Mobile banking mushrooms in the US

Banks and credit unions in the US are in increasing numbers rolling out mobile phone-based banking services. Indeed, the pace at which services are being introduced was described as “feverish” by Keith Lewis, product marketing director at financial systems vendor Diebold, in a recent discussion with EPI.

“Over 50 percent of US banks and credit unions will have mobile banking services in place in 2010,” said Lewis.

This, he added, will be up from around 10 percent some 18 months to 24 months ago.

In many respects, being able to offer a mobile banking service is becoming a necessity for US banks. This is highlighted in a six-month consumer research study sponsored by Visa and undertaken by financial services consulting and investment firm Mercatus.

“Owing to its rapid pace of adoption, mobile is a market that offers a clear first-mover advantage,” commented Bob Hedges, managing partner of financial services consulting and investment firm Mercatus managing partner in a statement.

“Banks that act soon, and deploy mobile financial services, will have a clear market opportunity to capture new business.”

The Mercatus study, which was published in December 2009, examined the impact of mobile financial services on consumer decision-making, specifically when it came to selecting retail banking services. Mercatus concluded that mobile financial services are approaching “a tipping point.”

In drawing this conclusion, Mercatus assessed consumer behaviour across three decades of distribution channel innovation.

This assessment, noted Mercatus, revealed how the current pace of mobile adoption exceeds past innovations including ATMs, debit cards and online banking.

For the study, Mercatus defined mobile financial services to include remote payments, bill payment, balance transfers, proximity payments, transaction alerts and access to account balances and statements.

Will eclipse online banking

In its survey of consumers Mercatus found that nearly one-third of consumers are using, or considering using, mobile financial services in the next year. In addition, responses indicated that mobile financial service adoption by consumers will grow significantly during the next five years, exceeding the use of online banking by 2015.

Underscoring this view, consultancy TowerGroup estimates that by the end of 2009 there will be some 10 million mobile banking users in the US – with the number forecast to hit 53 million by 2013. Furthermore, by 2011, the value of mobile transactions from consumers conducting business via mobile devices over mobile broadband will reach $36 billion, predicts TowerGroup.

Similar figures have been published following research from the Aite Group, which predicts the number of US mobile banking users will end 2009 at 8 million, up from 1.7 million at the end of 2008 and a negligible number at the end of 2006.

Aite Group forecasts that 35 million Americans will be mobile banking users by the end of 2010.

Unsurprisingly, Mercatus also found that a bank’s ability to offer mobile services, or otherwise, will impact its customer acquisition rate. Of particular significance in this respect, Mercatus found that mobile financial service capabilities can already have more impact on a consumer’s decision to select a bank than availability of online banking, access to ATMs, or nearby branches.

“Banks offering mobile financial services should anticipate as much as a 60 percent increase in sales lift,” stated Mercatus.

In addition, it found a 20 percent decrease in the cost of acquiring a new customer based on the increased effectiveness of mobile-related customer acquisition marketing.

The consultancy also found that customer acquisition promotional offers including mobile financial services out-performed those that did not include mobile financial services by nearly 30 percent.

Commenting on the survey’s findings Tim Attinger, head of product innovation at Visa, said: “Financial Institutions offering mobile services can have a strategic advantage when it comes to attracting new customers.”

He added that Visa is working closely with its financial institution clients to help deliver innovative mobile services to Visa account holders.

Defining the target market

Paralleling Mercatus’ upbeat view on mobile banking is a recent study published in December by Firethorn, the mobile banking unit of US wireless technology developer Qualcomm.

Summing up the findings of the study conducted for it by research firm StrategyOne, Firethorn emphasised: “Consumers are out there, and they are ready to transact now. They often represent a financial institution’s or a merchant’s top customers.”

Firethorn continued: “Financial institutions and merchants have a once in a lifetime chance to set the mobile trend now, to capture the initial sweep of changing habits.”

However, before setting out to conquer the mobile banking space Firethorn advised that banks must first understand their target markets. To this end, in its research Firethorn segmented mobile banking into three consumer categories:

• Those that have never used mobile banking services;

• Active mobile banking service users; and

• Former mobile banking service users.

Of consumers who have never tried mobile banking services, Firethorn found that 60 percent are female with an average age of 45 and form part of a household with an average annual income of about $45,000.

In addition, more than half of all those who have never tried mobile banking are employed, while 28 percent have a bachelor’s degree or higher.

Major reasons expressed for never having used mobile banking included concerns over security as well as potential costs.

Firethorn concluded that, for financial institutions, consumers who have never tried mobile banking services represent “an audience of opportunity”.

One important reason banks may be losing out on this market segment opportunity is their focus on delivering mobile banking services through a mobile internet platform, leaving those without web-enabled mobile phones technologically isolated.

