Twelve years ago the retail banking industry thought the end of 'bricks-and-mortar banking'
era was close, with the introduction of mainstream internet banking. However, this did not
materialise as banks in their quest to differentiate, realised the value of the branch in
the selling process and its necessity for customer acquisition and authentication.

The internet became a convenience channel and every customer with access to a PC expected
their bank to provide an internet enabled banking service. In addition, without a clear
integrated multi-channel approach, banks have in general not realised the expected cost
savings and revenue opportunities of introducing an internet channel.


African revolution
In certain cases in the developing world, beyond South Africa, we have seen a revolution in
the payment and remittances process led by MNOs (Mobile Network Operators). Kenya is a great
example where Safaricom, a MNO, with its mobile banking offering M-PESA have gained more
than 78% of the mobile phone market. In countries like Kenya, where there is a high
population of unbanked and a high penetration of mobile devices, we can expect this trend to
continue if the relevant banking or communications regulator does not check it.

South Africa however is different. It has a relatively 'mature' regulated banking industry
and, thanks to the Mzansi product, has seen a 17% growth in the banked population since the
launch of the account. FinMark Trust believes the Mzansi product accounted for just under
half of that growth.

In comparison to other emerging markets, South Africa has a relatively high percentage of
banked population around 46% compared to Kenya's 15% banked population prior to the arrival
of M-PESA. So it is highly unlikely that MNO led mobile banking play will dominate in South
Africa.

Mobile banking could have rapid adoption
However, with more than 60% of the adult population in South Africa owning a cellphone, the
highest on the continent, the stage is set for the rapid adoption of mobile banking.

In addition to the existing economic challenges, SA banks face significant pressure in the
form of the competition commission, government access targets and more demanding consumer
requirements. The winners, in the fight for market share, will be those banks with high
customer loyalty delivered through greater customer centricity, convenience and low cost
processing.

Mobile banking enables all three and we are already seeing extensive positioning in our
market with some innovative products such as FNB's Send Money and Standard Bank's Mimoney.

Mimoney enables payments between domestic users through SMS based vouchers with PINS that
can be redeemed at large retail stores. Not only is this type of innovation convenient but
it demonstrates how mobile can simplify a bank's distribution network - money is being
transferred between clients without the need of an ATM or branch.

The scramble for banks to partner with retailers, government institutions, gyms and other
'go to' locations, to provide cash out points has already begun.

Time for small innovative banks
This is good news for smaller innovative banks wanting to take on the mass market and take
market share from Tier 1 Banks. It is a challenge for the Tier 1 banks to defend with huge
investments in ATM and branch networks. Approximately 60% of a bank's cost is typically in
its distribution network.

Small innovative banks, using existing mobile technology, leveraging agents and through
partnerships in other industries, can bring low cost, convenient transactional banking to
consumers country wide thereby challenging the previous exclusive domain of the Tier 1
Banks.

The 'attack strategy' will be to acquire customer transactional business through a
combination of convenience and a low cost play - ownership of the transactional account is a
prerequisite for understanding a customer's behaviour and for executing a successful
customer centric strategy. A successfully executed customer centric strategy increases
loyalty (stickiness), decreases customer churn, increases the number of products sold to
clients and increases profitability and Return on Equity.

Evolution of mobile
Mobile will evolve quickly from P2P payments, wallet, bill payments and general banking to
more complex banking processes such as Account Origination (identification and
authentication) and finally the holy grail of them all true M-commerce - point of sale
transactions - in 2006 there were 160 billion POS transactions globally.

Account Origination identification and authentication processes are dependent on mobile
devices with camera and biometric capabilities, with implementation by roving sales and
service agents. It will take time before these devices become affordable for the majority of
the population. However, when they do become available, they will transform the mobile
handset into a sophisticated banking sales and service channel that will challenge the
prevalence of 'bricks and mortar' banking.

The success of M-PESA in Kenya has shown that in the mobile banking age, speed is critical
and a well thought through offering is vital to ensure market success. For banks to execute
an effective mobile banking strategy they will need a clear vision and an operating model
that enables low cost processing, and for more sophisticated customers a customer centric
approach to banking that is seamlessly integrated to the bank's other channels.
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