Banking on the Device

In the past, financial services on the World Wide Web were available only to PC users. Not anymore. The mobile phone and will greatly expand the market for the electronic delivery of personal financial services. Mobile data communication is already extending the Internet to people on the move. Financial-services providers keen to compete on the Web need to understand how this trend may evolve.

Consumers like the flexibility a mobile device can deliver: for example, access to their money anytime, anywhere; instant notification of movements in a given company’s share price; and the ability to transfer money into a bank account and to shop on the go. Not surprisingly, financial institutions are scrambling to develop mobile-banking services using the two main technical standards currently available: the Short Message Service (SMS), a simple but effective standard for brief text messages, and the Wireless Application Protocol (WAP), a more recently developed standard providing access to the Web, though in a less elaborate form than PCs do. Most mobile-banking services using these standards are still extremely basic, offering information such as account balances and stock prices or permitting customers to transfer money between accounts.

Yet in the rush to achieve a first-mover advantage (or to avoid being left behind), banks and brokers are in danger of overlooking the way they can create lasting value from mobile-communications technology. Since the basic services banks are putting together are mostly undifferentiated, a given bank’s competitive advantage is likely to be temporary. And it isn’t clear how much it will cost banks to provide such services. The lion’s share of the value that even mobile personal banking creates could still go to other participants in the value chain-most probably consumers and network operators. Bankers won’t be able to avoid supplying mobile services, but if they are to provide a return, it will be necessary to think hard about how to make the services distinctive.

Mobile Banking for Beginners

The first movers in mobile banking will undoubtedly acquire newcustomers. But in some markets, the opportunity to be a first mover is long gone. Like telephone banking, first-level mobile banking has become an admission ticket to the industry.

To retain existing customers, to say nothing of attracting new ones, banks will have to keep up with the fast-developing capabilities of mobile technology. The breadth and complexity of the banks’ mobile services will probably increase rapidly as they exploit the ability of WAP and the increasingly flexible SMS to support secure transactions.

The nature of future mobile services will also depend to a large extent on the relative penetration rates of PCs and mobile phones. In countries such as the United States, where Internet access via PCs is well established, banks are likely to provide complementary mobile services. Customers will be able to configure a service on their PCs and have it delivered-or “pushed”-to them over their mobile phones at the required moment. Investors, for instance, could ask to be alerted if the price of a specific stock or index fell below a certain level; a small business could ask to be notified of important financial events-for example, the receipt of a big payment.

In countries like China or even Italy, where far more people have mobile phones than computers, “pure” mobile banking, independent of PCs, may well take off. It will be a challenge for software designers to develop simple Web navigation tools and information display techniques that allow users in those countries to configure ambitious services on small screens.

Yet it is easy to overestimate the importance of this constraint. Subscriptions to SMS-based services are growing at a phenomenal rate-over 30 percent a month in many markets-despite the crude keyboards and limited displays of current mobile devices. The next wave of devices, combining the strengths of PDAs and telephones – some, such as the Palm VII and Nokia’s Communicator, do so already – will be far easier to use.

So will banks make money from mobile financial services? On the revenue side, how much banks can charge customers for them will vary by market. Most market research shows that customers are understandably unwilling to pay for mobile services (for example, account balances) that they already receive free through another channel. But they will pay for mobile transaction services such as stock trading and for new pushed services they couldn’t receive any other way.

What about costs? In some ways, mobile should be a bargain channel for banks, since the customer will bear most of the expense of accessing the services. Moreover, pushed SMS messages are a cheap and effective way of reaching individual customers-much cheaper than outbound telephone calls or letters and more effective than e-mail for short, time sensitive communications. But this doesn’t mean that banks will reduce costs once the channel is established. Many bankers are haunted by their experience with telephone banking and automated-teller machines (ATMs). Both promised to be low-cost channels. Banks invested hugely in them. But while unit costs per transaction plummeted, the volume of transactions rose because customers found these channels so convenient. Transaction costs per customer spiraled accordingly.

Advanced Mobile
Will banking on the move turn out to be ATM round two-a service that banks must provide to compete but that benefits customers and technology providers alone? This may happen, but only to banks that fail to grasp thebigger opportunities. For the advent of mobile data communications gives banks a chance to offer entirely new products and services and to recon-figure, radically, the kind of assistance customers receive. Bolder banks arealready pursuing a number of m-commerce ideas:

Providing the payments infrastructure for mobile-commerce services Banks start with huge advantages in m-commerce services such as ticketing, auctions, and value-added information: they control the existing payments infrastructure and understand the security issues. But unless banks assertively shape the technical standards and value chain of this new business, they risk playing second fiddle to network operators such as France Télécom and Sonera (the Finnish telco), to handset manufacturers such as Nokia, or to payment security specialists such as VeriSign and RSA Security (both based in the United States).

MeritaNordbanken, having adapted its established Internet payment
system, Solo, for WAP, is a pioneer in this area. Deutsche Bank is workingwith Nokia and Visa to develop “dual-slot” devices for m-commerce payments. One slot accepts the usual SIM (subscriber identity module) card, the other a “smart card” (such as Visa Cash). Customers of France Télécom can now pay for their purchases by inserting cartes bancaires charge cards into the second slots of their handsets. In effect, the mobile phone becomes a payment terminal.

Using mobile phones as point-of-sale (POS) payment devices The Pepsi vending machine piloted by Finnish mobile-security specialist Sonera SmartTrust is a striking example of another use for mobile phones: as POS devices. The company’s service allows the user to buy a drink from a vending machine by dialing its number on a mobile phone. In effect, the user makes a premium-rate call and pays a tariff equal to the price of the drink and the call.

Bluetooth, the emerging standard for short-range radio transmissions, will make it even easier for consumers to make POS payments through mobile devices. Without having to surrender the card to a stranger, a user could, for example, pay for groceries by debiting the sum owed from a card or a bank account or by adding the sum to the phone bill. Users could even employ mobile handsets to direct payments for parking to Bluetooth enabled parking meters. Support for such services could not only provide a new revenue stream for banks but also reduce the amount of cash they handle and the accompanying costs.

Launching mobile portals
The small screens of mobile devices make it hard for users to enter complex search instructions. So mobile portals-in other words, Web sites that aggregate information and help users navigate the Web-will be even more important for mobile users of the Net than PC-based portals are for people who use personal computers to surf. Mobile portals will thus be highly valuable for those who develop them. Although a bank or a brokerage house might have a harder time than a network operator developing a mobile portal with mass-market appeal, either one would be well placed to target particular market segments.

Either could craft attractive portals for individual investors, traveling executives, or owners of small businesses as well as for corporations that wanted private portals for their employees. Neither a bank nor a brokerage house is likely to have all the skills needed to create such portals on its own, but one could assemble the right set of partnerships with, for example, a mobile network operator, a specialist portal provider, or a handset manufacturer.

DavidMaude, Raghunath R and Anupam Sahay are consultants for McKinsey&Co. Peter Sands is a principal.