Though this group is not in the majority it remains sizeable. A survey conducted by internet price comparison service PriceGrabber in March 2009, revealed that 42 percent of online consumers do not own an internet- enabled mobile phone.

This is leaving a gap in mobile banking services being offered, stressed Diebold’s Lewis.

“Consumers want a short message service [SMS]-based banking service but are just not getting it,” said Lewis.

Allaying concerns that SMS-based mobile banking lacks the security offered by a mobile web-based service, Lewis emphasised that it can be made as secure because no data resides on the handset.

“The information provided when using a SMS banking service is no more risky than leaving a balance receipt behind at an ATM,” said Lewis.

Active mobile bankers

Turning to active mobile bankers in its study, Firethorn reported that they describe the experience as “fast and convenient.” Firethorn found that active mobile bankers are predominantly male – 69 percent – and have an average age of 38.

In addition, active mobile bankers have a considerably higher average annual household income than non-users – $86,000 – and twice as many as non-mobile bankers – 57 percent – hold a four-year degree or higher. The vast majority of active mobile bankers – 86 percent – own a smartphone.

Certainly an important market segment also to be considered are consumers who have used mobile banking but not continued to do so.

Firethorn found this group represented a surprisingly high 12 percent of the US’ general population, the majority are male – 56 percent – and have an average age of about 40. They also have the highest average annual household income of the three categories covered by Firethorn’s study – $87,000. Mobile internet access is also not a problem for the former mobile bankers with 72 percent found to own a smartphone.

The most significant reason for discontinuing the use of mobile banking was that online banking through their computers is sufficient. This reason was given by 34 percent of former mobile bankers. A perceived lack of security was cited by 11 percent of respondents who had given up mobile banking.

Firethorn advised that for those who suggest mobile banking is not needed, financial institutions can push the notion that a mobile application is an on-the-go channel that is easier to use than a laptop computer. Security concerns among consumers can be alleviated by leading them to only banking applications that are compliant with the Payment Card Industry Data Security Standards (PCI DSS).

PCI DSS standards include PIN authorisation, multifactor authentication to ensure compliance, automatic account deactivation in event of handset theft or loss, encryption of locally stored data and secure registration of mobile phones. Firethorn announced in June 2009 that its mobile banking solution meets full PCI DSS requirements.

Challenges

While there is a general feeling among US financial market players that mobile banking will gain momentum, there are still challenges to overcome.

“In the US the challenge is industry fragmentation,” Lou Byfield, director for product strategies (mobile banking) at Fidelity National Information Services, told EPI.

The key players – technology vendors, banks and mobile network operators – must come together to set the industry standard and ensure interoperability, said Byfield.

Once this happens, “mobile banking will take-off”, he predicted.

Another challenge awaiting banks and merchants offering mobile phone transactional services is the threat of increased fraudulent activity.

“The mobile channel is equally appealing to cybercriminals,” warned Ori Eisen, founder and chairman of internet security specialist 41st Parameter.

Eisen explained to EPI the major concern, is, quite simply, that internet-enabled mobile phones do not have the same degree of security offered by personal computers.

Among the security issues for internet-enabled phones, said Eisen, is that they do not have Adobe Systems’ Flash application which is often use by banks as an additional layer of user identity verification security.

In addition, online mobile phone banking sessions are channelled through mobile network operators’ networks making it impossible for a bank to ascertain the actual location of the user, added Eisen.

Beyond the mobile security issues, banks must also look to the potential scale of future customer uptake of mobile banking services, advises Eric Carlier, head of mobile payments at US Payments processing technology specialist Kabira.

He explained to EPI that, at present, much of the emphasis is on easy-to-accept services such as such as transaction alerts and accessing account balance details. This, he continued, forms part of the process of educating customers in the use of mobile banking applications.

The obvious development will be increasing acceptance by customers of mobile banking as a means to executing payments. This, he stressed, makes it vital for banks to select the correct mobile banking platform from the start. When transaction volumes begin to accelerate having an inadequate platform could cause major headaches for a bank.

“Banks must be prepared to scale-up rapidly and be positioned to rapidly deploy new mobile banking services,” said Carlier.

He continued that Kabira has positioned itself to provide highly-scalable, low cost mobile payments transaction process via its Kabira Mobile Transaction Hub (KMTH) which builds on the capabilities of its transaction processing platform and extensive experience in card transaction authorisation and switching and supplying remote top-up services to mobile network operators.

About three years ago Kabira took the decision to combine its expertise in banking and mobile top-up payments processing to develop the KMTH, said Carlier.

Indicative of Kabira’s processing platform’s capabilities, it was used to process 15 billion card transactions in 2008 with users including Visa and Bank of America. Kabira’s platform has been benchmarked to execute more than 50,000 transactions per second.

Kabira, as with other major mobile payments technology vendors, is bracing itself for significant growth.

“When mobile payments takes-off [volume] growth will be exceptional,” predicted Carlier.