The trickle-down structure of technology rollout across the world usually reads thus: something starts in Japan or Silicon Valley, blows minds, and makes its way through tech evangelists to affluent consumers. A cheaper version comes out for the less well off, and finally the technology penetrates into the third world, by which time something new is being launched at the start of the chain. Indeed, the pace of telecommunications was so slow in places like South East Asia and Africa that they gave up on a land-line network and went straight to mobile and fibre-optics.

Paradoxically though, it’s that very lack of a legacy telephone network, coupled with a similar lack of banking infrastructure, that has made developing nations the pioneers in mobile phone banking. As well as G-Cash in the Philippines, the most high-profile example of a successful mobile banking network in recent years has been M-PESA, a Kenyan service that has evolved out of a microfinancing tool developed by Vodafone. Two thirds of Kenyans “do not have bank accounts and never will have bank accounts”, according to Michael Joseph, CEO of M-PESA; the service is a way of transferring cash safely, often between a breadwinner working in the city to their family in the country. The money is sent via M-PESA and picked up in cash from one of their 14,000 agents across the country.

Moreover, “You can pay your electricity bill, your water bill, your council bill, you can buy airtime with it, you can pay salaries with it, you can make donations with it”, explains Joseph. Their recently launched “Diaspora” product allows transfer of money between Kenya and the UK, purely through mobile, and M-PESA’s parent company Safaricom even pays shareholders their dividends via the service. Research by thinktank CGAP noted that M-PESA often increased the income of rural people, and allowed greater financial independence for women whose husbands work in urban areas. Juniper Research has said that half a billion people will be using mobile phone banking services globally by 2014, with the majority of those in developing countries.

This kind of SMS banking has been offered, in a fairly uninterested way, by banks in the West for some time. But the experiments in the developing world have helped banks start to truly believe in the service, thanks to its ability to lower the cost of serving less well-off customers.

“If you’re less educated, don’t self-service, have few transactions, and less funds under management, you actually become unprofitable for a bank”, explains Serge Van Dam, head of marketing at M-Com, a leading provider of mobile phone banking services who recently added Microsoft as a technology partner. “You’re using expensive channels, you’re going to the branch. But in Kenya, a bank can make money from someone who’s got 100 bucks in deposits. So there’s a lot to be learned, not just in technology, but actually how you manage customers in a way that doesn’t erode your margins. The typical ratio in a Western bank is that a quarter of the customers aren’t profitable, so there’s a massive incentive to learn off these guys”.

The crucial factor is that while not everyone has the internet, everyone has a mobile phone which at least has SMS, which can first of all be used for a wide variety of banking alerts. And as well as allowing banking customers to do tasks that would otherwise involve a call or visit to the bank, mobile alerts provide banks with more directed marketing opportunities. “The fundamental thing that everyone went wrong on was that they assumed that the mobile phone was going to be another convenient, but customer-reactive channel. What’s fundamentally different is that the mobile phone can be a customer-proactive channel”, says Joe Salesky, founder of Clairmail, another major player in mobile banking services – the mobile phone allows the customer to demand the services, rather than have the bank dump services onto them.

New mobile banking services in the developed world include alerts that the customer chooses themselves, telling them when, for instance, they’ve spent over a certain amount using their credit card. These alerts both help the customer feel more secure, knowing that if their phone alerts them to a purchase that they haven’t made, they can deal with the fraud immediately; they also help keep any rampant sprees in check. The idea is that as the customer comes to see their bank as a benevolent sage, the marketers can move in for the kill.

Banks can direct relevant products (loans, credit cards) towards their receptive and softened-up customers within the alerts, which is far more efficient and empathetic than mass media advertising. The thing for banks to remember is not to spam their mobile users and erode the relationship; as long as they embed advertising in information that the customer has actually asked for, they’ll forge a uniquely personal rapport.

The next level of phone banking is actual payments – payment of bills or payments to another person. These can be remitted over SMS, but for which the attractive interfaces and sophisticated tech of smartphones are even better suited. And these payments involve processes that actually become more secure on a mobile phone.

As well as allowing greater fraud awareness, mobile banking uses more secure protocols, but without the cumbersome business of usernames and passwords, as Salesky explains. “You just text a ‘b’ to your bank, and your balances are going to come back to your phone. Is that secure? Absolutely – I’m doing the same thing as when I send you an alert, I’m sending data to a known destination, a trusted path. I didn’t put my username and password at risk.

“But if I want to do a transfer or a payment, I need to escalate authentication – the fact that it’s coming from that device isn’t enough. I’m going to send in the letter “g” for go – that basically tells the server that I want to initiate a session, and what the server does is send me a single use, outbound token, that is a proxy for username. Then I get presented with an SSL session when I’m going to key in my numeric password. I’m now in a session that’s four times stronger than a website session, because it was started with a known destination. It’s hopping protocols, using one for session request, and another for session start, and interrogating the user with something they know”.

Nevertheless, there are concerns that with the growing popularity of the medium, more and more breaches of security will be attempted. The most recent example is a “worm” that targets customers of Dutch bank ING who use ‘jailbroken’ iPhones, hacked to bypass Apple’s proprietary software, by sending them to an identical but fraudulent banking homepage. It’s more damning of the security of a hacked iPhone than of the bank themselves, but it shows that mobile banking is a prime target. “It’s all about critical mass – hackers aren’t going to get into it until such a time as there’s enough gullible people using it that they can try and target”, says Serge Van Dam. “Lots of financial institutions will be exposed if they haven’t taken the appropriate measures”.

