Are telcos smart enough to make money work?

Mobile operators have many of the assets and capabilities required to become a major force in financial services, but they will also need to tap expertise in data analytics/machine learning.

Telco consumer financial services propositions

Telcos face a perplexing challenge in consumer markets. On the one hand, telcos’ standing with consumers has improved through the COVID-19 pandemic, and demand for connectivity is strong and continues to grow. On the other hand, most consumers are not spending more money with telcos because operators have yet to create compelling new propositions that they can charge more for. In the broadest sense, telcos need to (and can in our view) create more value for consumers and society more generally.

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As discussed in our previous research, we believe the world is now entering a “Coordination Age” in which multiple stakeholders will work together to maximize the potential of the planet’s natural and human resources. New technologies – 5G, analytics, AI, automation, cloud – are making it feasible to coordinate and optimise the allocation of resources in real-time. As providers of connectivity that generates vast amounts of relevant data, telcos can play an important role in enabling this coordination. Although some operators have found it difficult to expand beyond connectivity, the opportunity still exists and may actually be expanding.

In this report, we consider how telcos can support more efficient allocation of capital by playing in the financial services sector.  Financial services (banking) sits in a “sweet spot” for operators: economies of scale are available at a national level, connected technology can change the industry.

Financial Services in the Telecoms sweet spot

Source STL Partners

The financial services industry is undergoing major disruption brought about by a combination of digitisation and liberalisation – new legislation, such as the EU’s Payment Services Directive, is making it easier for new players to enter the banking market. And there is more disruption to come with the advent of digital currencies – China and the EU have both indicated that they will launch digital currencies, while the U.S. is mulling going down the same route.

A digital currency is intended to be a digital version of cash that is underpinned directly by the country’s central bank. Rather than owning notes or coins, you would own a deposit directly with the central bank. The idea is that a digital currency, in an increasingly cash-free society, would help ensure financial stability by enabling people to store at least some of their money with a trusted official platform, rather than a company or bank that might go bust. A digital currency could also make it easier to bring unbanked citizens (the majority of the world’s population) into the financial system, as central banks could issue digital currencies directly to individuals without them needing to have a commercial bank account. Telcos (and other online service providers) could help consumers to hold digital currency directly with a central bank.

Although the financial services industry has already experienced major upheaval, there is much more to come. “There’s no question that digital currencies and the underlying technology have the potential to drive the next wave in financial services,” Dan Schulman, the CEO of PayPal told investors in February 2021. “I think those technologies can help solve some of the fundamental problems of the system. The fact that there’s this huge prevalence and cost of cash, that there’s lack of access for so many parts of the population into the system, that there’s limited liquidity, there’s high friction in commerce and payments.”

In light of this ongoing disruption, this report reviews the efforts of various operators, such as Orange, Telefónica and Turkcell, to expand into consumer financial services, notably the provision of loans and insurance. A close analysis of their various initiatives offers pointers to the success criteria in this market, while also highlighting some of the potential pitfalls to avoid.

Table of contents

• Executive Summary
• Introduction
• Potential business models
  • Who are you serving?
  • What are you doing for the people you serve?
  • M-Pesa – a springboard into an array of services
  • Docomo demonstrates what can be done
  • But the competition is fierce
• Applying AI to lending and insurance
  • Analysing hundreds of data points
  • Upstart – one of the frontrunners in automated lending
  • Takeaways
• From payments to financial portal
  • Takeaways
• Turkcell goes broad and deep
  • Paycell has a foothold
  • Consumer finance takes a hit
  • Regulation moving in the right direction
  • Turkcell’s broader expansion plans
  • Takeaways
• Telefónica targets quick loans
  • Growing competition
  • Elsewhere in Latin America
  • Takeaways
• Momentum builds for Orange
  • The cost of Orange Bank
  • Takeaways
• Conclusions and recommendations
• Index

This report builds on earlier STL Partners research, including:

• Consumer strategy: What should telcos do?
• Fighting the fakes: How telcos can help
• How mobile operators can build winning 5G business models
• Cashing in on the end of cash
• New age, new control points?
• Telcos’ apps: What works?
• Personal data: Treasure or trash?
• Will a big bet on banking pay for Orange – and other telcos?

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