A Lesson In Mobile Banking Economics

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).

    Before After
  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?


Dissecting The So-Called Rise In Bank Branch Popularity

The American Bankers Association released the findings of its 2014 survey of 1,000 US consumers regarding bank channel preferences. A pymnts.com article titled Mobile’s Impact on Bank Branches reported that:

“21% of those polled selected the branch as their most preferred banking method, up from 18% in 2013. The Internet was favored by 31%, but that’s down sharply from the 39% who preferred it last year. ATM’s are also up in popularity, rising to 14% from 11% in 2013. Mobile banking is up to 10% from 8% a year ago. “

The article quotes an ABA SVP who said, when asked why branches are getting more popular:

“When people are conducting a complex transaction…they often prefer to do it in person. We’re seeing a branch renaissance in a some areas, with many banks transforming their branches to become more efficient and customer-friendly.”

My take: The title of the article is wacky, and the ABA explanation is incorrect. Something else is going on here.


The pymnts.com title is very puzzling. How did they conclude that a 2% rise in mobile channel popularity was the cause of a 3% bump in branch preference? That doesn’t make any sense.

The ABA SVP’s comment doesn’t hold water, either. It’s not all-of-a-sudden that people are making complex transactions (the SVP cites opening an account or applying for a home or business loan as examples), and now prefer to do them in branches.

The percentage of consumers who open a new checking account or apply for a home loan is still a minority of all consumers, so the minority shouldn’t be moving the needle that much. And even if those consumers did prefer a branch to apply for those products, when asked “what is your most preferred banking method?,” they should be thinking about their broader set of banking transactions when answering the survey question.

Side note to ABA: I might be wrong, but I find it hard to believe that consumers who applied for a business loan are impacting consumers’ channel preferences.


The second part of the ABA quote–“we’re seeing a branch renaissance in some areas”–might be more of an hallucination than a legit sighting. “Many banks are transforming their branches…” Really? There are certainly examples of banks creating “branch of the future” prototypes, but it seems to me that the trend isn’t so much “transformation” as it is “downsizing.”

The focus on making the branch more efficient is in response to declining volume, not a resurgence in popularity.


The real story in the ABA survey isn’t about branches or the mobile channel. It’s about the Internet.

In 15 years of being an analyst dedicated to the financial services industry, here’s what I’ve learned: Change comes slowly. Percentage shifts in consumer adoption or preferences are typically very small year over year.

Yet, the ABA survey found that the percentage of consumers who listed the Internet as their preferred banking method dropped eight percentage points from 2013 to 2014. That’s a colossal shift.

What happened between 2013 and 2014 to cause this huge drop?

You will never convince me it was a shift to branches as the preferred method, because I simply don’t see a widespread improvement in branch capabilities, and usage numbers don’t support this theory.

I would buy the theory that people were shifting their preference from the Internet to mobile, but mobile’s popularity improved by just two percentage points, and the ATM saw a bigger percentage point jump than that (really? the ATM is your preferred banking method? weirdo).


Lacking access to the raw data, I’m at a loss to explain this drop in Internet popularity. With the data, I’d  look at year-over-year changes by generation, geography, and maybe even income. I’d also look at the underlying demographics of the survey sample in both years, but I’ll give Ipsos (the firm that conducted the surveys) the benefit of the doubt that they did a good job here.

While I can’t explain the drop in preferences toward the Internet, I will stick to my guns that this is not about a resurgence in branch popularity–and that, if anything, the impact of mobile on branches is bad news for branches, not good news.

Never Say Never (To Mobile Banking And Payments)

We’re going to survey like it’s 1999. According to an article published on CBS News‘ website:

“In a poll conducted for the ID security firm Intercede, 48% of U.S. consumers surveyed said they would never use bill payment apps, and 44% said they would never use mobile banking services. One in five said they did not feel safe shopping on their smartphone. And 63% said they worry about security on their mobile device.”

Substitute “PC” for “smartphone” and “online” for “mobile” and this survey could have been conducted in 1999.

And although online banking, bill payment, and shopping aren’t quite ubiquitous today, the fact is that a lot of people who once said they would “never” do those activities online (or using a PC) do those activities online (or using a PC) today.

But you wouldn’t expect a news organization to report that, would you? Because that would just deflate the newsworthiness of the findings.


The article goes on to say:

“With so many recent security breaches in the news–from Target to the Heartbleed bug to Russian hackers stealing passwords–Intercede’s CEO said it’s not surprising that consumers just don’t trust mobile security.”

There’s no mention (of course), that few–if any–of the data breaches making the news today have anything to do with mobile devices. Mentioning that would deflate the newsworthiness of the findings.


I don’t care what this survey found. I’m sticking by my prediction that 96 million Americans will use a smartphone or tablet to do their banking by 2016.

