Making Wireless Work

by Kenneth Cline

Pioneers say the technical obstacles in wireless financial services can be overcome, but the economics and public demand remain unclear.

Revolution, or just another layer of expense? Banks are having a hard time deciding what to make of this new technology called "wireless banking." Encouraged by successful experiments in Japan and Europe, many major U.S. institutions have launched pilot projects to see if their customers really want to be able to access the Internet through their cell phones and Palm Pilots. But others are taking a wait-and-see stance.

The stakes are high. At a time when the economy is turning against them, bankers can ill afford another expensive technological foray that doesn't offer even the hope of near-term profits. But neither can institutions afford to lose their best customers to competitors who offer the service. How to play this wireless game, and how deeply to get into it, are questions that continue to reverberate around many a bank boardroom.

To help sort through these issues, Banking Strategies recently conducted a roundtable session that included executives from two institutions that pioneered wireless banking in North America: Bank of Montreal, which owns a U.S. subsidiary, Chicago-based Harris Bank, and First Tech Credit Union of Beaverton, Oregon, which serves high-tech workers in the Pacific Northwest.

Mark Dickelman, a vice president at Bank of Montreal, and Thomas Kroen, director of information technology at First Tech, both view wireless banking strategy primarily in a defensive light. Rather than trying to make money on the service, at least initially, their institutions are trying to retain affluent, technology-savvy customers. It helps that costs are relatively low if a bank can leverage its existing PC banking infrastructure.

The two executives further maintain that this is one arena where size confers no advantage. In fact, they say, larger institutions are actually handicapped because of their need to deal with a multiplicity of technical standards and telecom carriers when operating across multiple regions.

Dickelman and Kroen were joined in the discussion by TowerGroup analyst Virginia H. Philipp, who shared some of the Needham, Mass.-based firm's research on wireless banking in the U.S. and overseas. We interviewed the three last November, when they spoke on these issues at BAI's Retail Delivery conference in New Orleans.

Banking Strategies: What's the proper role for wireless in a financial institution? What kinds of banks need to consider offering the wireless channel?

Dickelman: Look at the range of institutions represented here. We've got Bank of Montreal, which is a national bank with six million retail relationships in Canada. Then there's Harris Bank, Bank of Montreal's U.S.-based subsidiary, a regional with about a million customers. And finally we have Mr. Kroen's First Tech Credit Union, which has 80,000 customers. It's interesting that each of these institutions sees the need to incorporate wireless into its service offerings.

The demographics of wireless usage are broad, encompassing not only high-net-worth individuals but also middle-class people attracted by the convenience.

Kroen: Credit unions are seeing a huge interest in wireless. It could be because of all the press coverage and advertising done by the wireless carriers. In any case, it seems to be an arena where smaller institutions can play. One advantage is that we can harness technology that's already in place. We just take our home banking application and spread it across one more additional channel, which leverages our capital investment.

Dickelman: It's also interesting to note that Bank of Montreal, Harris Bank and First Tech Credit Union all use the Open Financial Exchange protocol as the enabling technology. Through happy coincidence, we all invested in OFX for very different purposes but then found we could use that communications standard to enable this new wireless channel.

Kroen: Standards are very important in this industry; they allow small players like us to stay in the game. We originally set up our OFX server to support personal financial management software such as Quicken and Money. Only about 3,000 of our 38,000 home banking users connect to us through PFMs, so people wondered why we wanted to support such a small segment of the market. But the key to OFX is that it can be used in multiple channels, and that's what set our stage for wireless.

Banking Strategies: Is OFX essential for wireless banking?

Kroen: Absolutely not. A lot of wireless service providers don't use OFX. However, if you don't use a standard interface such as OFX, the wireless vendor will have to "screen scrape," or write software code to link up with a proprietary interface, which can be very expensive.

Dickelman: OFX is not the perfect standard, but it's better than no standard at all. The key advantage to OFX, or any standard, is having a uniform entry point to legacy transaction systems. By using standard interfaces such as OFX, we are able to add and reconfigure interfaces, such as wireless, without having to go back and modify or re-write our core systems.

Banking Strategies: Isn't the development of wireless in the U.S. generally handicapped by a lack of standards?

Kroen: There are different kinds of standards. We're talking here about the data transport layer, where we do have a standard in OFX. The lack of standards in the U.S. involves the telecom companies, the wireless carriers.

