Bankers frequently ask us how mobile payments will generate revenues and profits. But an even more burning question may be: How much do banks stand to lose by not providing a robust mobile payments offering?
Some consumers maintain a combination of a checking and savings account and perhaps a brokerage account or mortgage with their bank. Consider the risk to that bank if a national retailer with a financial services franchise including thousands of branch outlets, or a new entrant such as PayPal, inserts itself into that customer relationship by offering a mobile wallet with enticing discounts and loyalty rewards.
In this worst-case scenario, the bank loses that valued credit card relationship along with the deposit base as the customer redirects his cash flow. The potential threat is significant: the six largest credit card issuers in the U.S. earned a combined $92 billion in revenue during fiscal year 2012 from their credit card businesses.
Now consider the possibility of these alternative players moving beyond payments by offering checking or bill payment services. Once they have convinced consumers to jettison their bank-issued plastic, they may begin to peel consumers away from their banks by providing products similar to traditional banking products, but with more attractive features at less cost.
Deploying a mobile offering is not solely a defensive strategy of course. For those banks seeking to grow, mobility offers a way to not only attract new customers, but to further engage existing customers and extend share of wallet. Mobility can help banks become more enticing to customers by enabling them to receive offers when and where they want.
We believe that mobile payment technologies such as cloud wallets, QR codes and near-field communication (NFC) payments will be the next big thing because of their rich feature functionality, so banks should be investing accordingly. Certainly, major payments players are already pursuing a similar strategy, including Google, Isis (the joint venture among AT&T, T-Mobile and Verizon) and Visa. While NFC has not taken off as quickly as initially predicted, Gartner estimates that by 2015, approximately half of smartphones globally will have an integrated NFC capability.
When non-traditional players' mobile offerings become mainstream, revenues of banks that do not shore up their offerings may be hurt, in the same way that iTunes has disintermediated music record labels. The threat comes from the fact that so many players who play a key role in the payments ecosystem — mobile network operators, mobile handset providers, wallet providers, payment startups and retailers — are developing strong relationships with banks' customers.
The mobile wallet market appears to be wide open to new entrants, with banks having a slight edge. While more than 20 percent of U.S. online consumers prefer to use their checking account for digital wallet services, 17 percent prefer PayPal, according to Gartner. That gap could quickly close in the next few years.
To survive in the mobile payments landscape, banks need to do three things:
- Integrate mobile into existing offerings. When someone applies for a new card today, regardless of channel, the bank typically mails it out in three to five days. In the mobile world however, customers expect instant results, which means "real time" systems are needed. To jump to the next level, they must integrate new mobile platforms and train customers to use them, so that banks can federate their credentials to support multiple payment services and work with partners as needed. For example, suppose a bank with millions of credit card customers having direct deposit accounts, partners with a mobile wallet provider. The bank will need the technology architecture to send pertinent customer card and account data to that provider to enable customers' mobile payments.
- Rebuild loyalty. Banks need to leverage emerging customer analytics techniques, coupled with geo-location services through mobile devices in order to make relevant offers at the right time. Smartphones have the unique capability of emitting "data exhaust" — a trail of often valuable data that can help banks identify customers' interests and needs. Innovative banks will layer in analytics over this data stream to reward customers for their loyalty or spending patterns, or to offer coupons by brands that customers most desire. Banks need to rebuild the customer trust that was frayed in the financial crisis, particularly since non-bank players are aggressively cultivating those same customers.
- Redefine success. It's no longer sufficient for banks to measure success by counting the number of mobile payments and online users. The lines have been blurred — a customer accessing the bank on her iPad, tablet and smartphone at different times during the day could be characterized as an online user, mobile phone user or both. Such pigeonholing no longer matters. The paradigm has shifted to how to engage customers with the right product at the right time, regardless of how they enter the bank. So, for example, it makes sense to offer geo-location-enabled offers to a customer while she commutes to work with her smartphone; but that service is irrelevant when she is home using her tablet. Ultimately, banks must shift from static, product-based metrics to performance metrics that measure customer engagement.
As mobile commerce reaches critical mass, consumers will chose provider and stay with that choice. Banks must be properly positioned when that moment comes.
