“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Besides being spent at merchants or withdrawn from ATMs, money: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
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:
- 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)
- 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;
- 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!