This is an excerpt from a recent CGAP paper, Banking on Mobiles: Why, How, for Whom? In it, Kabir Kumar and Ignacio Mas examine the business case and deployment options around mobile banking for smaller banks and microfinance institutions. With effective partnerships and technical choices (which affect customer uptake), we believe there is a strong market opportunity to reach poor people with a broad range of financial services.

Banking via a mobile channel is an idea that most bankers (and many bank clients) find intuitively logical, albeit daunting and confusing, to implement. In today’s world of electronic-based accounts, money is “information” passing through communications networks. The customer experience at the ATM—punching in a PIN, selecting among various options, being instantly gratified—evokes our mobile phone experience. We place our mobile phones in a very exclusive location—our pocket—alongside our money and our home keys, which suggests the high value we attach and even the level of dependence we have to the phone. Why can’t my mobile phone be my wallet?

But first an update on Ali Abbas Sikander and Tameer Bank: Abbas decided that the mobile banking channel was probably going to be the only channel for his rural customers, and hence it was going to be a key element of an aggressive growth strategy. Abbas and his colleagues determined the level of strategic engagement with the operator and the type of solution after navigating through their technology choices (which were explained in the second part of this paper). He decided to use an STK solution, which offers the highest level of end-to-end security but also requires a more integrated partnership with the mobile operator.

He decided to use the operator’s prepaid card distribution network, one of the largest retail networks in Pakistan, to distribute new SIMs and serve as cash-in/cash-out points. Although the new service is most likely to be co-branded by the operator and Tameer, the operator’s brand will be more prominent, which will help market the service to millions who use cell phones but have no formal banking relationships and already know the operator’s brand well.

As banks follow Abbas’s lead and begin implementing their mobile banking strategy, here are some “lessons for the road.”

The mobile banking opportunity will be largest for growth-oriented banks. Banks that are aiming to grow rapidly should benefit more from strategic alliances with mobile operators, leveraging several of the operator’s key assets. Banks can take advantage of the mobile operator’s widespread wireless coverage and extensive use of wireless devices as part of a branchless expansion program (using, for instance, manned POS devices at stores serving as banking agents). Branch economics, with heavy capital and labor costs, favor an environment for branches that is densely populated and where the customer transacts at higher values. Banks can also take advantage of mobile operator’s large and tiered distribution networks to roll out their banking agents.

Telecommunications companies have substantial leverage in mobile banking, and banks need to sit down and negotiate with them. Banks need to work with mobile operators if they want to create mobile banking services that are highly customer friendly, fast, and secure. Mobile operators’ control of the SIM, plus the attraction of leveraging their distribution networks, puts them in a strong negotiating position. This might create a challenge for smaller banks, who might find it more difficult to strike the right deal with mightier operators, or who might simply struggle to get them at the negotiating table. It also may create a tension with the principle of interoperability across networks, because tighter relationships might not be achievable with all networks.

Liquidity (conversion to/from cash) remains the anchor of the value proposition for mobile banking customers. To derive the most value from remote transactions—using the cell phone just like an Internet terminal—begins with getting people to leave more cash in their accounts. This might happen when people see that there are many ways in which they can cash out. In the language of payments, there needs to be a wide acceptance network. Once that cash-in/cash-out network is established, the value of transacting remotely may become more apparent. There may be cash substitution, but it will only be a very gradual process.

Banks who want to use mobile banking to reach out to unbanked customers need to develop strong partnerships for mass-market promotion of the service. Most banks do not have the capacity to aggressively market mobile banking on their own. Banks that want to use mobile banking to reach unbanked customers need access to marketing channels to and brand credibility with precisely those customers who have been excluded from banking. Unlike most banks, mobile operators traditionally use a mass market approach and aim to get into the pocket of every citizen.

Banks can learn from the mass-marketing approaches of mobile operators, or better still, can partner with them—and that’s on the marketing and branding side, not just on the technical service delivery side. Also, there may be other types of service providers or retailers that banks could seek out as marketing partners.

Mobile banking does not raise any inherently new security issues; still, ensuring adequate security through a combination of technology and operating processes is paramount. Any bank with an Internet banking channel can offer mobile banking today: all the bank would need to do is “reformat” its Internet banking content from HTML to WAP, to make it accessible to devices with smaller screens and a mobile-specific browser.

The security solutions to the problem of Internet banking (fundamentally, communicating through a customer device and over a network that cannot be assumed to be totally secure) apply equally to mobile banking. Moreover, mobile banking introduces the opportunity of using SIM-based security, which is more analogous to the ATM banking model in its use of cards (physical bank cards or embedded in the SIM card). Whatever the security of the technical solution, operators will need to ensure that operating procedures around it do not open up vulnerabilities.