Brett King

Can you do banking without a banking license?

In Bank Innovation, Customer Experience, Future of Banking, Retail Banking, Strategy on June 4, 2012 at 08:59

Clearly, to be a deposit taking bank and offer products like Mortgages, loans, savings accounts and so forth, it would be easier to have a bank charter. However, today the lines between banks and non-banks offering financial services is blurring faster than speculative investors dumping shares for Facebook.

There are many types of ‘banks’ or organizations that use the word ‘bank’ to describe their business activities such as Photo Banks, Seed banks, Sperm Bank, DNA bank, Blood Bank. There are also organizations that use the word bank in their name for other reasons like the “Bank Restaurant” in Minneapolis, JoS. A. Bank Clothiers and others. JoS. A. Bank offers a Pre-paid Gift Card program for individuals and corporates that has the name “Bank” in it’s offering, but isn’t regulated by industry. Bank Freedom, from Irvine California, offers a pre-paid Mastercard Debit Card but isn’t regulated as a bank.

Despite some claims to the contrary, it isn’t actually illegal to call yourself a ‘bank’ or have ‘bank’ in a tradename. In some states in the US, you might have difficulty incorporating yourself as a “Bank” if you have bank in the name of your company and you’re intending on offering financial services. But then again CIticorp, JP Morgan Chase, HSBC and others don’t actually have “Bank” in their holding company name. You don’t need the name ‘bank’ in your name to be licensed as a bank, and having the name ‘bank’ doesn’t force you to be a chartered bank either.

Then there are the likes of iTunes, PayPal, Dwolla, Venmo, Walmart, Oyster card in the UK, Octopus in Hong Kong, and the myriad of telecoms companys who offer pre-paid contracts, who regularly take deposits without the requirement of a banking license. In some markets, this has resulted in a subsidiary ‘e-Money’ or basic deposit taking licensing structure, but these organizations do not have the restrictions, regulations or requirements faced by a chartered bank. For more than 7 million Americans, 11 million Chinese and many others, their basic day-to-day method of payment in the retail environment is a pre-paid Debit Card (sometimes called a “general purpose reloadable” card). The pre-paid market is expect to reach an incredible $791 billion in the US alone by 2014.

When a bank account is not offered by a bank
What’s the difference between a prep-paid debit card account in the US and a demand deposit account from a chartered bank? Both can be used online commerce and at the point-of-sale. Both can be used to withdraw cash from an ATM machine. Both allow cash deposits to be made at physical locations. Both can receive direct deposit payments like a salary payment from your employer. Often pre-paid debit cards can offer interest on savings also. So what can’t a pre-paid card do that a typical deposit account can?

Most prepaid cards don’t allow you to write cheques (or checks), deposit more than a few times a month, keep a balance in excess of $10,000, make transfers/payments that exceed $5,000 per day, and/or going into the red with an overdraft facility.

For many customers who use pre-paid debit cards, these are not restrictions at all – and thus the card represents an alternative to a typical bank account from a chartered bank. Behind the program managers of pre-paid cards there is an issuing bank with an FDIC license in the US, but the program manager is not regulated as a bank. That nuance may be lost on some, but for the customer they are generally completely unaware that there is a “bank” behind the card – they simply see the program manager as the ‘bank’ or the card as a ‘bank account’ based on the utility provided by the product.

Bank Freedom offers an alternative to a checking account, although not technically a bank

Today PayPal, Dwolla, Venmo and others offer the ability to transfer money via P2P technologies that mimic the likes of the ACH and Giro networks. I think it is fair to say that no one considers these organizations to be ‘banks’, but until recently (certainly prior to the Internet) we would have considered the activity of these businesses to be “banking”. Now you could argue that PayPal is more like a WesternUnion than a Bank of America, but the point is that these organizations are increasingly attacking traditional ‘bank’ functionality.

Then you have P2P lenders who in the US have offered more than $1 billion in loans since 2006, despite not having banking licenses.

