Finding the right place, at the right pace in a volatile and uncertain mobile marketplace
By Collin Canright
It’s become a familiar story, usually with a new splash. Large banks and nonbanks, merchants and technology companies are pressing to solidify their inroads into the financial transaction business. Research and everyday observation show how consumers are increasingly using mobile technologies. But how far are they willing to go to do their banking on small mobile devices?
A consensus says that the future banking customer relationships—particularly for millennial consumers—will orbit to one degree or another around mobile technology. The latest twists came in September, when one of the biggest technology and payments events of the year featured the announcement of Apple Inc.’s entry into the payments business with Apple Pay. Big-brand megabanks, the Visa and MasterCard networks, and big-box merchants had signed up to become partners with Apple’s universal retail smartphone app that uses Near Field Communication and tokenization technologies.
“Tying community bank relationships with mobile banking is like peanut butter and jelly—it adds lots of stickiness and feeds the relationship.”
—Ed Bachelder, payments consultant
About the same time, a consortium of large retailers known as the Merchant Customer Exchange released a free new mobile wallet, a downloadable payments and commerce app called CurrentC that lets consumers pay, receive discounts and earn loyalty rewards at more than 14 major chain stores. Meanwhile, a number of other financial technology firms received major funding and rolled out new alliances and products.
Community banks will continue to have representation in the mobile payments field through the Visa and MasterCard networks, and ICBA Bancard, ICBA’s electronic payments services program for community banks, is working closely with the card networks on the launch of Apply Pay as well as on other digital developments. As players in the Apple Pay initiative, Visa, MasterCard and ICBA Bancard are working to ensure community bank credit card customers will have full access to the mobile payments system, including its tokenization security measures.
However, the overarching impetus behind various mobile developments in the payments system, from Apple Pay to the merchant consortium and beyond, remains that whichever providers have a digital hand or cog in the consumer’s digital wallet or paying device, however consumers decide to use them, influences the payments card or mechanism that becomes the consumer’s default. Fees follow.
So where do ballyhooed mobile banking and payments developments among the biggest players leave community banks?
Given the still nascent state of consumer adoption of mobile payments technology, time and opportunities for growth and innovation in the mobile arena at the community bank level still exist, banking technology experts say. Reducing technology costs and local market savvy can enable community banks to become equal competitors in the mobile and digital footrace, but they’ll need to begin taking steps soon and planning strategically. (See sidebar “Is Mobile Fully Catching On?”.)
Most technology strategists agree that community banks should plan their own mobile and digital delivery futures based on the more intimate understanding they have of their consumers. Indeed, the most important element in any mobile and digital future is the one that often seems missing from the conversation, at least when it comes to mobile payments: That is, consumers.
Moreover, many paying consumers are not overwhelming fans of flocking to mobile banking and payments, but they are huge fans of smartphones, tables and emerging big-screen “phablets,” all of which happen to be the platforms for mobile banking and payments. Any number of surveys also show that regardless of contrary news headlines, consumers trust banks most with their payments and identity information.
“Banks still hold a trust advantage when it comes to safeguarding personal data and using data in the best interests of their customers.”
—Teresa A. Epperson, technology consultant
“Banks still hold a trust advantage when it comes to safeguarding personal data and using data in the best interests of their customers,” agrees Teresa A. Epperson, a managing director at the global business advisory firm AlixPartners LLP. Consumer studies the Boston firm has conducted indicate increasing mobile-banking adoption and awareness and use of mobile remote-deposit capture applications. Not surprisingly, considerable research indicates that younger consumers lead the way in adopting mobile services. A recent AlixPartners survey found the highest and fastest-growing adoption levels in the 18-25, 26-34 and 34-44 age groups, respectively. The two youngest age groups show 60 percent and 50 percent adoption rates among smartphone users.
Regardless of their perceived threats and opportunities, however, mobile banking does not yet meet a particular consumer need or resolve a particularly vexing problem in an ultimately satisfying way, some technology consultants say. “By now consumers are tired of new, greatest-ever mobile solutions that are too difficult to use, prone to fraud and simply not filling any pressing need,” contends Tom Cannon, a card marketing expert and managing partner at Whitehall Advisors, a payments consultancy in Mill Valley, Calif. “Ever stand behind anyone trying to use mobile pay? If you do, you will understand the problem.”
Consumers still overwhelmingly rely on credit and debit cards and cash for payments and will for some time, even if a chip on the smartphone replaces plastic cards. Banks still receive revenue from interchange fees and will for some time. “The reality is that the marketplace today is controlled by legacy payments systems,” says Steve Mott, principal at the mobile payments consulting firm BetterBuyDesign in Stamford, Conn. As a result, evolutionary developments and relying on existing software system vendors probably represent the present and future roadmap.
But, overwhelmingly, consumers who pay for goods and services online, including over mobile channels, do so with a credit card. Further, slow-moving adoption of mobile services, or any technology, is precarious for winning the banking business of coveted millennials who now live on mobile devices and likely haven’t ever written more than three checks.
As Epperson says, “Community banks do have a need to appeal to that younger demographic who are managing their lives on their mobile phones.”
