Cover for VRL report, Mobile Banking and PaymentsThe latest VRL
report,
Mobile banking and payments, examines the short,
medium and long-term opportunities in the m-banking and payments
sectors and how strategy differs in emerging and developed markets.
According to the following excerpt from the chapter Banking the
Unbanked, the mobile phone has become the ‘killer app’ for the
unbanked.

 

Banks worldwide are realising that
banking the unbanked population can represent a compelling business
proposition. The unbanked market is estimated at over 2bn people
worldwide, a market comparable in size to the one that banks
already serve. While banks have historically viewed this market as
risky and unprofitable, the commercial success of the informal
financial sector has forced banks to reconsider the profitability
of the unbanked market.

In the US alone, unbanked and under-banked
people plus unregistered immigrants receive almost $1 trillion in
income, according to Visa estimates. The Center for Financial
Services Innovation (CFSI) estimates that the under-banked
population in the US spends at least $10.9bn on more than 324m
alternative financial services transactions every year. According
to industry figures, 15,000 payday lenders across the US extend
$25bn in short-term credit each year and 11,000 cheque cashers cash
180m cheques with an aggregate face value of over $55bn.

The tremendous growth of the micro-finance
movement worldwide in recent years has also caught the attention of
mainstream financial services providers. The Micro Banking Bulletin
in 2005 revealed that 63 of the world’s top microfinance
institutions had an average return on assets (ROA) of around 2.5%
when adjusted for inflation and subsidies. This compares well to
the ROA of mainstream commercial banks. Furthermore, studies
indicate that the recently banked are a far easier group to
cross-sell additional products and services to than long-term
existing customers.

Unsurprisingly, many banks now view the market
as a strategic imperative and are developing innovative strategies
for banking it.

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Mobile as a distribution
channel

Gautam Ivatury, manager of the
Consultative Group to Assist the Poor’s (CGAP) technology
programme, a group dedicated to extending financial access to the
world’s poor, points out that mobile phones have become the first
communications technology in history to have more users in poor
countries than rich ones.

Those who do not own a phone will often have
access to one through friends or family. In many developing
countries, mobile phone call offices are common and entrepreneurial
subscribers are often available to rent out mobile usage by the
minute. In rural South Africa, they even receive text messages and
deliver them verbally to illiterate customers. Many observers
consider that emerging markets are in a position to leapfrog the
West’s branch-based banking generation and move directly to a
distribution model based on technology channels such as mobile.

CGAP’s research indicates that third-party
agents with POS equipment are 30 times cheaper to set up than
branches and that replacing the POS device with a mobile phone can
cut costs in half again. Indeed, for the largely unbanked
populations in these countries, technology holds the promise of
extending banks’ reach into remote areas, lowering operating costs,
and efficiently processing a large volume of low-value
transactions.

In developed markets the mobile channel also
represents a new opportunity to reach unbanked consumers. In the
US, for instance, the CFSI points out that, while mobile usage
remains greatest among high-income segments, recent research shows
a pattern of adoption among demographics which are most likely to
be unbanked such as the young, lower income groups, those with less
education, and ethnic minorities.

These groups also often assign mobile phones a
greater importance in their everyday lives than does the general
public.

But since unbanked customers do not yet have
banking relationships, banks must attract them with so-called
‘gateway products’ which are designed to bring customers into a
bank so that they can be persuaded, over time, to invest in a
richer and more profitable suite of bank offerings.

 

*This article is an edited extract from an
updated VRL Financial News report
Mobile banking and payments.
The report looks in detail at the fast-developing global
m-banking and m-payments markets, and contains case studies,
statistics and interviews. For further information, contact Kinnor
Bhattacharya on +44 (0)20 7563 5638 or Kinnor.Bhattacharya@vrlfinancialnews.com