How mobile transforming banking

Consumers are not uniform in their banking preferences: retirees in Mallorca, millennials in Seattle and villagers in Peru will each be inclined to use a different mix of branches, ATMs

How mobile is transforming retail banking

Redefining banking to survive and thrive in a digital world

Preface 2Introduction 4Mobile, a big player in an “omnichannel” world 6

A new competitive landscape 9Moving beyond transactions 12Conclusion 14Appendix: Executive survey results 15Appendix: Consumer survey results 22

Contents

1 2 3 4

As the basis for this research, The Economist Intelligence Unit conducted two global surveys, sponsored by SAP The first polled 111 retail-banking executives in June 2014 and the other polled 1,827 consumers in September 2014 The findings and views expressed in this report do not necessarily reflect the views of the sponsor The author was Dan Armstrong Riva Richmond edited the report and Mike Kenny was responsible for the layout We would like to thank all of the executives who participated, whether on record or

anonymously, for their valuable insights

IntervieweesBrad Jones, head of North Asia operations and Asia transformation at National Australia BankIvan Mortimer-Schutts, East Asia-Pacific electronic and mobile banking specialist at the

International Finance CorporationJoshua Reich, chief executive of SimpleJose Manuel Villas, head of the digital channel at Banco Bilbao Vizcaya Argentaria

Andres Wolberg-Stok, global head of emerging platforms and services at Citibank

The Economist Intelligence Unit conducted two global surveys on mobile banking, sponsored by SAP: one of 111 banking executives in June 2014 and the other of 1,827 consumers in September

2014

The executive survey Nearly half (45%) of

respondents served in the C-suite or board of directors, while 17% were at vice-president or director level or ran business units Outside the “general management” category, the key functional areas were strategy and business development, finance and marketing and sales

The survey attracted executives at banks large and small A quarter (24%) hailed from banks with assets greater than $100bn; two-thirds (66%) had more than 100,000 retail accounts Half (50%) described their footprint as either global

or multinational, while 18% described themselves

as regional and 31% as national About one-fifth (20%) of respondents came from North America, 23% from Asia and 18% from Latin America

EMEA accounted for 21% of respondents, with most (19%) from Middle and Eastern Europe (a designation covering the countries from Switzerland and Germany on the west to Russia on the east)

The consumer survey Respondents to the

consumer survey were from five regions and 48 countries All currently use mobile devices and have bank accounts About 13% of respondents were from the US, with 6% each from Brazil, Mexico, Canada, China, the UK and France; no other country accounted for more than 4% Emerging markets were well-represented, with 19% of respondents hailing from the BRIC countries and another 48% from a more broadly defined group of emerging economies About one-fifth (19%) came from North America, 19% from Latin America, 23% from EMEA, 26% from Asia-Pacific and 14% from Middle and Eastern Europe.The median survey-taker was in the 41-to-50 age group; the average age was 45 Men outnumbered women by a ratio of 57:43 In terms of income, respondents exhibited a dumbbell pattern: the largest group made more than $125,000 per year (14%), while the second largest made less than

$10,000 (9%) and the third largest between

$10,000 and $15,000 (7%) The average annual income of respondents was approximately

$57,000 Most have smartphones (86%) and almost half have tablets (47%) A significant portion also uses a feature phone (22%)—a basic phone for calls and texts, with simple games and Internet connectivity

About the surveys

Our grandfather’s retail bank was a columned building with tellers and velvet stanchions Ours is fast becoming an icon among many on a tiny screen The traditional bank represented solidity and permanence The new bank is a portal into a dynamic new digital world.

