We will discuss about the increasing role of M-Commerce in Financial services. We will cover areas such as Mobile banking, Mobile payments/micro payments, which represents a major portion of the M-commerce in financial services industry.

Overview of M-banking:

Overview of Mobile Banking
The advancement of Internet has revolutionized the way the financial services industry conducts business. It has empowered organizations with new business models and new ways to offer 24x7 accessibility to their customers. The ability to offer financial transactions online has created new players in the financial services industry, such as online banks, online brokers and wealth managers who offer personalized services.

Over the last few years, the mobile and wireless market has been one of the fastest growing and most interesting markets in the world. It is still growing at a rapid pace. A recent study done by In-Stat/MDR claims that the number of mobile subscribers worldwide will reach 2 billion before the end of 2007. Mobile users have just started to fully utilize the data capabilities in their mobile phones. In Asian countries like India, China, Indonesia and Philippines, where mobile infrastructure is comparatively better than the fixed-line infrastructure and in European countries
where mobile phone penetration is very high (80% of consumers use a mobile phone), mobile phone banking is likely to appeal even more. This opens up huge market for financial institutions interested in offering value added services. With mobile technology, banks can offer a wide range of services to their customers such as doing funds transfer while traveling, receiving online updates of stock price or even performing stock trading while being stuck in traffic.

According to the German mobile operator Mobilcom, mobile banking will be the killer application for the next generation of mobile technology. Mobile devices, especially smartphones, are the most promising way to reach the masses and to create "stickiness" among current customers, due to their ability to provide services anytime, anywhere, high rate of penetration and potential to grow. According to Gartner, shipment of smartphones is growing fast, and should top 20 million units in 2006 alone.

source: http://www.polaris.co.in/new/PDF/Oct2005/SOA%20in%20Mobile%20Banking.pdf

The proliferation of mobile communications in countries around the world, especially the developing countries, has the potential to bring a wide range of financial services to an entirely new customer base, according to a new report commissioned by infoDev in partnership with the International Finance Corporation (IFC), and GSM Association.

Mobile enabled financial services, or m-Banking, can address a major service gap in developing countries that is critical to their social and economic development. In many developing countries, particularly in rural areas, access to financial services is limited. A large proportion of the population is excluded from formal banking systems and make payments entirely using cash, which is far less secure and flexible than electronic payment mechanisms.

m-Banking has the capability to bring advantages to all stakeholders:

For users: an opportunity to become engaged in the formal banking sector, facilitate and reduce the costs of remittances, and enable financial transactions without the costs and risks associated with the use of cash, including theft and travel to pay in person
For operators: a significant increase in text messaging revenues, and a large drop in customer churn
For the banks: an increase in their customer reach, and the added cash float available to the bank
For the retailers: added business opportunities through the sale of prepaid account credits
For micro finance institutions: the ability to advance funds into remote areas, and have regular repayments that do not significantly inconvenience the user
For service industries and utilities: the ability to get payments electronically from a significant portion of the overall population

source: http://www.infodev.org/en/Publication.43.html

The advantage of developing a market for micro-payments or m-Commerce, is that it continues to drive the economic system toward a cashless transaction environment. Elimination or minimization of physical cash has many advantages including less opportunity for fraudulent or criminal activity, reduction of cash handling costs and, for the user, less reliance on having the right amount of cash when needed. It also allows the value of money to be better utilized. Cash held outside the banking system is not available for short-term investment so that the time-value of the cash asset is lost. In the more affluent economies, there is already a good infrastructure for a cashless environment with most people having bank accounts and an array of both debit and credit cards. Nevertheless there is an underlying need for cash for minor purchases but there is little incentive to eliminate cash entirely. These economies can manage quite well and there is no specific interest group that feels sufficiently under pressure to develop systems aimed at eliminating cash from the environment. Systems that have been developed in such markets are often expensive and hence not particularly attractive to the user.

In the developing economies however, there is a very large 'under-class' that is totally reliant on cash for all their day-to-day expenses. Moreover, this under-class makes no use of the banking sector and so is 'invisible' in terms of its cash value. At the same time, the need for cash forces the providers of goods and services in these markets to have adequate cash-handling facilities and this comes at some cost. In these cases, the commercial organizations have much more to gain by addressing the problem of cash transactions. Not only is the risk associated with cash holdings that much greater, but the time-value of the cash being held outside the banking sector is entirely lost. Furthermore, the population in this category is lost, i.e. unseen by the banking sector. For these reasons, there is likely to be more incentive in developing economies to move the population at large away from cash, than exists in developed economies. That being so, a solution that meets the needs of developing economies will also have extensive application in the developed economies. This arises because the solution must be accompanied by very low costs as if it were otherwise, the solution would have no appeal in those developing economies.

