Mobile Banking: Where's the Business Case?
BY KAREN EPPER HOFFMAN
Even as cell phone banking takes off, banks still face the question: How can we make money on this?
At mid-2007, at least nine U.S. banks had begun to develop or had rolled out a mobile banking service to their customers, either through a proprietary mobile Internet banking site or via an application embedded into the handset. Proponents believe cell phone banking will grow quickly based on ubiquitous cell phone usage and consumers' growing expectation of anywhere/anytime access. Yet, with banks providing the service to customers for free and carriers clamoring for a piece of the action, a business case remains elusive. Banks say they will justify the investment based on strengthening customer relationships, lowering delivery channel costs and paving the way for more sophisticated mobile financial services in future years.
This year, several major institutions began offering their customers the ability to use their cell phones to check account balances, transfer funds and pay bills.
As was the case with online banking, these mobile banking services are being given away to seed the market. Yet "as banks experiment with some of these pilots, they're starting to look more into the business case," says Bob Egan, chief analyst for Needham, Mass.-based TowerGroup Inc.
In a recent survey by Boston-based Aite Group of 22 of the top 100 U.S. financial institutions, 55% identified the lack of a clear business case as an important or very important impediment to adoption of mobile banking (see chart "Security Biggest Impediment"). With direct revenue nonexistent, banks face the issue of justifying their investment, which includes bearing at least some of the cost to create and support the mobile channel. Also, in situations where they are actively working with carriers directly or through an outside vendor, banks pay a fee to the carriers.
Interviews with bankers underscore the uncertainty of this business case. Repeatedly, the similarity with online banking comes to the fore, as many executives say they expect the primary value of mobile banking will come in building stickier relationships with customers. Enhancing customer convenience was the highest ranked motivation for financial institutions responding to Aite Group's March 2007 survey (see chart "Customer Convenience Key Driver").
Other executives theorize that cell phone banking will help move some transactions to the mobile channel, balance inquiries particularly, which will lower usage of more costly channels, such as the branch and call center. Others say the real value comes when mobile users undertake more advanced tasks, such as making expedited payments or remittances, for which the banks can then collect incremental revenues.
And finally, some bankers say they need mobile services for competitive reasons. According to this view, mobile banking will become "table stakes" in the industry, something you've just got to have, similar to online banking.
Mobile Banking 2.0
Mobile banking went through its first iteration in the late 1990s and early 2000s. At that time, Bank of America Corp., Wells Fargo & Co., Citigroup Inc. and Bank of Montreal's U.S. subsidiary, Harris Bank, all launched mobile services. Most ultimately sputtered out in the face of tepid customer acceptance. Now, supporters say, the market has matured enough to support another run at the concept.
"The handsets are far more data-capable, networks are up to speed and there's a user propensity to play with data applications," says Nick Holland, senior analyst for Aite Group.
BancorpSouth, Tupelo, Miss., Bank of America and Wachovia Corp., both of Charlotte, N.C., New York City-based Citigroup and Broadway Bank, San Antonio, Tex., all began offering pilot mobile banking services to retail customers in late 2006. In May, San Francisco-based Wells Fargo took things a step farther by offering a mobile service to its business customers (see sidebar "Mobile Starts Taking Care of Business,"). By mid-year, at least three more institutions-SunTrust Banks Inc., Regions Financial Corp. and Synovus Financial Corp.-had joined the fray.
To be sure, the number of actual customers remains minute. TowerGroup estimates that only 400,000 out of almost 240 million U.S. mobile phone subscribers are conducting banking business over their cell phones. But analyst Egan predicts eight of the country's top 10 banks will offer mobile banking and bill payment by the end of this year and that within five years, a quarter of today's existing Internet banking customers will choose to bank by cell phone. Boston-based Celent LLC forecasts that by 2010 more than one-third of U.S. online banking customers will use mobile banking, up from less than 1% today.
"Clearly, these people [who bank online] also have a propensity to use their cell phones," says Gayle Wellborn, Bank of America's senior vice president of online products and services. "So it's the online customers we're targeting. The mobile device just takes it to the next level."
Wellborn adds that, for Bank of America, giving away mobile banking service is "very consistent" with the bank's online banking strategy, which is based on the belief that customers "will recognize the value and we will gain their loyalty." Bank of America was one of the first banks in the industry to begin offering its online banking services for free, in 1996, and subsequently bill payment as well.