As anyone who has witnessed rows of mesmerised commuters knows, mobile devices are becoming central to individuals’ interactions with each other and with businesses Banking, like so many industries, has been swept up by the wave

Both bankers and consumers expect the use of

mobile-banking technologies to grow rapidly, according to companion surveys of 111 bank executives and 1,827 consumers across five regions and 48 countries conducted by The Economist Intelligence Unit and sponsored by SAP

Yet the surveys also show that, even as mobile interactions grow, other channels where consumers and banks connect will remain as important as ever Many consumers still appreciate the feeling of stability that brick-and-mortar branches provide—and they will always need branches or ATMs to deposit and withdraw cash

Branches, ATMs PC Call centre Mobile devices

Regional breakdowns on mobile channel use

North America

Now

In five years

Middle and Eastern Europe

Now

In five years

Latin America

Now

In five years

Asia-Pacific

52 27

26

28 9

37

60 24

8 8

38

26 10 26

67 18

6 9

46 21

6 27

53 20

12 14

35

26 8 31

Source: Economist Intelligence Unit survey, September 2014.

Introduction

1

Many like the larger screens that their home computers provide Still, most also want the convenience of paying for items and handling transactions on their phones

This “omnichannel” world is diverse Consumers are not uniform in their banking preferences:

retirees in Mallorca, millennials in Seattle and villagers in Peru will each be inclined to use a different mix of branches, ATMs and online and mobile services

But consumers around the world are clearly embracing mobile as a vital channel—and banks need to be there In the EIU’s executive survey, 82% of retail bankers agree or agree strongly that

in the next five years mobile will become the number one channel for millennials and younger consumers—banks’ future customers

“Seventy percent of the Spanish population owns a smartphone It is clear that customers are increasingly moving to mobile,” says Jose Manuel Villa, head of digital channels at Banco Bilbao Vizcaya Argentaria (BBVA) “We need to enable distinctive digital platforms, and that requires a

substantial investment in both talent and technology.”

Moreover, mobile services could help make developing countries and the underbanked and unbanked more accessible and attractive markets

to banks In emerging markets, approximately 1.2bn mobile users will use mobile money accounts

by 2015, up from a negligible number in 2010, according to Ovum, an IT and telecom research firm A 2014 Federal Reserve study, “Consumers and Mobile Financial Services 2014”, found that the unbanked make heavy use of mobile phones and smartphones and that almost 40% of the underbanked use mobile transaction services at a relatively high rate

Bankers must develop their “omnichannel” strategies and watch the mobile horizon closely

We do not yet know how profoundly mobile commerce will change consumer behaviour—or whether banks will help shape that change or be swept aside by newcomers with financial products that help mobile consumers reach their financial goals and dreams

Will banks help

Bankers and their customers agree on two things:

Interaction via mobile devices will continue to grow quickly and traditional banking channels will not go away

Tradition, inertia and screen size may largely explain why Well over half (56%) of consumers who dislike mobile say that they simply prefer the

PC and another 35% like ATMs better About one-quarter of bank customers (26%) do not expect to visit branches less frequently, even if mobile banking improves For now, almost all consumers need a branch sometimes—if only to get cash—and a few want a branch all the time

Of course, these attitudes may well change as consumers gain familiarity with mobile services, electronic payments become more ubiquitous and apps become more intuitive New technologies are emerging and digital commerce is growing in a world that is increasingly mobile Retail financial services may not always live on a spectrum with mobile transactions on one end and traditional banking on the other In a time of flux, new business models may emerge, and they may coexist with traditional models—or upend them

Today’s bankers, most of whom have spent their careers in a world of branch banking, believe that branches will continue to be important Three-quarters say branches are needed to facilitate conversations, engage customers and explain complex products “There are things that happen in branches that are not immediately replaceable by remote approaches like online and mobile

banking,” says Andres Wolberg-Stok, global head

of emerging platforms and services at Citibank.This is also true in emerging markets, according

to Brad Jones, Brad Jones, a specialist in mobile financial services in Southeast Asia who has worked with IFC, Visa and mobile payments provider WING Cambodia “There will always be a need for the customer to be able to have some connection with the provider Maybe it happens at the level of an agent who [visits homes and businesses with a mobile device and] is himself supported by a branch Maybe it’s the ability to contact a call centre to address problems The human channel engenders trust Maybe your customer transacts through mobile primarily, but having a human to address issues such as fraud or security is critical.” The multiplicity of channels persists because no channel is a perfect substitute for another