The resulting low cost solutions can then be applied in the developed economies resulting in further efficiency gains.

Key issues:
Issues for a Network Operator:

Recognizing that the main objective for the mobile network operator is to generate further transaction revenue from the network messages that take place, the issue for the operator is to identify the banking parties that it can work with to achieve that goal.Working with a bank allows the operator to largely sidestep the banking regulatory scene as well as gaining from the facilities that a bank has available for electronic transactions and perhaps access to a debit card.
The alternative is for the network operator to adopt the Hybrid model wherein the network essentially becomes a bank in all but name. This would have to be an option in a situation where a partner bank was not easily identifiable but it carries a heavy load with regard to the need to meet banking regulations. In some markets it may be unacceptable to the central bank.
If the market already exhibits a high level of ATM, POS and credit card use, the availability of a debit card will become a useful attribute, as it will allow customers a wider choice of where they can purchase goods and services. If the network operator decides to adopt the Hybrid model, it must also decide how far the hybrid model is to be developed, recognizing that the path through the banking regulations may be quite difficult. If the network adopts the 'Access' model, it must find a banking partner who will be prepared to develop the service and provide the facilities. The economic downside is that its revenue stream will come entirely from the transactions. The alternative of adopting the Hybrid model places the product development and management more firmly in the network court but brings with it the possibility of the added revenue from managing the significant cash float generated from m-Commerce. Whatever model is adopted, the offering of an attractive service is likely to generate additional demand for mobile services when the users experience the convenience of m-Commerce. More importantly, the use of the m-Commerce service provides an element of customer churn reduction. Users of the service
are less likely to move between competitive mobile services as they will to some extent be tied by the m-Commerce application. Note the very significant reduction reported in the Philippines.

Banking Issues:

For the bank, the issue is more complex than just the added revenue. From a central bank viewpoint, the capture of the unofficial cash economy has to be a major factor in favor of moving to an m-Commerce service. Not only does it generate a cash float that can be used to improve the country's economic situation, but it also helps to reduce fraud, money laundering and criminal acts such as robbery because the cash assets of the users are no longer being carried around in person. For the partner banks, there are two related benefits. The first is the extra cash float that will be generated from the cash deposits into the m-Commerce system. The second benefit is that most of the customers taking up the service are likely to be new to the banking
sector so that the provision of the service gives the banks a greatly expanded market into which they can target specific products. Included with this is the opportunity to develop micro-finance opportunities.

source: check the attached report

Critical success factors/Growth drivers for M-Payments:

The single most important step in building a successful m-payment system is to set the incentives for all stakeholders. Without this, there will be no progress. Each of the participants, furthermore, must accept certain fundamentals and step up as needed for the good of the entire enterprise:

Banks and credit card companies (and incumbent stakeholders like acquirers, which bring new merchants into the network and process transactions, and network operators, which equip merchants with POS technology) must leverage existing value chains, rather than build new competitive solutions. They must also evaluate ways to let mobile telecoms participate in collaborative value generation.

Mobile operators must consider new mobile payment systems in the context of new ways to open up revenue streams, especially from monthly m-payment subscription charges or per transaction fees. Operators must also take full advantage of the positive side effect of embedding the mobile phone even deeper into the life of the subscribers - a significant motivator in the Japanese model.

Handset suppliers must embrace new approaches and start to consider active integration of mobile payment capabilities into product road maps and line-ups. Mobile payment capabilities are seen by some as the next big thing to drive handset replacement, making standardization and compatibility across operators and platforms critical to preserve user attractiveness and scale benefits.

Merchants must use their vast experience with cashless payments to drive further cost decreases that accrue from giving up cash, and to offset POS technology upgrade costs.

Finally, it needs to be demonstrated to mobile phone users that mobile payment is much more attractive than other more familiar payment schemes. The bundle of convenience aspects (safe, secure, available, fast, transparent, etc.) needs to be packaged and sold to target groups individually.

Although meeting these critical success factors is a balance not easy to achieve, it is worth the effort. An ecosystem play, tailored to the geography to be served, will succeed and change today's payment landscape.

source: http://www.finextra.com/fullfeature.asp?id=673

Student: I have tried to cover as many points as possible. Kindly point out if something is missing. I am also attaching a report which was used as source.