Prospects for collaboration between banks and operators in m-payments

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In the search for new profitable businesses, mobile operators are entering the payment market. New offerings are presented as all participants try to capture what looks like the ‘next big thing’ in mobile communications: the mobile phone as a payment instrument.

But can they do it alone? Is there a place for a bank in this scenario and what can a bank do in order to secure this potential source of new business?

Many banks have looked upon this new development with concern – it must clearly be a sub-optimization of resources, since the infrastructure already exists in the Visa and MasterCard networks. Another, more nuanced view, is that the operators may invade what has been banking core business and, as such, present a possible threat to this business.

On the other hand, banks want to offer services that encourage customers to use their services more, not less. Perhaps, therefore, they should collaborate with the operators in setting up solutions. The question that remains to be answered then is, ‘how?’

The most natural interface between an operator and a bank lies within credit card payments. Without a bank, the operator cannot offer a full-blown payment service. Without a bank, the operator would be forced to build the payment solution himself – and however feasible this may be technically, it is not commercially viable in any respect.

One of the main arguments for this is the simple fact that customers often prefer to store their funds in a single location rather than spreading money across many different (single-purpose) accounts. So for an operator wanting to move ahead on his own, offering credit facilities as the sole means of payment would result in credit exposure far too big to handle.

The margins generated from a payment transaction are miniscule compared to those of a voice or data call, even though the risk involved is much greater. Furthermore operators, in contrast to banks, are not used to handling credit risks of this magnitude.

This opens a window of opportunity for both parties. The bank can help the operator by offering access to payment instruments like credit cards, which customers already have, while the operator can offer new transaction volumes for the banks. The result is to generate income for all involved.

However, simply partnering with a bank does not solve all the payment needs of network operators. Their biggest new opportunity, where banks today lack solutions, is in micro-payments – amounts too small or too cumbersome to handle economically using a payment card.

This lies closer to the core business of the operator: to handle massive volumes of small size transactions. Here the operator can add benefit to a business that the banks don’t address today. The operator possesses an identification and input device – the mobile terminal – which is very well suited for this type of transaction, as speed is more imperative than security, at least from a credit exposure perspective. There is simply not that much to lose compared to the credit card scenario.

One of the main issues for network operators today is to find new sources of income, as the cost of voice calls will decline moving towards a flat rate per month. Average revenue per user (ARPU) will drop as heavy users generate lower revenues while some groups of light users refrain from getting a mobile phone at all due to the relatively high fixed cost.

Data and information services attract the most attention today. However, before these services generate substantial revenues, they need massive investments in payment solutions and other infrastructure. Even then, payback time for the investment is too long for operators to rely on the potential future revenues alone. There is a need to find early wins in order to secure the calculus.

Here banks can play a pivotal role, as we have seen in many countries over the past six months – pre-paid mobile phone top-ups. The cost for the operator for topping up an<