Russia Forum Buzz: Finance and Telecoms: Two Sectors Converging

April 23, 2013

 

Technology is changing the way traditional providers of financial services interact with customers. At the same time, mobile operators around the world are moving to offer financial services. These trends bring the two industries closer together, the topic of this discussion. Depending on financial service providers’ stage of development, collaboration may offer basic financial services to the public or promote advanced technologies that improve the customer experience. Hence, we will address whether operators are competing with banks or adding to the breadth of financial services. We will also discuss how financial institutions and operators can interact and ways in which the latter enhance the cross-selling of complex financial services by the former. Finally, we will explore how new communication channels for financial services such as the internet interact with traditional branch networks.

Denis Bugrov started by saying that over the past two or three years, telecom companies’ interest in banking and vice versa has dramatically increased. The aim of the discussion was thus to understand if it is a new trend that can lead to changes, or if it is just a beautiful idea that will not go anywhere. He then asked participants various questions.

Abraham Foss shared his view on whether successful telecom companies have all the prerequisites to become successful in finance. He claimed that Telenor basically has all the necessary things in place, its financial business having strong potential due to successful brand positioning with 150 mln customers in 11 countries (interaction with which can be monetized), low transaction and operating costs and a strong distribution network. For example, the operator has experience in providing financial services in Pakistan – an immature market with bank account penetration of just 10-15%. Telenor has been running a JV with a micro finance bank for three years. According to Mr Foss, when the JV was introduced, it became the largest bank overnight with 22,000 agents, and then turned into the third largest mobile payment provider in the world with 4 mln customers, roughly 120 mln transactions this year and $1.4 bln injected into that system. Apart from business in Pakistan, Telenor has payment JVs with other operators and with the largest bank in Norway, where the company provides OTC products, as well as insurance and saving products, and it plans to enter into lending.

In Mr Foss’ view, the convergence of mobile and finance is not about offering the same services at a lower price, but rather about using existing assets to create something new. And the success in this field depends largely on digital distribution, regulation matters and building competence, the latter requiring successful partnerships between the parties, as he put it, the focus being on making the cake rather than splitting it.

Andrei Dubovskov talked about whether telecom companies have all the necessary prerequisites to be successful in financial services and shared the experience of MTS in this field. He mentioned that MTS’ experience in the financial field is based not only on the company’s operational activities, but also on studies of regulatory regimes and peer experience in other countries. He claimed that the potential synergy between the two sectors is high, adding that the share of financial services in MTS’ net income would rise to 5% by 2017. In his view, the company’s recent deal to acquire a blocking stake in MTS Bank should lead to a successful alliance thanks to MTS’ knowledge of its subscribers, high level of trust from customers and well-developed mono-brand retail chain. According to Mr Dubovskov, the group’s financial project, MTS Money, has already expanded its service area to 1.3 mln credit and debit cards, with each third purchase within MTS mono-brand retail chains being made via MTS Bank’s credit products, and the latter’s credit portfolio amounting to several billion dollars. However, MTS’ finance business has yet to grow, current developments being just the first steps to fantastic results reachable in one to four years, according to the CEO.

Ivan Tavrin talked about the chances of the financial services story for telecom companies to repeat that of content, i.e. everybody will try, but nobody will be able to do it on a significant scale, with telecoms remaining the pipe through which traffic flows.

Mr Tavrin thinks that it is incorrect to compare content and financial services due to the people working in these industries. Creativity is an essential component in content, and thus telecoms and financials can coexist better than telecoms and content. It is also incorrect to contrast financial and telecom organizations, as partnership between these sectors are more important than the desire to control one system or another. Mobile devices cannot operate without content, and without applications smartphones are worthless, so telecom companies should be conductors and assistants to financial organizations.

Once telecom companies and financial organizations understand that they are not competing and should be partners, the number of services will substantially increase. Therefore, the role of telecoms is not to be a pipe, but partners with financial organizations.

Maxim Nogotkov speculated on whether banks should be concerned about the entrance of telecom companies into the financial market, or vice versa. He chose neither option, and said the most appropriate outcome would be strategic partnership. He explained that telecoms and finance are two different types of business, each of which needs operational qualification, and the potential synergy of combining them is usually overestimated. In his view, telecom operators have an opportunity to monetize the subscriber base, but carriers are not the only companies with this potential. This was proven by Tesco’s experience in the UK – the consumer retailer became one of the largest insurance providers in the country, while also offering credit products.

Mr Nogotkov stressed that when creating a successful banking service provider, brand positioning is of great importance. As for competition, he believes that partnership would be the best way to build relationships between operators and banks, as each party has particular expertise in building networks and risk management, respectively. However, he does not rule out the possibility of a tough rivalry should Russia repeat the experience of the US, where NFC-alliance competes with Google by blocking subscribers from using the Google Wallet service.

Sureyya Ciliv started the discussion on the role of telecom companies in the Turkish financial services market, given that it is one of the most competitive and dynamic markets in the world, by stating that between two and 10 years the traditional wallet will become a museum artifact. In Turkey, if we look at a case study of 50 banks over the past 10 years, the winners are those that have been consistent leaders in technology and had the right vision.

While not everybody has bank accounts, everybody has a mobile phone. In Turkey, 50 mln people out of a population of 76 mln are bankable, and out of these, only 60% have bank accounts. Given that all of these 50 mln people are connected through the air, telecom companies can offer financial services to these people anywhere and anytime. While Turkcell can offer certain financial services, it can also partner with banks, as partnership works better in some cases. The most important aspect for telecoms is how to deliver the best user experience, and companies can focus on providing this when telecoms and financial organizations work very closely together.

NFC-enabled phones account for only 10% of the total, and although it will take time for this share to increase, it will happen.

Oleg Tinkov was asked the question – if telecom companies are entering the banking industry, why are banks not starting to offer telecom services? In order to create telecom operators, frequencies are required, and the battle for frequencies is so extensive that there is no place for banks. Attempts to create MVNOs are not progressing due to a lack of support from operators, as they do not need it.

Competition does not exist in the telecom sector or banking sector, and a lack of competition is the obstacle for partnership. If there is no competition, there is no partnership, according to Mr Tinkov.

As for expansion of telecoms into financials services, he thinks that while there are examples, it is mainly within large financial-industrial groups. Although he thinks it is unlikely to happen worldwide, it is possible in Russia, as the Big Three are controlled by oligarchs and this is an advantage. Because they are part of large financial-industrial groups, Mr Tinkov has no doubt that, besides MTS, MegaFon and VimpelCom will also create banks.

Jane Zavalishina claimed to have a skeptic view on NFC development for several reasons. First, the technology itself has existed for over 10 years and is rapidly becoming obsolete, with no sound arguments for its intensive implementation being seen. In Ms Zavalishina’s view, NFC is unlikely to become popular among handset producers in the near term, as they are currently concentrated on bringing smartphone prices down and NFC is a rather costly option. In addition, shopping culture in Russia implies much time being spent in lines, which minimizes the marginal value of saving seconds when paying through NFC, she believes. More importantly, she sees no future for an alliance between telecoms and finance due to limited trust from customers in telecoms, which she declares to be a key prerequisite for success in the field. Finally, Ms Zavalishina admits to seeing little effect from combining mobile and finance, as the sectors are different in nature, finance relating to service and telecoms being more about infrastructure.