Sept 2001

In a new wrinkle on the old U.S. television game show Dialing for Dollars, European mobile telephone companies are setting themselves up to generate fees by invading the financial-services market and becoming providers of mobile banking services.

Initially, the idea is to get customers to pay for just goods and services using their mobile phones, much as they currently use debit cards issued by banks. But, once customers come to think of their phones as electronic wallets, telecommunications companies hope to expand into a range of services that would address all kinds of banking needs for Europeans on the go. For example, mobile phone companies already are preparing to offer such services as electronic payment transfers (which are basically virtual checking accounts) and credit cards. Someday, some of these telecommunications companies aspire to offer even loans and mortgages. In other words, the companies want to give a whole new meaning to "payphone."

While the battle between the telecommunications companies and banks is still in its very early stages, both sides are taking the issue seriously because so much could be on the line. By 2005, Forrester Research Inc. (www.forrester.com) estimates, 26 billion euros (about $22 billion) in commerce will be transacted via mobile, wireless devices—principally mobile telephones.

Even if Forrester is overly optimistic, as so many research firms have been when it comes to e-commerce, clearly the use of mobile payment devices will grow rapidly in the years to come. Any company that captures a big chunk of the fees for processing mobile transactions will have a lucrative business, and any company that can dominate the market for broader mobile banking services may hit the jackpot. So, banks and telecommunications companies want to stake out their positions now.

The telecommunications companies are by no means assured of success in mobile banking. There are regulatory requirements that they must meet before they can offer certain financial services. Then there are the technical and important security issues to be addressed. Meanwhile, customers accustomed to banking in branches or by using personal computers to reach the Internet, may not adopt mobile banking services as quickly as the companies would like. And, just because telecommunications companies "own" the devices that people will increasingly use to make payments and check financial accounts doesn’t mean that customers will want them to become full-fledged banks—any more than they want automated teller machine makers such as NCR Corp. (www.ncr.com) or Diebold Inc. (www.diebold.com) to do so.

Still, many telecommunications companies are charging ahead. Germany’s MobilCom AG (www.mobilcom.de), which is part-owned by France Telecom’s Orange mobile group (www.francetelecom.fr), last year became the first European telecommunications provider to apply for a banking license. "We think that mobile payment and brokerage and banking are [a] killer application," spokesman Wilhelm Fuchs says.

Sonera Corp. SmartTrust (www.sonera.fi), a unit of Finland’s former national telephone company, sells a service to more than 700 Finnish companies operating vending machines, parking lots, and fast-food joints, so that customers can use mobile devices to make payments. Consumers’ expenditures show up on their Sonera phone bills.

Some telecommunications companies in Scandinavia offer prepaid phone cards that pay an interest rate of as much as 5% a year on the money that consumers invest in the cards. That’s more than double the average interest on a bank account in that region.

Also entering the fray is Richard Branson’s Virgin Group (www.virgin.com). Virgin had already moved its strong consumer brand into financial products and services through its Virgin Direct investment arm and its Virgin Money financial information Web site. Now, Virgin is offering these services to Virgin Mobile customers in the U.K. who have phones that provide access to the Internet via a technology standard called Wireless Application Protocol, or WAP. About 20% of Virgin Mobile’s 900,000 customers have such phones. Virgin says its goal is soon to offer subscribers an "integrated account" that will be like carrying your bank account in your phone.

Vodafone Group PLC (www.vodafone.com), which bills itself as the largest mobile phone company in the world, set up a partnership with Barclays Bank (www.barclays.com) that will provide banking, credit-card, and stock-brokerage services for Vodafone’s U.K. subscribers who have WAP phones. Among other things, Vodafone hopes to handle "micropayments," which are payments that may amount to just a few dollars or even a few cents. The payments are too small to be handled efficiently by current systems, which involve checking the payer’s credibility with a central computer and which may charge a big enough processing fee that it would take all the profit out of a small transaction.

Vodafone also plans to offer brokerage services together with Barclays and UBS AG (www.ubs.com), the Swiss bank and investment-services firm, among others. Chris Gent, Vodafone’s chief executive officer, says that mobile phones will be at the center of "the personal networked economy."

Many telecommunications companies are, like Vodafone, making their initial moves through partnerships. After all, without a banking license, they still need to have a bank "clear" funds—in other words, handle the actual transfer and related issues. Even MobilCom, despite having applied for its own banking license, decided to form a partnership with Landesbank Baden-Württemberg (www.lbbw.de), a German bank.

But telecommunications companies will soon have more freedom. A European Community law called the e-Money Directive was passed in April and will begin to take effect in the spring of 2002. This law lets other companies provide certain services normally limited to banks. In addition, the directive specifies that mobile operators that want to provide certain financial services will have to maintain only 2% in risk-adjusted assets as a capital requirement, while banks providing a full range of services have an 8% capital requirement.