Accordingly, banks need to manage all channels to provide an optimal overall experience for the consumer “Increasingly, users rightly expect to be able to do whatever they need to do on whichever device they happen to be using at that particular moment,” says Mr Wolberg-Stok

Thus banks will have to invest significantly, not only in mobile systems but in integrating all their channels so customers can move seamlessly between them Only 15% of respondents say that all channels are integrated now But by 2019, three out of four banks expect to have achieved full integration

Mobile does offer unique business value for both

Mobile, a big player in an

global head of emerging

platforms and services at

Citibank

banks and customers, however By pushing low-value transactions to mobile, banks can greatly improve efficiency and service, which can help them grow their businesses significantly without higher operating costs, Mr Jones says

“Somebody who wants a savings account and needs to withdraw $10 doesn’t need to come to a branch That’s like using a cannon to kill a fly,” says Ivan Mortimer-Schutts, an East Asia-Pacific electronic and mobile banking specialist at the International Finance Corporation (IFC), part of the World Bank “It’s out of proportion these days, because there are other tools at our disposal.”

Meanwhile, these routine, commodity mobile transactions and products like mobile wallets can become gateways to deeper relationships and the sale of higher-value-added services like loans

Indeed, mobile offers advantages that extend to higher-value transactions as well, including real-time alerts and seven-day-a-week, 24-hour-a-day customer service

Loyalty—created or destroyed?

Banking executives remain divided about whether mobile will affect customer loyalty A plurality of 39% predicts it will increase attrition, with bankers

in Asia-Pacific and Middle and Eastern Europe registering the most concern But one-third of total

respondents (33%) say attrition will decline and the rest (28%) are not sure

The first group of executives believes mobile will fray the bonds that bind them to customers They think customer churn will rise because mobile will increase commoditisation (70%), reduce barriers

to entry (63%) and make switching easier (74%) They also worry that a diminished human connection will hurt interaction and engagement The second group believes that if mobile helps them provide an easier, faster banking experience, customers will not want to leave (83%) These bankers tend to believe many customers prefer self-service and that allowing them to serve themselves at the time and place of their choosing will encourage them to stay and that mobile will reduce providers’ costs and, thus, lead to lower costs for customers

But anytime, anywhere self-service is already becoming a basic—banks will have to offer more than account balances, transactions and bill payment, Mr Wolberg-Stok says “If you can explore new types of services as well as providing more convenience, then you have a chance to leverage mobile to really create differentiation.”

For instance, Citi’s mobile “Snapshot” feature enables customers to view deposits, credit-card balances and recent transactions without having to

Source: Economist Intelligence Unit survey, September 2014.

How will the migration of customers to mobile banking affect customer attrition?

to leave and make offers to keep them Greater efficiency will allow banks to lower costs for customers Many customers will prefer self-service over interacting with personnel Banks will gain scope for personalisation Banks will build loyalty with innovative features Banking will become easier and faster

Why will attrition rise?

(% of respondents) Security concerns will rise Human interaction will decrease Barriers to market entry will fall, leading to more new providers Basic banking services will become even more commoditised Switching to new providers will

become easier

36 47 53 56 61 61 83

30 37 63 70 74

global head of emerging

platforms and services at

Citibank

log into their accounts The app sends notifications when checks clear, balances fall below a set threshold and payments come due.

Many bankers see personalisation and innovation as important retention tools (61%)

Simple, a digitally native and millennial-friendly US bank recently purchased by Spain’s BBVA, is so convinced of this it only accepts new account applications from prospective customers with smartphones The bank lets customers customise their accounts with budgeting and goal-setting tools, “smart” transaction tagging, and instant account updates to their smartphones

Simple’s mobile interface lets consumers name their goals—be it a “Paris vacation” or “buy a

house”—and save for them over time by subtracting from their “Safe to Spend” discretionary funds “We see what customers are saving for If they’re saving for a down payment on a house, we’d love to be there to underwrite that mortgage at some point in the future or to offer student loans or do a variety of other things on the credit side of the house,” says Joshua Reich, Simple’s CEO

