Putting Mobile Banking In Consumer Hands — The Challenges And Opportunities

Brandon Workman | March 27, 2013

2 Copyright © 2012, Business Insider, Inc. All rights reserved.

Putting Mobile Banking In Consumer Hands — The Challenges And Opportunities

Brandon Workman | March 27, 2013

Over the years, retail banks have innovated to make personal banking

more convenient and consumer-friendly. They've built sprawling branch

networks, introduced credit cards, and developed automatic teller

machines.

In its latest evolution, banking is going mobile. With smartphones and

tablets increasingly at the center of financial decisions — especially those

of younger consumers — banks have to get their mobile strategies right.

If they don't, they risk losing business to more mobile-savvy competitors,

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as well as tech companies like PayPal, that are developing their own

payment and personal finance solutions.

In this report, we look at the competition to develop the best mobile

banking tools, and also touch on how this race affects the closely-related

business in mobile payments.

Adoption barriers: On the consumer side, there is still some

resistance to mobile banking, reflected in relatively low adoption

rates.

The platforms: We also take a peek at the technologies that

power mobile banking on the back-end, and the dealmaking that

has surrounded these platforms in recent months.

The app race: Banks are scrambling to differentiate their

mobile services in order to acquire new customers and prevent

customer loss. We'll look at a few banking app pioneers, and

explore the newest cutting-edge features.

A mobile-first bank?: If the legacy banks don't succeed in

redefining their services for the mobile age, they risk losing out to

upstarts like Simple with innovative mobile-first banking

formulas.

Bottom-up: Unlike past consumer finance technologies first

adopted by the wealthy in developed countries (e.g., credit cards),

mobile banking has caught on in poorer countries, and could

expand bank and credit access worldwide.

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Note: we employ a fairly wide definition of mobile banking, in part to

reflect the fact that consumer banks already serve as a hub of personal

finance.

Today, a bank account might be tied to any number of services:

investments, loans, retirement planning, credit card accounts, etcetera.

In the future, these services will be folded into mobile offerings.

Click here for the charts and data associated with this report in Excel→

Click here to read our February 2013 report on mobile payments→

Mobile Banking's Growth Spurt

Let's start by looking at the overall growth in mobile banking, both on

the consumer and bank side.

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Consumers: Globally, the mobile banking user base will grow at

18 percent annually to over 1 billion users by 2017, according to

Juniper Research. It's estimated that 590 million consumers will

use mobile banking by year-end 2013.

o East Asian markets have the highest rates of consumer

adoption of mobile banking services. (See chart, above.)

o In the U.S., younger consumers have taken to mobile

banking in proportionally greater numbers than average.

o While millions of consumers have taken up mobile

banking, adoption rates are still relatively low compared

to online banking. See section below, "Adoption Lag," for

more detail.

Banks: Studies consistently show that around 80 percent of all

U.S. banks already offer mobile banking services.

o A mid-2012 survey of U.S. bank executives found that 77

percent of the institutions surveyed offered either a

mobile app or a mobile optimized website to their

customers.

o At FindABetterBank.com, a bank comparison site for U.S.

consumers, 82 percent of banks as of February 2013

offered mobile banking (compared to 30 percent in late

2010).

As mobile banking takes off, a number of vendors have filled the need for

technologies to power the back-end of these services at the banks.

Among these providers is U.K.-based Monitise, which powers some $25

billion in annual mobile transactions at over 300 banks. Another player

is U.S.-based mFoundry, a mobile banking and payments specialist, with

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900 customer banks. These two players have been at the center of a

flurry of partnerships and deals lately. (See timeline, below.)

Adoption Lag

While mobile banking as a whole has seen tremendous growth, consumer

adoption rates are still relatively low.

A November 2012 panel study from OnDevice Research found that only

22 percent of smartphone owners had used mobile banking or bill

payment for one hour or more in the previous week.

A Javelin survey completed in mid- to late-2012 found that 65 percent of

U.S. mobile phone owners had never used mobile banking.

(In contrast, more than 60 percent of Internet-using adults are already

banking online.)

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If mobile banking offerings have evolved to the point where customers

rarely need to visit a desktop website or local branch anymore, why are

adoption rates no higher than the 20 or 30 percent range?

In our view, there are five main factors currently limiting adoption:

According to the Federal Reserve survey from March 2012, 48

percent of respondents not using mobile banking cited security as

a reason.

While 88 percent of American adults own a mobile phone,

only 55 percent of these are smartphones, which are required for

all but the most basic SMS-based mobile banking services.