Tom Llewellyn, chief information officer of $1.7 billion-asset Broadway Bank, notes that 43% of his company's overall customer base banks online, with online banking penetration more than double that (88%) among customers of Broadway Bank's Eisenhower Bank subsidiary, which serves military personnel. Llewellyn says that Eisenhower's customers tend to be younger (18 to 35 of age) and move around frequently based on changes in where they are stationed or deployed. After a "real lightweight marketing effort," Llewellyn says Eisenhower was able to get 1% of its online banking customers to use mobile banking.
For young people in their 20s, "who are so fascinated by and attracted to mobility, having something mobile is compelling," says William McCracken, CEO of Atlanta-based Synergistics Research Corp.
Justifying the Investment
Yet bankers are also becoming aware that the mobile realm is a very different environment from the online space they have come to know so well. Perhaps the most significant difference is that the mobile universe is tightly controlled by a handful of major carriers, or telcos.
"The carriers got caught off-guard by the Internet and became all these big dumb pipes overnight," says Tripp Rackley, CEO of Atlanta-based Firethorn Holdings, LLC, a vendor of mobile banking applications."The carriers will never let that happen again."
Rackley asserts that the only way for banks to succeed in their mobile efforts is to work with the carriers through a middleman, such as his company, which collects from the bank either a per-user or per-transaction fee for the carrier. He adds that it's only fair that carriers should collect a toll since they have funded the development of the wireless networks and also subsidize and support the wireless phones that most customers use. Spencer White, director of mobile financial services for Atlanta, Ga.-based AT&T Wireless, affirms that carriers would be loathe to support applications and field customer questions for services for which they're not being paid.
Nonetheless, several prominent banks have introduced mobile services that circumvent the telcos (see "Web Browser or Carrier Connection?").
Regardless of how banks handle the carrier question, they still face the issue of justifying their investment in cell phone banking. It's largely an insider's debate because the banks are being tight-lipped about the extent of their investment. Both Synovus and BancorpSouth, for example, have agreed to a "per-user model" with partner Firethorn. But neither Garry Hedges, director of payment strategy for Synovus, nor Michael Lindsey, senior vice president and manager of electronic delivery services at BancorpSouth, will quantify the fee or discuss how it might be split between the vendor and the carriers with whom Firethorn partners.
Wachovia embraced a browser-based strategy when it initially launched its mobile offering in September 2006. But in March 2007, the bank announced a partnership with Firethorn. Ilieva Ageenko, senior vice president and director of emerging applications, declined to discuss the Firethorn fee. But she says her bank's upfront investment in its original mobile service was "less than six figures," since the mobile Web site was able to run through the same back-end technology as the bank's online service-and the same security technology as well.
TowerGroup's Egan says bank-to-carrier fees may go up or down based on how the market shakes out and as it becomes more apparent if having an application pre-loaded on the phone and having other support from the carriers will actually encourage greater customer adoption. Both banks and telcos, he adds, recognize that mobile banking per se won't bring in new customers right away.
Instead, the hope is that offering the service will create tighter bonds with existing customers and act as a stepping stone, so that these customers will graduate to using more advanced applications than simply checking account balances. BancorpSouth, for example, reported a substantial up-tick in bill payment activity by its mobile customers during its 2006 pilot.
Banks are also keen to alleviate the transaction burden on their more expensive branch and call center channels, which could be facilitated by increased cell phone banking usage. Celent estimates that by 2010, about 70% of bank call center volume will be coming from cell phones and about half of those calls will be simple balance inquiries.
Lindsey says mobile services enable an institution to "cut customer servicing costs and deliver service to customers when and how they want." Nearly half (49%) of the participants in BancorpSouth's mobile banking pilot reported in a survey that they would decrease the number of calls they made to the call center because of mobile access. Forty-two percent said they would visit the branch less often and 23% said mobile banking was their preferred means for communicating with the bank.
In the long term, supporters see these basic mobile ventures as laying the groundwork for more advanced mobile financial applications, such as expedited or person-to-person payments, international remittances and loyalty and coupon programs, for which banks might be able to collect incremental revenue. "Everyone just wants to get a foot in the door," says Holland of Aite.
Ms. Hoffman is a freelance writer based in Poulsbo, Wash.
