A Wall Street Journal article titled Mobile’s Rise Poses a Riddle for Banks is so off the mark, I simply can’t let it slide. According to the article:
“A waitress from Queens, NY, Ethel Bueno keeps her phone close at all times and frequently logs on to her bank account to check her balance. But for bigger and more-complex transactions, which often require fees, Ms. Bueno prefers to visit a bank teller in person. That means her digital devotion to the bank doesn’t actually generate much revenue, a puzzle firms across the industry are still trying to solve. According to a new study by Bain, mobile [bank] interactions are now 35% of the total, more than any other type. A 2012 Fiserv report found that digital transactions cost on average 17 cents each, compared with 85 cents for an ATM transaction, and $4 for an interaction with a bank teller.” (italics added)
My take: Blind faith in the contention–and numbers–thrown around in this article is sheer stupidity.
If you read the full WSJ article, you’ll find that the two bank execs quoted are anything but puzzled about mobile banking. So how the author of the article concludes that mobile banking is a “puzzle” that banks “are trying to solve” is beyond me. Did anybody mention to the WSJ that the transactions being conducted on a mobile device for free were actually free when they done in a branch or ATM?
If anything, it’s a gift on a silver platter. Who cares if it doesn’t generate revenue? The cost savings that are implied by the channel transaction costs should more than compensate for the fact that the mobile transactions don’t generate revenue.
Assume for a moment that there’s a bank whose customers conduct 1,000,000 transactions per year. The WSJ article didn’t include estimates for call center transaction costs, so let’s assume they’re somewhere between the ATM and branch, at $2.50 per transaction.
Now assume the following transaction allocation, first before the implementation of digital banking (online and mobile) banking, and then now, with 35% of the transaction volume going to mobile (and for argument’s sake, another 15% coming from online transactions).
|Per transaction cost||Transaction allocation||Channel costs||Transaction allocation||Channel costs|
|Digital||$ 0.17||0%||$ –||50%||$ 85,000|
|ATM||$ 0.85||10%||$ 85,000||8%||$ 68,000|
|Call center||$ 2.50||25%||$ 625,000||10%||$ 250,000|
|Branch||$ 4.00||65%||$ 2,600,000||32%||$ 1,280,000|
|TOTAL||$ 3,310,000||$ 1,683,000|
In the Before scenario, based on the assumed transaction allocation, total costs are ~$3.3 million. In the After scenario, with digital transactions at 50% of all transactions (35% for mobile, 15% for online), the increased allocation had to come from somewhere, so ATM and call center percentages declined slightly. And with the impending death of branches (hey, that’s what all of you think, not me), the % of transactions going to branches declines from 65% to 32%.
Overall, the cost reduction from this jump in mobile transactions–based on the lower cost per transaction–should produce a 50% reduction in transaction costs. Good luck finding a bank whose has reduced their operating costs by 50% because of this explosion in mobile banking transactions.
But clearly, what’s happened, is that digital transactions have not fully displaced transactions in other channels, but have added to the overall transaction volume.
Now here’s what’s important, and what way too many bankers either can’t understand, or refuse to understand: It doesn’t matter how much less expensive digital transactions are than transactions in other channels if the digital transactions don’t displace those other channel transactions.
If digital transactions are additive, then even at just $0.17 per transaction, every digital transaction adds to the bank’s cost structure and is a drag on profitability. Conclusion: Per transaction costs by channel are meaningless if channel migration doesn’t occur.
There’s another problem with those channel transaction costs: They’re averages of all the transactions that occur in the channel. Some branch transactions will cost much less than $4 per transaction, and some will cost more.
If the branch (as well as call center and ATM) channel transactions that are displaced by digital transactions are the lower cost transactions, then the potential cost savings is even further reduced.
From a cost perspective, there are two key elements in mobile banking economics: 1) How many transactions are displaced from higher cost transactions, and 2) How many new transactions are added?
If the migration from higher cost channels doesn’t occur, of if the migration is from online to mobile (which is entirely possible), then there’s little economic benefit. If many new transactions are added, then even with a low cost per transaction, overall costs go up.
According to the Bain study, mobile transactions now account for 35% of all transactions. In other words, a minority of consumers (what, ~25%?)–who presumably are not mobile-only customers–are now accounting for a hugely disproportionate percentage of all banking transactions. That tells me that this minority must be adding a huge number of new transactions to the mix. Which implies that mobile banking isn’t saving banks anything, even with the huge disparity in per transaction costs.
The riddle (i.e, the challenge) that banks face–if there is one–has nothing to do with mobile banking. It has to do with the other channels. What can banks do to drive transactions out of those channels and into the lower costs channels?