Banking on the Run

By John R. Engen

Wireless banking presents a host of opportunities for U.S institutions, but managers face crucial challenges in adopting the technology.

Banks were beginning to acclimate themselves to the Internet, and now this. Since the mid-1990s, providers have struggled to reengineer their online banking programs to harness the burgeoning power of the Web. Now a new technology is posing yet another set of reinvention challenges.

The upstart is wireless banking, which makes it possible to deliver basic banking and brokerage services through the Internet to remote, hand-held devices such as cell phones and Palm Pilots. No desktop-bound personal computer required. Some experts, in fact, believe more people in the U.S. will eventually access the Internet through wireless than through PCs, which is now the pattern in Europe and Asia.

AT&T president John Zeglis recently predicted this will happen within five years.

This poses serious issues for institutions that have invested heavily in PC-based services, which includes most of the top 50 banks. If the pundits and tech gurus are correct, wireless could be the next big revolution in banking, boosting online banking from what is still essentially a niche business into a true mass-market phenomenon. The decisions institutions make today about wireless banking could affect their competitive position for years to come, similar to the situation these companies faced in the '90s with the Internet itself.

Until now, online banking has been hindered by the relatively high cost of PCs and the intimidating complexity of operating those machines. Cell phones and personal digital assistants, by contrast, are simple portable appliances geared for average consumers. The explosive growth in wireless Internet in places like Japan and Scandinavia underscores the potential of this technology.

Foot-dragging in the U.S. can be blamed on a multiplicity of technical standards and the entrenchment of analog phone technology. But that's about to change. The proportion of the U.S. population owning a digital wireless device will leap from today's 20% to roughly 55% by 2003, according to Meridien Research, Newton, Mass. These mobile phones, pagers and Palm Pilots are encrypted and "as easy to use as an ATM," promises Alan Young, vice president of access devices and distribution technologies for Citigroup's e-Citi unit. "At the end of the day, the U.S. always becomes the largest market in the world for any technology, and wireless won't be any different."

Backing up Young's assertion, New York-based Citigroup has announced plans to roll out wireless banking in the U.S. after completing a pilot project in Japan, possibly by yearend. At that point, Citi will be following in the footsteps of Harris Bank, First Union Corp., Bank of America Corp. and a few enterprising online banks and credit unions. Viewing these developments, top strategists at other major institutions will be tempted to jump in with wireless banking programs of their own.

At first blush, the economics seem appealing. Meridien estimates that the technology outlays required to implement wireless service range between $200,000 and $300,000 forthe average institution, since the software used is an "add-on" to current Internet applications. For that reason, Meridien projects total spending on wireless technology by top North American financial institutions will reach only $15 million by 2003 – small potatoes for companies that wield multi-billion dollar technology budgets. There is also the potential for cost-saves: Meridien estimates a banking transaction done by cell phone costs the financial institution less than 8 cents, compared with 60 cents using a call center employee.

But a lot of pain comes with the gain. Banks can't simply transfer their PC-based Internet interface applications to the cell phone. Instead, they will have to reengineer those applications to fit a tiny, hand-held screen. Wireless devices aren't suitable for browsing menus or advisory services. More appropriate are transactions, alerts and other short messages, often with simple prompts such as, "Your phone bill is due today. Do you wish to pay it?" Bank Web designers will have to adopt a whole new approach to configure these condensed services.

The nature of the service also dictates that banks must work closely with telecommunications companies and technology vendors. Managing partner relationships will be a critical skill, given the inherent potential for problems in such arrangements. Security concerns must be considered as well, since wireless Web usage opens up a whole new field for potential fraud. Even the operational excellence on which banks have always prided themselves is not a given in the wireless world, where customers often have to deal with dropped calls and busy signals.

Since the potential for alienating customers with poor service is high, bank strategists will need to think carefully about which customers will actually use wireless banking and what services they will require. It's possible that this will remain a niche market in the U.S., catering to the technology-enamored "early adaptors." Institutions therefore risk creating an entire new delivery channel for what turns out to be a small customer segment. Cyber Dialogue, which recently did a survey of 500 adults described as "intensive Internet users," reported that 39% of respondents expressed no interest in having any of their financial services delivered by a cell phone.