If only ‘banks’ did banking…
Today banking is not restricted to those with banking licenses. Banks no longer have an exclusive on the business of banking. If they did PayPal, iTunes, Dwolla, and the myriad of prepaid debit cards would be illegal. They are not. If they did, you couldn’t deposit money on your prepaid telephone contract without visiting a bank branch. If they did, you couldn’t send money to a friend without a bank BSB, sort code or routing number.

The assumption that only banks can do banking is a dangerous one, why? Because often, like any other industry suffering from competitive disruption, the only thing that forces positive change on an industry mired in regulation and tradition are competitive forces. Sometimes those forces result in the complete disruption of the industry (see Telegraph versus Telecoms), other times it results in fragmentation.

Are there banks who don’t have banking licenses? There are hundreds of organizations today that are doing banking activities that don’t have bank charters or licenses. Can they call themselves a bank? Some do, but they obviously don’t need to in order to offer banking-type products and services, and those that do generally have a regulated bank charter behind them through a partner. Like Post Offices around the world that offer a place to pay your bills or deposit money on behalf of a regulated bank, this activity is not illegal, nor does it require regulation. Why? Because the partner bank who has a charter is responsible for ensuring their agents and partners stay compliant within the legal framework

The activity of ‘banking’ is going to become a lot less defined, owned or identifiable in the next few years as many non-banks start infringing on the traditional activities of banking, and as banks are forced to collaborate more and more to get their products and services into the hands of consumers. While we still have banks doing the heavy lifting, much of the basic day-to-day activities of banking will become purely functional and will be measured by consumers on the utility of that functionality, rather than the underlying regulation of the company or institution that provides it. Thus, customers won’t really care if a bank is at the front end or what it’s called; just that they can get access to banking safely, conveniently and securely.

What will regulators have to say about this? Well that’s an entirely different matter.

Mobile Payments have been Mainstream for a while now…

In Mobile Banking, Mobile Payments, Technology Innovation on May 18, 2012 at 01:31

If you believe the pundits, mobile payments are years away from being mainstream. But that’s not at all an accurate assessment of the state of the industry.

Firstly, a mobile payment can be many things. There are seven primary models for mobile-enabled payments:

  1. SMS based transactional payments
  2. In-App Payments
  3. Direct Mobile Billing
  4. Mobile commerce and/or web payments
  5. Peer-to-Peer payments
  6. Virtual currency payments
  7. Contactless payments

As of today, it appears that around half of the developed world has made a mobile payment of some sort in the last 12 months according to this criteria – at a minimum an in-App purchase made from a mobile or iPad would qualify. Put that in perspective, more people made a mobile payment in 2011 than wrote a cheque in developed economies like the US, UK and Australia!

Would you call cheques mainstream? Of course. So how can we not call mobile payments mainstream already?

A recent study from ACI Worldwide and Aite Group – where smartphone usage in 14 countries was put under a microscope – identified a group of consumers where mobile payments behavior is definitely the norm. This group was classified as “Smartphonatics”.

According to this research, 80 percent of Smartphonatics have used their smartphones for mobile banking, just one-third of non-Smartphonatics report doing so. 70 percent of Smartphonatics have used their smartphones for mobile payments; under 25 percent of non-Smartphonatics have. Smartphonatics are generally younger consumers also: 36 percent of Gen Yers (between the ages of 20 and 31) are Smartphonatics as are nearly one-third of Gen Xers (ages 32-46). The number drops significantly among both Baby Boomers (ages 47-65) at 18 percent and Seniors (66+) at six percent

“Smartphonatics enthusiastically use their smartphones when they shop for products and services as well as when they interact with their banks. It is quite clear they are an emerging consumer force. Smartphonatics are driving the adoption of mobile banking and payments and will be an agent for change. Financial and retail institutions will need to adapt or risk being left behind.”
Ron Shevlin, Senior Analyst, Aite Group

The ACI/Aite research indicated that globally around 1 in 4 consumers (25 percent) count as Smartphonatics, with higher numbers found in India and China than in the United States and Europe. This makes sense, because in markets like India and China, mobile payments are competiting head to head in the growth of payments alternatives like cards, which are still quite new for most of the population.

