Although the suggestion of a merger between the UK's Vodafone Group and Citigroup seems almost heretical, some Booz-Allen & Hamilton executives argue in a report published this month that such a union is "not only plausible but logical".
Wireless financial services and mobile commerce are behind a push toward mergers, alliances and partnerships between banks and telecommunications firms, the executives say. Such convergence is well under way in Europe, and it is just a matter of time before the trend goes global. In Europe last year, telecommunications and financial companies joined at a rate of one alliance a month. These included joint ventures between Telefonica Moviles and Banco Bilbao Vizcaya Argentaria (BBVA) in Spain, and another between Telenor and Den Norske Bank in Norway. The executives speculate that Asian companies, like NTT DoCoMo, are moving into wireless finance and that US and Latin American firms will venture into it this year and next.
In a 12-page report called Why Banks and Telecoms must Merge to Surge, Wouter Rosingh, Adam Seale and David Osborn, all vice-presidents at the consulting firm, say the new contenders in financial services are telephone companies, specifically wireless. "The banks' latest challenge is at hand, literally, in the form of the increasingly ubiquitous mobile phone." Given the threat financial institutions face from wireless carriers seeking to make financial transactions available over mobile devices and networks, banks have much to gain by working with telecommunication companies, also known as telcos, say the authors. "The challenge for banks is that telcos own the network that the payment instruction goes over in this new model," says Mark Page, a vice-president in Booz-Allen's telecom practice in London. "That's a fairly historical event, and it's the first time banks do not control payment."
Most of last year's list of ventures had "some sort of joint equity investment", Mr Seale says. However, not all will be successful. One alliance in the Netherlands between KPN Telecom and ABN Amro has already folded. Their 50/50 joint venture called Money Planet was expected to be a pan-European Internet bank that would offer financial services in the Netherlands, Belgium and Germany, but the two partners pulled out of the venture in March. "They didn't define the value proposition for co-building a new bank," Mr Seale says. Movilpago, the 50/50 joint venture between Telefonica Moviles and BBVA, Spain's largest bank, may be a prototype of how banks and telcos will work together, according to the report. Movilpago, which translates as "mobile payments", plans to enroll 100 million customers and five million merchants in 30 countries over three years by teaming up with other telcos and banks. The telcos will provide the wireless infrastructure that will form the backbone of the payment system. The banks will provide the necessary credit and payment functions. Since the end of April, consumers in Spain have been able to make telephone-initiated payments at retail outlets, on the Internet or at vending machines. Now the venture is working on equipping merchants with terminals that would accept such payments.
Eventually, such a mobile payment infrastructure could bypass the settlement systems that have been set up by Visa International, MasterCard International and American Express, the Booz-Allen authors say in an interview. Wireless operators could pass on their lower costs of settling and clearing, saving merchants the processing fees they normally would pay the card associations. And payments could just be the beginning. Mobile operators could go after credit management, deposits and other banking products, the report says.
The reason telcos and banks, such as Mannesmann and Deutsche Bank in Germany and Telecom Italia and Banco di Roma in Italy, are forming partnerships, Mr Rosingh says, is because telcos don't know much about payments, but banks do. Mobile phone operators are also under the gun to make money. "Telephone companies are under extraordinary pressure to leverage their expensively acquired customer bases," the authors write. "They must also justify their investment in third-generation licences and network infrastructure. Wireless finance is a direct and natural extension of the way the typical consumer takes care of finances today."
One reason the new payment model has started in Europe first is the high number of mobile phone users there and the large deployment of digital networks. In the United States, one in three cellular phones runs on an analogue network and uses one of multiple messaging protocols like CDMA, TDMA or GSM. Mobile phone penetration in the US at 34 per cent is running well behind that of other industrialised countries. "The US telco infrastructure is behind Europe because we have different protocols here that mean it's taking longer to build bandwidth," says David Osborn, vice-president of Booz-Allen's retail financial services practice in Boston. "It'll be a 2002 or 2003 phenomenon here when we'll begin to see the same deals." Soon, however, Fidelity Investments and General Motors will team up to offer stock quotes and other financial markets information through GM's On-Star in-car communications system. Trading and account features are scheduled this summer. "The United States is not at the leading edge of this because of the backwardness of its mobile network," Mr Seale says. Pricing too, he adds, is less consumer-friendly in the US, where consumers are still charged for receiving calls. "As the retailing model evolves and the use of wireless as a choice for retailing gains momentum, the use of cards will be challenged," Mr Osborn says. Though such developments are probably several years away, "people know it will happen", he says. "Telcos own the channels and banks have the most valuable content to go into these channels. Innovative banks and telcos are positioning themselves."