Is that everybody? Of course not. Is that everybody that matters? Well, that’s a good question, no?

My forecast could be significantly off, but regardless, the reality is that many people who, today, say that they will never do mobile banking, will do so at some point in the future.


The rate of adoption of new technologies is always impacted by a confluence of factors that are nearly impossible to predict. Factors like personal influences, incentives/disincentives, and unforeseen circumstances:

  • Twenty-five years ago, I consulted to a very large company whose CEO didn’t quite get PCs. Didn’t want one in his office, and couldn’t understand why any of his direct reports needed one on their desks. The IT department wanted to compile statistics on PC adoption and develop models of productivity improvement to persuade the CEO to invest in PCs. My firm’s suggestion was less “scientific.” We said: Give the guy’s grandkids PCs. Which they did. And it worked. The CEOs grandkids pressured Grandpa to get a PC and communicate with them through email. Which became a gateway to him using the PC for other things.


  • Ask some of the large banks about what helped them drive up online bill pay use. Don’t be surprised if they say things like “we paid people to try it” or “we charged people to not use it.” Incentives/disincentives work. Funny thing is, when it comes to mobile banking, the rate of adoption seems to be pretty rapid, so I don’t see many banks or credit unions needing to incentivize/penalize anyone. Maybe Intercede’s survey found something I don’t know.


  • In a survey I conducted a while back, I asked consumers who paid bills online what got them started on that behavior. A fair number responded that they “needed to make a payment to avoid a late fee, and was able to do so online.” So…how many of those people who say they will never make a mobile payment will do so when they need to get on a train, don’t have cash, but could use that MBTA app to easily buy a ticket? Yeah, a bunch.


The lesson here is to take what consumers say (especially in surveys) with a grain of salt. We’re not very good at predicting our own behavior (or explaining why we did what did, for that matter).

Am I damning my own profession? No (freaking) way. The value of what we researchers do is in the analysis of the data, not the data itself. Asking the right questions helps, too.




Mobile Banking In 2017

One of the first “rules” I learned as an industry analyst was “Don’t comment on the competition’s research.”

So much for that rule. 

Another analyst firm has come out with its forecast on mobile banking adoption in 2017. According to an article in CU Times: 

“Much quicker than many expected, mobile appears primed to emerge as a dominant banking channel with a predicted 108 million users by 2017. That pencils out to some 46% of all U.S. bank account holders.”

My take: When I see forecasts like this, I typically do some back-of-the-envelope calculations to determine the feasibility of the forecast, and to help me figure out what assumptions were probably used to arrive at the number. 

I find the 108 million number doable. Here’s how I arrived at that conclusion:

Mobile banking adoption is highly driven by age (i.e., generation). Younger consumers, to date, have adopted mobile banking more aggressively, and that’s not likely to change. So, there are three key factors for determining how many mobile bankers there will be in 2017:

1. How many people of each generation will there be?

2. How many people will have a banking account?

3. How many people of each generation that has a banking account will adopt mobile banking?

Drawing on statistics from the US Census, I was able to estimate how many people there will be in the US in 2017, using today’s generational labels (i.e., in five years, the oldest boomers will be 70, but that doesn’t make them seniors — they’re still boomers).

Here’s my back of the envelope calculation:

                      Mobile adoption
         Est. pop       2012 2017   Banked  Total Mobile Bankers
Gen Y    75,000,000      39%  80%     90%    54,000,000
Gen X    40,000,000      28%  60%     90%    21,600,000
Boomer   75,000,000      15%  40%     90%    27,000,000
Senior   35,000,000      8%   20%     90%     6,300,000
        225,000,000                         108,900,000

At an 80/60/40/20% adoption rate across the generations, and assuming that 90% of the population is banked, 108 million mobile bankers by 2017 is pretty feasible. It assumes that the adoption rate for each generation will at least double in the next five years. That’s aggressive, but considering the rate of adoption of smartphones, not unrealistic. 

Banks’ Mobile Challenge

At the risk of ticking off or alienating any of my friends (like I have any) or other people that I have a great deal of respect for, I have a confession to make:

I am sick and tired of hearing people warn banks that if they don’t [innovate/use social media/etc.] they’re going to disappear, or be disrupted, or whatever.

Sorry to be blunt, but any idiot can come up with that claim. And plenty of idiots do. Sadly, a lot of smart people make these claims, and that’s what ticks me off.

What banks (and credit unions) need is good advice, not apocalyptic warnings.

I may or may not be able to provide valuable advice (after all, I didn’t say I wasn’t an idiot). But what I do think I can provide is a little more focus on the problem than simply spouting dire admonitions.

The question that banks need to answer is simple (not that there is a simple answer):

Where in the mobile customer experience do banks add value?