Apple’s splashy introduction of its mobile payments application Apply Pay only added to what was already a vigorous industry discussion about the transformative future of mobile banking. However, could the adoption of handheld banking in the real world—as opposed to the anticipatory but still theoretical projections by systems designers and technology pundits—be leveling off?
One assessment of recently flat mobile banking adoption comes from a Federal Reserve report, titled “Consumers and Mobile Financial Services 2014,” published in March. The Federal Reserve research, which gathered information and habits from 2,657 consumers, offers some evidence that most consumers likely to use mobile banking are already doing so.
The Fed’s research found that only 30 percent of consumers had used a mobile banking channel, an adoption rate that has stayed level for about two years. Further, among all consumers, only 14 percent had made a payment from a mobile device. Among the minority of consumers who have engaged in mobile banking, only 38 percent had made at least one mobile remote deposit capture transaction within the previous year.
The consumers surveyed by the Fed who had not used a mobile service often said their banking needs were being met just fine through other channels, often indicating it was easier for them to pay with cash or cards than with a mobile device.
Moreover, lingering doubts over the security of mobile channels also surfaced in the Fed’s research. Indeed, some studies indicate that consumer confidence in the security of any online financial transaction could be falling. One survey of 11,000 consumers conducted in August by a software security firm, Kaspersky Lab, found that 62 percent of consumers said they feared online financial fraud, up slightly from 59 percent last year.
Nevertheless, substantial growth of both new bank and nonbank options in mobile payments are likely to drive new adoption. Even the Fed predicts that the growth of mobile banking will continue to increase as more consumers use smartphones and more financial institutions offer the services. Doug Brown, senior vice president and general manager of mobile for FIS Global in Jacksonville, Fla., also disagrees that mobile banking adoption has plateaued, particularly considering more financial institutions have continued to adopt more mobile security measures.
While POS payments may represent the most likely growth for retail mobile services, Brown says mobile adoption will also increase because apps on both smartphones and tablets are incorporating more financial functions that include the ability to connect directly with a banker by video over a smartphone. Some technology observers also believe that tying mobile payments services to loyalty benefits or other incentives should provide a strong spark for a second wave of new mobile adoption.
Of course, then there is the ever-present coming generational shift as millions of technology-loving millennials—and those even younger than them—come of age. “Typically the younger segments are more innovative and are looking for new ways to do things,” Brown offers. “But these early adopters also typically influence their older friends and family members, and adoption among other age segments will occur in a domino fashion.”
Taking deliberate steps
For community banks to begin planning to attract the highly mobile millennials, start experimenting and get into your customer’s present and future digital mindset, and see how they want to use digital services, several technology consultants say. Differences in digital preferences and habits can be found by geographic market (urban, suburban and rural) and age groupings.
Epperson points out that young consumers are not adopting online bill pay at the rates that older consumers did in the past. “Younger consumers are much more interested in real-time liquidity management,” she says. “They want to look at their device and know the balance and pay a bill in real-time, rather than input it online.
“There’s a big gap between the Quicken generation and real-time liquidity management generation.”
One repeated recommendation is for community banks to review their entire operations broadly to identify steps they can take now to prepare for digital banking, and not narrowly with any specific software application like mobile banking or payments merely in mind. For example, banks could find that their call centers could provide customer balances or fraud alerts through a text-based app. Banks may also find that small-business owners in their market would use cash-management, card-payments or even payroll-notification options available through their tablets.
Community banks are closer to their customers than many of the large organizations that issue cards and develop technologies. “Community banks have always, by necessity, been good at networking in their market footprint and understanding their customers,” offers Ed Bachelder, director of research at Blueflame Consulting, a payments research firm in Melrose, Mass. “Tying community bank relationships with the mobile banking is like peanut butter and jelly—it adds lots of stickiness and feeds the relationship.”
Community banks should tap their close-customer relationships now to discover the way forward in mapping out their short-term mobile and digital futures. The main point is community banks will only know what their customers need and what their operations can support from a digital perspective unless they examine all of their own customers’ views and dynamics.
Today’s mobile options
Some of the ideas that may require new mobile capabilities could be developed using local software developers, some consultants say. App development today is not nearly as difficult as full-blown systems development. Others may be available off the shelf. It may be easier and better in the long run to have well-integrated applications across all products, but it’s also possible to use highly targeted applications that meet a specific banking, payments, shopping or lending need of your bank’s customers.
It is also critical to examine existing and potential partnerships when examining mobile and digital banking possibilities. Community banks, given their limited technology and marketing resources, will rely on existing technology platform partners for future services. Your community bank’s current vendors may well have their product development underway and be willing to include your institution in the testing process or easily add features more quickly than you think. One community bank recently asked its vendor to integrate real-time payments capabilities into its existing system and discovered how the vendor could and eventually did. The solution involved simply asking the right questions to the right people.
Community banks may also have opportunities to experiment with alternative payments firms, merchants and ecommerce providers. “We are seeing a trend where technology providers will unbundle capabilities and provide separate apps,” Epperson notes. This may well benefit community banks wanting to get started with small-scale, innovative experiments and do not want to wait for fully integrated mobile offerings. “Bring mobile technologies into your market in any way you can,” Mott advises. “Play with it, and learn how to master the technology and digital interactions. The good news is you have the time, and the bad news is if you fiddle around it will pass you by.”
Collin Canright is a financial writer in Illinois.