Brett King

Archive for February, 2012|Monthly archive page

Mobile Banking versus the Mobile Wallet?

In Customer Experience, Mobile Banking, Mobile Payments, Retail Banking on February 23, 2012 at 06:16

With recent news that Barclays Pin-git (or is it Ping-it) has had 120,000 downloads in 5 days, that Square has 1m merchants on their payments platform (1/8th of all US card merchants/retailers) and Starbucks is doing 25% of it’s North American payments via a cardless App – it seems like Mobile Payments are taking off like the H1N1 virus. The interesting thing is that many bankers are looking at all of this activity as if it has little meaning or impact on their business at this point in time. I think part of that may be that there is a fundamental misunderstanding of how the mobile can be utilized in the banking and payments space.

120,00 downloads in 5-day for Barclay’s PingIt

When showing glimpses of Movenbank’s Mobile App I often get asked by bankers whether it is a mobile wallet or a mobile banking app? It’s as if the two worlds of cards/payments and banking are destined never to meet when it comes to a conventional view of the banking world. In banks today, we even institutionalize this by having cards as a separate division or business unit, separate from the retail banking function. The only time they ever seem to meet is in the form of a debit card or within internet banking. But the cards business, while being a strong revenue earner generally for banks because of credit card fees and interest margin, philosophically is not really considered banking per se by most die-hard bankers.

In fact, I’ve known banks where if you walk into a branch, the teller needs to call the call centre to find out any information about your credit card, even your balance. With many of the banks I work with, in-branch or in the contact centre, CSRs/Tellers need to navigate between separate screens to see your credit card details and activity versus transactions in your checking account.

For a long time these two worlds have remained largely operationally separate. The popularization of the smartphone is destined to destroy that division of labor.

The world of Two Channels

Today retail banking is emerging out of the hyperconnected, digital transformation age as not much more than a collection of channels and utility. In the past, you had branches which were THE distribution channel, but that has rapidly fragmented. You also had cheques and cards which provided you a mechanism, or utility, for moving your money around. Historically banking was really about two primary things – storing or protecting assets, and helping in the conduct of trade and commerce. Rudimentary cheques (or bills of exchange) were around almost 800 years before physical currency, and prior to bank branches ‘assets’ were often stored in temples and palaces. At the core of banking was assets that you either kept safe, or moved around to effect trade. In many ways, that’s still at the core of the bank value proposition.

As some of you may have noted in BANK 2.0 I call out bankers for calling digital channels ‘alternative’ or e-channels because of the psychology internally within banks that tends to put these channels in a subordinate role to the branch. Recently I was approached by a recruiter looking at placing a global head of ‘E-Channels’ into one of the big global brands and asking me for my input into how could take on the role. I told the recruiter that any digital guy worth his salt would immediately stay away from this major banking brand, largely because the decision to classify the role as a head of ‘E-Channels’ already told me everything I needed to know about the brand – that they still thought of digital as ‘E’ rather than mainstream, everyday banking. That told me that anyone taking on this role would still be faced with massive inertia around branch networks and would be fighting everyday to justify budget, investment and mindshare in the total channel experience – and that is why I said this brand was not ready.

With Internet Banking being the primary day-to-day channel for banking in the developed world, and branch frequency/visitation off 90% from it’s peak in the mid-90s, the branch is really ‘alternative’ banking today, rather than pride of place at the core of banking behavior. So the pendulum has shifted.

So what are the two emerging channels?

If you characterize banking today from a day-to-day perspective, you’ve really got two core classes of activity. Payments AND day-to-day banking based on your assets, including applying for new products, wealth management engagement, etc. If you look at either customer engagement, transactional activity or the role of an advisor in respect to your assets, you’d be hard pressed to identify activities that aren’t done through either Payments Channels or Delivery Channels (credit to Terence Roche @Gonzobanker for this insight).

Given the way retail banking is structured today, this means that many banks look at a mobile wallet as an instantiation of payments – the ultimate, downloadable payment channel ‘function’ or utility.  However, they look at Mobile Banking as a mobile-enabled version of the Internet banking platform, which is ultimately just channel migration of transaction activity from branch to digital – hence, a delivery utility. Some progressive banks are even looking at onboarding customers entirely electronically through the web, mobile, ATM or call centre – without a signature. More delivery channels. The branch is the premier delivery channel still, and more so as transactions shift out of the branch, and it becomes about high touch sales and service (delivery of revenue and service).

When two worlds collide

The problem philosophically for retail banks is that the mobile device is collapsing this view of the world. Payments and traditional day-to-day banking utility will be packaged into one portable, handheld ‘channel’. It doesn’t make sense to have one app for ‘banking’ and one app for ‘payments’ or the wallet, you must have the utility of both the bank and payments capability in one.

That presents an organizational shift because it merges the two disparate parts of retail banking, but it also presents massive opportunities.

What is possible is that my day-to-day connection with my money is far tighter than it is in a traditional banking relationship. Whether it is simply the fact that I can see my balance before and after I make a payment (not possible with plastic, cheques or cash) or whether you can start to advise me day-to-day on how to utilize my money better – the opportunity for mobile is not the wallet, and not mobile banking. It is re-imagining the utility of banking from a mobile perspective.

Mobile Payments are already mainstream – stop waiting

In Retail Banking on February 13, 2012 at 08:37

As we’ve embarked on our Movenbank project, we’ve had a lot of people express concerns about our choice to be completely cardless and go with NFC and various other P2P solutions. There’s also often raised questions over which handset platform to support, which devices are certified, the lack of real NFC standards, how to enable the secure component on the various cellular networks and so forth? To a novice this all sounds very complex? Shouldn’t we worry about adoption rates? When will mobile hit critical mass? ISYS versus Google Wallet versus Visa’s play versus PayPal, etc, etc.

There are those that will tell you it will be many years before mobile payments is mainstream. You’ll hear figures like 2014, 2016 or even later bandied around as to when mobile payments will hit mass adoption. However, I believe the primary measure to focus on when looking at these sorts of predictions is first and foremost exhibited customer behavior – the predilection to a shift in the way they pay, bank, purchase or shop. If you look at consumer behavior, the story is very simple. The great mass is not only ready for mobile payments, they are racing towards it as fast as they can whenever the opportunity presents itself.

When will Mobile Payments be mainstream?

That’s a question that at worst shows ignorance, or at best a pigeon-holing of mobile payments into a single category around POS-only interactions. I’d strongly argue that mobile payments are already mainstream. Ask yourself this; what constitutes a mobile payment? Surely a mobile payment is simply a payment made from or via a mobile phone.

By that measure alone, anyone who has a smartphone and who has bought an “App” or downloaded digital content via their phone, is already in the habit of making regular mobile payments. 25 Billion Apps were downloaded in 2011 on the Android and iOs platforms, a 300% increase from 2010. In the US that represents 44% of the population, with the 50% tipping point estimated for the first half of 2012.

In reality, 67% of consumers flagged their intention to make a mobile purchase of real world goods and services in 2011 (source: PayPal), and we have hard data to show that 47% used their smartphone to make a purchase in December, 2011 alone (digital content such as songs/music, eBooks, ringtones, images, movies, TV shows, etc being the most common purchase.)

Here are some common mobile payment methods that are off-the-chart successful today:

PayPal – In 2009 PayPal processed just $141 million in mobile payments. However, last year that jumped to a whopping $4Bn, and PayPal projected that will increase to $7Bn in 2012 – a figure many consider conservative. PayPal classifies a mobile payment simply as a payment across their network from one party to another, however, by attacking the mode of payment, PayPal has created an electronic payment method that is both simpler and cheaper than ACH and Wire transfers offered by banks – the only viable bank alternative to checks.

Starbucks – In just over 1 year, the Starbucks Mobile App accounted for 1/4th of all Starbucks purchases in-store across North America. That’s 26 million mobile transactions, and the usage of the Mobile App has doubled in the last 12 months on a run-rate basis going from 1.4 million transactions per month in January 2011 to 2.9 million transactions per month last December. Remember, this payment method didn’t exist a year ago, but today 25% of all in-store payments are made via a mobile phone. If you’re prepared to argue that 25% of Starbucks’ customer base doesn’t represent mass adoption or mass consumer acceptance – I think you’re very brave, or just plain crazy.

Square – Both the Obama and Romney campaigns are using Square to take campaign contributions in the lead up to the 2012 elections. Square, which launched in May 2010, has more than 1 million merchants using their App to take payments on mobile smartphones. Considering that there are only 8 million merchants in the US, that means that 12.5% of merchants in the US use a mobile smartphone to take credit card payments – that’s in the space of less than 2 years. Now you might argue that Square is not a “real” mobile payment because plastic is still involved – but think back to my assertion about changing behavior. Once I’m using my phone to accept a ‘swipe’ what happens when I no longer need you to swipe, but instead just tap your phone, give me your phone number or use some other ‘cardless’ methodology (Square’s is called CardCase) to pay. There’s now no barrier to entry as you already own the infrastructure – i.e. you don’t need a POS terminal and a hard line.

Dwolla – Unlike Square and PayPal, Dwolla works completely independently of the existing payment networks beyond cash-in and cash-out functionality. Dwolla’s main strategy is to attack the current transaction costs of moving money around. If a transaction is under $10 the transfer (or payment) is free, if over $10, there is a capped $0.25 fee. Dwolla has around 70,000 customers today (including 5,000 merchants or retailers) and they process around $1m a day through their network. Dwolla argues that their network is safer for consumers and merchants alike because it doesn’t send sensitive credit card details across the network, just a secure ID and the transaction details. Dwolla is more than a payment network, however, because it (like PayPal) stores your balance in your account – it is a proxy for a debit card with none of the fees, and none of the card fraud risks. The majority of it’s payments are transacted through Dwolla’s mobile app.

Dwolla, PayPal & Square all attack modality and simplicity of current payments networks

Core payments behavior has already shifted

This is what Visa and Mastercard already know. Mobile payments and the behaviour required to drive mobile payment adoption is already widespread. The mass market loves the ease of use and modality of a mobile payment compared with plastic, cash and cheques. While debit card usage is growing, check usage is rapidly declining and cash usage is declining in most developed economies. In the US, prepaid debit cards were the fastest growing form of electronic payment in 2011. Combine prepaid debit cards and smartphones that allow you to pay at the point-of-sale (with NFC or some other cardless method) and you have the perfect storm for disruption.

In the last 12 months, Visa and Mastercard have both been accelerating their move to replace all the existing merchant POS units with PCI-compliant alternatives that also facilitate NFC mobile payments. What Visa and Mastercard realize is that If they don’t push NFC as if their very life depended on it, with the mobile quickly becoming the dominant payment device, payments will shift away to alternative ‘network’ rails. The only way to ensure their current payment networks stay a part of the mix, is to ensure they can support the behavioral shift to mobile (regardless of whether that is NFC or some other solution.)

NFC is the only viable solution that allows Visa to support both legacy card transactions at the POS, and mobile payments. This makes for an orderly transition, and requires only a POS terminal swap out. The alternative would be new point-of-sale systems such as those offered by Square and PayPal. For larger retailers and merchants, this would require a considerable investment and could be risky, but not impossible. The last thing card issuers want right now is a major retail chain announcing a deal with Square, PayPal or Dwolla, that renders them obsolete.

If Visa and Mastercard don’t convert their networks to phone-capable in the next 24 months, I fear Square, PayPal, iTunes and a myriad of others are just waiting in the wings to circumvent their rails. Argue all you like about NFC adoption, that’s not what you should be watching. The tipping point is the behavioral shift on the mobile phone – that is what will kill plastic, and it’s already happened.

Beyond the Branch – New Distribution Mechanisms

In Bank Innovation, Engagement Banking, Future of Banking on February 1, 2012 at 15:40

There’s a great deal of discussion and debate around what will ultimately happen to banking as a result of the massive changes in connectivity, utility, mobility and customer experience taking place right now. One thing is for sure, the world is changing.

We see PayPal owning online payments, with others like Stripe hot on their tails.

Square is attempting to disrupt the POS and circumvent the existing payments rails by going cardless.

Simple and Movenbank are vying for the new definition of the ‘bank account’.

Telcos like Rogers applying for banking licenses, and ISYS pitching head-to-head with banks for mobile wallet dominance in North America.

We also see Facebook and Twitter becoming increasingly dominant channels for customer dialog.

New Disruptors Abound!

Intermediate or Disintermediate?

So will banks get disintermediated in all this? Well, yes and no. In economics,disintermediation is generally defined as the removal of intermediaries in a supply chain: “cutting out the middleman”. So there’s not too many middlemen in the typical retail banking distribution chain. To some extent in financial services this is already happening with the decline in stock brokers, insurance agents, etc in favor of direct. However, conversely, a bunch of newer aggregators and intermediaries are popping up as the interface to the bank or payments providers.

New intermediary plays in the last couple of years include Square, iTunes, Simple, Mint, and others. Probably the most interesting new intermediary to emerge in the last year or so is Google Wallet (or Google, or THE Google wallet – not like THE facebook though…) If you doubt the veracity of my statement, here’s proof – after just over 18 months of operation, Square supports 1/8th of all US merchants. They didn’t exist 2 years ago.

So we’re likely to see more variations on a theme in banking and payments, where new players are coming into the ecosystem and offering value beyond the traditional methods of distribution. In its purest form, this will be simply a challenge to the branch-led distribution model. How so? Ultimately, with mobile banking and payments, the branch and resultant paperwork processes becomes a convenience “penalty” for transactional and basic onboarding. This friction is a target for disruptors.

Disruption and Disenfranchising

The disruption that is occuring in the customer experience is all about removing friction in outmoded or outdated processes for customers. Whenever you tell a customer he needs to fill out manual paperwork, or visit a physical location today, you’re going to increasingly get kickback from a segment of the market. While many will argue passionately for the role of a face-to-face interaction and the “richness” of the branch experience, the reality is that there are two reasons why most customers will balk at that.

Firstly, they don’t have the time or they perceive it is faster to go an alternative route – convenience was always a key driver for disruptors like Amazon and iTunes. Secondly, we’re being trained that you can open pretty much any non-bank relationship completely digitally today – so KYC (Know-Your-Customer) issues aside, the push is for rapid digital onboarding of customers. In usability terms we call the later a design pattern and it ends up driving consumer’s expectations becuase it is a entrenced behavioral expectation.

Digital natives won’t be able to figure out why you can sign up for Facebook, iTunes, PayPal and other relationships completely electronically, but your bank still requires a signature. It defies logic for the modern consumer, and no amount of arguing regulation will overcome that basic expectation.

The end result of this is that banks being the slow, calculated and risk adverse organizations that they are, will likely allow disruptors the opportunity to come into the space between the bank and the consumer as a ‘friction’ eliminator.

Secondly, geo-location and contextuality of banking products and services, will mean a marketing and engagement layer that is built on either event or location triggers to recognize the need for a financial services product and the capability to stimulate an engagement or journey in real-time.

The mobile, wallet and tablet are all key components in this shift, as is social media and the cloud to some extent.

The outcome?

In the end banks will, for basic products, no longer exclusively own the end consumer. They’ll simply be the underpinning bank manufacturer that supplies the product to a new distribution channel or channel partner.

So will banks be disintermediated? Not really, but they will be disenfranchised, losing direct relationships with customers as banks adapt to becoming pervasive providers of bank products and services, when and where you need them. A split between the distribution and manufacturing of retail FI products will be the core outcome.

Banks can not possibly own the telcos, mobile operating systems, marketing companies, retailers, locations and other elements that will drive the delivery of banking products and services in the near future. This is where the customer will live – this is where they’ll engage. I won’t come to your branch, download your “App” or even visit your website to directly engage the bank if someone else can deliver me that product as I need it