Tag: PSD2

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