financial services,” he wrote.

The evolution of payment plans for smartphones over the last few years suggests wide interest within that industry. Just a few years ago, customers who did not want to pay upfront for a phone would typically enter a contract with their carrier which would roll the the cost of the device into their monthly bill.

But firms have moved away from that model, embracing installment loans. In 2013, T-Mobile announced the end of those contract payment plans. “Stop the bullshit,” said John Legere, the company's outspoken CEO. "Do you have any idea how much you’re paying?”

The company began offering a zero-percent installment plan (with down payment), in effect de-coupling payments for the cellphone and network. Competitors soon began to follow suit, dropping their subsidized contract plans in favor of installment loans. Even manufacturers followed the trend. In 2015, Apple began partnering with Citizens Financial Group in Providence, R.I., to provide 24-month installment plans for its iPhones.

But cellphone carriers could soon begin to expand the range of their financial products beyond installment loans for cellphones.

“In the United States, we've had some of the telcos moving in the direction of broadening their offerings,” said Jo Ann Barefoot, a fintech consultant. “I do think that they'll make a step towards credit and payment.”

Cellphone companies today have every incentive to branch out into new business lines. “What used to be core to their businesses — the network — is actually not a great money generator right now,” said Atherton. “They've really been forced to look for new sources of revenue.”

They have already begun packaging their loans into securities. In 2016, Verizon announced a public sale of $1.2 billion in equipment installment loan-backed bonds.

And in many respects, they may already have a leg up on banks and other traditional financial firms. For one, they have access to a mound of data on consumers — including information on users’ social media habits, their location and payments they make through their cellphones. By coupling this data with their record of monthly bill payments, cellphone companies could develop innovative underwriting models.

“The telecommunications companies are pretty sophisticated with data,” said Atherton. “If you've established a payment history with them against your mobile phone plan, you've established a credit score.”

Cellphone companies are also operating at lower costs when it comes to financial services since they don’t have to deal with brick-and-mortar branches. Nor do they, as of yet, have to deal with the heavy regulatory load assumed by banks.

“Lending is much less regulated than banking,” said Barefoot.

Another advantage cellphone companies have is immediate collateral over their customers: disconnecting their phone lines.

“They're going to pay their phone bills before they pay their car payments,” said Atherton.

And they already have access to consumers that banks have had a hard time reaching. In 2015, 69% of unbanked households had access to a mobile phone, and 42.9% to a smartphone, according to a Federal Deposit Insurance Corp. survey. “They've got their relationships already,” said Barefoot.

ut even as installment lenders, the companies do have to comply with certain federal and state laws.

"If you make a loan to a consumer, you typically need to have state licenses,” said Lawrence Kaplan, a bank lawyer of counsel at Paul Hastings. “It is not unusual for some entities to control captive financing companies."

T-Mobile, Verizon and U.S. Cellular all own lending and retail installment sales arms licensed in various states, according to a database maintained by the Conference of State Bank Supervisors. (All three companies either declined to comment or failed to respond to queries).

Still, the companies are not subject to the same type of oversight as traditional financial institutions.

“If you're not a bank,” said Barefoot, “you aren't being examined for it on a regular schedule like banks have.”

But it remains to be seen whether the mobile companies be able to gain the trust of federal banking regulators.

The Consumer Financial Protection Bureau is already watching cellphone carriers closely, a sign that such firms are an emerging player in the lending market. In 2015, the agency sued Sprint and Verizon for a total $120 million in redress fees, alleging the companies had allowed scammers to charge customers’ bills without their authorization.

The CFPB hopes to go further. In its rule banning mandatory arbitration clause earlier this month, it asserted that mobile carriers are under its jurisdiction because by processing third-party bills, they engage in a form of lending or servicing.

Consumer groups have also accused cellphone carriers of deceiving their customers through their new mobile financing programs. In December 2015, a group called Change to Win asked the CFPB to pursue T-Mobile over its equipment installment plan, accusing the company of deceptive advertising and abusive debt collection practices.

“T-Mobile’s ‘no contract’ marketing is misleading because a customer’s cancellation of his wireless service before two years makes the amount remaining on the [installment plan] immediately due,” the group said, “a fee that is often larger than the penalties associated with early termination of a traditional two-year service contract.”

New York’s attorney general, who had also fined T-Mobile over its third-party bill-cramming practice, began investigating the company’s “no contract” claim that same month.

Despite these challenges, the market forces pushing cellphone companies towards fintech appear irresistible. Around the world, they are already emerging as industry leaders.

In Kenya, nearly half of the country’s GDP is now processed through the payment app M-PESA, which was launched by the cellphone company Safaricom roughly 10 years ago.

Cellphone companies and financial services have merged in developed countries as well. In 2008, Japan’s largest bank partnered with one of the country’s leading cellphone carrier to launch an online-only bank.

“Banks should expect a lot of competition from all five cellphone companies, from big tech companies, from startups, from cable companies,” Barefoot said. They “should put tremendous priority on their mobile strategy.”

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Lalita Clozel

Lalita Clozel covers fintech regulation, anti-money-laundering, cybersecurity and the Federal Deposit Insurance Corp. in American Banker's Washington bureau.