Financial institutions have control over standards used in the data transport layer between the wireless application provider and host system. Unfortunately, we can't control the standards used by the wireless carriers themselves. Currently in the U.S. we have four major competing wireless standards: Global System for Mobile Communications (GSM), Code Division Multiple Access (CDMA), Personal Communications Services (PCS), and Time Division Multiple Access (TDMA).

The good news is that most of the wireless application providers help insulate the financial institution from these competing standards by assuming the role of "traffic cop" and interfacing with all the major carriers.

Philipp: Multiple standards in the area of wireless telephony are definitely impeding progress in the United States. And yes, this issue is beyond the control of even the largest financial services companies.

Interestingly enough, when it comes to wireless implementation, it's not necessarily the big players who will prevail. We're seeing leadership in this area coming from banks below the top 20.

Dickelman: I'll give you an example of how that works. Harris Bank operates in Chicago, a city that has more than half a dozen wireless carriers serving about 12 million people in the metro area. Harris partnered with Sprint, which was the first carrier to provide mobile Internet service in the region. By focusing our initial attention on a single carrier, we were able to develop a more consistent user experience and fine-tune our enrollment and promotion programs.

A smaller institution has to deal with fewer variables. If you have to cover a more diverse geographic area, you have to deal with different menus and devices with each carrier.

Banking Strategies: So the real disadvantage in the U.S. falls on large institutions that cover multiple markets?

Kroen: Absolutely. First Tech is concentrated in the Pacific Northwest, for example, so we only have to worry about that one region. I deal with four or five carriers who have geographic coverage in the Northwest.

Philipp: National players face more challenges. Bank of America Corp., for example, has to deal with multiple wireless networks across the country. Given the multiplicity of standards, they can't move very quickly.

The large banks may have capital and resources, but they also must deal with poorly integrated information technology departments.

Dickelman: Mega-banks have many different record-keeping systems, not all of which are Internet-enabled. That poses a huge logistical challenge for them.

After Harris Bank acquired a number of banks in the Chicago area, we found ourselves confronted with dozens of demand-deposit account systems. Now, imagine the challenge facing an acquirer that sprawls across several U.S. geographic regions.

Banking Strategies: Let's talk about the wireless business model. Is this just another layer of cost that institutions will have to bear, or is there actually a way to make money?

Dickelman: At Bank of Montreal, we leveraged a technology investment that was made many years ago to support OFX. So instead of having to rip apart our processing environments, we were able to assimilate wireless quickly. It took us six months to launch in Canada and less than a month in the U.S., and we were first to market in both countries.

I don't want to downplay the amount of investment involved. The larger the organization, the greater the expense. But most companies are using Application Service Provider-based models rather than building their own software. So I think the tools are there for banks to solve this problem quickly.

We're working with Toronto-based 724 Solutions Inc., which is a software development company that offers ASP services through partners. We would like to see their platform adopted by as many major banks as possible because it becomes more economical for us if that platform becomes the standard.

In terms of customer service and support, wireless holds the promise of being the lowest-cost channel. But the issue is: will customers pay for it? We don't know that yet.

Philipp: Wireless banking is not about making money. It's more an issue of keeping the right customers happy, namely the top 10% to 20% who contribute the bulk of bank profits.

Kroen: We analyzed our wireless activity and found that upscale customers are our most frequent users. They are the people we want to keep.

Dickelman: That's really the challenge for any institution. You've got to be where your customers want you to be. Banking customers have never seen a channel they didn't adopt. The more convenient we make it, the more channels they use.

There's general concurrence in the industry that wireless is table stakes. Most major institutions are going to be launching commercially within a year. The only problem most of them face is adapting internal infrastructure.

Banking Strategies: What sort of infrastructure problems did Bank of Montreal face?

Dickelman: In the early days, we had to go through a lot of device and network issues. We had problems to work out with the carriers, the manufacturers, and the software providers. We now have a pretty close relationship with a lot of the major players as a result.

If you set realistic expectations and possess the underlying technologies, it can be done quickly. A lot depends on the market you're going after. The larger the coverage area, the greater the marketing challenge. We elected to put our brand on carrier menus to simplify customer access to our service. Customers can locate our service by simply looking at menu items on their phones.

Partnering smartly is also important. Trying to do it all by yourself is not going to work in the long-term. You'll get stranded when new generations of technology are introduced.

Banking Strategies: Is this going to become a mass-market phenomenon?

Dickelman: The excitement around wireless devices is important and it's real. It may not happen tomorrow, but I think the trends point toward mass-market participation in the not-too-distant future.

