India- the new mobile frontier?

I just returned from India. The contrast between frenetic growth in the subcontinent and recession blues in the West is palpable. To be sure, India went through a mild downturn late last year. There was a slowdown in retailing, real estate prices came down a bit from speculatory madness, food prices skyrocketed and annual salary increases in the IT services sector came down to 7% and 10% from the 20's, 30's and beyond. But it is back to growth again for a billion plus Indians- in the number of automobiles, new highways and metros under construction, high rise buildings, and mobile phones.

With 500 million hand sets in use, India has more mobile phones than any country except China. It is adding to that base at a rate of around 35 million phones per quarter! Significantly, 92% of all phones are wireless- a clear indication that the country is leap-frogging the land line era. This in a country where in the not so distant past, a land line required a deposit payment and a waiting period of months (sometimes years) to get!

The phenomenon has benefited from a policy decision to open the industry to private sector competition, as opposed to domination by state owned monopolies as was the case with the wireline industry at the outset. Fierce competition has driven prices down to the point where many at the "bottom of the pyramid" can afford the service (BTW, C.K. Prahalad's book on the fortune at the bottom of the pyramid is a great read). Incoming calls and texts are free, encouraging consumer use, as well as businesses hawking all manner of products and services direct to the handset. Tata Docomo recently introduced a pay by second model at one paisa (about 0.022 cents) per second, which is bound to boost call volume.

In addition to mobile marketing, there are other mobile services that are poised to avail of the critical mass and growth in teledensity. Mobile banking is one area where we may very well see India leap-frog other countries. While only 1% to 2% of mobile subscribers use mobile banking services today, there is an enormous upside. Some of the common uses today are bill payments, insurance premiums, charitable donations, pre-paid mobile telephone recharging, and travel ticketing.

The Reserve Bank of India (RBI) has been both aggressive and strategic in building a regulatory framework to enable the growth of mobile banking. It issued guidelines for Mobile Banking Transactions in October 2008 addressing banking, money transfer, payments and commerce. RBI has since moved to swiftly revise some aspects of this guideline based on feedback over 12 months.

Arguably, the most well known example of mobile banking in the developing world is M-PESA in Kenya. It is widely used for money transfer by the unbanked and is run by the mobile operator Safaricom through a nationwide agent network. The RBI, however, wants banks firmly ensconced in the transaction stream, but with a twist. While funds have to be deposited at a bank branch, the disbursement of cash at the receiving end can be through an ATM or a bank-appointed agent. The RBI is thus ensuring the need for oversight through Know Your Customer (KYC) norms and the regulated banking system to address money laundering concerns in a part of the world where informal networks like "hawala" are rampant. It is also addressing the need for "last mile convenience" in a country with an evolving physical infrastructure. The not so invisible hand here is that of the RBI, nudging banks, mobile operators, and others with agent networks to partner to facilitate ubiquity and security.

Other RBI modifications include raising the daily cap on transactions from Rs. 10,000 (~$218) to Rs. 50,000 (~$1087), enabling larger purchases, such as airline tickets. At the other end of the spectrum, it also removed the need for end-to-end encryption for transaction below Rs.1000 (~$22) to remove the cost overhead on small transactions.

While the stage appears set for an upsurge in mobile transactions, led perhaps by funds transfers from banked urban workers to families living in villages, it is not easy to pick early winners in the race. Of the 32 RBI approved mobile service provider banks, 21 have launched services. The partnerships between banks and mobile service providers are yet to materialize. While India is known for its information technology prowess, most well known names are services companies. There are very few true product companies in the country that have embraced product management, development and delivery for general availability, and streamlined delivery and support of versioned products across large customer bases. That would spell opportunity for the many battle tested mobile banking product vendors in the U.S. and Europe, right?

Well, before you pack your bags for Mumbai, keep in mind that selling software into India is extremely challenging. Markets at the bottom of the pyramid are very price sensitive. They call for innovative price packaging like the one paisa per second model from Tata Docomo. In addition, while attitudes are changing, justifying value for software products in India is difficult. Races to the price bottom, regardless of other value attributes, are common. If your business model dictates recovery of Dollar or Euro based cost from Rupee sales, you can end up in a bind if you are not careful.

Despite the cautionary note, mobile services in general and mobile banking in particular are poised for explosive growth in India. We will see innovative services offered there before we see them in the West. It is a transformational journey of a billion people that will be exciting to watch and participate in. Mumbai, anyone?

ET Phone Home (and zap up a check)

Mobile phone cameras have captured images of everything from election protests in Iran to the recent tragic collision of a helicopter and a small plane over the Hudson River. So, what could one possibly add to the list of things that would intrigue mobile shutterbugs? With apologies to Mr.McGuire in the movie The Graduate, "I have just one word for you. Just one word.....checks."

