Written by Ignacio Mas, an adviser for CGAP’s Technology and Market Intelligence programs, and Kabir Kumar, a Microfinance Analyst working on CGAP’s Technology Program, published June 2008 as Focus Note Number 49, a CGAP paper series, 28 pages, available here.
This paper begins and ends with a description of an existing Pakistani microfinance bank, Tameer Microfinance, currently implementing a mobile banking solution. Tameer, seeking a means to penetrate a market with minimal infrastructure and a rural landscape, considered branchless banking an ideal model that could be delivered using mobile phones. However, Abbass Ali Sikander, the Tameer Group Executive Director, knew that without a clear strategy for implementation, it would be an uphill battle. This real-life example used by the authors is reflective of the larger aim of the paper, to define the key factors driving a successful mobile banking operation and to answer the question, “How can banks translate the potential of mobile phones into greater financial access for poor people is addressed?”
The authors do not offer a single solution but attempt to identify the fit of mobile banking within a bank’s overall customer strategy. Specifically, the paper discusses the strategic value of mobile banking, the types of implementation choices a project will face, which technologies are being used today, and lastly, what lessons have been learned from existing mobile banking programs.
What makes a mobile phone useful compared to other electronic banking interfaces?
Mas and Kumar offer a hypothesis that mobile banking changes the relationship between a bank and its customers. Specifically, the bank is connecting with poor people by providing access to previously limited services. The mobile phone can operate as a virtual bank card, a point-of-sale (POS) terminal, an automated teller machine (ATM) and a laptop for Internet banking. These are all services that otherwise might be largely inaccessible to the poor by nature of their location and cost. The bank would incur higher investment costs pursuing Internet banking and is instead able to ride the market penetration already made by the mobile phone companies.
Also, cell phone technology provides the bank with some useful options. First, it allows the bank to send out personalized messages to market products or communicate account information. Second, the two-way communication eases the account management process. Third, security is enhanced through the use of SIM cards and location awareness.
What about cash?
Physical cash delivery channels still need to exist and as such, any rollout of a mobile banking program will require some form of bank branches, ATMs, or third party banking agents. Generally a program rollout will have stages. Customers will want to be able to cash-in and cash-out any money in play immediately (loans, government benefits, etc…). As the roll out progresses and confidence builds, the cash-out becomes daily and, over time, cash conversion becomes less necessary. However, there needs to be wide acceptance of electronic payments at some point, otherwise the customer does not see the convenience.
How does the bank meet its strategic objectives?
The bank can increase market penetration by targeting underserved populations, leading to total revenue growth and reduced costs in deploying customer touch points. By exploiting the new functionalities offered through mobile phones the bank can sell more services to existing customers. Costs are decreased by replacing the more expensive channels and devices with the cheaper mobile solution.
Mobile banking scenarios
The authors provide three scenarios as archetypes to illustrate the range of strategies a bank might pursue. In the first scenario, Cool value add, the bank aims to exploit the personal nature of the mobile headset to build a stronger relationship with its customers and achieve customer retention by positioning mobile service as a point of differentiation. The second scenario, Easy bank, seeks to increase market share by attracting customers from the competition; this is done by highlighting the simplistic and low cost services and targeting specific market segments. The third, Virtual bank, focuses on increasing penetration by targeting new-to-banking or underserved people; this is accomplished by reducing barriers to access (low transaction costs, more geographical coverage).
Implementation Choices: Technical and Otherwise
There are four key themes that a bank faces in implementing a mobile banking service:
- the customer experience
- the security framework
- bank roles versus outsourced roles
- the degree of service interoperability
All of these aspects are intimately linked and largely determined by the technical platform chosen by the bank. The technical choices are dependant on the types of customers the bank wishes to reach. The paper breaks down the key technical choices a bank must make by asking three questions:
How do you transmit data from and to the phone?
The answer to this question is in the choice of wireless bearer, the communications channel that is used to transmit data to and from the mobile phone over the air (OTA). In choosing how they want to transmit data from and to the phone the bank is determining the basis for reliability, speed, cost and security. The paper goes on to provide significant detail on the primary transmission options, from SMS to USSD[1].
How do you secure the data so that they cannot be retrieved or tampered with during transmission?
