As non-banking groups like Google, Apple and PayPal develop and diversify their payment services, banks are increasingly confronted by how to keep pace with the new digital service offerings that their customers desire.
Trust is at the heart of the bank and customer relationship. Consumers and businesses want assurance that their finances are in safe hands and that the institutions with which they entrust their money are reputable and engage in responsible lending activities. In the post-GFC world, the focus on trust is greater than ever because negative sentiment toward banks remains high and regulators are making it easier for customers to switch accounts.
Building customer engagement is a valuable method of developing trust. This involves understanding what customers want from their banks and responding in a way that ultimately delivers value.
Vital to banks building a rich customer experience that ensures loyalty is the innovative use of digital services.
People these days expect the same 24/7 real-time banking service that they experience elsewhere, such as online retail, and they want access to rich content, features and interactions. For Generation Y, a bank’s digital offering is an important factor in deciding which provider to go with.
Harnessing the opportunities afforded by digital technology is also crucial if banks are to remain competitive in a world where newcomers emerge from unexpected places. Strong online brands and world-wide reach mean that power-houses such as Google, Apple, PayPal and Facebook pose significant challenges to the traditional banking industry, particularly with respect to mobile payments where there is strong potential to disrupt the traditional banking value chain and impact adversely on banking revenues.
The focus on digital
For some time it has been possible for customers to perform banking transactions without visiting a bricks-and-mortar institution, using innovations such as phone and internet banking services.
Digital wireless banking and mobile banking, involving access to, and provision of, banking and financial services through mobile devices, are an extension of this technological progression. They recognise that customers increasingly choose to conduct their banking business around the clock via smart phones and tablet computers. Australia has the second-highest global level of smart phone penetration.
That has led to digital banking innovation including:
- developments in user experience, including rich and interactive customer interfaces;
- advances in mobile devices and networks, allowing access to banking anytime and anywhere;
- social media and collaboration, whereby customer advocacy of banking products and services becomes the new differentiator;
- customer analytics, providing deeper insights into customer preferences and enabling the development of more personalised and localised products and services; and
- channel integration technologies, making the end-to-end banking experience more seamless to customers.
These features offer significant opportunities for banks to engage and interact with customers in new and innovative ways. They promise richer and more personalised experiences for customers, and the ability for banks to enhance their brands and ultimately to become the bank of choice for their customers.
Mobile banking v mobile payments
Mobile banking and mobile payments are terms that are often used interchangeably, but they have distinct meanings and have different implications for industry players.
Mobile banking refers to platforms that enable customers to access financial services such as account transfers, bill payments, balance information and investment options. Support is often provided by technologies such as:
- SMS text;
- WAP (wireless application protocol); and
- platform specific applications.
A first step for many banks entering the mobile banking space has been to adapt existing internet platforms to meet mobile standards. In effect, this requires a WAP site that can be securely viewed on a mobile device and which has much the same look, feel and functionality as an existing internet-banking portal.
For a more unique user experience, platform specific applications are being developed that combine ease of use with dynamic content. Most of these applications run on specific operating systems such as Apple’s iOS or Google’s Android and can, therefore, carry high development costs for banks. Nevertheless, platform specific applications are gaining traction, spurred on by apparently insatiable customer appetite for smart phone and tablet based applications.
Mobile payments are concerned with the use of hand-held devices to pay for a product or service, either remotely or at a point-of-sale.
There are two main types of mobile payment systems:
- over-the-air (OTA) systems, whereby payment transactions are initiated by a mobile handset and authorised via a wireless network operated by a mobile network operator; and
- contactless mobile payment systems, commonly referred to as near field communication (NFC), which rely on handsets equipped with chips containing an embedded antenna that enables the handsets to communicate with point-of-sale (POS) readers across short proximities.
At the moment, much of the focus appears to be turned towards NFC. Key issues identified in past trials undertaken by Australia’s leading banks include:
- concerns and perceptions around mobile phone security;
- lack of NFC capable smart phones;
- relationship issues between telecommunication manufacturers, payment providers and banks, with the former limited in their ability to exploit the technology without complex partnerships with banks;
- the limited number of contactless payment devices; and
- underlying concerns regarding the security of financial and transactional information.
