The Person-to-Person (P2P) payments competition is officially on.

P2P was a hot topic at last week’s American Banker Mobile Banking & Emerging Applications conference in Las Vegas. Almost every presentation and panel discussion included some discussion of P2P.

There’s a real sense that it’s finally time for banks to implement P2P.

Yesterday Fiserv announced they have over 100 financial institutions signed up to offer their new ZashPay P2P service. CashEdge has announced commitments from a similar number of institutions for their POPMoney P2P service. PayPal and Obopay of course have had services available for some time. PayPal in particular has 84 million users in the United States alone. Obopay and Mastercard recently went live with their Mastercard MoneySend iPhone mobile app.

So the questions becomes, will people use it?

P2P has been used in countries like Australia, New Zealand, and Canada for years. Serge Van Dam, from MCOM, recently analyzed 200 random transactions in New Zealand for usage patterns. MCOM provides Fiserv’s mobile technology and has run P2P payment systems in Australia and New Zealand since 2004.

Not surprisingly, MCOM found broad usage that generally replaces checks and cash. Here’s how the P2P payment usage broke down:

• 40% were personal payments (one individual to another)
• 60% went to small merchants (like lawn services, housekeepers, etc.)
• 20% were to small online merchants (like eBay or Craigslist sellers).
• Average payment size was $240

Mobile and P2P payment product announcements are nothing new. The landscape is littered with initiatives that went nowhere. But, it’s looking different this time in a number of important ways:

1. Banks are driving the current P2P initiatives. Consumers have consistently shown they prefer to manage their money through their bank whenever possible.
2. Consumers can send and receive money directly from their bank accounts to the recipient’s account. Consumers have repeatedly avoided P2P systems that require funding intermediate accounts. Systems like Obopay and PayPal that technically use intermediate accounts have reduced or eliminated the need for customers to manually fund these accounts. CashEdge and Zashpay don’t use intermediate accounts and use ACH bank-to-bank electronic payments instead (like traditional bill pay systems).
3. Mobile banking is getting customers used to using their phone to manage their finances. P2P use cases are more suited for quick mobile situations than traditional desktop use cases. When you need to pay someone like the yard guy, odds are you’re not at your computer (and neither is he) — but both of you have your phone.
4. The sheer number of banks — and therefore their consumers — signing up for P2P is getting us closer to critical mass. The value of any network increases exponentially as it adds connections (e.g. the Network Effect, aka Metcalfe’s Law). To pay someone, the recipient needs to be in your network.
5. Most of us don’t carry checks or cash anymore.

So, many barriers have come down. There are a few more to go.

Interoperability, in my mind, is the most important barrier to bring down. None of the networks have complete coverage and it’s doubtful any network will. Nor do we want a monopoly on payments. ATM and Debit networks are great examples. There are a variety of competing networks that are interoperable. This keeps costs down and access nearly universal. With interoperability, adoption will come.

Cost is also an unknown factor. Albeit one that’s bound to change over time. Many U.S. offerings provide both standard 3-5 day ACH clearing as well as next day clearing. Look for standard clearing to be free to consumers with a charge for expedited payments.

Before you bankers cringe over standard clearing payments being free, think about what paper checks (and cash) cost you.

You’ll make money on P2P, if you can get consumers to adopt it.

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.

CIBC iPhone Mobile Banking Application

CIBC is live with Canada’s first full-featured mobile banking iPhone application.

The native iPhone application provides a key money movement feature that have eluded American mobile banking solutions. CIBC leverages the Interac email money transfer system to allow sending money to others.

American bankers have been dreaming of a P2P payment system like this for a while.

The CIBC iPhone application also has all the standard capabilities found south of the border including full account management capabilities, including credit cards.

The application also provide a branch & ABM/ATM locator.

Scotiabank announced late 2009 it would offer a native iPhone application this Spring. Both Scotiabank and Desjardins have ABM locators in the app store.

Most Canadian banks have had browser-based solutions live since 2000 when the first wave of mobile excitement swept the world — then went nowhere for nearly a decade.

CIBC and Scotia are two back-to-back examples that the gloves are off in Canada and the mobile banking competition has begun.

Canadian consumers will definitely be the winners!

Scotiabank announced mobile banking in Spring 2010

Mobile Banking in Canada has seemed poised for explosive growth for years now, yet very little ever seems to actually materialize for Canadian consumers.

The latest reason for hope is Scotiabank’s announcement that they have selected MCOM to provide mobile banking services. New Zealand-founded but Atlanta headquartered MCOM has been providing mobile banking since 2000, but has only made a signifcant push into North American markets this year through its partnerships with Fiserv and Microsoft. MCOM’s historical strength has been in SMS and mobile web mobile banking, although they now offer native application technology as well.

So, is the Scotiabank announcement the catalyst that finally breaks the Canadian mobile banking logjam? One could argue that Scotiabank is just catching up to what RBC, TD, & CIBC already have.Canadian banks have had mobile-web based mobile banking implementations on-and-off since 2000 — which consumers have generally ignored.

Scotiabank’s announcement was vague about what kind of offering they would provide, only saying:

Scotiabank’s mobile banking service will provide personal and small business customers with easy access to their Scotiabank accounts from their mobile device, regardless of their mobile service provider. Customers will be able to view balances and transaction history, pay bills and make transfers.

If Scotiabank only offers up mobile web, it’s not a step forward for Canada. Canadian banks already have mobile-web based mobile banking, and like everywhere else, the impact is minimal. Many smartphone customers will try Scotiabank’s mobile banking, but only a select collection of hard-core users will use it repeatedly.

On the other hand, Scotiabank can disrupt the entire Canadian banking status quo by offering a number of mobile banking offerings at once (mobile web, SMS, native iPhone application, native Blackberry application, etc.). Bank of America has seen tremendous success (3.5 M customers and counting) by offering a variety of technology options so consumers can interact in the mode that suits them best. Javelin Strategy’s recent 2009 Mobile Banking Scorecard recommends this approach as well.

Scotiabank and MCOM on paper have the capability for a bold move. However, by omitting specifics from the announcement they have muted the impact. The consensus among Canadian bankers is that they have time to sit back, watch and wait.

Scotiabank missed an opportunity to knock their competitors out of their chairs.

UPDATE (12/2/09):

Scotiabank issued a clarifying press release specificially saying they’re offering Alerts and native iPhone applications. This announcement shakes things up in Canada!

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.