M-finance: an existential challenge for banks
Illustration: Michael Kirkham
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M-finance: an existential challenge for banks

Graham Jarvis & Kenny MacIver – January 2013
Mobile technologies are reshaping the retail banking landscape. How are the giants of financial services responding to the new threats and opportunities?

The soaring numbers must make uncomfortable reading for retail bankers everywhere. Across the sector, technology-fuelled upstarts are appropriating huge volumes of core financial transactions — transactions that would traditionally have been the preserve of venerable financial institutions — by exploiting innovative models enabled by mobile technologies. Take just two, high-profile examples:

•    Square, the three-year-old mobile payments start-up headed by 
Twitter co-founder Jack Dorsey, now processes transactions worth more than $10 billion, on an annualized basis, for the 2 million US small business customers that use its plug-in credit card-reader with their mobile devices. Next up for the company: international expansion and the aggregation of multiple retailers’ “value stores” in the Square mobile wallet.
•    With a focus on Africa and the “unbanked,” but now spreading throughout the developing world, M-Pesa, the mobile phone-based money transfer mechanism pioneered by mobile network operator Safaricom (now owned by the UK’s Vodafone) handles annual transactions valued at over $10 billion for its 15 million registered users, with transaction volumes running at an estimated 2 million per day.

As those examples highlight, the challengers to traditional banking may be mainly focused on mobile payments, but as commentators such as Jim Marous, business author and veteran banking strategist, point out, this is determining the stakes for retail banking in the future: “If banks give up the payments function, they say goodbye to the customer relationship.”

Sensing that raw opportunity, a disparate field of aspirant competitors is rushing to grab a piece of the action. Alongside online giants such as PayPal, Google and Facebook are credit card companies who want to own the customer’s wallet; mobile network operators who see location and communications as the basis for financial transactions on the move; mobile device makers who sense they might control the banking platform of the future; peer-to-peer payment companies where simplicity and ease of use is the most compelling story; retailers who want customers to transact through stored-value “cards” residing in digital wallets; and numerous rivals to Square outside of the US such as Sweden’s iZettle. And all of those moves are before the mighty Apple, with its 400 million iTunes accounts, or Amazon, with more than 188 million active accounts, have even started to play their hands.

What such newcomers are all salivating over is the chance to disintermediate the banks, at least in selected areas. As Anthony Duffy, director of client engagement and consulting at global ICT giant Fujitsu, highlights, their goal is to “manage away” routine transactions from banks and in the process encroach on the critical relationship that banks have traditionally had with the customer — and their money.

One active participant in that disruption is Craig Oldroyd, head of mobile payments at O2. “Banks need to recognize the changing landscape — it is moving away from traditional models,” he says. And that means an abrupt shift in focus from the bricks-and-mortar branch to the mobile context in which customers increasingly want to transact.

Aggregated analyst estimates of how interaction will change in coming years suggest that by 2016 mobile will be the most common customer touchpoint for banks, with an average of 20-30 interactions per month. That compares with a forecast of 10 sign-ins a month for web banking, and only one or two visits to a branch every year.

As David Gee, CIO at Credit Union Australia, says, it’s time to grasp the nettle: how banks react now to these changes will be “key to their survival.”
The bigger picture

The scope of the current threat should, however, be kept in perspective, given the banks’ much wider activities — at least for now. Ben Green, head of mobile banking at the UK’s RBS Group, says: “I don’t think the current digital and mobile trends are undermining traditional banks, but they have the potential to if ignored.”

Banks need to respond to changing patterns of technology-centric customer engagement, keeping a close eye on — and learning from — the initiatives of new (as well as existing) competitors, says Green. Like other major banks, RBS already has a relatively strong online banking proposition and a complementary set of mobile banking capabilities, enabling customers to manage their finances from anywhere at any time.

The bank (whose subsidiaries include NatWest in the UK and Citizens Financial Group in the US) boasts 2 million mobile banking customers in the UK alone, who use the service about 26 times a month.

“Different banks are responding in different ways,” says Green, “with some trying to keep up with new entrants, others launching cutting-edge services, and most forging different kinds of partnerships (including with mobile operators, retailers and mobile app specialists) to bolster their positions.” All of this activity is reinvigorating the market, he adds.

Two other banks are demonstrating that point, and indicate that some of the incumbent financial powerhouses are being far from complacent.

In recent years, Spain’s BBVA has been preparing for the impact of customers switching their focus away from its branch network. When customers deal through remote channels, “everything changes,” says Luis Uguina, global head of new technologies. “Our aim is to control the destiny of the bank when faced with these kinds of remote relationships.”

Mobile apps — and the frequency with which they are refreshed — are proving critical. By rolling out a new mobile banking and related product every quarter, each time with significant new features, the bank has been able to engage with the remote customer and gain a larger share of their wallet, Uguina says. “When the user sees that the upgraded version has useful features, it improves their relationship with the bank.”

BBVA launched its core mobile banking app in December 2011. And with each release — in March, June and Sept 2012 — the upgrade in functionality has been accompanied by a major jump in user numbers. In just a year, active users went from 150,000 to almost one million.

One reason for this success is that the delivered functionality is a direct reflection of user requirements. In planning for new versions, BBVA monitors thousands of relevant blogs, feedback websites and social networks, as well as taking direct requests from customers and user-ratings of existing features. Currently 50% of all new functionality being rolled out is based on that customer feedback and 35% comes from BBVA line-of-business managers, leaving 15% for innovations from its technology staff.
New banking metabolism

Rapid innovation was also something that UK bank Barclays had in mind with its highly successful Pingit mobile payments app. “From the idea to the build, test, pilot, marketing, implementation and launch took just eight months,” says Graeme Jones, head of mobile engagement. “That broke the mould for Barclays. But that’s mobile: it’s about increasing the metabolic rate within banking; that’s the way this new world works.”

In the first 10 months after its debut, Barclays rolled out six releases of Pingit. The initial app enabled Barclays’ UK customers to make payments to each other of up to £300 ($480), just by knowing the recipient’s mobile number. That was quickly extended to cover payments to customers of other banks. Jones reports that in 2012 Barclays recruited more new accounts using Pingit than through its online account opening process.

Subsequent releases have opened up of a payments corridor to Africa, with Kenya (home of
 the well-established M-Pesa transfer system) as the initial target, followed by Botswana, Zambia and Ghana. Further locations will follow, says Jones, and the platform’s flexibility supports the prospect of joining them up to create a “global payments ecosystem.”

Banks are only too aware they need to react to the “new entrants and competitors vying to eat their lunch,” says Fujitsu’s Duffy. Whether that meal amounts to a few crumbs or a banquet will depend on how agile and innovative the traditional suppliers can be in the next few years.
First published January 2013
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