Five Myths of Mobile Banking

The buzz about mobile banking is at an all-time high so maybe it’s time to take the hype down a notch. Below, we have debunked some common myths about mobile banking so that financial institutions can focus on what really matters and provide a roadmap to meet customer needs and improve their bottom line.

First Myth: We can wait. Shortly after their launch dates, first movers witnessed as many as 10% of retail customers adopting mobile banking. This implies that customers value, and will increasingly expect, mobile capabilities from their banks.

The leading banks have been offering mobile banking for several years; banks that lag will realize they can’t close this gap by being fast followers and will likely begin to lose market share. Given the complexities of developing a mobile offering, banks should start up the learning curve immediately.

Second Myth: Our customers aren’t the kind to use mobile. Mobile phones have penetrated the entire population; they are no longer a phenomenon limited to young people. For example, according to research by CTIA, 90+% of people in the U.S. have a mobile phone and 20% of these devices are smart phones, a percentage expected to rise exponentially in the coming years.

From our client work, we have seen that between 40% and 60% of callers to the typical bank call center are already calling from a mobile phone number. In an era when most banks are asset-hungry, it is also worth noting that mobile banking customers are more likely to borrow money than non-mobile customers.

Third Myth: We need to fix our legacy systems first. Banks have successfully offered online banking without these kinds of fixes for more than a decade. Mobile access can work similarly in terms of connectivity to core systems. While we acknowledge that embarking on mobile will eventually highlight core system deficiencies such as the inability to provide real-time, or near real-time, transaction and balance alerts, this should not prevent banks from entering the market.

Fourth Myth: There is no business case and/or it costs too much. Mobile banking is correlated to, and may actually cause, an increase in customer profitability. The retention, cross-sell, and profitability of mobile banking customers exceed that of online banking customers. Mobile bankers are less likely to attrite, they are more disposed to add accounts and they conduct more debit card transactions than online-only clients. Moreover, we are close to an inflection point where the online and mobile capabilities of a bank will become table stakes when both consumer and business customers consider joining a new bank. The implementation of mobile will also likely result in some loss of activity at the call center, which can reduce costs.

Fifth Myth: Mobile payments are just around the corner. The near-daily announcements by the media, non-banks, and banks that highlight mobile ventures, payments pilots and the advancement of Near Field Communications (NFC) technology would seem to indicate that the mass adoption of mobile payments is imminent.

However, in our experience, new payments systems take longer to gain traction than expected. For example, despite the promised benefits of enhanced security and improved global access, it took 15 years from the 1996 Atlanta chip card pilot to the announcements last year by the largest U.S. card issuers that they will begin to issue EMV PIN cards to U.S. cardholders.

A few organizations have been pushing NFC heavily for years, but have failed to gain traction among large merchants like Wal-Mart and leading card issuers. With Apple’s 2011 decision to exclude NFC from the current version of its iPhone and ongoing merchant and issuer skepticism, there is still a lack of consensus around mobile payments development.

This is not to suggest that we are bearish on mobile payments. Rather, we feel compelled to acknowledge that a great deal of market development remains before mobile payments reach anything approaching critical mass. This includes commitments/investments on the part of retailers regarding their point-of-sale systems and banks in terms of mobile banking and card base management, as well as coordination among the major payment networks such as MasterCard, STAR and Visa.

The implication for banks is that their focus should be on developing and enhancing their mobile banking offering in the near- to intermediate-term. For example, we expect developments that will allow mobile devices to access cash, such as a special number that allows a customer to get or give their designated recipient a pre-authorized cash withdrawal from an ATM.

Three Stages to Development

Given this backdrop, how should banks proceed in their development of mobile capacity? Through our global work in bank distribution, we have identified three primary stages of mobile development: mobile banking, offline enrollment and mobile payments. Banks will need to pass through each stage sequentially to achieve mobile payments ubiquity because mobile capabilities should be made available to all customers, not just existing customers of online banking, who account for about half of the typical bank’s customer base. This will increase the potential user base of mobile payments by 100%.

Also, most customers will need to become comfortable using mobile for basic banking transactions before moving on to more advanced functionality, such as mobile wallets. This includes becoming comfortable with the security of mobile banking, as has occurred over time with Internet shopping.

The basic “triple play” for mobile banking offerings includes all three mobile access methods: mobile browser, downloadable application and Short Message Service (SMS), or one- and two-way text messaging. In terms of transactional activities, a basic mobile banking offering encompasses transaction inquiries and funds transfer capabilities, plus bill pay and deposits using mobile check capture via imaging technology.

Through our client work, we are seeing that a proactive and helpful “offline” enrollment approach can make a large difference in the uptake rate, usage and overall customer satisfaction with mobile services. For example, in countries with more developed mobile banking markets such as New Zealand, banks have made mobile available to all of their customers, not just to their online banking customers. As a result, as many as half of all mobile bankers at these institutions don’t bank online and total mobile banking activation rates can exceed 50% of the entire customer base.

Person-to-person (P2P) payments are emerging as the first mobile payments application to gain widespread adoption. Given the ubiquitous nature of P2P payments via cash, check, and more recently email, we expect many of these transactions will migrate quickly to the convenience of mobile. PayPal and Fiserv have already staked out material positions here.

As noted earlier, however, we expect that mobile wallets will be much slower to gain market traction. The hurdles to achieving this end state are fairly high today. Precursors include the adoption of basic mobile banking, offline mobile banking enrollment capabilities, technology changes to the card issuer environment (i.e., improved card base management capabilities), and finally merchant and consumer adoption.

Note that the card base management capabilities required for mobile wallet are the same as the requirements for EMV, giving an early-mover advantage to banks such as JPMorgan Chase, Bank of America, and U.S. Bank, which have already announced plans to implement EMV for certain segments of their cardholders.

We understand that banks’ technology investment budgets remain tight, and even in prosperous times the demand on the existing resource pool always exceeds the supply. However, now is the time for banks to fully develop their mobile roadmap and accelerate implementation. Ultimately, those banks that fail to implement a broad-based mobile offering risk losing some of their best customers to banks and non-banks alike. Additionally, laggards will find it increasingly difficult to restructure their distribution costs by migrating customer transactions to lower-cost self-service models without a more robust mobile offering.

Mr. Gallagher is vice president and head of the payments practice with New York City-based First Manhattan Consulting Group. He can be reached at [email protected].