In this section we analyse whether banks can make money based on the three main premises that could be a motivation for a bank to invest in the technology:
- Banks could cut costs using mobile payments
- Banks could win extra customers or revenue using mobile payments
- Banks have to offer mobile payments as a defence against the telephone companies entering the payments market
How Banks Could Cut Costs Using Mobile Payments
In the Person to person market there would appear to be a genuine opportunity to cut costs as, in the UK, person to person payments are free, hence it is in a bank’s interest to use the lowest cost mechanism possible. The business case is illustrated in the table below.
The economic argument would be based on subtracting the variable costs of mobile payments from those of cash and cheques. Providing a sufficient volume of cash and cheque payments are displaced, the fixed cost of setting up the mobile payments system would be covered plus profit. Obviously every bank’s customer base is different, but most have a sufficiently large customer base, making person to person payments, to make this a worthwhile opportunity. (For example cash volumes are growing at 5% per annum).
The main inhibitor to a bank adopting this idea is one of internal performance measurement. The people who typically have mobile commerce and payments are organisationally a long way from the cost centres of branches and back office cheque and cash handling.
In the Person to Merchant payments market the economic argument is much less clear cut. Banks get income from all person to merchant payment mechanisms.
Hence a new payment mechanism has to cut cost and recover lost income. This is less economically attractive, especially when the mechanism is user unfriendly (see Person to Merchant payments in How Mobile Payments Might Work). Furthermore, in all the situations where the merchant takes cards (the majority) a superficially more simple approach to displacing cash and cheques would be for banks to change the pricing structures to make card payments more attractive to the retailer. Indeed, the Competition Commission/OFT may force this on the banks anyway.
In short, we cannot foresee cost savings through the introduction of Person to merchant payments.
Can a Bank Capture Extra Customers or Extra Revenue?
The benefits to an individual of being able to make a payment via their mobile phone are
- a more convenient, secure payment mechanism for person to person payments
- a simple way to make remote person to person payments
- a more secure way to make telephone based purchases than divulging credit card details (probably more secure than typing in credit card details over the internet).
This does not seem to be a compelling reason to switch bank accounts, but would probably greatly contribute to retaining customers. (For example First Direct’s text messaging features are probably not enough to switch an account for, but have greatly contributed to customer satisfaction and retention.). Certainly in the UK market where other payment mechanisms are free to individuals, one could not expect to charge for this service and hence extra direct revenue would not be expected.
If a bank chose to promote an “Off the Electronic Wallet” approach as opposed to mobile payments “Off the Bank Account” the bank might get interest free balance income, but then it may already have that income on a current account.
In the general merchant marketplace the opportunity for extra income and revenue is probably nil. One would have to generate enough income (presumably as a percentage of the payment) to cover;
- the setup of the central mobile payment system
- the connection of mobile communications devices to the merchant’s till, or the provision of standalone devices,
- mobile phone messaging costs,
- the hassle for the retailer of having two merchant acquirers (one for cards and one for mobile payments) or the incorporation of mobile payments with existing merchant acquisition systems,
whilst at the same time being significantly cheaper than the other payment types to make it worth the effort for the retailers.
There may be an opportunity in some niche merchant markets where telephone ordering is the main business (e.g. theatre tickets, mail order catalogues as discussed in the Person to Merchant section of How Mobile Payments Might Work.
Must Banks introduce mobile payments as a defence against Telcos?
No! Telcos would have to get revenue from somewhere to recover the costs of upgrading their billing and settlement systems. Individuals in the UK are used to having zero cost money transmission facilities (free in credit banking). No hope for payment revenue from individuals then for Telcos.
Merchants do pay for receiving payments so potentially Telcos could take some of this marketplace; however, we have already seen that the proposition for Person to merchant payments from the user’s point of view is poor apart from the niche areas of telephone ordering. Furthermore, if in the unlikely event Telcos could come up with a viable merchant proposition, banks could presumably respond by reducing credit card acquisition charges.
We believe that banks can make money out of mobile payments but only by driving at specific niche areas of application.
- Person to Person Payments
- Telephone Ordering Merchants
It is not likely to be a generic payment method like a cheque book or a credit card. The main inhibitor to banks capturing the opportunity will be the cross bank working required and conflicting internal targets. To make it work and achieve cost savings, marketing departments, sales teams and operations areas need to work together.
We do not believe mobile payments represent an opportunity for Telcos much less a threat to banks.