Can mobile banking fulfil its potential?

The use of mobile technology has been heralded as a potential revolution in the retail banking sector, enabling bank customers to manage their financial affairs regardless of their location. However, a decade after the arrival of the first mobile banking services, actual usage remains modest in many countries, and the industry is littered with the debris of discontinued projects, terminally fractured partnerships and shredded deployment plans, while failed niche technology vendors and service providers lie permanently marooned by the curbside. Is mobile banking an over-hyped gimmick, or is it in fact a credible 21st century banking channel?

Mobile banking is a credible channel, but usage in developed markets will remain low

From a purely operational and technological standpoint mobile banking is a credible channel in 2009. A range of services are commercially available – some simple, others relatively complex – and improvements in device functionality and data network transmission speeds have without doubt enhanced the overall user experience. Alas, credibility does not equal substantial customer adoption. The first mobile banking and payment services emerged in 1999. Fast-forward ten years and usage in many regions remains decidedly low, even within developed markets where mobile devices have become nearly ubiquitous (Western Europe and North America).

There are, of course, some exceptions to this rule. In certain Asian countries – notably the technologically advanced nations of Japan and South Korea – mobile banking and payment services have flourished over the past decade. Whether this equates to genuine maturity is a matter of conjecture. However, the growth of mobile banking in Asia must be viewed firmly in isolation, and it would be dangerous – reckless even – to compare mobile banking development in countries such as South Korea on a pure like-for-like basis with nations in other regions of the world.

So, what is stifling the adoption of mobile banking in Europe and North America? The appeal of mobile banking simply isn’t strong enough to influence the mass migration of bank customers away from existing channels, such as online banking (OLB). If customers have grown comfortable with one low-cost, self-service mechanism, it doesn’t make particular sense for a bank to drive them to use another one.

IT spending on mobile banking is continuing, but it is not the highest-priority channel

Despite modest market growth opportunities (and a track record of extravagant promises and embarrassing underachievement stretching back ten years), mobile banking services still feature in the channel strategies of most retail banks in Europe and North America. Our latest Retail Banking Technology Spending Strategies survey indicates that mobile services are part of banks’ current and future thinking about customer interaction. However, mobile banking is not the highest priority for technology investment in 2009, and IT executives are focused on supporting development activities involving other channels (most notably the branch network and OLB).

Institutions in Europe and North America appear to be treading a cautious path. Mindful of previous fantastic projections of billion-dollar income streams (which turned out to be fantasies, at least so far), and operating in the toughest trading conditions in decades, banks in developed markets appear unwilling to place big bets on future revenue growth delivered via the mobile channel. Under the circumstances, and taking historical events into account, a conservative approach is entirely sensible.

Mobile banking’s greatest market opportunity involves serving the needs of the unbanked

According to the Consultative Group to Assist the Poor (CGAP), an independent policy and research centre dedicated to advancing financial access for the world’s poorest citizens, in 2009 more than one billion people worldwide lack basic bank accounts but own a mobile device. Catering to this ‘unbanked’ segment of global society undoubtedly represents mobile banking’s greatest market opportunity.

A number of mobile banking services have been launched in developing countries, and growth has been both continuous and rapid in several cases. By way of illustration, Safaricom’s M-Pesa mobile money transfer service has attracted more than 5 million Kenyan users after less than two years of operation. Encouraged by the success of M-Pesa, other operators are keen to launch similar services. Rwandatel is scheduled to launch a mobile banking and money transfer service in October 2009, becoming the latest African telco to target the continent’s huge unbanked market.

Unbanked citizens also exist within developed regions and nations. These include the world’s richest countries, where migrant workers operate in both the mainstream (legal) and shadow (illegal) economies. These workers often do not possess bank accounts in their temporary country of residence (either through personal choice or on grounds of ineligibility), but still have financial requirements that need to be met. The ability to send money back to their country of origin – typically to family members – is of particular importance.

During 2009, the World Bank anticipates total remittances flowing to developing countries will decrease from $305 billion to around $290 billion as a direct result of deteriorating global economic conditions. At this lower level, remittances will still outstrip both private capital flows (which are expected to fall 50% in 2009) and official development aid (typically around $100 billion), but there will unquestionably be additional hardships in many poor nations. Nevertheless, $290 billion is a significant amount of money, and providers (and agents) of remittance services are still in line to generate substantial revenues from transaction commissions.

Mobile banking services will replace traditional remittance flow methods

The provision of international remittance services has traditionally been the preserve of long-established firms such as Western Union and MoneyGram. These organisations operate across the world using locally appointed agents – Western Union has 375,000 – and their geographic and demographic reach is therefore more extensive than that of any individual retail bank.

However, the competitive landscape is in a period of change, and the dominant market position of Western Union and MoneyGram is under direct threat. Banks in North America are using remittance services to attract unbanked and underserved customers (estimated by the Center for Financial Services Innovation to total 40 million households). Moreover, the recent expansion of the EU (to include the countries of Central and Eastern Europe) greatly increased the number of migrant workers, and in 2009 banks are catering to this temporary segment of the population by offering remittance services (in the expectation of subsequently converting the status of such customers from unbanked to banked, and then cross-selling additional financial products).

Mobile solutions are destined to play an intrinsic role in the provision of international remittance propositions aimed at migrant workers in developed countries, and there is already evidence of services being launched specifically for this segment of the market (and at a lower cost than Western Union or MoneyGram).

Retail banks and technology vendors must be prepared to play the long game

It is difficult to ignore that banks in Europe and North America are either offering mobile services today or have plans to do so within the next three years. However, it is not a question of implementing a solution based on one of several different technological approaches (such as SMS alerts, mobile browsing or dedicated Java applications) and then simply sitting back to wait for the money to roll in. If banks in developed countries are ever going to generate substantial recurring revenues from their mainstream customers through the mobile banking channel, they must be prepared to play the long game and undergo four distinct phases of development:

•    create awareness

•    stimulate interaction

•    launch fee-based services

•    Achieve full engagement.

The pace of transition between phases will vary case by case, and some institutions will doubtless make faster progress than others.

Alex Kwiatkowski is a financial services technology analyst at Ovum