Are telcos smart enough to make money work?

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

financial services

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:

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The value of analytics, automation and AI for telcos Part 1: The telco A3 application map

Getting to grips with A3

Almost every telco is at some stage of trying to apply analytics, artificial intelligence (AI) and automation (A3) across its organisation and extended value network to improve business results, efficiency and organisational agility.

However, most telcos have taken a fairly scatter-gun approach to deploying these three interrelating technologies, with limited alignment or collaboration across different parts of the business. To become more sophisticated in their adoption of A3, telcos need to develop a C-level plan to manage deployments, empower business units supporting A3 to efficiently deploy resources, and create cross-functional implementations of these technologies.

The first report in this two-part report series supports telcos in this aim through a high-level mapping of the application areas which can be developed by a telco. It illustrates the opportunities and forms the foundation of our ongoing research in A3.

In the second part of the series, we estimate the potential financial value of each of the A3 application areas for telcos. The follow up is now available here: A3 for telcos: Mapping the financial value 

This research builds on STL’s previous reports covering telcos’ early efforts in implementing analytics, AI and automation within specific parts of their operations, as well as benchmarking their progress globally:

Introducing the telco A3 application map

The first section of this report goes further into the use of different types of A3 in the Telco A3 applications map. Our analysis focuses in turn on the six types of problems that are being addressed and how automation, analytics and/or AI can provide solutions – and for which types of problems and in which parts of a telco’s business each of these three technologies can have the greatest impact.

Summarising the six types of problems A3 can help with:

  1. Making sense of complex data – using analytics and ML to identify patterns, diagnose problems and predict/prescribe resolutions
  2. Automating processes – where intelligent automation and RPA helps with decision making, orchestration and completing tasks within telco processes
  3. Personalising customer interactions – where analytics and ML can be used to understand customer data, create segmentation, identify triggers and prescribe actions
  4. Supporting business planning – where analytics and ML can be used in forecasting demand and optimising use of existing assets and future investments
  5. Augmenting human capabilities – this is where AI solutions such as natural language processing and text analytics are used to ‘understand’ and act on human intent or sentiment, or surface information to customers and employees more quickly
  6. Frontier AI solutions – cutting edge AI solutions which have specialist uses within a telco, but are not widely adopted yet

Following our analysis of the key application areas, we look at how A3 is used not only for the individual parts of the business illustrated in the map, but how more sophisticated implementations require significant integration and interdependencies between A3 solutions across multiple areas of a telco’s operations.

It should be noted that this two-part series only considers the application of A3 to telcos’ internal operations and we will consider both the external monetisation of such services and their use in telco products in follow-up reports.

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How telcos should use the A3 map

  • Innovation teams within the telco should consider plotting their existing and planned A3 activities on a map such as that shown below
  • This map should be presented to the board and also socialised within IT and support teams such as customer care. It can be used to describe current top-level focus areas and those which are more nascent but considered key in the short and medium-term
  • The map can also be shared with vendor partners and other interested external parties to ensure that they are aware of the company’s priorities.

Table of contents

  • Executive Summary
  • Introduction
  • The A3 problem/solution types
    • Type 1: Complex data uses A3 to conquer size and speed
    • Type 2: Automation to replace or augment human resources
    • Type 3: Personalisation uses algorithms to reveal what’s next
    • Type 4: Bringing optimisation and forecasting into planning
    • Type 5: Augmenting human capabilities focuses on chatbots
    • Type 6: Frontier AI solutions are the leading edge of the A3 future
  • Cross-type applications of A3
    • Concept 1: Sharing data between boxes using a data lake
    • Concept 2: The flow of data across different A3 application areas
  • Appendix 1: Further definition of applications by type
    • Type 1: Making sense of complex data
    • Type 2: Automating processes
    • Type 3: Personalising customer interactions
    • Type 4: Supporting business planning
    • Type 5: Augmenting human capabilities
    • Type 6: Frontier AI solutions
  • Appendix 2

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How Zain Bahrain simplified and digitised customer engagement

Introduction

Increasing pressure on the telecoms business model…

Data volumes and revenues continue to grow globally (albeit at a slower rate than before). However, as competition to win market share intensifies, prices are being driven down. As many markets are fully penetrated, the downward price pressure and lower average revenue per user (ARPU) is causing a rapid slowing in global mobile telecoms revenue growth. And, with a high fixed capital and operating cost base, it is unsurprising that telecoms operators are facing a margin squeeze. This situation is clearly illustrated in Figures 1 and 2.

Figure 1: Global wireless telecommunications revenue and EBITDA margin 2012-2016

Source: Telegeography, STL Partners

Figure 2: Regional blended ARPU 2012 & 2017 (USD constant exchange rate)

 

Source: Telegeography, STL Partners

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…is driving the need for cost efficiencies as well as improved customer experiences

To increase or keep margins stable, telcos face the additional pressure of reducing costs through greater automation and process simplicity. Such a reduction in costs would usually be driven by a reduction in workforce and lower network and IT costs. However, operators are faced with new competitors providing alternate communications services (IM, VOIP, social networking) as well as fierce traditional competition and so must improve the quality of their customers’ experiences.

To illustrate, consider Figure 3, which represents the average “Net Promoter Score” (NPS) for several industries. Telecommunications significantly underperforms relative to other industries, with a NPS of 24 – lagging far behind industries such as transportation and retail. These factors all paint a sobering picture for telcos.

Figure 3: NPS by industry, 2018

Source: CustomerGauge

This situation has created a dilemma for telcos – how can they both reduce costs and improve customer experience simultaneously? This is particularly relevant given the notion that improving customer experience is costly and requires investment in multiple channels.

Figure 4: Telcos traditionally face a trade-off between quality of service and running costs but technology potentially solves this dilemma

Source: STL Partners

One telco that has made steps towards achieving this is Zain Bahrain.

Contents:

  • Executive Summary
  • Introduction
  • Increasing pressure on the telecoms business model
  • Zain Bahrain: A simplicity success story
  • How Zain Bahrain’s management achieved success
  • 1. Understand the problem
  • 2. Make basic channel modifications
  • 3. Extend digital channel capabilities
  • 4. Educate customers
  • Key lessons for other operators

Figures:

  • Figure 1: Global wireless telecommunications revenue and EBITDA margin 2012-2016
  • Figure 2: Regional blended ARPU 2012 & 2017 (USD constant exchange rate)
  • Figure 3: NPS by industry, 2018
  • Figure 4: Telcos traditionally face a trade-off between quality of service and running costs but technology potentially solves this dilemma
  • Figure 5: Zain Bahrain NPS Q1 2017- Q4 2017
  • Figure 6: Zain Bahrain channel roles
  • Figure 7: Mobile application – 2017 results
  • Figure 8: Zain Bahrain customer interactions by channel Q1 2017 – Q1 2018
  • Figure 9: Channel mapping
  • Figure 10: Zain mobile app promotion
  • Figure 11: Scratch and win promotion

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