Smaller banks have been slower to embrace mobile banking. In

the U.S., only 37 percent of community banks offer mobile

banking, according to a late 2012 survey from the Independent

Community Bankers Of America.

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Banking giants such as Bank of America and JPMorgan

Chase have cut jobs, outsourced customer service to offshore

centers, and announced branch closings. Consumers unfamiliar

with mobile banking may have a negative perception of it as just

another way to dilute the quality of customer service while saving

the banks money.

A study from Fiserv, a vendor of financial services technologies,

implies that banks should be far more aggressive in terms

of promoting their mobile banking solutions. According to Fiserv,

banks that have pushed their mobile banking apps with more

marketing have seen double the adoption rates of those that

haven't.

In terms of security, we believe the fears are overblown, and that

consumers will get over them with time.

According to Dan Wiegand, senior analyst with Corporate Insight,

mobile security procedures are similar to those employed for online

banking, with equivalent encryption standards and authentication

protocols.

Richard Johnson, group strategy director at Monitise, has gone as far as

to claim that the “mobile phone is the most secure way you can touch

your money, as long as the service is built properly.”

The transition from e-commerce to mobile commerce offers an example

of how consumer security fears can fade with time. In the early days of

mobile commerce, many consumers resisted completing transactions on

apps, but as awareness spread of the convenience without much news of

security breaches, the consumers rushed in.

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Apps: Remote Deposits And Beyond

In the highly competitive retail banking sector, any service or feature that

helps a bank differentiate can lead to a greater market share, larger

deposit base, and an edge on the competition. That's why banks have

begun to invest heavily to integrate the latest and greatest features into

their smartphone apps and mobile sites.

Meanwhile, smartphone apps have become the principal channel for

consumers who have adopted mobile banking, ahead of mobile websites,

and SMS. (See chart, below.)

While basic functions like checking account balances and transactions

remain the most-used features, more sophisticated activities like

managing investments are beginning to gain acceptance among

consumers.

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On the whole, consumers express high levels of satisfaction with these

services. In a Corporate Insight bank customer survey released in late

2012, 95 percent of mobile banking users rated their experience as

satisfactory or better.

Meanwhile, consumers are increasingly keen to latch onto the most

convenient and flexible mobile banking solutions. As that happens, apps

— especially those sporting specific features like remote deposit capture

— can play a role in bank customer acquisition.

According to AlixPartners, 39 percent of consumers said they

were likely to switch banks on the basis of mobile banking, and

within this group 65 percent pointed to the availability of remote

deposit capture as the main factor.

The same survey found that among mobile banking users who

had switched banks in the past year, 32 percent chose mobile

banking as a bank's most important attribute, putting it ahead of

other traits like fee levels and branch convenience.

Bank comparison site FindABetterBank says that the percentage

of bank switchers saying mobile banking is a must-have

feature has increased from 11.2 percent in the third quarter of

2010, to 18.3 percent in early 2013.

The rise of remote deposit capture — pioneered in 2009, by USAA —

illustrates how a new feature can quickly begin to alter the competitive

landscape. By late 2012, 75 percent of the large banks tracked by

Corporate Insight had adopted RDC.

However, it's clear that consumer adoption of the more advanced mobile

banking services like RDC has occurred more slowly than the fast pace of

banks' RDC rollouts might suggest. (See chart, below.)

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That's why SMS still has a place in the mobile banking menu, even in

developed economies — because it is quite able to provide basic functions

that still get the heaviest use: balance inquiries and payment due alerts,

for example.

(In emerging markets, SMS plays a more dynamic role, powering all

aspects of mobile banking and payments, since feature phones are still

prevalent and traditional banking infrastructure was never built out.)

We believe the mobile banking race has only just gotten started, and that

the real prize will come as more holistic all-in-one solutions are

developed with the mobile consumer in mind. These are examples of the

more advanced features that are beginning to emerge:

Remote bill payment, or paying bills with a few clicks by taking a

photo of them with a mobile app.

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Integration of capabilities such as all-in-one investment

management.

A payments hub that includes mobile payments and peer-to-peer

payments.

Real-time financial planning and notifications.

Personalized, data-driven customer service and financial advice.

Tablet-friendly banking apps and sites with richer feature sets,

such as the iPad app recently announced by the Alabama-based

Worthington Federal Bank. Chart and data-heavy research on

stocks, bonds and mutual funds naturally lends itself to tablets'

larger screen. (See chart, below.)

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The banks that establish a reputation for mobile innovation now may

benefit in the future from greater market share and more engaged — and

high-margin — customers.

