Last December, Starbucks announced that during 2011 it processed 26 million transactions in the US through its mobile payment application. While this news was anecdotal for traditional financial service providers such as banks and credit card companies, it showed mobile network operators (MNOs) the speed with which they can be left out of the business. Their only income in this case was the data traffic generated to complete the transactions. It is not news that the Average Revenue per User (ARPU) continues to decrease and mobile financial services are a great opportunity to reverse this trend. In mature markets such as Western Europe, the decline in ARPU has already led to a reduction of revenue. In Latin America the continued expansion of the subscriber base still enables revenue growth, but this trend will not last forever.
I recently met with Tom Elliot from Strategy Analytics, a Boston-based consulting firm to discuss these issues. Tom stressed that nowadays it is hard to find an MNO that is not developing some kind of financial service, but that nonetheless the business model is still uncertain, and what works in certain contexts is hard to replicate successfully in other markets. Strategy Analytics’ forecasts for 2016 (see charts) do not show many signs of innovation in the industry. Their outlook is rather an inertial one where the aggregate income of the industry will flatten or decrease according to the region. These figures are more or less within the consensus of the mobile industry consulting world. However, the promise of financial service provision is enticing for MNOs when properly implemented. M-Pesa, Safaricom’s mobile money service in Kenya, contributes 17% of total ARPU, which represents 53% of non-voice ARPU. While Kenya has its own particular market characteristics, we can use this as a best case indicator of the potential of mobile financial services. A 17% increase in ARPU in 2016 in the case of Western Europe, for example, would push income levels above those of 2007.
The threat to this promise is the model à la Starbucks, where MNOs become dumb pipes. The model for obtaining significant revenues must be one in which the carriers are efficient players of the ecosystem, beyond the mere provision of connectivity to mobile phones. Consequently, the construction of a model that avoids treating carriers as dumb pipes in the developing world requires important definitions of the core variables of the ecosystem. Depending on the definitions of these variables, very different business models can be shaped: from a scheduled savings product for house improvement targeting the unbanked, to the Starbucks model mentioned above. In each of these models, the players of the ecosystem have different roles: banks, MNOs, retailers, credit cards, etc. In Latin America, at the time of shaping this ecosystem of mobile financial services, carriers have decided to split the risk and the investments by partnering with banks, credit card companies or both. The two most significant initiatives in the region are Wanda, a joint venture between Telefónica and Mastercard and Transfer, another JV between America Móvil and Citibank, which officially launched in Mexico this past month.
The uncertain viability of the different business models explains much of the reasoning behind this decision. However, these partnerships have direct implications when defining the basic variables mentioned above, which need to be negotiated and agreed with the partners. Banks for example, can be very good partners for cash management and identification of customers, but not so effective for other tasks. A report published this year by the World Bank, puts Latin American banks among the most expensive in the world. Expensive partners might be reluctant to embark in low margin/high volume business models. Experience shows that banks have yet to reach out with a value proposition to the 50% or 60% of unbanked households in Latin America. On the other hand, credit card companies can be great allies for mobile payments and short-term loans, but their record in offering other financial products such as savings products is lean.
There is still little evidence in LAC to establish the conditions under which these associations can be functional to the carriers’ need to supplement their declining ARPU. But already some points are clear. Carriers are those with the most to gain (and to lose) in this bet on mobile financial services. Their partners do not have as much at stake. Some results that would be catastrophic for MNOs, such as the Starbucks model, would leave their partners relatively well positioned. In an industry with the current volumes exhibited in Latin America, there is ample space for a wide array of players to explore the business opportunity to provide mobile financial services for the base of the pyramid, which will hopefully result in a more tailored provision of services to those who most need it.
 Strategy Analytics 2012