LONGREAD: Will mobile banking be an Atom bomb or damp squib?

Given Australian bank customers are among the world’s fastest adopters of mobile banking, many observers consider Australia a prime target for this new type of disruption in traditional banking.

" These new players have no intention of becoming full service banks… instead offering a limited range of products to targeted consumer groups."
Steve Worthington, Professor, Swinburne Business School

However, in the past decades we have seen the launch of a number of internet-only banks we were told would take the place of bank branches and break the existing business models of the mainstream banks.

In the UK ambitious online based banks were launched with names such as Egg (Prudential); Intelligent Finance (Halifax) and Smile (Co-operative Bank) all of which have now either disappeared or been incorporated under their original master brands.

In Australia UBank is a division of National Australia Bank which was launched in 2007 as an online bank with no branches. It is “aimed at self-directed customer segments that prefer to manage their own finances rather than seek advice” and to date has over 350,000 customers.

So the question is, will the new mobile-only banks be an Atom bomb for existing income streams or will they be a damp squib and another cost center for financial institutions?

MACHINE LEARNING

Let’s look at what the new mobile banks are offering and how consumers in different markets around the world might view and use them.

Since its creation in April 2014, Atom has raised over $A250 million in capital from a group of over 100 private and institutional investors. In November 2015, the Spanish bank group BBVA took a 29.9 per cent stake for $A83 million, thus becoming the largest shareholder in this mobile-only start up.

Atom will use biometrics and machine learning technology to service customers, who will register with Atom, then receive an invitation code to log in via a previously downloaded app.

The machine-learning technology intends to guide the 30-strong customer support team via software that learns which of the team is getting the best results, resolving customer queries and feeding through to the rest of the team.

Ultimately Atom plans to integrate the technology into its banking app, which will give customers the ability to query the app directly.

Atom’s first products are one- or two-year fixed-savings offerings, which are close to the top of the best buy tables and loans through intermediaries to SME’s. A current/checking account, credit cards, mortgages and instant access savings products are planned by the end of 2016.

The marketing tagline for Atom is “The future of banking available today” and is based on the premise there will be no branches or call centers in the future - smartphones will be the new local branch and that customers will prefer self -service.

ESPECIALLY FOR YOU

Fidor Bank is another new entrant. An online only bank founded in Germany in September 2015, Fidor’s tagline is ‘Banking made especially for you’ and claims to be more of a social community (albeit with a BoE banking license).

This approach meant setting up a ‘talk-first’ community of like-minded potential users (before actually launching any products) so Fidor could engage with its target audience about their financial needs and product suggestions.

Targeting the early adopters, Fidor listened and identified their priorities in what has been described as a “mutual approach” before settling on the specifics of the launch.

Fidor’s services and products include crowd financing deals and peer-to-peer loans, where customers can post requests to borrow money on the bank’s online community forums, through which other customers can then offer to lend to them.

Fidor has also linked its interest rates to Facebook likes; for every 2,000 likes the bank gets, it adds 0.05 per cent to the saver’s interest rate, an incentive that is capped at 0.5 per cent. Other products are a current/checking account, which allows three free ATM withdrawals each month, after which there is a charge per withdrawal and fixed rate savings bonds.

Tandem Bank is another mobile only bank already with a UK banking license and it is due to launch later in 2016. It already has a 5,000 strong community of ‘co-founders’ who have a share in the business and who are helping the bank to decided what products are to be offered.

It launched a crowdfunding campaign in late May 2016 to raise $A1.85 million and hit the target within 18 minutes. Within eight hours the crowdfunding total stood at $A3.30 million, with over 1,000 individual investors.

No products have been launched yet, but credit cards, loans and savings account are forecasted to be first off the block.

These new players have no intention of becoming full service banks, aspiring to serve all the financial needs of their customers. Instead they are offering a limited range of products to targeted consumer groups.

These usually are the tech savvy millennials and the underserved SME’s, who are swayed by the combination of an enhanced customer experience, often at a lower cost to them.

BRANCHES OUT

It has to be said that for many consumers, whilst they may increasingly use technology to manage their money, the definition of a main financial institution is still the one that has branches near to them.

As an example, a recent briefing from Commonwealth Bank of Australia (CBA) revealed whilst two-thirds of its customers engaged in digital banking and half logged on every month, proximity to a branch remained important.

Four out of five of CBA’s most profitable customers still use branches and forty per cent use both branches and digital. It was also revealed whilst mobile and online banking may have moved beyond the purely transactional, digital sales of banking products are still lagging, particularly for mortgages.

While 21 per cent of CBA’s total sales are made entirely through digital channels, including nearly half of credit card sales and 30 per cent of personal loans, the figures for mortgages is just 5 per cent.

There are also other factors which may limit consumer appetite for digital banking. A 2015 survey of 83,000 consumers from 22 countries, including 2,700 Australians, conducted by Bain and Company revealed Australian bank customers are among the world’s fastest adopters of mobile banking.

The Bain survey found 38 per cent of Australian interactions with a bank occurred via smartphone or tablet and mobile banking has overtaken online banking through a desktop computer as the main way for Australians to interact with their bank.

Yet firm evidence of the success of mobile payment services is scarce, even in markets like Australia, which is considered to be an early adopter of new technology. Mobile wallets rely on Near-Field Communications(NFC) technology to enable smartphones to morph into payment devices.

NFC is also vital to facilitate contactless payments from both cards and smartphones. Australia is also one of the world’s leaders in the uptake of contactless cards, both in ownership and usage, with the world’s highest threshold spend limit of $A100.

The recent launch of Apple Pay in Australia, followed by the arrival of Samsung Pay and with the forthcoming debut of Android Pay, has however not yet translated into mass usage of mobiles as payment devises.

NO EXTRA VALUE

Why is this? Could it be that when it comes to making a payment, perceptually for a consumer there is no extra value to be gained by using a smartphone rather than a contactless card?

Where is the added convenience? What if the point-of-sale terminal is not yet compliant with the smartphone app? What if the merchant does not accept anything other than cash for lower value payments? Consumer experience with mobile wallets may not be such a no-brainer as the mobile advocates think it to be.

Mobile phones have other payment uses than just at the PoS. In Kenya MPesa (the M stands for mobile, Pesa is Swahili for money) is a proprietary service offered by Safaricom, Vodaphone’s brand in that country.

Their share of mobile phone subscription in Kenya is now thought to be over 90 per cent and their services are now used by over 25 million Kenyans, equivalent to over half of the country’s population.

MPesa allows Kenyans to transfer funds using their mobile phones. They pay into the system via a retail outlet which also sells airtime and the money is credited to their MPesa account. The money can then be transferred to others using the phone and MPsea’s success has been credited to the perception it is a safer place to store money than the country’s banks.

MPesa now offers loans and savings accounts and it can also be used to pay bills. The group generates significant revenues for its owners from the interest that they can earn when they place funds from pending transactions on overnight deposit. MPesa also now has a vast data base on their customer’s credit worthiness and financial transaction behavior.

The new mobile banking entrants may not be the Atom bomb which will blows up existing business model for banks; indeed, they may turn out to be just damp squibs like online banking; only another channel by which financial institutions can offer their services.

In some countries like Kenya, mobile banking may come from entrants outside the usual suspects, whose business model suits the conditions in each different country.

Steve Worthington is a Professor at Swinburne Business School