To be sure, this emerging technology represents one more layer of expense and effort financial institutions must shoulder, on top of all the other outlays for information technology and online banking. Yet no institution wants to be left behind when the market picks up. In the end, strategists may have little choice but to get into wireless banking and hope for the best. It may simply be the price of staying in the game.

The Mobile Internet

Wireless banking is already a reality in some parts of the world, thanks to common technical standards and a ubiquity of mobile phones. In Scandinavia, for example, some 200,000 customers of MeritaNordbanken get small-screen readouts of account balances and receive and pay bills, all with a few pushes of a button. They also trade securities without ever talking to anyone or sitting down at a computer terminal. And when they get a hankering for a good book, they can buy it through a virtual shopping mall displayed on their screens.

The convenience of being able to perform utilitarian tasks such as bill payment while on the road is so appealing that the only thing limiting the growth of wireless banking is a shortage of handsets, says Bo Harald, executive vice president for network banking services at the Helsinki-based institution. "Banking," he says, "is the most natural thing in the world to do on the mobile Internet."

From Hong Kong to Poland, where Citibank already boasts some 60,000 wireless customers, the story is much the same. Yet in the United States, presumably the world's most technologically advanced society, wireless banking has been slow to catch on. To date, development of wireless channels has been limited mostly to a few institutions: Citigroup, Wells Fargo & Co., Bank of America, and First Union, among the mega-players, and then a small assortment of others, including Bank of Montreal's Chicago-based Harris Bank subsidiary and Internet-only player USABancshares. A few technically sophisticated credit unions have also gotten into the act.

Harris, further along than most, operates a pilot with about 300 customers. Charlotte, N.C.-based First Union, often on the cutting edge of delivery technologies, has tested mobile delivery on just two people – both bank employees. At least for depository institutions, " The technology is in a very immature stage right now," says First Union's Parrish Arturi, vice president of channel development.

By contrast, brokerage firms are forging ahead. Already, nearly two dozen firms offer some sort of wireless stock trading notification or execution capabilities. Fidelity Investments, Boston, reportedly has about 60,000 customers signed up for its InstantBroker service. Charles Schwab & Co. recently announced plans to offer stock trading via Palm Pilots. Like the Internet itself, mobile technologies seem particularly well suited to the demands of frequent equity traders.

Bankers attribute their reticence to technology obstacles, American culture and the nature of banking itself. In Europe and Asia, the Global System for Mobile Communications has emerged as a near-universal standard for digital voice and data communications, paving the way for rapid growth in wireless usage. In Japan, the number of mobile phone users actually exceeds the number of fixed analog lines, 56.8 million versus 55.4 million. About 18% of these mobile phones, or 10 million, are equipped with Web access, making the telephone more popular than the PC as an Internet interface in that country.

Meanwhile, the U.S. market struggles with multiple competing standards and a geographically fragmented network of telecom providers. That, combined with the abundance of older-style analog cell phones now in use, has limited digital usage here. It has also stifled investment in the kind of innovations banks must contemplate to make their services user-friendly.

As a result of these technical obstacles, the domestic view of the Internet is starkly different from the rest of the world. Ask Americans about the Internet and they'll mention the PC; Europeans and Japanese are more likely to cite mobile phones. Meridien projects that only about eight million customers in North America will actually use remote devices for banking by 2003, compared with 19 million in Europe and 12 million in Asia. In the near future, at least, PC-based Internet services "will continue to be the flavor of choice" for Americans, says Meridien e-finance analyst Dana Stiffler.

On the other hand, there is some evidence that PC usage predisposes people to consider wireless options. In the recent Cyber Dialogue survey, the overwhelming number of respondents who expressed interest in wireless banking already used some form of online financial services. "If you're already using the Internet to do your banking, then you're more likely to be interested in using something even more remote, like a cell phone," says Sam Callard, senior analyst at the New York-based research firm.

