Three Revenue Models for Mobile
There’s no question that bankers “get it” when it comes to mobile banking and payments, considering that most major financial institutions now offer their customers some package of mobile banking services. What’s less clear, however, is if banks get it when it comes to figuring out the appropriate business model; for now, most have defaulted to offering the service for free.
Banks do that, in part, because the available services are largely informational, such as account balances and overdraft alerts. Customers do not consider these utility-like services worth paying for. Mobile services are, however, quickly evolving from simple informational alerts to complex, value-added transactional and interactive services, such as remote deposit capture and financial advice. This platform of innovative products and services presents a rare opportunity for banks to dramatically modernize how they interact with customers. By placing banking services into the palms of customers, financial institutions can pervade everyday life, creating possibilities for compelling value-added offerings for which customers would be willing to pay. Now is the time for banks to fundamentally change how they view and structure pricing and move from free to paid-for banking, which is anchored in the value of their services to customers.
So how should banks start monetizing mobile banking services? Our research through customer surveys and client engagements suggests three revenue models that can enable both service providers and customers to benefit from mobile technologies. Customers’ needs can be met and service providers can expect to be remunerated – what a concept! We call this “fair value exchange,” the point at which the objectives of both customer and financial institution are aligned.
We envisage the following three revenue models being used in the future:
Versioning and Packaging. Our research suggests that 76% of the youth market will pay a monthly fee of $8 for a functionally rich mobile banking service that includes informational, transactional and interactional services.
We start with our belief that fees cannot be assessed for informational services. However, in the same way that packaged value-added checking accounts (VCAs) have succeeded in many mature banking markets such as the U.S., U.K., France, Italy, and Germany, our data suggests that versioning and packaging can serve as a robust revenue model for the future once transactional and interactional services are available. By transactional, we mean payment services such as bill pay or person-to-person services; interactive services do not yet exist in a mobile banking context but would include applications such as the GeoGuard location-based fraud detection product from Misys. While core utility services are the most important to any package, the value-added features can be intelligently grouped to design different package versions, each with a different fee.
But why stop at mobile-only packages? Mobile banking offers a major strategic opportunity for traditional product lines. Mobile services can also be incorporated into custom digital VCAs. By offering core banking services, non-core benefits (e.g. phone or tablet insurance) and mobile services together, versions of digital VCAs can be developed for the technology-savvy consumer. By designing packages to meet customer needs, a price premium can be charged for the service and the optimal point of fair value exchange is achieved.
Transaction Pricing. Under this model, informational or utility services, again, should be free with fees included for transactions, which relate to any number of specific mobile events that customers initiate proactively. This may comprise payments (retail purchases, remittances, bill payments etc), share trading, SMS alerts, ATM withdrawals or blocking lost/stolen cards. Where customers have a desire to perform any such action, there is an opportunity to monetize that event. The value that customers place on each of these services depends on the need and frequency of use. Therefore, the first step in establishing a revenue model requires an understanding of the value-to-customer and the willingness-to-use.
Our research suggests that 92% of smartphone owners are willing to try mobile payments. However, this willingness-to-use differs when broken down into the constituent payment types. In our customer surveys, contactless mobile payments were the most popular (70%) and remittances the least (39%). The price metric and price level for each is different too. For contactless mobile payments, customers would pay a one-time fee of 75 cents to $5 to load a mobile wallet and then make unlimited payments until the funds were spent. For remittances, however, customers would prefer a per transaction fee ranging from $1.50 to $4 per event. This difference in price metric (one-off fee to load a wallet compared with a per transaction fee) and price level clearly demonstrates that these distinct mobile payment types serve different customer needs, which highlights the opportunity to differentially price mobile payment transactions.
Mixed or ‘Non-linear’ Pricing. Mixed pricing is a combination of both the previous two revenue models and is used extensively by other industries, e.g. mobile network operators. This revenue model relies on a lower package price for basic (mobile) services and the opportunity for customers to purchase individual value-added services as add-ons. This could be an add-on consisting of 25 peer-to-peer payments, 12 SMS alerts to notify that a monthly credit card payment is due or additional features such as the ability to reserve promotional rates on mortgages, savings or share trades. This “a la carte” approach gives customers the ultimate flexibility to select the services they seek from mobile banking and further increases the likelihood of achieving fair value exchange.
Once again, the add-ons must be designed to meet customer needs. Once the needs are established and the products designed, the pricing can be determined. The price model (metrics and levels) must be clearly aligned with customers’ willingness-to-pay and be distinct and related to how customers wish to utilize the service.
Mobile technology is a radically new platform and success will come from service providers who understand the value that customers place on different utilities, their willingness-to-pay and therefore the optimal price model. In a world where smartphones are an omnipresent feature of daily life, customers have the ability to act on impulse and banks can tap into this new phenomenon by offering distinct, intelligently designed, paid-for mobile banking services.
Mr. Baumgarten is managing partner and head of North American Banking with Simon-Kucher & Partners, a global consulting firm specializing in product pricing and marketing strategy. He can be reached at [email protected]. Mr. Ke, director, and Mr. Chung, senior consultant, are on his team and can be reached at [email protected] and [email protected].