Underdeveloped markets

[Dave Birch] Payments News points me to a new research report from the CFSI (not to be confused with our own CSFI: the US one is the Center for Financial Services Innovation, our UK friends are the Centre for the Study of Financial Innovation) called "Mobile Financial Services and the Underbanked: Opportunities and Challenges for Mbanking and Mpayments".  We often discuss the use of the mobile phone to provide financial and payment services to developing markets (a technology-driven strategy so obvious that even management consultants recommend it) — and the overlap with other developing market financial trends such as microfinance — but sometimes forget that there are a great many people in developed markets who are not served by current finance and payment institutions.  I thought it might be useful to look at the specific financial services highlighted in the report.

Technorati Tags: banking, mobile, p2p, payments, remittances

I’ve taken the services described in the executive summary of the report and list them below with additional comments.  The services are…

• Merchant Pay: In March 2006, Scarborough Research found that 50% of Americans without bank accounts had shopped at Wal-Mart stores in the previous 30 days.  Indeed, large and chain retailers, such as discount and convenience stores, grocery stores, and gas stations, seem best positioned to make the kind of investments necessary to receive mobile payments—because of both their financial resources and the particular value they receive from speeding and simplifying transactions.  If these types of merchants prove to be the earliest adopters of mpayments technology, the underbanked will stand to benefit perhaps even more than other customer groups.
• Bill Pay: Consumers without checking accounts generally depend on walk-in services to pay their bills, incurring fees as high as $3 for regular payments and $7 for rush payments.  You’ll remember the recent discussion here about this in the context of BT.  According to Mercator Advisory Group, walk-in bill payments are expected to reach more than $80 billion in volume by 2009.  Prepaid card companies have already begun to allow customers to pay bills that can be funded using direct debit, usually for a fee of between $.50 and $3.00.  A significant market opportunity may exist through partnerships with major utility companies.  Mobile financial service (MFS) providers could offer competitively priced remote bill payment services structured similarly to P2P transfers, as we have advised a number of clients in developing countries in the past.  Apart from anything else, the unbanked often pay for utilities weekly or even daily, so there are far more of these utility payments to process than for banked customers.
• Remittances:  We’ve long recognised the potential for mobile phone-based service in the global remittance market.  In 2004, workers in the United States sent $34 billion to Latin America and the Caribbean, and approximately $6 billion each to India and the Philippines.  A 2002 study by the Pew Hispanic Center and the Multilateral Investment Fund found that as many as 43% of Latino remitters in the United States lack any kind of bank account; a greater number may have formal banking relationships but choose to employ non-bank money transfer services.  While the fees charged for international money transfers have decreased substantially in the past few years,  remittances remain a relatively high margin business and a key point of entry to immigrant markets—and therefore a potential mobile financial service well worth considering.
• Person-to-Person (P2P):  Surprisingly (to me, at least) in the U.S. more than a third of the "remittance" market is actually domestic.  According to one bank, 37% of the remittances channeled through its U.S. branches were domestic.  Clearly, there is some need for secure methods to send funds domestically among people who cannot write personal cheques, deposit to shared accounts or use PayPal. Mobile transfers of funds may provide a solution.
• Prepaid Top-up and Tie-ins: Atlantic-ACM recently estimated that the total number of prepaid users will more than double from 24.2 million in 2005 to 55.5 million in 2010.  Because prepaid mobile services are particularly popular among immigrants, lower-income consumers and those with poor or no credit (which is one way in which the US market is different to the European market), financial services linked to prepaid wireless represent a natural point of departure for MFS targeted at the underbanked, which I think is a critical part of the analysis.
• Short-term Credit: The magnitude of the $6 billion U.S. payday lending industry is just one indication of the strong demand for short-term credit among consumers without easy access to more reasonably priced loan instruments, such as credit cards or bank lines of credit.  MFS platforms could add value for credit-underserved customers by offering short-term credit instruments that could be applied for and disbursed via mobile phone. MFS providers would have access to considerable data on their current users’ financial behavior, information that would help them better price loans.  They need not provide the credit, of course, since (rather as eBay does with GE), the MFS provider could simply deliver white label credit from a third-party provider to a "seller".
• Saving: service providers could help spur savings among their customers providing a convenient means to move funds between active spending accounts and mobile savings accounts.  I’m not sure about this one, because it seems like the kind of thing I’d prefer a bank to manage for me at the back-end rather than be bothered about it during the day when I’m out and about.

All of these taken together explain why there’s been a rash of activity in the U.S. mobile banking and payments space.

These opinions are my own (I think) and presented solely in my capacity as an interested member of the general public [posted with ecto]