Search for Relevance

At some point Americans will come around, experts predict, with important strategic implications for banks and other businesses. "Sooner or later, everyone in the U.S. will be using a mobile device, and banks have the trust, brands and reliability – and all the tools for payment and verification – to capitalize on that growth," says Harald, the Finnish banker.

Already, wireless application protocol, which allows companies to use their Internet banking applications on wireless devices, is emerging as the de facto tool for enabling wireless communications. Consolidation is coming to the telecom market, creating more nationwide partnership opportunities for banks. Flat-rate pricing plans for phone usage also should encourage customers to make greater use of the technology. Perhaps most significantly, new vendor solutions that allow banks to communicate with an assortment of wireless devices will diminish the problem of multiple providers and incompatible devices.

Ten years from now, more Americans will bank via handheld devices than on PCs, according to Meridien projections. To compete in that world, banks must think hard about how their customers really want to use wireless channels. They must define the sorts of information required by small-screen users and refine how that content is presented. The recent Cyber Dialogue survey suggests potential wireless banking customers are most interested in viewing their account balances (48%), with funds transfer (27%) and bill pay (25%) ranking as lesser priorities.

"The biggest challenge is getting the kind of clear insight into the customer that will translate into relevance – something that helps build relationships" says Trace Poll, a senior vice president of Internet commerce strategy for Bank of America, Charlotte, N.C.

Some critics dispute the notion that Americans will ever find much relevance in wireless banking, however. Consultant Tom McGrath points out that customers can already access their banks remotely – through a call center. "If you've got a mobile phone and know the number to dial, you can find out anything you want about your account 24 hours a day. You have to ask what additional utility is gained by downloading some new application to accomplish the same end," says McGrath, managing director of Bank Earnings International LLP, Orange, Va.

Then there's the profitability question. McGrath notes that most banks run their call centers as customer service units rather than profit centers; wireless banking may prove no different. "Where's the revenue going to come from? Are you going to start charging people for balance inquiries?"

Telecom Deals

The myriad capabilities required to execute a sound wireless strategy are beyond the grasp of even the largest institutions. To position themselves and grab a seat at the table as the rules for wireless banking are written, BofA, Citi and a few other banks are cutting deals and making alliances.

Several have taken equity stakes in 724 Solutions Inc., for example, which has emerged as the early front-runner in wireless banking technology. The Toronto-based vendor makes middleware that recognizes which device a customer is using and then interfaces with banks' existing Internet platforms to provide information seamlessly to the customer. It also boasts technical relationships with most device makers and telecommunications carriers.

At the same time, banks are vying for space on handset screens operated by telecom providers such as Sprint PCS, the Kansas City-based subsidiary of Sprint Corp. It's now technically possible for mobile phone customers to access a bank Web site by typing in its URL, much as a person sitting at a PC would. From a marketing standpoint, however, institutions prefer to have their logo already positioned on the phone screen and linked to their URL so their site is the "default" choice for that particular service.

Such positioning requires agreements with telecom providers. Boston-based Fidelity, for example, is the default brokerage choice on Sprint PCS. Citigroup announced in April that it was seeking similar agreements with telephone companies around the world. "I want to be on the screen every time the customer turns on the phone," Citigroup's Young says.

With about a dozen vendors competing in this area, launching wireless services looks relatively cheap when compared with Internet banking itself. Some vendors, such as New York-based w-Trade Technologies, a major provider of wireless technology to brokerages, charge a simple "per-user, per-month" fee. Such arrangements could encourage those providers that are unsure about how their customers will embrace the technology.

Bank executives also must consider the security issues involved in wireless banking. Although wireless devices are encrypted, Arturi says his security team is uneasy about opening First Union's Web operations to communications protocols that are "inherently less secure than our Internet banking service." Citigroup, also cautious, has been testing and re-testing its wireless operations since last fall. "When it goes live later this year, it has to have the same reliability and security we expect with everything else," Young says.