Two different world views, two different results; both are plausible and, in fact, both may come true Some banks will use mobile to differentiate and get customers seeking more personal and comprehensive services Others will provide generic solutions and retain customers satisfied with a commodity experience

The mobile invasion is forcing banks to navigate a complicated world of new partnerships and rivalries Transactions must be easy, convenient and relevant and take place securely on any device

in any location In response to these competitive mandates, an array of alliances is emerging among payment processors, financial institutions, mobile-network operators and retailers

For example, under the Yaap partnership in Spain, Santander, Telefónica and LaCaixa have collaborated to create virtual showrooms for retailers and a payment service Yaap is an open platform where any store, including small retailers with limited online presences, can reach hundreds of thousands of potential customers via a mobile app

with discounts, offers and loyalty programmes Yaap Shopping aims to become Spain’s largest customer-loyalty network A second service, Yaap Money, is a peer-to-peer-service that enables anyone to send funds from one mobile device to another

To better understand the new competitive landscape, the EIU asked bankers to identify rivals and potential partners It found that traditional rivals remain—large, established banks were clearly entities to be feared (83%)—while other types of companies occupy less clear ground Exactly half of retail bank executives see virtual banks, or banks that do not have physical

branches, as rivals, while three in 10 view them as potential partners Bankers are almost evenly

A new competitive landscape

Big retail banks

Many potential partners and a few big rivals

divided on the threat from digital-payments companies like PayPal and firms that advise on personal financial management; a similar split exists for personal financial advisers.

The rest of the world is rich with potential partners: Mobile-phone companies (71%), social-media firms (60%), large brick-and-mortar retailers (54%) and Internet retailers (51%) are viewed primarily as potential partners

This view, however, is less accepted in Europe, the Middle East and Africa (EMEA), where 65% view virtual banks as significant rivals, 61% worry about payments services and 48% see retailers as future competitors Some 17% disagreed with the statement “Our customers trust us with their money more than they would trust an Internet company,” more than triple the percentage in the Americas However, 68% of EMEA respondents view

social-media companies as potential partners

To fully realise the full potential of mobile to empower customers, banks will need to ally themselves with other members of the mobile and retail ecosystem These partnerships must be much more than marketing initiatives; to have real business impact, they will have to be ambitious efforts to create and offer open platforms, as Yaap

is attempting to do, where data are integrated and user experiences are seamless—and customers get something new that is of real value

Mobile employees

As mobile capabilities for customers gain currency, banks are likely to see the virtues of also providing bank employees with more mobile capabilities—to operate smarter, drum up new business and compete in the marketplace

EMEA Asia MEE Latin America North America

Percentage of bankers who disagree with the statement:

“Our customers trust us with their money more than they would trust an internet company.”

(% of executive respondents)

Source: Economist Intelligence Unit survey, September 2014.

17 16 10

5 5

Internet-only banks Online payments services (eg, PayPal) Large retailers (eg, Walmart, Tesco) Personal financial management companies Mobile phone service providers

EMEA banks are most likely to see threats to their franchises

To what extent do you see these entities as potential rivals?

(% of executive respondents)

Source: Economist Intelligence Unit survey, September 2014.

65 61 48

39 22

As banks become more virtual, mobile and focused on customer experience, how will the roles of employees at your bank change over the next five years

(% of executive respondents) Real-time mobile will help them identify opportunities, cut risk and improve services They will speed up approvals and processing They will go to customers rather than customers coming to the bank

Source: Economist Intelligence Unit survey, September 2014.

