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Mobile Banking

A catalyst for improving bank performance


Introduction — Mobile Banking at the Tipping Point

Mobile banking is on the cusp of transformation from a niche service for the technologically elite to a mass-market service demanded by all customer segments.

As banks develop their strategies for giving customers access to their accounts through cell phones and other mobile devices, they should also regard this emerging platform as a potential catalyst for generating operational efficiencies and as a vehicle for new revenue sources.

Moreover, the Dodd-Frank Wall Street Reform and Consumer Protection Act and other regulatory changes are transforming the economics of banking, creating additional incentives for banks to serve customers in a better, yet more efficient, manner. Additionally, these new and convenient products and services provide banking institutions with a way to reconnect with their customer base and regain some of the trust that was lost as a result of the financial crisis.

At the same time, banks must prepare to defend their franchises against threats from not only other financial institutions, but also mobile carriers, credit card processors and other nonbank competitors that want to help consumers conduct financial transactions wherever they — and their mobile devices — are.

A Confluence of Factors

Bankers have been talking about using cell phones as a channel for consumer banking almost as long as energy companies have been trying to make solar power affordable, but it has taken a confluence of factors to make mobile banking a reality:

Rapid adoption of smartphones
Over the past several years, consumers have made smartphones their preferred mobile devices. Smartphones allow users to make calls, send and receive e-mail and text messages, browse the Web and perform many other tasks by downloading free or low-cost software applications or “apps.” According to published reports, the number of smartphones sold in the United States rose more than 60 percent, from 26 million in 2008 to 42 million in 2010. Another 25 million consumers are expected to purchase smartphones by 2012, bringing the total number of units in use to 67 million, or 50 percent of market share.

Shifts in consumer preferences
Like automated teller machines “ATMs” and online banking services, smartphones are giving consumers more options. By being able to access account information and perform transactions without requiring access to bank branches, ATMs, or computers, consumers are able to “bank” wherever and whenever they want — and they are learning to expect such convenience.

A significant capability build-out
Most large banks have made substantial investments in mobile banking capabilities and smaller financial institutions are not far behind. In addition, mobile network carriers, credit card processors and online personal finance services that allow consumers to aggregate their accounts on a single Web site or app are among the many nonbanks jockeying for position in this fast-growing space.

Product and service innovation
The mobile channel allows banks to offer customers features they cannot find online, such as remote check deposit, person-to-person (P2P) payments and real-time fraud notification. Such features make mobile banking a richer experience and will drive adoption over the next few years.

The Demographics of Mobile Banking

Mobile banking is growing at a fast clip among U.S. consumers.

From 2005 to 2010, mobile banking usage increased at nearly a 100 percent compounded annual growth rate, with most of that growth occurring after 2007, the year that Apple Inc. introduced its revolutionary iPhone and App Store.

According to Deloitte’s research, approximately 10 percent of mobile phone users conduct some banking transactions by phone. Chief among these users are the members of Generation Y, who were born between 1979 and 1994. Also known as “millennials,” these youngest adult consumers represent the fastest growing segment of today’s workforce and 25 percent of the global population:

  • Early technology adopters: Generation Y consumers are digitally sophisticated and hyperconnected to one another. Half send an average of 50 text messages per day , 97 percent are active on Facebook and other social networking sites and 80 percent are active online banking users. Smartphone users, including many Generation Y consumers, are three times more likely than consumers with traditional feature phones to use mobile banking and more importantly are significantly more active users — behavior that translates into greater loyalty, stickiness and, eventually, stronger banking relationships.
  • Significant earnings capacity: While Generation Y consumers currently earn approximately $215 billion annually, their annual income is expected to reach $3.4 trillion by 2018 and eclipse baby boomers’ earnings. Additionally, millennials are expected to inherit more than $1 trillion over the next decade making them an attractive target market with an increased appetite for banking services.
  • High-growth/high-potential market: In the United States, approximately 20 to 25 million Generation Y consumers will potentially become new banking customers over the next five years.

While the members of Generation Y are leading the charge in the adoption of all things mobile, we expect baby boomers and older consumers to increase their usage of mobile banking as it becomes an established and familiar channel. Based upon our analysis, we believe that mobile banking will surpass online banking as the most widely used banking channel by 2020 — if not sooner. And, as mobile banking grows, so, too, will opportunities for banks to increase revenues and gain operating efficiencies.

Opportunities for Operational Efficiencies

Banks can realize operational efficiencies by adopting an integrated channel strategy that includes mobile banking. As shown in Figure 1, the cost of processing a transaction via mobile phone can be as much as 10 times lower than via an ATM and as much as 50 times lower than via a branch.

According to our analysis, a bank with a footprint of 100 branches and 250 ATMs and an average daily deposit/withdrawal volume of 165 branch transactions and 65 ATM transactions, could expect to save about $5 million annually if the bank were able to convert 20 percent of those branch and ATM transactions to its mobile channel. Features such as remote check deposit or P2P will enable those transactions to take place through the mobile channel — and reduce dependency on branches or ATMs.

The more transactions that banks can drive to mobile phones, the greater the possibility that they can close poorly performing branches and increase operating efficiencies by shifting the focus of branch employees from transactions to more advisory-type services that will lead to greater sales or cross-selling rates.

Opportunities for Revenue Growth

Mobile banking offers banks several opportunities for increasing revenues. These include monetizing the value of customer analytics, delivering greater real-time access to products and services and conducting targeted marketing campaigns based upon the knowledge of consumer preferences that banks collect.

Expanding distribution and coverage models
Mobile banking gives banks the potential to expand beyond their geographical footprint as well as ability to cross sell and up-sell products to existing customers. Banks that harness these additional mobile financial services capabilities can see a profound impact on the nature of the banking relationship.

Monetizing the value of customer analytics
Unlike supermarkets, department stores and other businesses that see only one dimension of consumers’ spending habits, banks have a broader view of what their customers buy and where they like to shop. This puts banks in a specific position to develop a new line of business focused on bundling data analytics for retailers and other entities vying for customer intelligence — while maintaining the privacy of individual customers’ information.

Merchants could employ such aggregated information to target customers more effectively than they might through other means. In addition, banks could use this knowledge of their core customers to strengthen their own abilities to acquire new customers, cross-sell existing customers, improve decisioning capabilities and provide better customer service — resulting in significant value streams for banks.

Delivering greater real-time access to products and services
Mobile banking could provide bank customers with the ability to compare options at time and place of purchase. At the same time, banks could offer these shoppers complementary services, such as financing or leasing options, insurance quotes (through partnerships) and more.

Offering discounts and purchasing incentives to bank customers
By establishing relationships with manufacturers and retailers that could offer bank customers discounts while they research product options at the point of sale, banks can position their mobile channel as something more than just a convenient way to pay.

Conducting targeted marketing campaigns
Similarly, banks could conduct a variety of targeted marketing campaigns to customers who use mobile banking. For example, banks could pinpoint shoppers’ physical locations to make relevant offers to their customers, such as offering them temporary line increases. In addition, banks could leverage the mobile banking interface as a real-time, tailored advertising engine by using behavioral analytics they compile to develop campaigns tailored to customers’ shopping preferences.

Additionally, banks might be able to offer their customers “smart” coupons while customers are in stores shopping for a flat-screen television or digital camera. The coupons would come from alliances banks form with the products’ manufacturers and/or retailers — and banks would receive a fee for each coupon used.

Download the attached document for more information.

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