Bill Gates’ take on frictionless banking with cellphones for all

Bill Gates talks about access to banking for all on Bloomberg Television.
His take: the banking fees from the developed world are just too high for the “rest of the world”.

While pervasive low cost technology like cellphones is the obvious product solution, the business model needs to be different.

It is not as insurmountable as it sounds, because the costs of doing business are also different:

  • marketing can be significantly cheaper: no need to advertise on TV
  • risk is lower: smaller amounts are involved and there is a lot less credit (mostly deposits & payments)
  • regulations can be lighter: see how M-Pesa got local support from the government in Kenya

While this may be too much to ask from large banks from the western world to adapt to, local players can greatly optimize their services and reduce dramatically the number of un-banked in the world.

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Mobile Phones Foster Financial & Economic Inclusion

Apple confirmed yesterday Sept 9 2014 its unsurpassed ability to address the high end smartphone market with the introduction of the iPhone 6 and Applepay.

While there may be 25M people in the US whose contracts are up for renewal and who will jump at (or rather wait in line for) the opportunity to buy a new iPhone, there is a larger number of people for whom a smartphone means a lot more than a 25% gain in screen size or processing power.
They are the economically and financially under-served, or even the excluded.

Two government agencies have published whitepapers about the positive impact of mobile phones on economic and financial inclusion:
Federal Reserve Bank of Boston's Mobile Financial Services Article

FDIC White Paper On Economic Inclusion Via Mobile Phones

  • The FDIC published earlier this year a study assessing the potential impact on economic inclusion of financial services delivered by mobile phone
  • The Federal Bank of Boston just published an article by Elisa Tavilla about expanding financial access an inclusion with mobile financial services.

Download the documents by clicking on the cover pictures.

Both documents point to a promising and positive influence of mobile phones on fostering economic and financial inclusion. The anticipated “Haves versus Have Nots” problem with access to technology does not actually come into play here because under-served people use more smartphones than the average US population.

It is now up to the banking industry to leverage the unexpected penetration of smartphones and the expected positive influence they will have on helping people climb the financial inclusion ladder.

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The mobile phone as the solution to the financial education conundrum

Tell me and I forget
Teach me and I remember
Involve me and I learn

In other words, we learn most by doing.

Up to now, most financial education has attempted to “tell” or “teach”.  Even in today’s digital world, financial literacy has mostly consisted of transposing to computer screens the content of courses and books about managing money. Video tutorials are more entertaining than text and can replicate some of the experience of a physical classroom, but they are still a one-way teaching method.

Some have ventured into the world of interactive games, all the way to letting players navigate inside 3D virtual worlds.  Role playing can let users manage  some fictitious wealth, pretty much like the game of Monopoly. However, these games do not get you involved in managing your actual finances.

Budgeting tools like Mint or Money Desktop do connect to your actual money by reading information out of your bank accounts and credit cards. However, they remain separate from the online management access that your bank may have given you, so they duplicate some of the functions while not allowing you to actually initiate any movement of money.

smartphone financial guidanceI believe that the holy grail of efficient financial education is going to be smartphone apps that combine financial guidance and budgeting with the full management of your money into a single application.  GoBank is an example of bundling budgeting with the full access to a payment card within a single app. It is currently limited to one single payment instrument, so it does not help you manage other bank accounts or cards, but it is a promising first step.

I am pretty excited at the prospect of developing an application for low to medium income (LMI) consumers, which will combine:

  • the management of a prepaid card used as alternative to a checking account
  • the management of a credit card used to pay certain bills and build up a credit score
  • financial guidance in the form of just-in-time over-the-air delivery of advice, exercises, and call-to-actions applicable to the 2 cards

I am looking forward to the work that we will have to put into developing and fine-tuning the “algorithm” that will trigger the proper pieces of financial guidance at the right time and in the right amounts to foster best cardholder behavior.

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Opening of Deposit Accounts is Going Full Mobile

It used to take a bank branch to open deposit accounts for new customers.

Then, in the early-to-mid 2000’s, when the penetration of Internet Connected personal computers reached critical mass, it became possible to open accounts from the comfort of your home (or office).

Today, 149 million Americans have a smartphone (source: ComScore, Nov 2013), and many of those people have disconnected their fixed phone line and trashed their home computer. It is evident that cellphones are going to become the dominant way to open accounts.

This is a major shift in the world of “mobile banking”. Banking apps will no longer be a companion to an account opened at the branch or from a PC: they will be how your open an account in the first place.

Below is a short presentation on Mobile Account Opening that showed at All Payments Expo on March 3 and 4 in Las Vegas:

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Dear Mobile Virtual Network Operator, meet Mobile Virtual Banking Operator

“The future of banking and payments is mobile.”