Philipp: The European market right now is coming down off a wave of hype. There was so much talk about how manufacturers were going to sell millions of Internet-enabled wireless devices, but it just didn't happen. And without those devices, there will be no wireless Web proliferation, ergo no wireless financial services.

The growth projections are impressive and imply we'll reach critical mass somewhere down the road. But not in the near term. Right now, it's really about a minority of techno-savvy consumers. But those are also generally the high-net-worth customers who will switch banks if they don't get the service they want. As a bank, you're forced to play; you have no choice.

Dickelman: The studies vary. But I think there's hard data to support the proposition that from 5% to 10% of customers will defect if you can't satisfy their channel needs.

Kroen: There's another side to the story. My son has a cell phone and so do about one-fourth of the students at his high school. We've got a generation coming up that's Internet-savvy and comfortable using the wireless channel. These people are your future customers.

Banking Strategies: How serious are the privacy and security barriers to wireless adoption?

Philipp: Internet security is still a huge issue in many regions of the world, although less so in the U.S., where we've grown accustomed to our institutions picking up the security slack.

In Europe, however, credit card usage is low, partly because of security concerns. If Germans and Brits are reluctant to use credit cards on the Internet, and even at local stores, we can't assume they're going to be willing to conduct financial transactions over a wireless device.

As usual, it's a standards issue. As soon as the major financial institutions in a region band together and establish a single standard, a single security solution will evolve and consumers will start to feel more comfortable.

Kroen: I'd agree. But financial institutions have to be concerned about the regulations that could be coming down the pike. A lot of it is out of our direct control. In a wireless environment especially, we don't have a lot of direct control over the security aspects.

Dickelman: That's right. We don't have end-to-end security in wireless devices. There's a small technical hole, or translation point, where you go from very high-grade security on the handset, military-grade encryption in fact, to the carrier, where the data has to be translated into plain text and then re-encrypted.

This is sometimes referred to as "the gap in WAP," WAP being the Wireless Application Protocol that connects wireless with the Internet. If this problem isn't mitigated properly, you face the risk that customer data will be exposed or compromised.

As a bank, we have an obligation to know our customers. We need to know our telecom carriers as well. We need to have relationships and controls in place with the carriers to make sure they maintain appropriate safeguards over the data.

The second area of concern has to do with the way you address wireless devices, which is different from the way you address PCs. For example, if you know somebody else's wireless subscriber ID, you can impersonate them and modify their information. We've seen a number of situations where financial institutions have not understood the implications of that anomaly.

The last issue involves privacy. A number of carriers in North America have elected to use the handset identifier as the phone number. While that's convenient, it can also invade the user's privacy. You can be surfing the wireless Web and unintentionally disclose your phone number.

Those are some of the implementation issues we've worked with our carrier partners to address.

Kroen: The potential for security breaches is present in any channel. You just have to understand the exposure. It's really a risk-management issue.

One thing you can do is limit the functionality, i.e., what customers can do on these devices. For example, we offer bill payment on wireless devices. But customers can't set up a new vendor on their phones. So if someone were to gain access to your phone, they couldn't actually pay themselves; they can't take money out of your account.

Dickelman: That relates to what is probably the most important security control: application design. For example, we require different levels of authentication depending on the customer's activity, which ranges from just browsing the Web to trading stocks.

Banking Strategies: What will be the state of this industry five years down the road?

Philipp: By then we will have overcome the standards issue in the United States. That automatically will boost market penetration, so we'll see some critical mass developing.

But right now, we shouldn't be overly concerned that the wireless channel has low penetration and is mostly limited to pure informational banking. Wireless is still pretty much in the testing phase for financial services. Additional application development is needed before the setup will be ready for the mass market.

Five years down the road, the global standards issue will also have been resolved. A business traveler going to Europe, for example, will be able to access his U.S. accounts via wireless devices.

Kroen: You'll also see a convergence of wireless devices. It won't matter what device you use. Everybody laughs at the idea of putting a Web browser on a microwave. But the fact that such a combination is technically feasible underscores the growing versatility of Web interfaces — you can be served by a device that looks nothing like what you think it should.

Standardization is the key. I think this country ultimately will establish unified standards at both the messaging and device levels so we can have true interoperability.

Dickelman: Pervasive computing is the ultimate destination, and wireless is the first hint of what that may look like.

Mr. Cline is senior editor of Banking Strategies.

Copyright © 2003 by Banking Strategies, published by BAI.

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