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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Will a big bet on banking pay for Orange – and other telcos?

Introduction

This report analyses Orange’s launch of Orange Bank at the end of 2017, examining the strategy behind the new services, considering why Orange decided to launch a bank independently and exploring the ways in which the business model could be relevant to other telcos.

In examining the business case, the report looks at what Orange learnt from its previous mobile money initiatives, what its long-term strategy is, why it chose to launch a new banking service and how it was aided or impeded by regulatory changes in the industry.

The report is structured into the following sections:

  • The first part of the report outlines consumer behaviour changes and regulatory intervention in the payments industry. This explains why the current climate is aiding the launch of new mobile banking services by telcos and other innovative players.
  • The second section considers the strength of the banks’ position in the consumer payments market, and how leveraging customer data and digital services can provide opportunities in this area, with a particular focus on telcos.
  • The third and final section examines the Orange Bank proposition in detail, mobile money strategies from operators in developed and developing markets, and how Orange’s approach can inform similar telco strategies, while also suggesting ways for telcos to differentiate themselves from the competition.

How consumer financial services is changing

Smartphones drive fintech adoption

Digital financial services, part of the broader fintech trend[1], have been gaining traction among consumers for some time. By some measures, about one quarter[2] of the global population are already using some kind of fintech innovation, while fintech start-ups have secured $45 billion in funding since 2015.

In France, for example, 793.4 million online banking payments were made last year, according to the European Central Bank, an increase from 586.2 million in 2014. Ernst & Young (EY) predicts the number of customers going online to open an account in France will surge nearly six-fold to 17 million in the next ten years. In addition, there has been an increase in bank licences being issued to non-traditional banks in international markets. In the UK, for example, there has been a steady influx of licences issued since the financial regulators relaxed rules for new entrants in 2013, according to the Bank of England. Overall, there has been a shift in industry perspectives about the feasibility of launching new banking products and competing with the incumbents.

Fintech providers are benefitting from the global adoption of smartphones, which is growing at an extraordinary pace: today there are about 4 billion smartphone connections, nearly double the figure of three years ago[3]. As consumers are increasingly using smartphones for many aspects of their lives, brands, tech companies and whole industries are finding they are required to innovate to stay relevant, and banking is no exception to this rule. In many cases, incumbent financial services players have been slow to adapt to the rise of the smartphones, opening up an opportunity for newer, more agile players, such as challenger banks or mobile operators wielding new technologies and innovative banking concepts.

Contents:

  • Executive Summary
  • Technology and regulation rock banking
  • Recommendations and takeaways
  • Introduction
  • How consumer financial services is changing
  • Smartphones drive fintech adoption
  • New regulation to shake up payments industry
  • Banks under pressure to innovate
  • Orange Bank, a mobile-first proposition
  • Incumbents’ response to Orange Bank
  • Telcos’ track record in financial services
  • The developing world
  • The developed world
  • Conclusions and Recommendations
  • Orange Bank looks promising
  • Telcos have multiple options in the banking market
  • Recommendations and takeaways

Figures:

  • Figure 1: Orange Bank provides customers with a breakdown of their spending
  • Figure 2: Orange Bank is clearly differentiated from existing banking services
  • Figure 3: Many reviews of the Orange Bank App are critical
  • Figure 4: The global mobile money industry is still expanding quickly

[1] Fintech is defined by STL Partners as “technology that improves and disrupts financial services”, as outlined in Fintech: Definition and Landscape Overview, June 2016

[2] Frost & Sullivan, AI and Big Data Technologies Transforming Financial Services, September 2017

[3] GSMA Intelligence, 2017

BBVA: Traditional retail bank embraces digital disruption

Introduction

Why are we doing non-telco case studies?

Digital transformation is a phenomenon that is affecting every sector. Many industries have been through a transformation process far more severe than we have seen in telecoms, while others began the process much earlier in time. We believe that there are valuable lessons telcos can learn from these sectors, so we have decided to find and examine the most interesting and useful case studies.

Traditional banking is being disrupted by fintech. This disruption has not happened overnight, but its speed has accelerated in recent years as consumers and enterprises have become more confident using digital tools to manage their finances. Although the fintech market is currently highly fragmented, with fintech companies typically focussing on one or two specific financial products, this can still have an enormous impact on the traditional banking value chain, which relies on a diversified portfolio to create profit. In addition, there is the threat that a digital native company, such as Amazon or Google, will enter the mainstream banking market through a series of acquisitions.

BBVA’s chairman, Francisco Gonzalez, foresaw this threat early-on, and has worked tirelessly to restructure the bank to be competitive in the era of digital banking. This transformation has involved significant changes in leadership, technology, business processes, and the bank’s portfolio. Like telcos, traditional banks are large organisations with legacy technology and processes, and turning the ship around is challenging. Therefore, there are many ways that BBVA’s experience can inform telcos’ own digital transformation strategies.

General outline of STL Partners’ case study transformation index

We intend to complete more case studies in the future from other industry verticals, with the goal of creating a ‘case study transformation index’, illustrating how selected companies have overcome the challenge of digital disruption. In these case studies we are examining five key areas of transformation, identifying which have been the most challenging, which have generated the most innovative solutions, and which can be considered successes or failures. These five areas are:

  • Market
  • Proposition
  • Value Network
  • Technology
  • Finances

We anticipate that some of these five sections will overlap, and some will be more pertinent to certain case studies than others. But central to the case studies will be analysis of how the transformation process is relevant to the telco industry and the lessons that can be learned to help operators on the path to change.

How digital disruption is threatening banking

Retail banks rely on a two-sided business model

Retail banks make money by using deposits in current or savings accounts made by one group of customers (depositors) to finance loans to other customers (borrowers). The borrower not only pays the bank back its loan, but also interest on top – in effect, paying the bank for the service of providing the loan. The bank pays the depositor a lower interest on savings, and makes money on the spread between the two rates of interest.