Mobile Banking's Cloudy Future

The consumer banking space in most developed economies tends to be

dominated by just a handful of big players: In the U.S., it's Bank of

America, JP Morgan Chase, Citibank, and Wells Fargo.

These legacy retail banks are threatened on the one end by mobile

payments companies with popular apps, PayPal and Square. These

players are edging closer to offering full suites of personal finance and

shopping tools, which undermines the position of legacy banks as one-

stop-shops for all personal financial needs.

For example, the big banks' lucrative credit and debit card business

would be threatened if more players from the tech side emulate PayPal

and team up with competing banks to market credit cards. (To create its

PayPal Extras MasterCard, PayPal teamed up with GE Capital Retail

Bank, which actually issues the card.)

On the other side, the traditional banks are threatened by online-only

and mobile-first consumer banking start-ups like Simple, which offers

both apps and a desktop Web version and has the slogan, "Replace Your

Bank." Another bank in this line is Moven.

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Simple’s intuitive interface and user-friendly app features — and claim of

superior customer service — are what separate it from the legacy banks.

In some ways, Simple behaves like a fun smartphone app, instead of a

bank. Just had the best meal of your life? Snap a photo with your phone,

attach it to the transaction recorded in Simple, and you can remember

what you ordered and how much it cost. But Simple also allows users to

do everything they might do at an online bank: check account balances,

transfer money, pay bills, and so on.

For clarification, Simple itself isn’t actually a bank. Its interest-bearing

checking accounts are actually held by a chartered institution, The

Bancorp Bank, which also issues Simple's Visa credit card and ATM card

(which has no-fee withdrawals inside the Allpoint ATM network). Simple

itself is really just an interface that aims to make banking more

convenient and consumer-friendly.

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It may be that mobile-first banking start-ups like Simple and Moven

don't go anywhere, but the emergence of these solutions show that the

race is on. If consumer adoption of mobile banking speeds up, as we

believe it will once security fears subside, legacy banks will need to

integrate their products — from money transfers to retirement

planning — into stronger mobile offerings, otherwise they risk getting

challenged by competition from more tech and mobile-savvy players.

The Bottom Of The Pyramid

Mobile might also help bring banking services to lower income

consumers across the world — those at the so-called "bottom of the

pyramid."

This might be a bigger opportunity in emerging markets where lack of

basic financial infrastructure and limited access to credit is a huge

economic bottleneck. But even in the United States, where credit and

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financial markets are highly evolved, an estimated one-fifth of the adult

population have limited access to banks.

According to the Federal Reserve, 11 percent of Americans do not have

access to basic financial services, and can be considered unbanked. An

additional 11 percent of Americans have recently resorted to alternative

services for access to credit, such as car title-based loans and check

cashing services. The Federal Reserve classifies these consumers as

underbanked.

Mobile could be an effective channel for traditional banks and niche

financial institutions to engage with the needs of the unbanked and

underbanked in the U.S., and globally.

In the U.S., the underbanked already use mobile banking more

frequently than the general population — probably because there are no

bank branches nearby and many of them don't own PCs.

Interestingly, perhaps because of their greater need for it, unbanked

consumers seem to have more trust in mobile payments technology and

less security fears than average consumers. (See chart, below.)

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In emerging markets, mobile has already proven adept at offering

financial services to fill a vacuum where there's no depth of banking

infrastructure. In fact, it is in Africa where the mobile banking and

payments revolution has so far had the most impact.

In Africa , large percentages of the population already use their

mobile phones to pay bills and send money. In Kenya, Gabon,

and Sudan, it's over half the population.

Jana, a company that pays consumers to fill out surveys, has built

a massive user base on the back of its payouts of mobile phone

credits as currency. It also offers product discounts and coupons.

While unbanked or emerging market consumers may not be an attractive

segment for all financial players, there are opportunities to be had since

they represent such a large swath of the consumer market.

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THE BOTTOM LINE

Mobile banking has arrived, and the next year or so will serve to

differentiate banks that embrace the mobile channel from those that only

give it token attention.

The biggest obstacle to consumer adoption seems to be a lingering

concern over security, which is why banks should put their marketing

budgets to work to alleviate these worries.

The depth and quality of mobile banking services can be a factor in

customer acquisition and certainly in retention.

Mobile-first upstarts threaten legacy banks in the same way that mobile

commerce threatens bricks-and-mortar stores. Consumers will gravitate

away from legacy banks if new brands emerge that understand how to

leverage mobile banking.

Click here for the charts and data associated with this report in Excel→

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