Mobile Banking

Evolution or Revolution?

B. Nicoletti

• Publisher: Palgrave Macmillan
• Year: 2014
• ISBN:
  9781137386564
• Topic: Betriebswirtschaft
• Subtopic: Finanzdienstleistungen

Mobile is impacting heavily on our society today. In this book, Nicoletti analyzes the application of mobile to the world of financial institutions. He considers future developments and the possible use of mobile to help the transformation in products, processes, organizations and business models of financial institutions globally.

1

Innovation in Financial Services

Introduction

The main challenge standing in the way of change taking place in the financial services industry is the conservative nature of many financial institutions. The less they change, the better their executives feel. Consequently several outsiders have introduced innovations:

•A small financial institution in the Netherlands pushed for online banking. It became a global leader in Internet banking: ING Direct.

•An outdated post office launched a prepaid card in Italy and became a leader there with almost eight million cards: Poste Italiane.

•A telecom operator launched a person-to-person (P2P) money transfer service using mobile phones. It became a market leader in Kenya: Safaricom.

It is time for financial institutions to take the lead in innovation and making the processes leaner and digitized. It is possible to do this profitably in almost all the financial sectors. The requirements are clear:

•New Product Innovation. Since financial institutions essentially manage information, this should be relatively easy and not very expensive.

•Agility: for instance, in inquiries from the customer. Speed is the name of the game. If a customer needs a mortgage or a loan, he/she would like to have it immediately. Risks should be managed, but with the right balance between customer satisfaction and loss avoidance.

•Continuous and secure operations. This should be pursued by moving to a multichannel strategy based on lean branches, online banking, or entirely mobile banking. Security is at a premium. It should not delay the speed of the operations. Digitization can help quite a bit. In this case, an organization with a middle office can help take the burden off the front office.

•Back Office. This should be reduced as much as possible. It should be outsourced or offshored.

•Financial institutions for several reasons, including the forthcoming Basel 3 regulation, will need additional equity. These requirements imply substantial cuts in operating costs to free needed funds.

Challenges for financial institutions

Today, financial institutions face several challenges. They can be summarized as the six C’s:

•Culture

•acting customer-centric;

•balancing the interests of the shareholders and the organization;

•being lean, automated, and agile.

•Customers

•empowered and demanding;

•complex and confused;

•sometimes malicious.

•Competition

•more and more aggressive;

•global.

•Computers

•based on new technology;

•always connected to networks;

•available through other devices, such as the mobile ones.

•Compliance

•more fraud;

•need for security;

•increasing legislation and regulation;

•governance, risk, and compliance (GRC) management.

•Costs

•huge push for improving the return on equity;

•more outsourcing.

To overcome these challenges and ensure the future of the organization, it is necessary to accelerate changes. There is a famous statement attributed to Charles Darwin:

It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is most adaptable to change.

This is true for the animal species as well as for organizations. They need to innovate. They must find a better way to cope with the six C’s. Organizations need to strive to add value to their customers and to the organizations themselves, eliminate waste and to drive competitive advantage. They should act on the four P’s:

•people

•products

•processes

•platforms

A correct approach should be based on leaning and digitizing.¹ Adding value to the customers, process improvement, reduction of cycle times, and waste cutting require knowing the processes and being able to measure them. In theory, the improvements in processes should be relatively easy in a banking environment, since financial institutions have in the past often been inefficient, and they do not have physical products with complex supply chains, but rather they essentially manage information.

Mobile banking for a new model for financial institutions

Financial services need to change. The current economic and financial crisis is a powerful accelerator in this respect. The crisis is welcome since it is finally forcing financial services to change after having been static and conservative for a long time.

The model of the services also needs to change in a drastic way. This is a threat, but it is also a great opportunity. Consequently, there will be significant changes in the share of the markets of the players in financial services.

It is essential to change the structure of the costs in financial institutions. For instance, in Italy, financial institutions use on average roughly 125 euro of funds for each 100 euro of funds. Equity and spread cover the differences. It is necessary to change this ratio and lower it to 100–105. To achieve this result, it is essential to earn more through the services and reduce costs in drastic ways.

There are two possible paths to take in order to meet these challenges. One possibility is to reduce working capital through the sale of assets. Several financial institutions have embraced this path. It does not seem that there is much more to squeeze. An alternative is to cut the ratio of operating costs to operating income (the so-called cost-income ratio, a simple indicator of efficiency). In 2008, in the banking sector in Italy it was still at the levels of 1984.

This is a correct diagnosis, but it is not the recipe. It may be interesting to analyze what financial institutions could do to try to achieve the objective of cutting costs. Mobile banking is one of the most interesting solutions. According to a report published by Javelin Strategy Research, mobile banking could bring an additional saving of $1.5 Billions in the United States alone.² Mobile customers tend to be valuable customers. At one extreme, they are rich and young. At the other extreme, they are poor and unbanked. Both these sectors are interested in innovative financial institution’s products and services.

To be a viable competitor today, a financial institution has to offer a robust mobile banking service.

Marketing analysis is becoming very important. As mobile banking moves out of its infancy, financial institutions need to develop their service offerings to meet customer expectations and accelerate growth. Reaching maturity in mobile banking will require focusing on several dimensions³:

•satisfying customers with enhanced functionality

•protecting customers with better security

•being effective and compliant

•enhancing solutions

Although these dimensions are interrelated, each of them encompasses its own set of complexities and challenges. The following chapters will discuss each of these items in detail. The following paragraphs define the playground for these aspects.

Satisfying customers with an enhanced experience

Pleasing customers today is no easy feat. The bar is set very high for financial services institutions. In fact, pleasing customers is not enough. It is important, to delight the customers ahead of the competion. Especially in the case of mobile applications, customers have become used to the kind of experience that is possible when interacting with the likes of Google or Amazon. This is what they want from their financial institutions as well. On the other side, customers expect a consistent level of service, security, and simplicity across all financial services channels, including mobile, online, in person at the branch, on the phone, or at an ATM.

Yet this kind of experience is insufficient, as financial institutions must also be constantly accessible. They must deliver services faster and more effectively than before. The proliferation of mobile applications has created the expectation that features and functions will improve continuously and they will provide cheaply. If customers do not see new features or multiple application updates during a single year, they may be inclined to seek other institutions for a different or more satisfying and advanced experience.

Delighting customers will also require new servicing procedures. Financial institutions personnel in call centers, service centers, and branches need to understand mobile features, functions, and devices so that they can support their customers effectively. Training employees so that they can encourage customers to use the new effective and low-cost mobile services – as well as can help them troubleshoot – will be essential in increasing the adoption rates for the new technologies.

Protecting customers with better security

Financial institutions have to balance the pace at which they introduce new and innovative features with the need to keep transactions and data secure. Thus, financial institutions are forced to apply the same level of rigor and scrutiny to mobile banking as they do to their other chann...