In answering this question the paper reviews the two dominant types of encryption. The first, Bearer-only encryption, is an extremely secure form of encryption because the software encryption keys are embedded in the SIM’s hardware, therefore, difficult to tamper with. The vulnerability with Bearer-only encryption exists within the bank since the data is decrypted before flowing through its network. End-to-end encryption is where encryption is happening on the phone and at the bank server. The risk with End-to-end encryption is seen in native SMS services, which, although secure in transit OTA, are not secure while they are stored on the handset in clear view. A thorough breakdown of the encryption options is also provided[2].
How do you manage the user interactions, including the presentation and capture of data to/from the user?
The application environment, the software platform that controls how the service is presented to the user’s handset and the interactions between the user and the bank’s server, is the answer to this question. In choosing the application environment the bank is determining the user-interface, the speed-of-service, the ease-of-setup and the ease-of-upgrade. The primary choices are a Client based application, where an application downloaded on the phone takes control of the service, and a Network based application, where there is no specific application downloaded, and the service is presented directly in the way that it is sent from the server to the handset. Both options are detailed with pros and cons examined[3].
What is being used today?
The authors address this question by summarizing the main types of mobile banking implementations in the market today, based on how customers interact with the service (how they issue transaction requests and provide transaction details) and what bearer the service uses to transmit data. A number of existing mobile banking operations are considered and their technical and operational strategies examined. The implications for operating processes around data security and for bank and mobile operator relationship are broken down[4].
What about regulation?
There are regulatory factors that define the competitive field for mobile banking, and providers need to consider them carefully. Some key regulatory factors that need to be considered include:
Cash in/cash out: Regulatory restrictions on banks to outsource cash-in/cash-out functions to third party retail establishments.
KYC: Regulatory obligations for banks to know your customer (KYC) and maintain transaction records, and their ability to outsource this function to third-party retail establishments.
E-banking: Rules on the use of electronic retail transactional channels, including minimum data security levels, preservation of customer privacy, customer claims and redress mechanisms, and other consumer protection rules.
Issuance: Regulatory restrictions on account issuance by nonbanks, or on the outsourcing of the operation of bank accounts to nonbanks.
Taxation: Taxes on telecommunication services.
Summary
The overall discussion illustrated the range of choices a bank has in terms of how to structure a relationship with mobile operators. It can go from a narrow purchase of bulk SMS, to a full-fledged outsourcing of a parallel banking infrastructure. Which option a bank should pursue depends on how tightly it wants to integrate the mobile banking service into its core propositions, and its ability to implement technology based projects. Mobile banking is an idea that most bankers (and many bank clients) find intuitively logical, albeit daunting and confusing, to implement.
The authors make the following conclusions:
- the mobile banking opportunity will be largest for growth-oriented banks.
- telecommunications companies have substantial leverage in mobile banking, and banks need to sit down and negotiate with them.
- liquidity (conversion to/from cash) remains the anchor of the value proposition for mobile banking customers.
- banks who want to use mobile banking to reach out to unbanked customers need to develop strong partnerships for mass-market promotion of the service.
- mobile banking does not raise any inherently new security issues; still, ensuring adequate security through a combination of technology and operating processes is paramount.
About the authors
For the past dozen years before joining CGAP, Ignacio Mas worked in the telecommunications industry. Over this time he has served as vice president of Marketing and Account Management at interTouch, director of Global Business Strategy at Vodafone Group, and senior manager responsible for telecommunications investments in Europe at Intel Capital. Earlier in his career, he worked for the World Bank on financial sector reforms in several countries and also held positions at the Treasury of the World Bank. Mas has been a visiting professor of International Business at the Graduate School of Business at the University of Chicago. He holds undergraduate degrees in Mathematics and Economics from MIT and a Ph.D. in Economics from Harvard University.
Kabir Kumar previously was an IT and telecommunications marketing and strategy consultant and has worked at the World Bank on gender equality and economic growth. He also designs experiments and builds partnerships to use cell phones and other technologies to expand access to finance. Kumar has a dual masters in Public Administration and International Relations from the Maxwell School of Syracuse University.
[1] Page 12
[2] Page 13
[3] Pages 14-15
[4] Pages 17-20
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