The recent announcement from USAA, allowing its customers to make deposits by sending images of checks taken with their Apple iPhones, brings together technologies from the 19th and 21st centuries. Until the advent of Check 21, the movement of deposited funds depended on the physical transport of paper. An extensive retail branch network was developed to act as collection points for deposited paper. USAA, which serves 7.2 million active and retired members of the U.S. military and their families from one branch in San Antonio, has consistently used technology to turn conventional wisdom on its head. Three years ago, it announced its Deposit @Home service that allows customers to make deposits by sending images of checks scanned at home. Despite early scepticism from many, USAA claims 150,000 users. The addition of mobile smart phones takes the remote capture notion even further.

In addition to this announcement, mobile deposit technology provider Mitek Corporation has announced relationships with Fiserv, RDM, NCR, and J&B Software to take the capability to their customers. As these formidable players get past their pilots and launch offerings, we will likely see more financial institutions make mobile deposit services available.

What about fraud, you say? Doesn't Check 21 require account and transit information to be read magnetically to ensure security? While I admit that the prospect of sensitive check images flying through the air can be unnerving, and there are issues of authentication, privacy and data integrity that need to considered (another post, another day), the fact is that there is no regulation that requires that the magnetic ink character recognition (MICR) information be read magnetically. In fact, Check 21 is silent on the subject. Thus absent regulation, it falls to the individual financial institution's tolerance for risk, versus the obvious convenience of the service.

There are two factors that can mitigate risk to some extent: the old dictum of knowing your customer (KYC), and the option to delay funds availability until the check has cleared. I believe we will see the adoption of mobile deposit capture in defined communities such as the USAA customer franchise, where the financial institution has a very good idea of risk exposure. Credit unions with well defined memberships are more likely to offer this service than banks (and like USAA, most credit unions are also not extensively branched allowing them to make virtue out of necessity). We will likely see the service offered to the "safest" customers first, based on their deposit history, followed by a gradual expansion using funds availability agreements as a tool to calibrate exposure.

The banking community at large has a different challenge. Deposit acceptance is arguably the raison d'etre for large retail branch networks. Remote capture in general, and mobile deposit in particular, poses an interesting channel conflict paradox (see BAI Insights for a summary of a presentation I did with Bob Meara from Celent on the RDC/Branch paradox). Thus, my take is that banks (particularly the larger ones) will perceive mobile deposit as a bridge over troubled waters and be reluctant to put their branch network at risk.

While I don't see the airways saturated with check images from mass deployment, I believe mobile deposit will do well through niche (not necessarily small) adoption. Technology providers, transaction processors, and financial institutions all have different but related niche marketing challenges ahead. Astute target market selection will likely govern success. The alignment of factors like service and product features, pricing (ex: who pays for the data plan for zapping all those images, and what's the payback?), as well as path-to-market partnerships, are imperatives to be carefully considered.

TransPay Perspectives

I was in San Diego this week to attend the Bank Administration Institute annual TransPay conference. This conference which has its roots in check processing has been gradually repositioned as a venue addressing a broader payments ambit. As someone who spends a lot of time advising companies on positioning and alignment, I understand the challenge of balancing legacy wealth with future promise. I will say that BAI has made partial gains on its journey. The conference sessions had a mix of topics that included ACH, pre-paid, mobile, gen-Y and other subjects, along with check processing, while the exhibit floor was dominated by image based check products and services.

Debbie Bianucci, BAI's president and chief executive officer, aptly set the tone for the times we live in by evoking the memorable opening lines from Dicken's Tale of Two Cities, "It was the best of times, it was the worst of times/ it was the epoch of belief, it was the epoch of incredulity/ it was the season of Light, it was the season of Darkness/ it was the spirit of hope, it was the winter of despair/...in short, the period was so far like the present period".

Dr. James Canton, the futurist emphasized how consumers drive adoption, and enterprises follow later. He shared interesting facts- 2 billion Internet users, 4 billion cell phones, total world population 6.5 billion, 5 billion You Tube videos per month, 150 million active Facebook users, 900% growth in Twitter users in one year etc.. You do the math- somewhere in that mind boggling array of statistics is a case for a collaborative, device independent future where payments will play a part.

Dave Stewart from McKinsey & Company had a more earthbound perspective on the $282 billion payments industry, suggesting that the winning financial institutions will be those who proactively focus on competitive advantage, using the capital base from the historic growth in deposits as consumers flee from risk.

The eminent author and business expert Ram Charan painted a picture of our descent into madness from the repealing of the Glass-Steagall act to facilitate the Citibank-Traveller's merger, through the secured derivative hall of mirrors, to the deft transfer of risk from financial institutions to investors. His take was to cut costs deeply now to create cash reserves to fuel the innovation that is imperative to pave the way out of this crisis.

FiServ had two interesting takes on payment convergence. Denny Carreker and Dave Robertson presented a vision of a "silo-busting" platform that spanned from transaction initiation to settlement for multiple payment vehicles. Mike Reagan came at it from the perspective of exceptions management through common case tools and data repositories.

An engaging panel discussion on mobile banking with representatives from Amazon, Clairmail, and Wells Fargo addressed questions regarding revenue sharing between the wireless carriers, and banks. Notable quotes: "AT&T is the largest bill payment company in the world", and "What the carriers want is like saying, 'If you use the phone to order pizza, I want a piece of it!'" Other points included the need for relevant and personalized text alerts, like bill payment reminders as due dates approached.