Retaining depositors is a vital part of retail banks’ business model

Source: STL Partners

While this is highly simplified, this is the fundamental business model of all traditional retail banks, whose main source of income is created through managing a diversified portfolio of financial products across savings and loans. Banks also make money from applying charges when customers use credit or debit cards, or charging its customers fees such as ATM fees, overdraft fees, late payment fees, penalty fees.

Societal changes have driven digital banking adoption

Digital disruption in banking has taken much longer than in other industries, for example, publishing and media, despite attempts from banks themselves to persuade more customers to use online services. For traditional banks, moving customers to digital channels for most of their banking needs could significantly cut the cost of maintaining and staffing a large network of physical branches. However, when online banking services were first launched in the 1980s and 90s, consumer concerns about security and a lack of confidence in managing accounts themselves online meant that adoption was slow.

Since then the market has changed: For example, in 2000, 80% of banks in the U.S. were offering internet banking services. The launch of the iPhone seven years later caused a paradigm shift, triggering a wave of enormous development and widespread adoption of digital services accessible online and via smartphone apps. Ten years on, consumers are much more confident using digital financial services, and, although younger consumers are leading adoption, older generations are also increasingly using these services.

To read on about how BBVA responded to a changing market, please login and download the report, or contact us to subscribe.

Contents:

  • Executive Summary
  • Six lessons telcos can learn from BBVA
  • BBVA in STL Partners’ transformation index
  • Introduction
  • Why are we doing non-telco case studies?
  • General outline of STL Partners’ case study transformation index
  • How digital disruption is threatening banking 
  • Retail banks rely on a two-sided business model
  • Societal changes have driven digital banking adoption
  • Challenger banks and fintechs are changing the game
  • BBVA’s story
  • Phase one: Investing in technology to catalyse change
  • Phase two: Organisational change
  • Conclusions
  • BBVA in STL Partners’ transformation index
  • Appendix

Figures:

  • Figure 1: BBVA is rated as “Green” (good) in the STL Partners’ Transformation Index
  • Figure 2: Retaining depositors is a vital part of retail banks’ business model
  • Figure 3: The digital banking generation gap is closing
  • Figure 4: The sharing economy has taken off
  • Figure 5: BBVA’s global presence
  • Figure 6: Telcos need to virtualise their core to deliver cloud business models
  • Figure 7: Digital experience needs to be distributed across the organisation for transformation to succeed
  • Figure 8: BBVA’s leadership team is structured to accelerate digital transformation
  • Figure 9: Traditional banks need to adopt agile processes to compete with digital-native competitors
  • Figure 10: Ecosystem markets need new business models
  • Figure 11: BBVA’s co-opetition strategy involves acquisitions, investments and open APIs
  • Figure 12: BBVA’s shares are performing well
  • Figure 13: More smart and mobile device owners in Turkey use their devices for digital banking services than any other country surveyed
  • Figure 14: Turkey leads the way in four out of seven digital banking services
  • Figure 15: Turkish respondents are the most open to automated digital banking services
  • Figure 16: Less than 60% of Turkish adults had a bank account in 2014
  • Figure 17: Turkey is an attractive emerging market for investment
  • Figure 18: BBVA is rated as “Green” (good) in the STL Partners’ Transformation Index

Understanding Fintech: Why Interest and Investment Has Exploded

Introduction

Why should telcos care about fintech? Telecoms operators have long been interested in financial services, especially consumer-facing financial services. STL Partners has discussed the relationship between telecoms and financial services in a range of prior reports, from Digital Commerce: Show Me the (Mobile) Money, to Apple Pay and Weve Fail: A Wake Up Call, and from Telco-driven Disruption: What NTT DoCoMo, KT, and Globe Got Right, to Digital Commerce 2.0: New $50bn Disruptive Opportunities for Telcos, Banks and Technology Companies.

It is fair to say that telcos have found only mixed success in financial services. While certain operators have had great success in recent years providing mobile money services, there have also been many examples of telco incursions into financial services that have not paid off. On the other hand, there have been many instances of successful disruption in financial services – even technology-led digital disruption. PayPal is the foremost example of a digital business that originally found a niche doing something that banks had made quite laborious – online payments for goods between private individuals – and making it easier. But these disruptions have, to date, been limited and individual. Why, then, should telcos pay attention now?

In the last two years, the wider landscape of financial services has begun to change, as the established players have faced disruption on multiple fronts from a large number of new businesses. This has become known as fintech, and interest and investment are taking off:

Figure 1: Google Trends search on ‘fintech’, 2011 – 2016

Source: Google Trends

Fintech therefore represents a potentially huge shift in the status quo in financial services: this short report provides an overview of this shift. STL Partners will follow up with a report that considers options for telecoms operators, and makes some strategic recommendations.

 

  • Executive Summary
  • Introduction
  • Disrupting the Financial Services Industry
  • Defining fintech
  • Why fintech’s time has come
  • The state of the ecosystem: investment is accelerating
  • Key Capabilities and Service Areas
  • Fintech specific capabilities: doing the same, but differently
  • Fintech service areas: Diverse and developing
  • The Future of Fintech
  • Growth ahead
  • …but there are uncertainties around the future evolution
  • The uncertainties could still play out well for start-ups
  • Conclusion and Outlook

 

  • Figure 1: Google Trends search on ‘fintech’, 2011 – 2016
  • Figure 2: Fintech companies are disrupting financial services
  • Figure 3: Global Investment in Fintech
  • Figure 4: VC-backed Investment in Fintech, by Region
  • Figure 5: A framework for understanding fintech
  • Figure 6: Fintech start-ups within each service area