And despite all the advantages, banks are still dragging their feet with mobile banking, especially in terms of selling the idea to their customers. In the UK, mobile phone banking is slowly growing, but still only five percent of customers use it; in the US it’s more like 10 percent, but the number of customers getting banking alerts has plateaued after four years of growth. “We saw too often that banks were fumbling the message. In some cases they’d invested all this money on mobile banking and you couldn’t search on their website to find information about mobile banking”, says Mark Schwanhausser, mobile analyst at Javelin Strategy. “And too often banks were ignoring consumer fears about it.” Van Dam agrees: “Your average banker, middle manager, they’re 45 years old, they earn US $200,000 a year, they have no empathy for someone who lives week by week and doesn’t sit in front of a computer all day. They just sit there and say: why don’t these people do online banking?”

Some offerings are simply dismal. Take the iPhone app for US bank Chase. “Look at the feedback that’s being given – it’s appalling” says Van Dam. “They have no tools to help customers with the app. They say you need to help yourself, or sorry, we can’t help you. That’s entirely unacceptable in the world of financial transactions”. The recently launched Natwest app hasn’t fared much better, with App Store reviews slating its speed, functionality and the cumbersome security protocols.

In Africa meanwhile, the success of M-PESA is so far relatively isolated – a report from Oxford Policy Management outlines the difficulties and measures that need to be taken before the likes of Angola and Malawi can start to offer phone banking even in their own countries, let alone across borders. Cross-border banking could be hugely useful to the continent, where labourers and refugees often move back and forth across different countries, yet for countries that don’t even have reliable telecommunications, the reality is still a long way off.

Because of the massive setup costs of a full mobile banking infrastructure, most banks are turning to third-party providers of these services; and with the industry taking off as it is, it’s one of the major technology growth areas. “In Atlanta, which is the Silicon Valley of electronic banking technology, there’s probably a new startup in mobile banking payments once a week – everybody wants to capitalise on this space”, says Van Dam. That said, the market is already consolidating, with mergers between some of the bigger players paring the market down to a handful of heavyweights. “Providing bank infrastructure technology is not something I would invite many people to go and cut their teeth on”, says Joe Salesky. “It’s an area of significant requirements – if you don’t have US $30m, you probably can’t get there.” Van Dam adds: “Mobile is going to end up with five to ten real vendors within three years”.

The inability by the banks to see the potential in mobile has meanwhile led to another business opportunity for those who do see it. “The banks don’t know how to use it for Gen Y”, Salesky says. “They have some expertise, but there’s others that really help people understand what gets people to adopt”. Cue Clairmail providing analytics and adoption services alongside its actual product.

Despite the ongoing hiccups, the overwhelming financial incentives for banks to roll out these networks means that we’ll start to see more and more features embedded in them. As well as saving banks money by making their customers do their banking for them, and providing cheaper and more effective advertising, services like payroll accounts and international payments will start to be channelled through phones. “Everybody’s missed the network effect”, says Salesky. “If you’re offloading funds at a Western Union, they just go to cash. But if you have the ability to have micro-accounts that are efficiently managed, the person doesn’t have the security risk of going and picking up cash, and it actually fuels another banking relationship”. The customer is more secure, the bank takes a fee – everybody wins.

The ‘Swiss Army Knife’ nature of modern smartphones has prompted innovative banks to respond with intuitive tools that make the most of a phone’s capabilities. Geo-location, by guiding the user to the nearest free ATM or bank branch, was the first step; now they’re using inbuilt phone cameras for what’s known as Remote Deposit Capture – taking a photo of a cheque and sending it to the bank to be cashed. Clairmail use the “push” technology in smartphones that automatically refreshes your email inbox when new mail comes in, to create a dynamic mobile banking icon that flashes when new alerts come through, meaning that you don’t have to needlessly check up on your banking.

Mobile will also become another type of acceptance, like a debit card, either through Near Field Communication (the technology Oyster cards use) or having your various accounts stored within the phone. Mark Schwanhausser paints the future: “What we see coming is the mobile wallet – this thing you carry is going to contain the ability to know your bank accounts, your credit cards, offers from merchants. It’ll enable you, when you walk into a store, to find out what coupons are available, what specials are available, to speed the process up for tracking your mileage and your points – wouldn’t it be nice if when you’re stood at the checkout, your phone says if you use this card rather than that card, you’re going to have a bigger discount.”

Back in Kenya, Michael Joseph says that the technology will continue to further social programs in the country. “We’re looking at NGOs now funding or providing money to people who are in need via M-PESA, and at how the government can provide benefits to children and old people with it”.

It’s taken some time for the penny to drop, but banks are finally realising that the one piece of technology that everyone owns worldwide is the one that most people are likely to bank with. “There’s a lot of transformational consumer habits that are happening because of mobile devices”, says Serge Van Dam. “And banks in order to stay relevant need to meet consumers where their habits are.”

Art by Alan Clarke