The EC has given the go-ahead for non-banks to issue electronic
money payments. Nick Huber reports
A European Commission directive allowing mobile operators to become
virtual banks is set to throw the financial services market wide
open.
You could forgive IT managers in the UK banking sector for not
having an intimate knowledge of EC directive 2000/46. But closer
examination reveals far-reaching business and IT implications for
high-street banks.
The directive will allow non-banks to become electronic money
institutions from as early as summer 2002. They will be able to
issue payments in electronic money - in effect, telecoms providers
could become virtual banks.
The directive is technology-neutral and is not specifically aimed
at benefiting any one industry. However, the smart money is betting
that telecoms companies will take advantage of the directive and
move into the virtual payments area.
Many of the telecoms providers are already well versed in providing
mobile commerce services based on micro payments.
Last week, for example, Vodafone signed an agreement worth more
than £6m with e-commerce supplier Brokat Technologies to provide
its customers with secure mobile payment capabilities. The telecoms
giants also have the advantage of sprawling and sophisticated
networks and IT systems which could easily support extensive
payment services.
Both Orange and Vodafone have been tipped as the companies most
likely to offer virtual banking services. Both have refused to
comment on speculation that they will go head-to-head with the
traditional banks. A Vodafone spokeswoman said that it would be
premature to talk about the directive.
Not surprisingly, the banks have already played down the threat
from the telecoms providers, arguing that there is only a limited
market for pure virtual banking.
A spokeswoman for Barclays said, "The banking industry has opened
up quite considerably over the past few years with, for example,
supermarkets providing services. This is another area of industry
that can come into banking.
"But at Barclays we have discovered that customers like the
multi-channel approach, such as mobile phones, face-to-face and
Internet banking," she added.
"Two million of our customers use our online banking but most want
to be able to pop into their local branch on a Saturday when out
shopping. The pure play virtual banks have only had limited
success."
The argument is a solid one, but the banks should not be too
complacent, according to industry analysts.
On the plus side for the telecoms providers is their wealth of
experience in billing customers as well as having the systems to
support virtual banking. And mobile operators also have another
advantage in their vast networks.
"It's reasonably easy for telecoms firms to do the transaction [for
virtual banking]," said Graham Taylor, vice-president at IT analyst
Gartner.
"They would have to present different types of transactions and
billing systems for different products, but I don't imagine that's
a problem."
The IT challenge for the telecoms giants is likely to be in taking
on new roles and risks if they move into virtual banking.
These potentially more difficult areas include dealing with
disputes between the customer and the merchant about bills,
handling high-value transactions and integrating their IT systems
with those of merchants.
Telecoms companies could be ideally suited to handle only low-value
transactions less than $10 (£6) for pre-pay services, Taylor said.
But he added that credit card companies, such as Visa, may not
think payments below this level are worthwhile.
"One possibility is that telecoms companies could become virtual
banks but only offer pre-pay services for cashless facilities,"
Taylor said. "For example, you could buy a coffee and a newspaper
by zapping money from a phone vendor. There might be a limit on
what the telecoms companies might feel they are able to
handle."
Taylor pointed to the experience of US telecoms company AT&T
which started to build up a credit card business about 10 years ago
only to pull out of the market later because of the level of bad
debts accrued by the business. Much also depends on whether the
telecoms firms are content to use the Visa and Mastercard credit
card networks for routing the transactions, or whether they decide
to go it alone and use their own networks.
Whatever the telecoms leaders decide to do they will have to pay
close attention to security to gain the trust of the public and
business.
However, there is also another scenario, according to industry
observers. This would see telecoms firms working in partnership
with the banks by supplying micro payments in the front end of the
new virtual banks. Under this arrangement, banks could use their
vast back-office systems for processing transactions and
transferring money from the back office to the Web.
The EC directive is in no danger of sidelining UK banks but it does
look set to shake up the technology underlying the industry. With
their networks and billing systems, the main telecoms companies are
well placed to become virtual banks, particularly if they offer
micro-payment services.
Although the telecoms multinationals have refused to comment on the
potential in virtual payment services, the banking industry cannot
afford to ignore the threat from the telecoms sector. IT managers
need to start planning whether to work with or against the new kids
on the block.
EC says: "Show me the e-money"
- All member states should bring laws into force to allow
electronic money institutions to operate by May 2002
- Electronic money can be considered a surrogate for coins and
bank notes. It can be stored on an electronic device such as a chip
card or computer memory. However, the electronic money is viewed as
different to the deposit-taking activities of banks generally
intended for payments of limited amounts
- A single licence will be recognised throughout the European
Union. The directive introduces a "technology neutral" framework
for electronic money. A separate supervisory regime for electronic
money will be introduced.
nick.huber@rbi.co.uk