The e-Money Directive "lowers the hurdles quite significantly for competitors to banks," said Nick O’Neill, a partner in the international financial-services practice at Clifford Chance LLP (www.cliffordchance.com), a law firm based in London.

Even if telecommunications companies don’t end up generating huge fees from mobile banking, they hope that offering new services such as virtual checking accounts will at least make customers more loyal and boost phone usage. Banking and brokerage services typically rank No. 4 in popularity among WAP-phone users, studies show, right after news, weather, and transportation information.

"Financial services on mobile phones will be successful," says Johan Montelius, a senior analyst at Jupiter MMXI (www.jupitermmxi.com), a London-based firm that measures Internet audiences. "I’m not sure how much people will pay for mobile banking, but these services will be important for mobile operators as part of a bundle of services that they will offer to make their customers more loyal."

First, though, the phone companies will have to overcome the technical obstacles that have led to such a slow start for wireless devices, such as WAP phones, that provide access to the Internet. After an eruption of hype, WAP phones ran into problems because they are complex and have tiny screens. In addition, using current networks, download speeds are slow, and callers are charged on a per-minute basis, which can add up to a big phone bill, fast.

"WAP banking services are not that successful," admits Jeanette Winter, head of e-commerce at Woolwich PLC (www.woolwich.co.uk). "We’re not seeing the take-up on WAP that we are on interactive TV and the Internet. The issues aren’t just around speed. They’re about how to get set up and started. These phones are sophisticated, and it’s not always clear how to access the Internet. You’re asking the customer to do a lot before he can actually access the service."

If they are to take business from the banks, the telecommunications companies will also have to clear a psychological hurdle.

"Banking is complex and has high security issues," says Jonathan Etheridge, head of e-strategy for First Direct (www.firstdirect.com), a cyberbank in the U.K.. "If mobile companies believe they have a relationship with their customer that is like a bank’s, they are deluding themselves. Banking is about trust. It’s about integrity. It’s not about selling a bit of technology."

Ambrose McGinn, director of retail e-commerce at Abbey National PLC (www.abbeynational.com), a bank and building society in the U.K., says that some of the brands that telecommunications companies are creating for mobile banking "don’t have any heritage, whatsoever, in money transmissions, transactions, and investments."

Research firm Forrester doubts mobile users will make phone payments much larger than 10 euros, equivalent to about $8.50. That means telecommunications companies would only have a shot at the sorts of transactions that take place at vending machines.

Jean-Luc Vey, vice president of Deutsche Bank AG’s mobile business group (www.deutsche-bank.de), cedes a bit more territory to the telecommunications companies: He thinks consumers will let them handle small payments, such as buying a pair of shoes or paying the light bill. He is convinced that banks will still handle larger transactions, such as providing mortgages and car loans. "Everybody has realized that banks and network operators can’t live without each other," he says. "But the question is: How will the business be split?"

Forrester thinks that, in any case, it will be years before mobile banking catches on. In a recent report, analyst Michelle de Lussant, based in the Netherlands, wrote: "Despite retailers’ enthusiasm about mobile payments, consumers don’t want it, providers can’t offer it, and technology can’t support it. These issues will not be resolved in the first half of the decade."

A spokesman for National Westminster Bank PLC (www.natwest.co.uk), David Outhwait, agrees that "mobile banking is still in its infancy." While NatWest launched a mobile banking partnership with Orange, the France Telecom unit, a year ago amid much fanfare, that partnership has been quietly wound down. The bank does have a mobile deal with Cellnet, British Telecommunications PLC’s U.K. mobile operator, but it won’t release usage figures or talk about its mobile banking strategy.

Even if mobile banking doesn’t catch on for some time, banks are taking seriously the threat from telecommunications companies. For instance, First Direct, which is part of a larger banking group called HSBC Holdings PLC (www.hsbc.com) and which began by offering services via fixed-line telephones a dozen years ago, now is migrating its services to the Internet and to mobile devices such as WAP phones and personal digital assistants. The bank has been encouraged by the response to its WAP service. First Direct’s Etheridge says: "When customers log on, they are task-focused about checking their account, moving money, or whatever. But afterward, we are seeing that they are willing to look around and, perhaps, even spend money." He adds that people who do their banking via mobile devices spend an unusually long time logged on to the First Direct Web site, giving the company an important audience that it can leverage in any partnerships it sets up online. Telecommunications companies, he says, "may begin to realize they need us more than we need them."

So, while telecommunications companies are forcing the issue on mobile banking, it’s not clear how this will all shake out. You might say the eventual winner is anyone’s, um, call.