Why should banks collaborate with the telecoms operators?

Banks are today facing increasing threats from criminals who are challenging the security of internet banking, the mainstream mechanism for managing personal financial services today. Global losses due to phishing are already US$2.8 billion. During the first half of 2006, losses in UK only were UK£23 million with the number of recorded incidents rising 16-fold to 5059. A recent Gartner study has shown that high-income earners are the preferred target for phishing scams. People earning more than US$100,000 have received 50 percent more phishing attacks than lower earners. The average loss per victim is US$1244, but for high-income adults the average loss was US$4362. Only half of the money lost is ever recovered. Banks are taking preventative measures by tightening security – for example browsers are now recognizing known phishing sites. None the less the volume of attacks is still expected to increase for at least the next two years.

But banks are fighting back. The solutions proposed so far have been separate tokens for end user authentication and transaction confirmation. There are many models of these available. Most of them use a credit card or similar chip based token, which is inserted in a reader with some processing capability, keyboard and a screen. For consumers this means a separate token is needed to bank online, as well as the hassle around using a card and a reader. The fact is that the mobile phone already residing in the consumer’s pocket has greater capabilities than these tokens. Integrating the authentication and transaction signing functionality there would make a lot of sense from the consumer’s perspective. It would also mean cost savings for banks if reasonable business models with operators can be agreed.

NFC and other emerging mobile payments

The newest trends in the mobile payments space are contactless payments via an embedded payment instrument integrated in the mobile phone; stored-value based person-to-person payments through mobile and separate mobile payment systems like PayPal mobile. There are already more than 40 mobile contactless payment trials going on in the world, and the number is expected to increase to 100 by the end of the year. There are already 13 million contactless credit cards and other forms of payment devices (for example key fobs or NFC phones), and 46,000 merchant terminals accepting these in the world.

Near field communications (NFC) is the new technology that enables applications stored on a secure element (SE) in the mobile phone to communicate with other NFC chips. This technology enables an enormous number of user-friendly services. Person-to-person payments and remittances are the newest services being today offered by mobile operators. Usually these have been implemented in format of stored value accounts.

It is often asked, whether the mobile is a trusted enough platform for financial transactions. Indeed, ensuring sufficient security is on the top of the agenda of the involved financial institutions. When the applications are based on a certified chip the platform security can be ensured. In fact, the mobile as a replica of your wallet can provide increased security compared to the traditional wallet. The leather one cannot be called up and turned off. Furthermore, if there is cash in the wallet when stolen, the cash is gone for sure. This is not necessarily the case with the mobile wallet; technology provides protection mechanisms to lock the wallet and the monetary instruments inside.

Creation of the new mobile financial services business ecosystem

Mobile could be a strategic channel for financial services, but current products and services, such as plastic cards or online banking, do not easily fit in the mobile. The major obstacles for banks interested in offering financial services through mobile are the lack of available hardware based storage for financial applications and lack of commercially feasible mass-market capable business models to offer the services to their customers.

Mobile financial services have been on the industry agenda for a long time, but this is the first time when all of the key actors are combining their efforts to reach the common target. All the previous proposals have been ‘biased’ towards a particular industry sector. Now the key stakeholders are working together in the Mobey Forum, which is working on creating suitable business ecosystem scenarios that would benefit all stakeholders.

The first deliverable of this project was published in September 2005. That was an analysis on security element (SE) alternatives available for banks. As outcome the six possible SE alternatives were short-listed to three, which are SIM, Secure Memory Card (SMC) and Embedded Chip.

The work continued by analysing the impact of the SE choice. The outcome was that collaboration across industry sectors is needed for the success. The key roles in the ecosystem are the SE issuer and platform manager, i.e. the party issuing the SE to end-users and managing the SE platform respectively. The three major Scenarios recognized were:

• Operator-driven scenario; mobile operator both as SE issuer and platform manager.
• Bank (or other service provider) driven; bank as SE issuer and platform manager.
• International scenario with an independent player as platform manager and any party as SE issuer.
  

Building the collaborative model

Since April 2006, Mobey Forum has analyzed alternative roles and key requirements of main stakeholders. The perspective of mobile operators, merchants, alternative platform managers, and the banks have been studied so far. The main learning has been that the key requirements are the same in all industry sectors: banks, operators and merchants all need to have a business case, and they all need to stay in control of their existing businesses also in the future. To continue, the transparency of the ecosystem needs to be in place for all; ie earnings in have to be in relation to the added value, not to critical control points.

The next step is to try to find a model which suits all players and fulfils at least the key requirements of all parties. From the macroeconomic perspective all industries will benefit from mobile financial services. Banks will have an opportunity to reduce cash transactions and increase electronic payments, and to cut costs in authentication token and card issuing in the future. Mobile operators and handset vendors will have a great opportunity to position the mobile handset in the middle of the consumers’ life. Operators will have solid new revenue streams from the new services enabled by payments. Merchants will have an opportunity to speed up the payments at point of sale; it has been calculated that payment with NFC is 12 seconds faster than a traditional plastic card payment.

Cross-industry collaboration is essential in the ecosystem project; none of the stakeholders can solve the problem by themselves. The key is to raise the understanding of each other’s requirements and needs. Mobey Forum believes that by co-operation across the stakeholder sectors flourishing mobile financial services market can be achieved.