Banks Have Nothing To Fear From TELCOs

In my opinion article titled "Impact of Regulation on Financial Services Providers" that was published in the August 2012 issue of  The Journal of Internet Banking & Commerce, I'd argued that banks don't have much to fear from the slew of financial products launched by non-banking financial services providers. In response to this piece, many career bankers told me that they heaved a sigh of relief when they read my article.

One of them, however, felt that telecom companies could pose a major threat to banks. To paraphrase the email I received from this person who is the head of marketing of a Tier-2 private sector bank in India, "While regulation may well prevent them (TELCOs) from ever taking deposits, I think the day can come when they become significant payment aggregators, ergo, superb alternatives to credit & debit cards".  He went on to add, "The sheer convenience of paying just one bill a month for all my transactions, and being able to chuck all the plastic in my wallet, is a customer benefit that may nudge telcos into investing in acquiring merchants big time".

When Gen Y Mobile Payments (GYMPs) entered the retail payments scene in 2009, I'd felt the same. In stark contrast to then existing alternative payment providers that ran on ACH or card networks, Boku, Zong and a couple of other GYMPs supported "carrier billing". Under the new model introduced by these new kids on the block, purchases were billed to consumers' mobile phone bills. As a result, GYMPs bypassed banking rails altogether. Besides, as I'd highlighted on my personal blog in a post titled GenY Mobile Payments Crack The Holy Grail Of Convenience Versus Security written at the time, GYMPs seemed to have cracked the Holy Grail of the conflict between convenience and security, something that has constantly been the Achilles Heel of all forms of bank-sponsored electronic payments. Therefore, it appeared that GYMPs were set to grab a major share of the retail payments market.  It was indeed conceivable that, over time, telecom companies would acquire them and use their alternative payments rails to challenge the hegemony of banks in this lucrative space.

Fast forward to today. The threat from TELCOs (including MNOs) has fallen drastically for various reasons. 

GYMPs continue to be terribly expensive. Although down from their peak of 30-40%, transaction fees for direct carrier billing are still as high as 20%. As a result, they haven't managed to make much headway beyond virtual goods, which have remained their traditional low hanging fruit. For micropayments, their other sweet spot, GYMPs charge outrageous premiums. I discovered this recently when, after posting an update on my Facebook Page, I got a pop-up message asking me if I wanted to promote it via FB's Sponsored Post. I decided to give this new service a whirl and said yes. The price was US$ 0.30 (which is around INR 15 @ US$ 1 = INR 50). However, when I opted to pay via mobile phone, the price shot up to INR 99, which translated to a whopping 560% premium. Fat chance that merchants / cardholders, who complain so vehemently about the 2-4% interchange / surcharge slapped on them for credit card payments are going to accept the kind of transaction fees / premium applicable on carrier-billing payments, especially for big ticket items.

Perhaps realizing that they were stunting their growth by tying themselves down to TELCOs, some carrier billing products recently started accepting credit cards (e.g. Zong). In other words, to ensure their own survival, they've embraced the same banking rails that they set out to dis-intermediate when they came into existence. How the mighty have fallen! Lest anyone associate this fate exclusively with startups that are long on enthusiasm and short on resources, let's not forget that ISIS, the mobile wallet developed by Verizon, AT&T and other mega telecom corporations, abandoned its original plan of setting up an exclusive TELCO rail, instead roping in BarclayCard and other banks into its network last year. Maybe this explains why there hasn't been much M&A activity in this space. Even Zong was acquired by PayPal, not a TELCO.

As for TELCOs consolidating all my accounts with them into one master account and allowing me to pay only one bill at the end of the month, well, I don't see it happening anytime soon. For ten years, I've been having two mobile phone contracts in my name with a leading global MNO. Not once has this company offered to link both my accounts into one and save me the hassles of making two bill payments every month. If a TELCO can't consolidate its own accounts, I seriously doubt if it can aggregate third-party accounts into its billing system.

Even assuming that TELCOs will eventually overcome all these challenges, they'd be able to process payments from end to end only by partnering with merchants, payments services providers and other participants in the retail payments ecosystem. On this count, I can say from personal experience that it can be quite frustrating to strike partnerships with MNOs. In a recent case, one of my customers approached a leading MNO with a proposal to cocreate a platform for targeted advertising to the MNO's customer base. The MNO's senior management flatly refused to entertain this proposal,  saying that their C-Suite was totally against monetizing their customer data. Imagine my customer's shock when he read a news item a couple of months later about a new startup that announced a deal for targeted advertising to the customer base of the same Holier Than Thou MNO! You don't expect such shady behavior and utter lack of transparency from a publicly-listed, multi billion dollar corporation, which this MNO is.

Now, from this Finextra article, it appears that banks are also having trouble getting TELCOs to the discussion table and some, like Bankinter, are finding ways to forge ahead on their own. This Spanish bank recently devised a highly innovative architecture that let it launch its mobile payments product without having "to strike deals with telcos...".

Forget about fearing them, savvy banks will simply bypass TELCOs to maintain their leadership in financial services.