By Clive Haswell


With clients expecting faultless goods and services; regulators requiring stronger governance, controls and compliance; and, the ever growing threat of financial crime (now estimated at $11tn globally), banks and the global financial industry is witnessing profound changes.
But perhaps the biggest driver of change in Banking comes from technology led innovation. Most of this change is driven by the evolution of consumer electronics, telecommunications and data analytics, which, over the last 30 years, has disrupted many industries, especially information-based service industries — like banking.  In particular, 3G and 4G mobile telecommunications networks and the spread of smart phones have ended any lingering complacency about the position of traditional banking.
Because these changes, unlike previous generations of innovation in banking, are largely driven by forces outside the industry, they bring a new threat — that of disintermediation of banks and their clients. Others (sometimes new startups) obviate the need for a bank’s traditional role as a financial services broker.  It is not that banking has become redundant — arguably the converse: the digital economy is spawning many new small businesses in need of funding. However, other parties are now able to undertake the provision of those services — particularly the making of payments. Sometimes it is the technology itself and not a new service provider that replaces what a bank does — a smart phone app can do a lot of what a teller traditionally did.
Guaranteed by a sovereign state, cash was a critical innovation as a means of exchange, and it has maintained its dominant position for thousands of years in various forms. Its uniqueness is in the way its value is independent of the bearer or his/her credit worthiness (or that of their banker).  It’s flexible, accessible to all, highly portable and untraceable. Since the early part of the last century, card technologies have begun to challenge cash, although they have by no means replaced cash in many areas and many developing countries. Credit and debit cards have brought a more convenient alternative to customers and one that has allowed an easy link to the granting of credit facilities that has further enhanced convenience and also provided a lucrative lending vehicle to card issuers. There is still a future for this medium — contactless payment on credit and debit cards for small value transactions means speed and stored value cards are particularly useful in day to day transactions. Easy and cheap to implement, the convenience of the card in your wallet may yet stave off the inevitable rise of payment by smart phone, for a while.  
e-Wallets on our computers and phones are an innovation that, although not yet near critical mass, is beginning to virtualise the card. The virtual card retains all the features of the plastic card, but maintains them in a digital (and therefore electronically exchangeable) format, thus boosting a card’s usefulness.  In many markets a smartphone app allows you to load card details for future use — and in Korea, these Mastercard/VISA credit cards details are even distributed electronically directly to a customer’s smart phone (the customer gets the plastic later).  Putting a cash wallet onto this same channel begins to truly virtualise banking; in that one no longer needs the involvement of a third party to make payments and transfers.
The next and perhaps ultimate virtualisation of payment mechanisms comes with the removal of a currency that depends on an issuing bank or state.  Crypto currencies, such as Bitcoin, are already in use by those who choose a business model that excludes the existing financial system and the regulatory bodies that govern it.  Banned by Russia and China, legalised in New York, the subject of debate about how to regulate them in London, crypto currencies offer a truly challenging alternative. The transparency of the block chain mechanism offers the opportunity for a highly secure and confidential transaction. It remains to be seen whether the comprehensive transaction history in the block chain can be reconciled with the need for transaction scrutiny and bring an enhancement, rather than a threat, to regulatory compliance.
“Bitcoin users can handle many …. daily payments ….. without the need for interaction with banks, and avoiding the need to incur bank fees. In the same way, value stored in PayPal accounts moves outside of the bank’s payment systems, depriving banks of valuable payments revenue.”
Most worrying for banks must be the new players’ payment products such as Paypal, which entirely bypass banks. But, the online markets have an additional angle on payments. They can assure the integrity of the transaction between buyer and seller.  eBay and Amazon have grown dramatically as consumers have chosen to transact online and have become confident in the security of those transactions. But there’s more.  Trade Finance, the cornerstone of many a major bank, primarily exist to ensure payment and delivery obligations are met from a buyer and seller’s perspective, as well as to provide clients with funding. Alibaba, the Chinese online eCommerce trader famed for the world’s biggest ever stock market flotation last year (worth $25bn), teamed up with the California based Lending Club to provide the same service to SMEs in the US purchasing Chinese goods.  It takes less than five minutes to get a loan online to finance a trade on the Alibaba platform.  Alibaba’s tag line on their web page is “Global Trade Starts Here” — a warning to any bank that believes its market position is safe because it has been based on selling very traditional trade finance products for the whole of its history.  