Other technical challenges include figuring out the nuances of presenting information on a small screen and integrating wireless offerings into the delivery mix. Some executives, such as MeritaNordbanken's Harald, argue that wireless should be handled "as just another terminal into the Internet bank," with the same sort of displays and sequences of action that a customer might experience on a PC. "It shouldn't be viewed in isolation," he says.

Taking an opposing view is Charles Mauro, president of Mauro New Media in New York, who says institutions must make their wireless solutions more user-friendly. The problem: screens on most PDAs are too small to hold much information and, despite their portability, can be inconvenient to use and difficult to read. Mauro, who has advised Citigroup and the New York Stock Exchange, believes banks tend to focus too much on the technology itself, as opposed to the manner in which customers will use it.

For instance, many providers seem intent on merely scraping content from Web sites designed for viewing on personal computers and throwing it on the wireless screen, instead of formatting it in more wireless-friendly ways. "When someone is driving in a car and looking at their bank balance, they have a much different set of psychological and physical requirements than when they're sitting in their den with a PC," Mauro says.

Some analysts further fret that mass-market wireless usage could overwhelm Web sites designed for the relatively low volumes generated by PC-based Web banking. Stiffler notes that customers in some foreign markets are using mobile phones to access bank Web sites up to 20 times a day. "Having a scalable Internet platform is crucial in making this work," she says.

Bankers are studying these issues within a framework of skepticism. On one hand, the evolution of Internet banking has made high-level executives and bank boards more accepting of new technologies. On the other hand, decision-makers question the value that mobile banking capabilities might create for both customers and shareholders. Bankers also worry that now-lucrative businesses such as paper-based checking could suffer if mobile payments proliferate.

Vendors acknowledge the dilemma. "Wireless may be threatening to banking's current businesses," says Greg Wolfond, chief executive of 724 Solutions. "But executives need to understand that there's also an incredible potential to build new value propositions for customers and strengthen those relationships."

M-Commerce

Beyond customer retention, wireless banking offers the potential for creating new revenue streams. Using the ATM analogy, many experts anticipate that as-yet-unforeseen opportunities will transform what is now viewed as an incremental cost into a moneymaking business.

In Finland, for example, MeritaNordbanken fully expects to turn a profit on its mobile banking operations, even though current financial results still are negative. The bank's customers, after all, have proven amenable to being charged about 35 cents each time they go online to view account balances. "In the mobile world, cost doesn't seem to be much of an issue," Harald says.

Even more promising, a predicted boom in so-called "m-commerce," or mobile commerce, could position institutions with strong wireless capabilities to capture a good chunk of the still-evolving e-commerce payments system. Experts foresee a time when mobile devices will accommodate smart cards, whose superior authentication capabilities will boost the security of digital value transfers and facilitate consumer-to-consumer payments.

Banks would be natural candidates for capturing such business. They would also have the most to lose if some other type of intermediary captured the center of the m-commerce payments world. Meridien, in a recent report, noted that banks have become increasingly concerned by the trend of mobile phone companies, particularly in Europe, allowing subscribers to charge purchased goods and services to their phone bills. Banks therefore face the risk of being disintermediated out of m-commerce. "There is going to be a very, very large wireless marketplace as we move forward, and in the middle of it all will be payment opportunities," says Charlie Piermarini, executive vice president for electronic channels at Harris Bank. "We want a piece of that action."

Ultimately, each bank must decide for itself whether its customers truly want wireless access, and what services it will offer. Urban clients seem more likely to embrace the technology first. But advocates expect everyone from yuppie lawyers to combine-riding farmers to someday take advantage of the service. That's why, despite the costs and risks, most banks will eventually conclude they must get into the wireless game.

"You can be late to this party and still be successful," says Chris Musto, senior financial services analyst for Gomez Advisors, a Lincoln, Mass.-based Internet research firm. "A bank that is exploring its wireless options and saying, 'We're going to be deliberate and make sure we spend wisely' should be well-positioned when it takes off."

Mr. Engen is a freelance writer based in Minneapolis.

Copyright © 2003 by Banking Strategies, published by BAI.

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