Banks, Telecoms Need to Work Together on Mobile Payments

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Banks tend to look at competitors in the emerging mobile payment space with a wary eye. But after reading the latest mobile payment report, Ernst & Young's "Mobile money 2011," it's easy to draw the conclusion that banks would be better off working with one segment of this group - telecom network providers. Banks and telecom providers at this point are co-dependents after the same thing: a new source of income through mobile payments, to supplement dwindling debit card fees and rising regulatory costs on the one side and flat phone and data plan sales on the other.

The E&Y report reiterates Gartner's estimates last year that mobile payment services will reach $245 billion worldwide by 2014. This represents 340 million users, 5% of all global mobile subscribers. It points out that the most successful mobile payment services have originated in developed Asia, where mobile contactless services are well established. The next-best programs are in the Phillippines and Kenya.

In Kenya, telecom company Safaricom rolled out a mobile payment system in 2007 that circumvented banks. At SourceMedia's Mobile Banking and Emerging Applications Summit in June, Michael Joseph, former CEO and strategic advisor to Safaricom, pointed out that banks' efforts to thwart the telecom company's plans did not turn out well. "Banks tried to stop us, they formed a committee," Joseph recalled. "We were saved by the minister of finance, who said M-Pesa was fully compliant" with Kenyan laws although he never performed an actual audit."

According to the Ernst & Young report, the M-Pesa service was supported by a lack of rules governing non-banks providing money transfer. "Going forward, regulation will be a key facilitator of a successful transition to new payment channels, providing clarity for service providers and end users," the report authors say.

Later, after M-Pesa became popular, the local banks embraced it. "If they didn't embrace it, they would go out of business," Joseph said. Today, about 70% of all transactions in Kenya use M-Pesa.

Numbers gathered by Ernst & Young point up one advantage telecom operators have -direct access to mobile subscribers. According to the report, the number of mobile subscribers in North America grew from 1.9 million in 2009 to 3.5 million in 2010. In Latin America, the subscriber number grew from 5.1 million to 8.0 million in the same timeframe; in Western Europe subscribers rose from 4.5 million to 7.1 million. In EMEA those numbers are 16.8 million and 27.1 million; in Asia Pacific, an impressive 62.8 million people have mobile plans today, up from 41.8 million in 2009.

The report touches on various countries' attempts to regulate mobile payments. Although the G20 Financial Inclusion Experts Group has advocated a "test and learn" approach, the Chinese government, concerned that a move to e-money could accelerate inflation due to the increased velocity of transactions, has begun asking e-money organizations to register. In the Phillippines, the government has set maximum monthly load limits. In the U.K., Her Majesty's Treasury has issued a consultation document on how it should regulate e-money institutions and what level of guarantees should apply. The U.K. government has worked to promote the entry of mobile phone operators into the e-money market and to promote the development of new forms of as yet untested e-money services, the report says. In South Africa, by contrast, e-money issuance is restricted to banks only.

Other countries seem to be ahead of the U.S. in terms of collaboration among mobile payment players. In China, an alliance has been struck between 18 Chinese banks, card association China UnionPay, China Telecom, China Unicom and device vendors, in an effort to create a single, open platform for mobile payments. In the Netherlands, the top three retail banks have formed a joint venture with the country's three mobile network owners. "Such high levels of participation translate into wider coverage of both mobile subscribers and bank customers, boosting the addressable market for mobile payment," the report says.

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