Take a look at the picture below. Many thanks to Jaime Punishill who I stole this picture from.

In this picture, Kelly is out shopping, when she sees a pair of shoes that she wants.

A number of questions immediately pop into her head: How much do these shoes cost? Can I get them cheaper somewhere else? Do any of my friends have these shoes, and what do they think of them?  Possibly — but not necessarily — Kelly might also ask: Can I afford them?

In the old world of shopping, Kelly would had to have gone into the store to check the price, then go home, and search other retailers’ sites to see if they carried the shoes and what they sold them for (in the OLD old world of shopping, she couldn’t even have done that), and call around to her friends to get their opinions.

What I’m not sure a lot of banks understand just yet is that mobile shopping is more important than mobile banking or mobile payments.

In the new world of mobile shopping, banks must figure out how to add value in this process beyond “checking balances” prior to the transaction, and being the “payment mechanism (mobile device or not) at the culmination of the transaction.

The potential areas to add value, as I see it, lie in answering questions like:

    • Can Kelly afford it?
    • What will this do to Kelly’s budget if she buys this?
    • Which payment method should Kelly use?
    • Which payment method(s) do FIs want Kelly to use?

Answering the first question is fairly straightforward. Does Kelly have the money in her account or not?

Answering the second question is a little more tricky. It presumes that Kelly has used the FI’s PFM offering to set up a budget, and/or categorizes her expenses to enable the FI to provide some analysis. Although many FIs are moving in the direction of making their PFM offering mobile-enabled, answering this question — at the point of sale — is not that easy.

The third question is where the realm of possibilities leapfrogs what is currently available. With a mobile wallet that stores multiple payment methods, conceivably an FI could make recommendations on which account (e.g., checking account, credit card, or other account) would be best to use based on the account balance, rewards, and other criteria.

But even more value can be added if FIs could compete, in real time, for Kelly’s business. Perhaps American Express would offer Kelly an additional 5% discount if she uses her Amex card instead of her debit card. Perhaps her bank would offer her 50% off the cost of the purchase if she applies for a credit card (and is approved, of course).

There are probably many more questions that could be addressed. But my advice (helpful or not) to banks and credit unions is this:

The mobile challenge in front of you is determining where you add value in the mobile shopping experience.

Many mobile banking functions are just the porting of existing capabilities to the new channel. And success in mobile payments is dependent on adding value to the mobile shopping experience.

I hope this is a little more specific than “banks are going to disappear if they don’t innovate!” And I apologize to those of you who have said that. I know you know who you are.

Mobile Banking Delusions

Aite Group expects the number of banks and credit unions that offer mobile banking to double from 2011 to 2012:

Bank Technology News reported on a survey of bank executives which found that:

“Eighty-seven percent of respondents say the hope of strengthening customer ties is driving the development of mobile banking apps at their institution. Competitive pressure was cited by 71%. Surprisingly, only 55% said that moving transactions to lower-cost channels was a driver and 53% cited new relationship acquisition.”

My take: What flavor of kool-aid are the 87% drinking that make them think that mobile banking apps will “strengthen customer ties”?

Every time I see this particular survey result (and I see it all the time), I’m reminded of something that Pat Swannick, who used to run the online channel group at Key Bank, once said to me:

“If every project that we invest in in the name of improving customer retention actually delivered on its promise, we’d be at 800% retention.”

The delusion of “strengthening customer ties” has been a part of the justification for nearly every new technology in the banking space for the past 15 years: online banking, online bill pay, eBills, PFM, and now mobile.

Did none of the people that left their bank for a credit union or smaller bank in the weeks leading up to, and including, Bank Transfer Day, use their bank’s mobile banking capabilities?

While the percentage of banks that offer mobile banking is growing, the largest banks — those presumably hardest hit by BTD — have been the early adopters.

So what has online banking online bill pay, eBills, and mobile banking — not to mention the billions of dollars invested in enterprise-wide CRM applications — done for those banks’ customer retention efforts?

You’ll pardon me if I conclude: Very little.

The 87% expecting to “strengthen customer ties” would also appear to be ignoring some market research conducted in 2011 by the American Bankers Association on consumers’ channel preferences which found that:

The least preferred method of banking was the mobile channel, which dropped from 3% in 2011 to 1% this year.

If just 1% of consumers prefer the mobile channel to other channels, then what impact is mobile going to have on overall customer retention rates?

Last year, I published an Aite Group report called The Impact of Mobile Banking: The Case for Mobile Marketing. In the report, I concluded that mobile banking:

  1. Will have a detrimental impact on revenues. The ability to better monitor balances helps consumers avoid overdrawing on their accounts, which will lead to fewer overdraft fees, negatively impacting bank revenue.
  2. Doesn’t drive mobile payments. Mobile shopping drives mobile payments, which in turn drives mobile banking.

