Would Telecom payments be a game changer in the Payments market?

Recent times have been challenging for the telecom players with a highly competitive industry landscape where tech players and OTT players are competing to cater for the voice and video services to the customers. The revenues that the telecom players are getting from their traditional customers for voice and data are getting stagnated, and as per GSM Intelligence report the global mobile revenues are estimated to stabilize at $1.1 trillion beyond 2020. As per another research, the CAGR is projected at only 0.7% for the telecom industry1. All these are pushing the telecom players to explore opportunities and cater to the growing Enterprise and Business segment which is currently at a range of 10–15% of the total revenues for most developing telecom companies.

Let’s talk about one such promising industry — Digital Payments — for the telcos. The global mobile payments market which is valued at $1.48 trillion in 2019 is expected to reach $12.06 trillion by 2027, increasing at a CAGR of 30.1% from 2020 to 20272. The trends also suggest a shift in preference pattern where people are more inclined to digital payments than cash payments. In fact, 33% of the millennials feel that they wouldn’t need a bank in the future and 73% prefer financial services from digital start-ups3.

As the data suggests, the digital payments segment is booming, and this is the right time for telecom players to make use of this opportunity to capture the payments market. There are many such instances where telecom payments have come into the market all around the world including Airtel Payments, STC payments, Orange Payments etc. to name a few. But a question arises about how well they could thrive in this industry owing to the other well-established and focused payments players and what would be the USP for telecom players to get into this market. Let’s try to answer few of these apprehensions moving forward.

Telco and Fintech — A mutually beneficial ecosystem

It would be difficult for a telecom player to develop its own financial arm with wide portfolio of financial offerings in a short time. Though payments is one option where they can venture into without much third-party support, there needs to be more value addition that they ought to provide to stay ahead of the competitors as discussed before. This is where a partnership would serve the purpose. The telecom and fintech partnership seem to be a mutually beneficially collaboration where the synergy brings about a comprehensive ecosystem creation. One might question the reasoning behind telecom players’ involvement and the possible change that it might bring to the ecosystem. So, let’s look at brief a few advantages that the telecom companies would enjoy with fintech partnerships, and vice-versa.

Advantages for Telcos

1. Access to Financial Products

The telecom companies have a huge customer base comparing to the banking sector. For example, as per report, in 2019, the telecom penetration was around 129% as against 73% in the banking sector in the Saudi Arabian region4. The telecom industry is also a highly competitive industry with competitors competing for the market share through better services and products. Through the digital wallets and partnerships with fintech players telecom companies could get access to wide range of financial products. Through this they’d be able to reduce the customer churn and attract new customers. For example, Orange S.A acquired majority stake of Groupama Bank in France to provide new products and payments related to credit, insurance, and payments.

2. Business Opportunities

This would open new business opportunities for the telcos that includes,

· Offering loan solutions, micro-credits, insurance products etc. for their customers

· Playing ‘Closed Loop Integrator’ role and provide bundled services by integrating their auxiliary services like DTH, Voice, and data with the payments by providing benefits like discounts

· Venture into SMS based payments option

· Key role in KYC and customer authorization process for the financial institutions

3. Data Monetization

The telcos would have a huge amount of data about the customers based on their usage that could be sold to the third-party players. For example, Tala, an online lender in Kenya uses around 10k data points from the customers through telcos to score the credit worthiness and process loans for them. Similarly, Jumo analyzes a person’s smart phone usage and provides individual credit scores.

4. Independent payment arm for Telcos

As discussed before, it is also not mandatory for the telecom players to have a partnership with the banks to venture into financial sector. They could work independently with their own financial division to provide the financial services to the customers and monetize the transaction data to the third-party players as discussed above for additional revenues and as well get revenues from the commission paid for transactions. For example, T-mobile launched Mobile Money without any bank participating where they offered prepaid account wired to mobile banking application to make transfers, payments, and withdrawals.

Advantages for the Fintech players and Banks

1. Customer reach:

As discussed before the telecommunications penetration is higher than the banking penetration in most of the regions. The banks can use this to market and promote their products to the wider customer segment for better reach. They could also solve the ‘last-mile connectivity’ problem that most financial institutions face during their expansion.

2. Scale up the Offerings:

They could integrate with the telecom wallets and scale up their broad range of products and services like insurance, loans etc.

3. Access to data:

They’d be able to access vast amount of data captured from the customers during the course and design personalized financial products for the customers and measure the performance of using customer-centered metrics.

Thus, the telco-fintech partnership would a mutually beneficial one with each sector benefitting from the presence of the other. We could also see from the below figure on the operational similarity — in terms of ID mechanism, value exchange, regulation, customer scale etc. — between the financial and telecom sector. This would make the partnership of both sectors smooth for collaboration.

Figure 1: Operational similarities between banks and telecom

(Source: How banks are becoming telcos and telcos are becoming banks in Africa | by Wiza Jalakasi | Medium)

Overall Key Stakeholder Ecosystem

The below are the key stakeholders in the overall ecosystem. The telcos form the ‘one-stop solution’ linking the banks and the customers, and eventually provide better customer experience and access to the financial products improving the financial inclusion.

Figure 2: Stakeholder Ecosystem

A brief on few aspects that would interest the individual stakeholders in the ecosystem

Telecom Operators

· To improve product offerings, reduce churn, retain customers, and diversify revenues

· Access to robust financial technology products

· Provide personalized services to the customers

· Act as ‘one-stop’ platform for diverse customer needs

Banks/ Financial Institutions

· Scale their technology and access the capital they need for growth

· Wider reach of customers through the telecom services platform

· Better marketing and promotional channels

· Better insights about their customers for cross-selling

Fintech Enablers and Technology Companies

· Provide the platform and technology for the overall system

· Provide consulting and strategy for developing the payments business

End customers

· Financial Inclusion for unbanked customers

· Possibility for credits and loans when rejected by banks

· Tailored Financial Products

· Access to other key products like credit, loans, insurance etc.

References

1. Gundaniya, N., How Telcos can unlock new business opportunities with mobile wallets? from https://www.digipay.guru/blog/telcos-mobile-wallet-solution/

2. Mobile Payment Market Size, Share, Trends | Global Analysis, 2020-2027. from https://www.fortunebusinessinsights.com/industry-reports/mobile-payment-market-100336

3. Adlittle: Convergence of Banking and Telecom from https://www.adlittle.com/sites/default/files/viewpoints/ADL_ConvergenceOfBankingAndTelecoms.pdf'

4. KK Foundation: Financial Inclusion in Saudi Arabia from https://kkf.org.sa/media/ipuh5olx/2-financial-inclusion-in-saudi-arabia-2018.pdf