If it is the need to use online markets that led to the boom in online payments via VISA and Mastercard, it is the expectation that this ease and speed will be reflected in utility payments, Point of Sale (POS) payments, and mobile-to-mobile payments that has spawned the smart phone payments technologies. Wider take up depends on ease of use.  The mobile phone must become easier to use than the cash in your pocket. According to an MIT report Apple Pay (launched this year in the USA) will start a rush to mobile payment (in the US) . There are a few reasons this might be right: a) Apple Pay is one touch – it checks your thumb print to provide payment authorisation. So, it’s even faster than coins and bills; b) a virtual card on your phone is more secure than a physical one with a specialised chip built in to the phone to securely store a unique identifier for transactions against that card — i.e. there is no skimming opportunity; c) POS terminals are going through an EMV upgrade in the US in 2015 — most of these new terminals will have NFC built in .  Hitherto, this feature was absent as curiously the US lagged well behind in the deployment of the EMV card security feature. Apple may once again set the benchmark for others to follow.
In the 80s we first started talking about the end of bricks (physical branches) and the move to clicks (online access to banking services).  Well bricks have co-existed with clicks for longer than people thought. In the UK, the closing of the last branch in a small town used to be a significant political event and one that worried the bank owning that branch – what would be the reputational damage of closing a community’s access to banking services. These concerns have all but disappeared as fewer and fewer customers need their bank to be present at all to access all the services they need because of electronic banking, and now mobile banking. In 2007, 45% of UK customers visited a branch every week.  By 2014, this percentage had fallen to 28% . “Banking is no longer a place you go to, but something you do . . . in the next 5 years mobile will be the primary engagement channel”.
Why is this happening?  As witnessed by the music and publishing industries, Financial Services is to be completely transformed by the ubiquity of the internet.  Moreover, the mobile internet is making the online access pervasive.  As an industry, the mobile internet has revenues of $700bn, and is expected to grow to $1.55tr by 2017 and the online commerce it has spawned is the preferred transacting medium for the generation under 30. Enabled by decades of infrastructure deployment, the average annual growth of the mobile internet is now 23% — higher in developing markets, such as India with 40%. And the wave of this growth has not yet begun to crest.  
If it is still unclear whether there’ll be a positive outcome for banks.  However, there can be a very positive outcome for under-developed countries, which have the opportunity to leapfrog stages in the development of a financial services industry. The infrastructure being built now will allow new and more widely available financial services products (and in particular payment products) to be deployed rapidly.  And, as the pace of mobile payments gains momentum, the opportunity to cross sell a personal financial management system opens up.
For example, the introduction of M-PESA, a peer to peer mobile phone based payment system introduced first in 2009, is by now enabling 17mn Kenyans (two thirds of the adult population) to send money easily and securely to and from their mobile phones - this equates to 43% of Kenya’s GDP traversing the M-PESA payment channel.  It has allowed the largely unbanked masses of a poor African country to make $19bn worth of transactions in 2014, truly realising the vision of financial inclusion and the consequent wealth generation.  In nine African countries more people use mobile money accounts than bank accounts.  In 2012, M-Shwari, added the capability to save and borrow on top of the M-PESA mobile phone platform, further stimulating economic growth in a most underdeveloped part of the world. As ‘banking the unbanked’ becomes a primary policy objective for governments globally, the Kenya model provides an example of how mobile payments can contribute in the success of these policies.
In the Mena region, Master Card plans to wire up 54mn Egyptians to their mobile payment cloud .  With Egypt’s card penetration standing at a paltry 7% and bank accounts held by just 25% of the population, this is indeed a market that could leap frog straight to a mobile payments future.
For banks, the opportunity comes at a price.  Firstly, a significant investment is needed to gain entry to the game. Then comes the cannibalising of existing revenue streams — albeit onto a platform that should be more cost effective and scalable. Only then if the overall pie grows, through financial inclusion and/or a rich new set of services to meet today’s needs of the mobile internet economy, can banks benefit from the opportunity.

* Clive Haswell is the chief information officer-MENAP at Standard Chartered. The views expressed are his own.