In Asia, however, mobile payments have been mainstream for the best part of a decade. Japan sets the benchmark for m-payments with 47 million Japanese adopting tap-and-go phones. In China alone, there will be 169 million users of tap-and-go payments in 2013. Between 500 million and 1 billion people will access financial services by mobile by 2015, depending on various estimates. The mobile financial services market will be dominated by Asia, driven by mobile operator-led initiatives in developing nations to bank the unbanked. Remittance and transfers by mobile is growing three times faster than m-banking. Mobile remittances are a form of mobile payments, essentially mobile-led P2P.

A study released in May, 2012 from MasterCard found that although the United States is ready for mobile payments, 9 of the 10 countries most prepared for the technology are in Africa, the Middle East and Asia. Ironic isn’t it that in Kenya 50 percent of the population sends money by SMS regularly, but in the US most consumers still write cheques!

Asia leading the way

In South Korea, there are more than 60 million contactless phones in use. Most use the Felica standard, but already more than 5 million NFC-enabled phones have been purchased in South Korea by eager consumers.

In 2012 almost 1/3rd of South Koreans bought music, videos, ring tones, online game subscriptions and articles from newspaper archives and other online items and charged them to their mobile phone bills, regularly evert month. This amounts to total mobile transaction revenues of 1.7 trillion won, or approximately US$1.4 billion, in 2008 alone. In 2012, there will be 21 Million Koreans watching TV via Mobile Digital Multimedia Broadcasting (or T-DMB as it is known). 40% of cellphones sold in South Korea have the capability for watching free-to-air TV in this manner.

T-Money™, electronic cash stored and refilled in SIM cards and phone chips, can be used to ride the subway and bus or buy snacks from a 7-Eleven store, vending machines or cafeterias at school. Instead of giving their children cash, Korean parents now transfer money to their kids’ T-money account.

“If I leave my wallet at home, I may not notice it for the whole day. But if I lose my cellphone, my life will start stumbling right there in the subway.”-21 year-old Kim Hee-young, Sookmyung Women’s University
NYTimes Article May 2009[1]

e-Money and mobile payments started in Japan in 1999 and usage is growing exponentially. e-Money and mobile payments already today are an important and big part of Japan’s economy. Japan leads the way in mobile commerce today with 75 percent of the population on a ‘smartphone’ and more than 40 percent of Internet users having made a purchase on their phone.

In 2003 SONY’s FeLiCa IC semiconductor chips were combined with mobile phones to introduce the first “wallet phones” (“Osaifu keitai” – おサイフケータイ). Today the majority of mobile phones in Japan are wallet phones.

Mobile Payments are not an emerging technology

The two parallel systems in Japan today are Edy and MobileSUICA. Edy stands for Euro, Dollar, Yen, expressing the hope for global success ― Intel Capital believes in this success and has invested in the company that runs Edy: BitWallet (backed by SONY). MobileSuica (also known as Felica) is a service for Osaifu Keitai mobile phones, first launched on 28 January 2006 by NTTDoCoMo and also offered by SoftBankMobile and Willcom. Initially used for commuters travelling on Japanese rail networks, today mobile ticketing payments are used by more than 90 percent of Japanese commuters.

Electronic money became popularised around 2007 in Japan, when two major retailers, Aeon and Seven & I, started their own versions of electronic money. The transactions by Aeon and Seven & I account for roughly 50% of all transactions in Japan still today.

Just to highlight how huge the e-money market is in Japan: Transaction volumes at Edy, the country’s biggest prepaid e-money issuer, nearly doubled in 2010 to 1.4 trillion yen (US $15 billion). To put that in perspective, PayPal did $4Bn in Mobile Payments in 2011, well behind just this one mobile payments scheme in Japan alone.

Between Edy and Suica, more than 84 million mobile contactless payments transactions take place every month[2], through around 450,000 merchants or outlets. Between retailers AEON, PASMO and NANACO (Seven & I) another 120 million mobile contactless payments are made every month, at another 300,000 merchants.

Yep, Mobile Payments are not an emerging trend or something to worry about in the future – they are mainstream and they are now.

[1] “In South Korea, All of Life is Mobile”, NYTimes May 2009,

[2] Source: