P2P payment networks must connect

There’s a lot of momentum behind Person-to-Person (P2P) payments in the U.S. JP Morgan Chase is the most recent, but PayPal, Fiserv, CashEdge, Obopay, and others are signing banks and trying to get consumers to enroll and use the service. The networks must interconnect if banks want the new payment revenue.

P2P promises the ability to pay anyone electronically essentially as a check or cash replacement. Mobile is the ideal platform for P2P since we’re usually not at our desk when we need to pay someone. With P2P, users can send (or request) money to others using just an email address or mobile phone number.

P2P also offers a strong ROI for institutions. Handling cash and checks is expensive. Theft and fraud are real costs of doing business when dealing with cash and checks. Yet banks can’t charge for cash and checks. P2P can reduce the number of cash and check transactions while generating new revenue from expedited payments.

Current P2P offerings generally allow free transfers for 3-5 day clearing, offering an opportunity for banks to generate float revenue. Users can choose expedited (next day) clearing for a fee. Banks make more money in both cases because the transaction is making new money while costing less. That’s a good business model. It’s certainly better than free checking.

The problem is that P2P offerings aren’t connected. There’s no way for a Fiserv customer to pay a PayPal customer. They system is missing what Jim Kittridge at Wachovia a few years ago called “The Big Directory in the Sky.”

P2P payments simply will not go mainstream if users must belong to multiple networks. People already forget their online banking password. They’re not going to memorize credentials to multiple systems. They’re probably not going to remember what network they use. They’ll either identify their financial institution or PayPal. They won’t know it’s a CashEdge or Fiserv network. How many consumers know what debit card network their cards use?

The system needs The Big Directory in the Sky. P2P needs a standard mechanism to see if an email address or phone number is registered on any of the networks then route the payment to that system.

Yes, there’s a ton of complexity and coordination to work out but it’s possible. Americans should look north to Canada. Canada has had P2P payments for years through the industry consortium Interac.

Canada’s system isn’t perfect and Canadian bankers would likely agree a few tweaks are needed. However, it’s a suitable model for us to study as we figure out our own system.

The American market is bigger and more complex. However, there’s also an opportunity for more revenue given economies of scale.

P2P networks must interconnect or they will fail.

This sounds like a task for NACHA.

If you had any doubts about the pervasiveness of mobile, look no further than the SAP Sybase purchase announcement yesterday.

Instantly, SAP has become a formidable player in multiple mobile vertical markets. SAP runs the backend systems for many enterprises, including providing the core deposit software systems for a number of banks around world. SAP also gets leading database technology that lets them avoid giving $1B annually to arch competitor Oracle.

With Sybase, SAP can mobile-enable many of those services which previously would have involved difficult integration efforts at each company. That said, SAP is also known for lengthy integration efforts and obtuse user interfaces.

Sybase brings solid mobile messaging and mobile banking capabilities. Until now, mobile banking vendors have partnered with larger companies like Fiserv, FIS, Diebold, and NCR with varying levels of success. SAP’s move could spark a round of acquisitions as vendors feel the need to more fully integrate these solutions into their product set.

Integration and product development is the key to the success of this purchase. Mobile applications use data from disparate areas of the enterprise and often seem deceptively simple to implement. SAP will have a very compelling offering if they can make it work. SAP has the backend systems. SAP has the data analytics capabilities necessary for the highly targeted segmentation required in mobile marketing. SAP now has the infrastructure for SMS, mobile web and native mobile applications. SMS also gets a database and a platform for rich enterprise mobile applications.

If SAP gets this right, this unlocks a tidal wave of mobility. So far though, no one has really gotten it right.

An overlooked issue in mobile banking for the developed world is that almost every implementation in the marketplace only supports online banking customers.

Wells Fargo is the only major institution in North America supporting offline customers with the SMS capabilities announced in February.

US Online Banking Adoption

Canadian Online Banking Adoption

Offline customers, as non-online banking customers are often called, are ignored because they’re more difficult to support technically. In fact, the exclusion is so complete that mobile banking adoption rates are usually quoted in relation to the number of online banking customers, not the number of overall customers or even households.  Most banks and credit unions are thrilled to have 40% online banking adoption. Therefore 10% mobile banking adoption usually means 10% adoption of 40% of customers.  I think it takes some of the excitement out of the adoption rates when you think about it that way.

The irony is that the real ROI in mobile banking is in reaching offline customers.

Fiserv/MCOM/Verisign research last fall found that 60% of offline customers were interested in using mobile services. Fiserv’s numbers also show that live agent calls typically cost an institution US$3.75 while online banking and mobile respectively cost only $0.17 and $0.08.

Customer Support Costs

So targeting mobile banking at online bankers doesn’t address the real customer support expense. Getting online bankers to use mobile saves $0.09 in support costs whereas getting an offline customer to use mobile would save $3.67 per call. Furthermore the same study found that offline users were 20% more likely to leave the institution than the broader population. This is backed up by data I’ve seen at other banks. Mobile banking customers are far less likely to attrite (leave the bank) than any other type of customer. Often the difference is quite dramatic (unfortunately I can’t share the numbers, suffice it to say I believe Fiserv’s numbers).

Sample ROI Calculation

Let’s do some back-of-the-envelope math. Let’s say an institution has 100,000 monthly live agent calls from offline customers. For many banks this would represent a household call-in rate in the single digits. Mobile banking has been shown to reduce calls by 30-40%.  At $3.75 per call, this institution would save $375,000 per month or $4.5 million annually.

100,000  monthly calls before mobile
     30% reduction in calls by mobile
  $3.67  savings per calls transferred to mobile
-------
$375,000 in monthly savings (after figuring cost of mobile support)
$4,500,000 in annual savings

Factoring in savings from attrition prevented can add millions more in returns depending upon how profitable each customer is to the bank.

4,000,000  customers
      10% "regular" attrition
       5%  reduction in attrition from mobile
----------
20,000 customers retained

$2 million in savings for each $100 in customer profitability

Banks rarely share customer profitability numbers. I would assert that $250 per customer is a conservative figure, at least historically.

At $250 profitability per customer, banks would save $5 million dollars annually from reduced attrition.  So this sample bank would save $9.5 million dollars by providing mobile banking to all customers, not just online bankers.

The next step is working through the technical and procedural complexities in supporting all your customers. Often it’s not a straightforward as it might seem. We’ve put a lot of thought into the process. Contact us if you’d like to discuss it in the context of your organization.

Doug Brown of Bank of America provided an update today on the success of mobile banking at BofA in a webcast sponsored by InformationWeek and VeriSign. Brown provided his insight on mobile banking and shared key statistics from their experience with mobile banking.

Bank of America now has over 3.5 million customers and represents over a third of all U.S. mobile banking customers. They have seen adoption increase significantly since they first went live in the first quarter of 2007. It took them 13 months for the first 1 million customers to adopt mobile banking. The second million took 9 months and the third million took 6 months. This represents an acceleration rate of roughly 30%.

Brown describes general mobile adoption as historically faster than other technologies such as telephone landlines, televisions, etc. Roughly 10% of online banking customers (30 million) now use mobile banking (3.5 million). BofA attributes their mobile banking adoption success to two key factors:

First, mobile banking is made available to as wide a customer base as possible. BofA noted that they support over 850 handsets via their mobile web application while providing native applications on iPhone, RIM, and Android platforms in addition to SMS banking. While mobile banking is limited to online bankers and isn’t available to customers in Washington State or Idaho, Bank of America’s mobile reach is far broader than most or all U.S. implementations.

Second, Bank of America embarked upon a marketing and customer education campaign to share the value proposition to end users and to alleviate their security fears. BofA has tried to completely integrate mobile banking into their existing operations to reach all kinds of customers and provide consistency to the consumer regardless of what channel they use. For example, Brown noted that mobile banking customer service and technical support is handled by the same team as online banking.

Notably, Brown described the technical support impact of mobile banking as a “non-event” that was “seamless to support.” This statement should put a lot of prospective mobile bankers at ease. Many banks and credit unions considering mobile banking are concerned by the potential impact of mobile banking on their support operations. Many bankers will be relieved by BofA’s experience as the largest mobile banking implementation in the U.S., however results depend upon how mobile banking is implemented. For example, a bank implementing SMS balance alerts with no other form of mobile banking risks dramatically increasing calls to the call center.

Mobile banking has also provided significant ROI to Bank of America. In particular, Brown says mobile banking is directly responsible for attracting 150,000 new customers. Additionally, Brown describes the type of customer mobile banking attracts as a “very valuable customer segment.” Brown describes these customers as more deeply engaged and typically using more products than average. Brown also shared some customer comments indicating how deeply customers appreciated mobile banking which creates stronger loyalty and engagement with the bank.

Verisign also provided cost figures for various channels based on a study commissioned by MCOM. Banks can find significant savings by serving customers in the mobile channel ($0.08) rather than through the contact center ($3.75), IVR banking ($1.25), ATM ($0.85) or even online banking ($0.17).

Banking service costs and channel usage

Interestingly, Brown noted that mobile banking users tend to spend more on their debit cards providing additional revenue to banks and retailers. Brown surmised that consumers can spend more confidently knowing that they have ready access to their account balance — even when purchasing on a whim. Mobile banking customers have also moved over $9.5 Billion since 2007, presumably reducing bank and consumer costs to move money. Bank of America provides payment capabilities between user accounts, to any other Bank of America customer, and through bill payment functionality. Brown described future interest in supporting point-of-sale (POS) payments, remittance, and value-added marketing such as location-based coupons.

Bank of America also uses mobile to provide additional security in other channels. Specifically, Brown mentioned that all high-value transfers in other channels like online banking require confirmation from their SafePass product on the mobile phone. Brown described the mobile phone as a unique security tool because almost everyone has a mobile phone with them and it is almost always on. Brown stated that the same anti-fraud scanning algorithms used in online banking are also used on mobile banking activity. He described mobile security as having industry-wide importance to ensure overall consumer trust in mobile commerce.

In summary, this type of specific case study is what the industry needs. 48% of webcast attendees not currently doing mobile banking cited Lack of ROI as the primary reason. Most bankers I talk to know in their gut that mobile banking will have a huge impact on future banking. However, almost every banker is struggling to build a solid business case for moving immediately, especially during the recent financial crisis.

Bank of America’s experience validates many bankers’ expectations and provides fuel for further experimentation. While sharing this data is bound to increase competition, the metaphorical tide is likely to raise all boats by increasing overall customer comfort with mobile banking and mobile commerce in general which will lower costs and drive up profits through new customers and more profitable transactions.

Mobile Banking is becoming a commodity in the U.S and will likely drive mobile banking vendor consolidation. Consolidation and feature parity among the remaining vendors will make it difficult for banks and credit unions to differentiate themselves. Institutions should develop a long-term mobile strategy to account for these changes and plan ways to differentiate from the competition, generate more revenue, and retain customers.

Mobile Banking vendors are pairing up with traditional banking software vendors. Fiserv offers MCOM mobile banking. Fidelity National Financial Services offers mFoundry. S1 offers Fundamo.

Increasingly vendors are offering similar features on a variety of platforms including Mobile Internet (WAP), SMS, iPhone, Blackberry, Android and others.

Furthermore, while neither vendors nor banks will talk about what they’re spending on mobile banking solutions, off-the-record indications are that the price points are coming down significantly.

Lower prices are great for bankers, especially in this tough economy. More mature software and more intense competition also bodes well for banks and credit unions. However, consolidation almost certainly follows plummeting price points and deep pocketed partners who can afford even deeper discounts.

Soon the market may be down to two or three mobile offerings from the same two or three vendors that offer online banking and core deposit systems. As with online banking, vendors will likely make it difficult for their mobile banking system to connect with others systems, to prevent erosion of their customer base. Therefore, many institutions will have little choice but to choose their mobile banking solution from their Internet Banking vendor.

Many banks are developing long term strategic plans to account for this consolidation. Bank of America, USAA, Wells Fargo, and Capital One have all experimented with a number of vendor provided technologies and ultimately provided more than just vendor provided solutions. While these are large institutions with many resources, there are far smaller banks and credit unions following the same path. For example, San Antonio community bank Broadway Bank has a solution provided by Mobile Earth that is tailored to their specific needs.

We recommend our clients to evaluate their long term mobile strategy and determine the directions that are right for them regardless of vendor developments. Each institution has it’s own brand, culture and competition. While transformative, the mobile channel will ultimately extend the existing institutional traditions but in new ways. When organizations clearly understand their needs, they can push vendors toward fulfilling their needs or make decisions to innovate themselves.

(This was featured in Banking Connects 8/18/2009, available here.)