Granted, you have heard this before.
Also, we are several years away from the tens of millions of merchant Point Of Sale terminals and the millions of bank Automated Teller Machines around the world being able to transact with mobile phones.
ATMs and POS terminals are actually only involved in a minority of monetary transactions.
Besides being spent at merchants or withdrawn from ATMs, money:

  • must first be deposited
  • might be partially saved for future use
  • may need to be transferred between people locally or across the globe
  • could grow through interest and rewards

mobile banking
All of the above monetary activities can already be handled through Internet-connected PCs and cellphones today. Fewer and fewer people go to branches to conduct banking transactions. Mobile phones have become portable personal branches through which all interactions with the bank can take place. Smartphones are in effect mobile checkbooks.

This does not mean that banks are becoming obsolete: keeping and managing other peoples’ money must remain a well trusted and secure enterprise, which cannot be performed without a proper regulated charter.

Irrespective of recent circumstances which have eroded consumer confidence in them, banks are still the only entities that can be entrusted with consumer deposits, just like regulated wireless carriers are the only ones entrusted with the radio spectrum.

But most banks are bad at marketing, product management and consumer engagement, especially when these functions are increasingly carried out through mobile digital devices. This is a tremendous opportunity for “Mobile Virtual Bank Operators”.
Here is what an “MVBO” would do, when entering into an agreement with a Bank:

  • Manage the consumers accounts inside a range of 16-digit payment card numbers, similar to how Mobile Virtual Network Operators (“MVNOs“) like Virgin Mobile or Boost Wireless, handle consumer mobile engagement inside a range of phone numbers;
  • Engage directly with banking customers through distribution and access channels, including product & service management, sales, marketing and customer support, like MVNOs engage with, manage and support mobile subscribers;
  • Handle the physical distribution to consumers of access devices i.e. plastic cards, in the same way as MVNOs organize the distribution of handsets; (Note that plastic cards will probably end up being replaced by software embedded in a secure computing unit either inside mobile devices or in a cloud-based computer server)
  • Implement those parts of the applicable regulations that the Bank must ensure its partners comply with in order not to violate its own charter, similar to MVNOs complying with a part of the regulations in cooperation with the Network Operators;
  • Have Profit & Loss responsibility of the service while paying the Bank for access to its infrastructure, in the same way as MVNOs operate their business with a host wireless carrier;

As can be seen, the roles and business arrangement between an MVBO and a Bank are identical to those between an MVNO and a Network Operator.

There are already a number of established “VBOs” (Virtual Bank Operators). Companies like NetSpend, RushCard, Plastyc, AccountNow, Simple, are Virtual Bank Operators. They are just not called that name; instead the financial services industry calls them “Program Managers”, and the banks that enter into agreements with them are called “BIN Sponsors”. BIN stands for Bank Identification Number and is the first 6 digits of a 16 digit payment card number. BINs are like Area Codes for card numbers. Program Managers operate account services inside the BINs allocated to them by the Bank. For the most part, Program Managers handle prepaid account services, because they can be marketed to the “under-banked” and “un-banked” populations more easily than Checking Accounts. There are more than 60 million under-banked people in the US (and billions more worldwide), which banks are usually not good at (or interested in) reaching.
Most “VBOs” have recently become MVBOs by mobilizing their services: they have deployed mobile apps for iOS and Android devices that allow consumers to manage their money from a smartphone. Even market players focusing on the under-banked enjoy excellent reach because the penetration of smartphone devices is higher than average among the under-served population. Counter-intuitive but true: under-banked people are usually not “under-phoned”.

The main reason why MVNOs should consider also becoming MVBOs is not the similarities in roles and business principles. It is above all a compelling business opportunity:

  1. Reduce churn by turning customers’ cellphones into a personal bank branch and mobile checkbook; (Note: mobile wallets for payments will also help, but later, when the POS and ATM infrastructure gets upgraded)
  2. Upgrading cash-based unbanked customers to banked customers helps ensure more frequent, convenient, and less costly payments for prepaid cellphone services. Instead expecting cash-based customers to renew their prepaid phone service by showing up every month with cash at a retail store, the MVNO turned MVBO can simply keep the payment card on file;
  3. Increase revenues with interchange fees obtained from the payment service operated for the Bank. Instead of entering into a conflict, or a complicated relationship, with the banking industry, as most network operator wallet initiatives have experienced so far, being a VBO is a well appreciated and non-controversial business model for the banks;

MVNOs can test the waters of the MVBO opportunity by first entering into marketing agreements with those established VBOs willing to operate as a service bureau or to deliver private labeled services. But the real deal is for MVNOs to become MVBOs themselves.

They may even find banks easier to deal with than wireless network operators!

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