For decades, pundits predicted the demise of banks as we know them. Killer competitors were going to be everything from brokerage houses to national retail chains to automobile and computer companies. Yet, somehow, sheltered by their monopoly access to the payment system, their branch systems, deposit insurance, and consumer inertia, banks have held their own despite of declines in their share of financial assets.
Today, however, the next threat to banks is at hand in the form of the mobile phone.
It has already started in Europe, because Europeans have embraced mobile technology with greater enthusiasm than Americans. But wireless-driven change in financial services is sure to follow in the rest of the world.
The potential for this revolution is real because there’s a natural fit between wireless phones and financial services. To start, telecom customers are just as accustomed to doing business with their phone companies as they are with their banks. Furthermore, coupling the telecoms’ large, expensively acquired customer base with a communications technology that can be leveraged easily in new, lucrative ways is irresistible. It also may be necessary.
Telecoms have sunk billions of dollars into licenses and infrastructure, and they’re now in a race to provide content that will generate a return on their investments. Although they’re looking for content from media, entertainment, gaming, and other industries, financial services increasingly are seen as the most appealing because that’s where the money is.
The core attraction: Most financial services are inherently “bittable.” Twenty years ago, former Citicorp chairman Walter Wriston said the beam of electrons that carried a bank’s foreign exchange positions via a satellite in orbit was indistinguishable from the signal carrying the morning news. Today, paying for lunch with a credit card is comparable to making a quick call on a cell phone while in a restaurant.
Using a mobile phone for banking is logical for consumers. Retail finance innovations often fail because they require wholesale changes in consumer behavior. But using a mobile phone instead of a credit card to pay for a meal hardly seems a stretch. Successful innovations in retail finance — think of credit cards and 24-hour ATMs — always complement rather than complicate consumers’ lives.
The relationship between telecoms and their customers also mimics banking relationships. For example, when telecom customers settle their long-distance charges at the end of the month, that’s credit management. Prepaid phone services are like savings accounts.
A host of firms in Europe are betting on this convergence of telecoms and financial services companies. Take Movilpago, a joint venture subsidiary of Telefonica Moviles, the cellular unit of Spanish telecom Telefonica SA, and BBVA, Spain’s largest bank. Telefonica brings to the union the front-end capabilities for processing transactions at a low cost. BBVA supports the credit and payment functions that Telefonica did not possess.
The power of the business concept was made clear by Movilpago’s recent legal challenges over competition issues before Spain’s highest court. The power is also demonstrated by its ambition: Movilpago expects to acquire 100 million customers and 5 million merchants in 30 countries in three years, a penetration that took the credit card associations and American Express decades to achieve. And that’s just one telecom with a brand presence, primarily in Spanish-speaking countries. Other multinational brands have even greater potential for leveraging their names. Vodafone has built a global brand that customers carry everywhere. Think what it could do with Vodafone-branded financial services.
For the telecoms, the question is how deeply to get involved in financial services. Some will settle for distributing products and services made elsewhere, but the most aggressive may become “manufacturers” themselves. Already, Vodafone’s German subsidiary, Mannesmann, has a joint venture with Deutsche Bank.
Today, the preferred structure is just such a joint venture. However, one or more telecoms might try to acquire a bank. Even with recent market corrections, telecoms enjoy higher absolute capitalization and P/E ratios than banks, which gives them the means to do so. Regulations and an unwillingness to take a bold step could hold them back. But, over time, a megaplayer union such as an AT&T/Citigroup merger will make more sense, not less.
Meanwhile, banks have strong cards to play: brands that evoke security and reliability, credit skills, and physical distribution channels.
The sooner banks ally with telecoms for their share of the wireless marketplace the better. Otherwise, their franchises face additional sources of competition.
By teaming up with a telecom provider, prescient banks have the chance to monetize their investments in online capabilities, and amortize their services across a broader, telecom-enhanced customer base.
The convergence of telecoms and banks is an opportunity for those banks that act soon. For those that wait, it will become a threat. Ask not for whom the phone rings.
Wouter Rosingh, [email protected]
Wouter Rosingh is a vice president with Booz-Allen & Hamilton’s Financial Services Practice in London, specializing in corporate finance and strategy. He is a member of Booz-Allen’s firm-wide Investment Committee and a visiting scholar at the London Business School.
Adam Seale, [email protected]
Adam Seale is a vice president with Booz-Allen & Hamilton’s Financial Services Practice in London, where he specializes in strategic transformation and e-business for retail financial services companies. He is the leader of the firm’s global/banking/telecommunications convergence research.
David Osborn, [email protected]
David Osborn is a vice president with Booz-Allen & Hamilton in Boston, and has 20 years of consulting experience. He focuses on helping retail financial services companies through strategic transformations. Mr. Osborn has extensive experience working with global clients.