However, positive customer response to pilot programs involving contactless cards and NFC companion devices means that banks are increasingly seeking to address the challenges. Ultimately, it is expected that customers will decide which payment system is widely adopted by pushing adoption rates to a level that offsets investment costs.
What is happening in the market?
The payments market, in particular, is undergoing significant change as it accepts mobile channel and non-bank providers offering new and innovative mobile payment solutions.
Payments have always been a key component of the banking value chain and are linked to as much as 40 per cent of bank revenues. In Australia, the four major retail banks are the major controllers of the card payment market, including the EFTPOS terminal fleet.
The typical players in the traditional payment value chain include: merchants; acquirers or payment gateways; payment networks; banks/issuers; and consumers.
In recent times, the payment value chain has been disrupted by the rise of alternative payment providers such as internet payment giant, PayPal. Unlike traditional players, PayPal acts like a digital wallet that allows customers to store all of their payment options in an escrow-like arrangement with PayPal. When customers want to make a payment online, they don’t need to disclose their payment details to merchants. Rather, they simply log-in to their PayPal account and select their preferred method of payment. Because PayPal is not regulated to the same extent as banks, it is able to move much more quickly.
PayPal has also recently launched a credit card reader and smartphone application that is designed to let small businesses accept multiple forms of payments from mobile phones. Apple is also expected to enter the mobile payments arena, while Google is already active with its Google wallet product. Companies such as these, with control over device manufacturers, proprietary networks and global reach, represent new and emerging competitors in the global payments market.
Other new entrants include:
- technology providers;
- mobile network operators (MNOs);
- mobile software and platform providers; and
- trusted service managers (TSMs), which work with banks and MNOs to bridge multiple banks and operators to ensure a secure and inter-operable mobile payments system.
It is becoming increasingly important for banks to respond in a timely manner to newcomers that are entering the payments system in order to curtail the potential loss of market share. Given the pace of change, strategic partnerships with new entrants are likely to provide an attractive proposition.
The threat of disintermediation is particularly prevalent in mobile payments, but it also exists with respect to other aspects of the banking value chain. Industry players with e-wallet and stored value card offerings, along with handset manufacturers and personal finance platforms, are all seizing opportunities. MNOs, for example, have grown in importance as banks look to deploy and test their own applications across multiple devices and networks.
This is not to say that banks will cease to be the primary provider of financial services. Indeed, they have strong existing customer bases and are best able to leverage their existing assets and regulatory experience to deliver in the digital age. However, in order to acquire and retain customers, banks need to act quickly and form strategic partnerships with technology and mobile innovators in order to deliver the type of digital innovation which customers are seeking.
The key challenges to the uptake of mobile banking and payments include:
- mobile fragmentation resulting from competing mobile operating systems such as Apple’s iOS and Google’s Android;
- the lack of standards to effectively facilitate the payment process across the value chain, from customer to payment processor to banks;
- customer authentication and security concerns;
- unproven demand and the cost of investment in new technologies, such as NFC; and
- the complexity associated with co-ordinating the many and varied industry players lining up to take part in the mobile banking and payments value chains.
- From a customer perspective, security and fraud management is paramount. If entering the digital arena is about customer trust and engagement, then it goes without saying that delivery of high security services is a necessity.
Emerging legal issues
As digital banking and payments become more pervasive, a number of legal issues are emerging such as:
- legal wrangling over patents in relation to mobile technology, particularly as players look to determine what part they will play in the future mobile payments value chain;
- re-consideration of the regulatory regime applicable to banking and payments, particularly with respect to banking-like functions being undertaken by non-banks. This includes telecommunications providers expanding their role as holders of stored value or providers of credit;
- privacy issues, including the security of personal data and the collection of personal customer data through the use of location tracking functionality;
- liability issues arising out of the increased number of participants in the mobile banking and payment value chains, and how responsibility for customer losses is ultimately determined amongst those players; and
- security, fraud, authentication and data control issues.