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Mobile Banking: A Bonanza (or Bust) for Banks?

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Mobile is top priority for many banks. It gulps lots of money and management attention, and generates new risks. But the road ahead is blurry.

We can visualize it much more clearly by checking the rearview mirror, observing how prior consumer payment innovations have played out – and what they have or haven't contributed to bank market shares and profitability.

Every time technology provides new payment mechanisms, some banks expect that moving faster will yield more rapid, more profitable growth. Examples include ATM's, telephone-actuated payments, electronic bill payment, advances in merchant terminals and debit cards.

Thirty years ago, some thought debit cards would quickly eclipse credit cards – because if the customer qualifies for a credit card, he has plenty of money in the bank. Likewise, up-and-coming executives competed to gain responsibility for expanding their banks' ATM networks. That was how we were going to cut branch costs and improve profits. 

So, where are the flowers of yesteryear? Did most of the early adopters gain great, lasting advantage? Why do bank efficiency ratios get worse, while customers get greater convenience and economy?

One reason is that consumer transaction volume growth through new payment mechanisms is glacially slow, almost always much slower than projected. Habits are strong, payments are important and most consumers ignore the inconveniences of the status quo. For decades, standing waiting for a teller was less unattractive to many than risking trouble with a new-fangled ATM. NFC won't even get anyone around the supermarket checkout line. Many consumers who were switched involuntarily and without warning to PIN credit hated it — and blame their bank.

There's another reason why plunging in to out-guess these market transformations has generally proven futile: Payment networks inevitably converge towards universality and open access. This happened with merchant terminals and ATM networks, even though hardware and software were not standardized. We've seen it again, as the big application initiatives such as Visa's V.me, Isis and Google Wallet mostly point away from attempts at exclusivity and work towards including more banks.  Good strategy.

Many people were sure Internet service providers such as AOL would control most Internet sales of products and services. Wrong. Likewise, some think that with the right Android app, a bank will capture many more consumers and transactions. Unlikely. Very few will be moved by a neat mobile app that isolates them from their currently preferred bank or card.  If you think teenagers are profitable customers, go for it!

During the slow migration, there will be convergence to effectively neutral payment and wallet platforms. And don't forget the long, dismal history of wallet products for PCs. Lots of venture capital burned; no big successes. Why should this time be different?

The most relevant comparable for mobile is computer bill pay (today, universal payment) systems. Visionaries anticipated electronic presentment and all kinds of glories, but, in fact, pioneer CheckFree was never free of mailing millions of paper checks, and often lost money. More importantly, although decades later half the bills are paid this way, few customers ever switched banks to get better electronic payment capability. After all, how would they even know how great it would be to use B of A's system, if they weren't already B of A customers? Your neighbor isn't going to show you her bill payments — or rave about them.

The underlying bill pay platforms are mostly maintained by a small number of nonbank entities. Neither they nor their bank clients have had much interest in adding value, since they don't see how to make consumers pay for that. As a result, rather incredibly, a bank's supposedly private-label bill pay doesn't even favor that bank's own credit cards. And, if a bank wanted this, its outsource operator would insist on making the same capability available to competitors — so, not worth the bother.

Don't expect mobile to evolve differently. Despite the fact that, irrationally, banks have many managers chasing few mobile payments, and few, if any, even thinking about most customers, who pay from their PCs. (Is even the desktop computer obsolete yet? Look around you.)

With a substantial fraction of customers already having access to remote deposit capture (through which only very small numbers of checks are being deposited), you can easily find a substantial, proven vendor whose service and costs are no worse than those your largest competitors incur. Details won't matter.

Compressing consumer PC payment services and wallets onto a small screen likewise will come down to routine, standard, bank-neutral vendor options, without proprietary advantage. Customization and exclusivity are transient mirages not worth chasing.

Andrew Kahr is a principal in Credit Builders LLC, a financial product development company, and was the founding chief executive of First Deposit, later known as Providian.

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Comments (2)
There was a time when this kind of writing would have seemed almost un-American. However, that was when the spirit of the American public was based upon innovation and a can-do attitude, both of which were widely admired. Today, negativity and criticism seem a more popular, crowd-pleasing approach.

Mr. Kahr uses the rearview mirror approach to make his points, and that is okay. It may be true that ATM's did not cut costs and improve bank profits and that NFC cannot get people around the checkout line; that "consumer transaction volume growth through new payment mechanisms is glacially slow;" and, that wallet products for PCs burned through a lot of venture capital with no success. The problem with viewing things through a rearview mirror, however, is that the view is so limited.

Another way of looking at these things is to start with what folks were attempting to do and asking what was driving them at the time. Has NFC is been touted as a cost saver or a convenience? As a cost saver, it begs the question, how can it do that in a "not-present" environment, such as cyberspace? NFC is a good application for tracking inventory, but it was not designed to authenticate or to secure transactions in cyberspace. Similar conclusions can be drawn for tokenization, biometrics and passwords.

A proper question is, did these products do what they were originally designed to do?

After stating his series of conclusions, Mr. Kahr asks, "Why should this time be different?" ...why is the glass half empty?

Innovation and the ability to adapt solutions to problems are part of what made this country great. Rearview mirrors also reveal the works of Edison, Ford, Firestone and Jobs. Which is to say that there is more to hindsight than just failures.

Mobile should be a priority for banks. Why? Because it is something their customers want.

Can authentications in cyberspace be both convenient and secure, while lowering costs and improving bank profits? Don't bet against it... In fact, some solutions may already be out there.
Posted by rcarrott | Monday, December 17 2012 at 5:14PM ET
Another flower of yesteryear...Mailway Banking. Crocker First National Bank introduced it as a more convenient way to bank back in 1944. Crocker First National Bank also helped pioneer ATMs a few decades later. Being the first provider of these innovative new channels (which did eventually become mainstream) didn't help Crocker First National Bank avoid getting gobbled up by Wells Fargo in the 1980s. Being the first is rarely the most profitable course of action, because (as you point out) consumers are generally unwilling to embrace change right away (particularly when it comes to their financial lives).
Posted by Alex Johnson | Friday, December 28 2012 at 5:12PM ET
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