Romina Abel and Beth Costa from Edgar Dunn presented insightful research on pre-paid cards use by the unbanked. I found it interesting that 25% of the unbanked had a standard credit card (High, I thought- versus 54% overall), and 18% had pre-paid cards (almost the same as 17% overall). The main reasons for pre-paid use were ease of use, wide acceptance, use of own money, safety and security, and control over finances. Notable quote: "Pre-paid as an alternative to The National Bank of the Mattress!"

Putting formal research and industry perspectives in sharp relief was an enjoyable dialogue between four 'generation Y' youngsters, and the audience of (significantly older!) conference attendees. For me, the defining moment was this interchange: Question, "Do you have Direct Deposit?"... Answer, "I don't know what that is". As you create tomorrow's systems, keep in mind that this is what you're up against.

On the exhibit floor, there were a few vendors that caught my attention...

At the top of my list is Clear 2 Pay. This is the first transformation that I have seen of payment convergence from an idea to a product. While convergence is a journey and not an event, these folks have cut their teeth on SEPA (Single European Payments Area) integration in Europe and are getting set to penetrate the Americas. The white papers on their website spell out an intriguing vision. As they say in the billboard business, watch this space.

In the vein of convergence, Mitek had their mobile check image capture application in view. While the jury is still out on how widespread adoption might be, their announced integration with mFoundry's mobile banking application, and their relationships with J&B Software and RDM Corporation for remote deposit capture suggest promise. There was also research recently from FiServ that indicated that one third of their financial institution survey respondents showed interest in offering mobile deposit capture to their business customers. Taking pictures of checks with cell phones, and sending them for deposit...who would have thought?

The folks from Alogent, now part of Goldleaf, have an approach to tailoring the user experience to match the needs of various market segments for remote deposit capture. Their Payment Web Services toolkit allows financial institutions to offer user experiences appropriate to the needs of consumers, merchants of varying size, and corporations. "Yes, so what's new in having different products suited for markets?" you say. But that is precisely where the uniqueness lies; this is a single infrastructure that can be configured to effect flexibility. It should help the total cost of ownership in not having to manage multiple products- each with its set of features, and product release calendar. With this toolkit that also allows integration with cash management systems, Goldleaf may have a compelling case for a look under the hood.

In the days prior to the passage of Check 21 in 2004, exhibitors at this show used to bring reader/sorters, which were electro-mechanical monsters that took up much space, and made a lot of noise. While those sorters have gone the way of the buggy whip, their place has been taken by desktop scanners. Panini launched their latest Ideal scanner at this conference. It is targeted for small businesses at a low MSRP of $299, and has a compact form factor that would fit a crowded point-of-sale counter. I found the automatic alignment capability where a check could be fed in at odd angles, and yet have the sensors and feed rollers line up the document for a good image scan an eye-catcher.

I'll go back to how Debbie opened the conference, "It was the best of times, it was the worst of times...". Given the ideas I saw and heard, and the will to prevail that I sensed from many, I am inclined towards the former disposition.

Payments Technology Adoption by Consumers

This last week I was told twice that the biggest challenge faced by technology companies offering new payment alternatives was technology adoption by consumers. The first comment came from an executive at a mobile payments company, and the second from an individual at an organization with a new take on alternate online payments. They both felt that they had to "move the needle" in getting more consumers to use their vehicles.

While I understand the need to get market traction in order to get emerging technology going, the fact remains that technology companies in the payments space do not control the consumer franchise. The ones that do are the banks, merchants, and to an extent- merchant acquirers. If past history is an indication, the ability of these entities to jump start technology adoption is middling at best.

There is the oft repeated example of ATMs having taken decades before consumers embraced them, and that too for cash dispensing, not deposits. The adoption ramp rate of check imaging has been one of the fastest in recent memory, and even there the widespread use by small business had to await the re-engineering of the check clearing infrastructure- propelled by the external legislative push of Check 21.

"So, what of PayPal™?" you say. The secret to moving needles, I believe, lies in this success story. Whether it was part of an overt strategy, or a fortuitous perfect storm, the coming together of PayPal with a technology, and eBay with a new and rapidly growing consumer franchise was at least one secret sauce in this story. The "viral" adoption that is talked about was at least in part due to the clear and present access to a large group of consumers.

Thus, my take on a strategy for payments technology providers trying to get consumers and small businesses to embrace the "new and different" centers on not trying to engender "viral" growth on one's own. It is unlikely that technology providers will have either the reach, or the muscle to change behavior. It is also difficult to get a major part of a market segment like banks, merchants, or acquirers of a certain type to sign up for something untested regardless of the co-marketing programs one might put in front of them.

I submit that it is better to narrow the focus significantly to find the one, two or three entities with the broad consumer franchise, receptivity to new paradigms, and the wherewithal to execute the shared vision. In other words, spend the energy in finding the rare horse that can get you there, and then hang on for the wild ride!

How does one find that rare horse? Well, they don't call it a "secret sauce" for nothing!