Banks that latched onto mobile banking a few years ago were more interested in first-mover advantage than profitability.
But the squeeze on IT budgets, along with the growing popularity of banking services on smart phones, is shifting bankers' attitudes. Bankers needing to replace shrinking revenue don't have forever to wait for mobile banking's benefits to materialize — and with the rapid maturation of services and offerings, feel they don't have to. Now, when talking to their service providers about mobile banking, the conversation begins and ends with return on investment.
A year or so ago, "you may have been having a strategic conversation with a financial institution," says Calvin Grimes, a product manager for Fiserv's Mobile Money solution. "Now that discussion will change to something more tactical."
Vendors still tout the advantages for early adopters. Mobile-based payments are expected to take off within the next few years as more and more phones are outfitted with contactless chips, and banks that have a base of mobile customers in place would be best positioned to profit from the payments evolution. There's also the coolness factor; banks that offer mobile banking are more likely to win over Gen-Y customers.
But providers like Fiserv are starting to come to the table with metrics showing that banks of all sizes can realize substantial early gains in mobile deployment. At a recent mobile-commerce conference, Fiserv touted that a mid-tier bank can earn $1 million annual profit within three years primarily by migrating customers from branches and call centers — and that doesn't include mobile transactional services.
Drew Sievers, co-founder and CEO of mFoundry, also says banks are getting tangible returns. Besides reducing call center volume from habitual "balance checkers," mFoundry has counted "5 to 10 percent" of the average bank's mobile user base as new customers. "It's also proving to be quite sticky, and particularly true for folks who set up bill payments on the mobile phone," says Sievers, whose client roster includes Citibank, BB&T, PNC Financial Services Group, and Zions Bancorporation.
Whether vendor claims resonate with banks remains an open question, given the low rate of adoption so far. According to a survey this year by research firm Aite Group, only about 600 U.S. banks are expected to offer mobile banking by year's end. Marc DeCastro, research manager for consumer banking and credit practice at Financial Insights, says many bankers are skeptical about a quick return on investment and are instead basing decisions on whether they will fall behind the competition if they don't offer mobile banking.
The rapid adoption of smart phones is also changing bankers' mindset about return on investment. Bankers are asking providers to showcase the impact that mobile services will have on other delivery channels, such as branch and call centers, as these mobile services move into the mainstream.
Grimes acknowledge that he is encountering skepticism among bank clients. "Obviously, financial institutions are challenging any ROI statements out there," says Grimes. "But we at least start to take this position to the market around how things need to work and what your target should be."
Fiserv, in a mobile-commerce study with platform partner Mobile Commerce (M-Com), calculated that a mid-tier bank with 250,000 customers would see escalating profits of $165,000 to $2.4 million through the fifth year of a mobile services deployment — amounting to an annualized $1.3 million ROI.
The savings in that model come through a 51-percent cost reduction in migrating consumers from higher-cost channels; 29 percent improvement in customer retention; and a 20 percent drop in costs for process automation (such as using text alerts for customer notifications). "Institutions can tap into mobile's potential to help them achieve the organization's broader strategic goals around cost reduction, right-channeling, and deposit gathering," the report states.
Fiserv says its numbers came from third-party research on customer service costs at branches, as well as real-world statistics culled from New Zealand-based M-Com's experience in introducing mobile services at banks in its home country and across Asia (a region far ahead of the U.S. in mobile banking and payment adoption rates). By replacing a $4 per interaction cost for a consumer branch visit with a mobile interaction costing a few pennies, it would only take a reduction of a couple of teller transactions to fully pay for a full year of a customer's mobile activity, according to Grimes.
M-Com, a late entrant to the U.S. mobile banking market last year, contends that banks in the U.S. could also see a faster return on investment if they marketed mobile banking to all of their customers, not just those already enrolled in online banking. "None of the U.S. banks to date offer mobile banking to the offline base, which to us is mind-blowing," says M-Com marketing director Serge Van Dam. "The U.S. is really the anomaly."
TowerGroup analyst Charul Vyas agrees, noting in a recent five-year forecast on mobile banking that "U.S. banks will need to expand their thinking about mobile banking beyond 'online-banking lite' and start to view mobility as its own powerful and compelling delivery channel." She notes one of M-Com's bank clients in New Zealand attracted up to 40 percent of its offline deposit customers to mobile services by promoting adoption outside the Web site.
TowerGroup estimates that 27 percent of U.S. mobile banking users will be exclusive, non-Web banking users by 2013.
USAA Bank in San Antonio is among institutions looking at mobility in its own right, rather than a cousin to online activity. It recently debuted an Apple iPhone application for its globally dispersed military customers that handles their banking, investment and insurance accounts. "We certainly put pen to paper and did a ROI around this," says Jeff Dennes, USAA's executive director of mobile and money movement. "It wasn't so much that we were going to get 'X' million dollars worth of benefit, as much as it was we have a very mobile membership, and it was another way for them to access their accounts and activity and keep up with their financial lives."
Mobile banking usage has already expanded rapidly — more than six-fold in 2008 — and 7.5 million households will be enrolled in mobile banking by the end of 2009. TowerGroup projects that, by 2013, banks will have 53 million active mobile users (plus a total of 108 million total enrollees), which will require banks to start planning mobile services as an "integral component" of is channel delivery lineup. While bank deployment outside the major tiers is still nascent, an Aite Group survey earlier this year reported that 59 percent of the nation's largest institutions would likely purchase or replace their mobile banking application this year.
And for community banks, the numbers are expected to grow as well. In its biennial technology survey from June 2008, the Independent Community Bankers of America found 30 percent of small banks planned to up their spending. "That number is going to be closer to 40 percent" in 2009, says Cary Whaley, the ICBA's director of payments and technology policy. "What they are looking for is a different way to reach customers and add customer convenience… not looking to displace cash or wallets, but give consumers 24/7 access."