Don’t get me wrong: I’m a strong proponent for the mobile channel. But I’m also an advocate for making a realistic business case for making mobile channel investments. The realistic business case has three components: 

1. Revenue generated from improved marketing efforts. Banks and credit unions must get a whole lot better at mobile marketing — in the form of cross-selling, influencing choice of payment cards, merchant-funded reward offers, and driving mobile payments — in order to recoup their investment in mobile banking.

2. Lower costs from transaction migration. The 55% that said that moving transactions to lower-cost channels was a driver of mobile banking investments are on the right track. But unlike past efforts, this time around banks and credit unions have to realize the potential savings by downsizing other channels, and forcing customers to give them up. The rationale that bankers give for not doing it — fear of losing customers — is ridiculous. They’re losing customers anyway.

3. Competitive differentiation. The battle for differentiation through the mobile channel will come from the deployment of “purely mobile” applications — applications that use the capabilities of the mobile channel that are unique to the channel, and can’t be replicated in other channels (e.g., location awareness, augmented reality).

Porting online banking capabilities to the mobile channel doesn’t qualify as differentiation and will do little to “strengthen customer ties.” Please don’t harbor mobile banking delusions like 87% of your peers appear to do.

Credit Unions’ Achilles Heel?

If you work in financial services — and like market research data — check out Prime Performance’s 2011 Bank and Credit Union Satisfaction.

If you work for one of a handful of large banks, you probably won’t like what you see, and will probably stop reading half way through. If you work for a credit union, then enjoy this cup of kool-aid.

I’m not disparaging the study with that last statement. The study is well executed, the sample size is more than adequate. But as with much of the market research in financial services — and I am as guilty of this as anybody — data about credit unions is reported at the overall level, which obscures the differences in individual institutions.

Instead, I’m taking a playful swipe at the credit union folks who will see that credit unions are rated highest in every category tracked except for one, and pat themselves on the back, as they do every time a survey comes out that shows that they’re superior to the big banks.

There are, however, two things credit union people should take away from the survey results:

1. There is some halo effect going on here. I’m not surprised in the least to see higher satisfaction and higher advocacy (“Doing What is in Your Best Interest”) scores for credit unions. But significantly higher scores for “reps offer higher quality advice”, “reps have the expertise to handle your financial needs”, and “satisfaction with Internet banking”? OK, maybe I can give in a little on the first two of those criteria, but there are a lot of credit unions out there whose public Web sites are atrocities and whose authenticated site design and functionality is serious lacking. I suspect that many respondents are just giving their credit union a high score across the board regardless of their actual experience, as well as the opposite for some of the large banks.

2. Mobile banking scores. In the scheme of things, credit unions’ scores on mobile banking are hardly a cause for concern — 68% of respondents are satisfied, 12% dissatisfied. But in comparison to the scores on the criteria — where the percentage dissatisfied average between 2% and 3%, and the percentage are often in the mid- to high-80s — mobile banking might be a cause for concern.

Is mobile banking credit unions’ Achilles heel?

I’m coming to the conclusion that channels are segmentation tools. Sure, Seniors may use the Internet, but they still rely on branches — and the branch is probably the most influential channel impacting their satisfaction. Boomers are big users of the call center (as well as the Internet), and Gen Xers are big users of their banks’ and CUs’ web sites.

Gen Yers? Well, the mobile channel is becoming — if it isn’t already — their primary access channel. As (pretty much) every credit union in the US goes about trying to lower the average age of their member base by attracting Gen Yers, the mobile channel will likely be — if it isn’t already — the competitive battleground and point of differentiation. 

The challenge for credit unions is to look beyond mobile banking. Looking up account balances, transferring money between accounts, an even getting alerts are basic features. Every institution will have those capabilities before too long. 

What credit unions should be exploring and experimenting with are what I like to call “purely mobile” apps — capabilities like location awareness, augmented reality, and mobile payments that are available only through the mobile channel.

Public villains come and go. You don’t see too many articles about BP anymore. With time, banks won’t be the whipping boys they are today. 

Developing innovative mobile capabilities may very well be one way in which they get back into their customers’ — and the public’s — good graces. Not to mention a way for start-ups like Movenbank and Simple, or even firms like Google and Facebook , to offer banking-like products that compete with established banks and credit unions. 


I hope the mobile banking scores in the Prime Performance study raise some discussions in credit unionland. In the meantime, congrats to CUs for kicking bank butt on the Prime Performance satisfaction survey.

JAN 10 UPDATE: Well, at least I now know that CUs aren’t ignoring the mobile opportunity. Check out this article titled Credit Unions Gear Up for Mobile Banking Explosion on the Credit Unions Online site.