84 69

A large majority of bankers believe that mobile services can help employees identify opportunities, reduce risk and improve service Seven out of 10 (69%) think mobile for employees will help speed

up approvals and processing And half see bankers going to customers rather than customers coming

to the bank—a trend that is already in full swing in emerging markets, where banks are enlisting local agents and arming them with tablets to support rural customers

So far, however, banks have not focused as sharply on mobile capabilities for employees as they have on capabilities for customers While half

of survey respondents say they are above-average

in developing mobile capabilities for customers, only one-third say that about their capabilities for executives and one-quarter indicate such about capabilities for employees in the back office Customers come first, executives second, the front office third and the back office last

Well below average for the industry Below average Average Above average Well above average for the industry Online capabilities for customers

Mobile capabilities for customers Mobile capabilities for managers and executives to aid service-related decision-making Mobile capabilities for customer-facing branch employees

Mobile capabilities for customer-facing employees who visit customer locations Mobile capabilities for back-office employees to aid service performance

In your effort to improve online and mobile experiences for customers, how would you rate your organisation

on the quality of these operational elements?

second, the front

office third and

the back office

last.

© The Economist Intelligence Unit Limited 2014

12

For customers to embrace mobile fully, banks must offer a more compelling experience, which means going beyond the basics

The bar is high Seven out of 10 (69%) retail bankers say that consumers expect banks to provide the same quality of experience big Internet companies provide The nightmare scenario for banks is the spectre of distintermediation at the hands of the “mobile wallet disruptors”—Google, Facebook, Amazon, Apple and PayPal—whose reach into the consumer market dwarfs that of even the largest banks

Sensing the danger, banks are planning to significantly expand mobile capabilities for customers over the next five years

A large majority currently offer the basics:

mobile access and management of accounts, information about products and bank and ATM locations, and alerts, transfers and payments

Banks in the Asia-Pacific region are furthest ahead; those in Middle and Eastern Europe are furthest behind

But five years from now, the emphasis will shift

to more advanced features like spending analyses and wealth-management capabilities (78%), opening new accounts (76%), personalised offers (75%) and mobile wallets (74%) Again, Asia-Pacific is in the lead and Middle and Eastern Europe lag

Latin American banks are most likely to see themselves as becoming a hub for services beyond traditional banking, for example, legal advice and insurance Within the next five years, 85% of Latin American respondents expect to offer

nontraditional services, compared with about 59% for all other regions

The strategy looks wise According to the EIU survey, large numbers of consumers want help from

Moving beyond transactions

4

In which areas of money management could you most improve, and in which would you most like help from your bank

(% of consumer respondents) Managing it

Spending it Earning it Saving it Investing it

Areas for improvement Areas wanting help from banks

Source: Economist Intelligence Unit survey, September 2014.

72 43

64 44

58 53 55 61 50

75

74 44

68 45

59 54

their banks to manage, spend, earn, save and invest their money

In general, however, the more they think they need improvement, the less they think their banks can help; the less they think they need

improvement, the more they think their banks can help For instance, 72% of consumers rank

“managing money” as an area where they could most improve, but only 43% think their banks can help them manage their money better Likewise, 64% cite spending as a key area of improvement, but only 44% say their banks can help

Consumers believe that banks can be most helpful to them in saving and investing: 61% say banks could help them save better, while three-quarters say banks could help them invest more wisely But fewer consumers think they need help

in this area

Mobile offers a way to change consumer views about banks’ inability to help them with spending and budgeting decisions Consumers are joined to

their mobile devices as they spend money out in the world—and popular nonbank financial applications, such as Mint and Level Money, focus

on these areas where many consumers see banks falling short

The good news is that large numbers of consumers are open to getting help with their personal finances from their banks This suggests that a lot of opportunity exists for innovative services—mobile and otherwise

Simple has a feature called “block card” that helps its customers enforce personal limits on their spending

“Usually you want zero friction; when you’re buying coffee in the morning, want to give your order and spend the money instantly,” says Mr Reich “But if you’re trying to control your spending, you may want friction You may want to set limits at certain times of day, with certain merchants or for spending over a certain dollar amount.”

their banks This

suggests that a lot

Mobile is quickly becoming a vital banking channel, but even banks that have developed addictive mobile experiences cannot afford to neglect other channels

A few banks have pursued a model based on digital and call-centre services and partnered with ATM networks to provide cash But that is not an option for most banks—and it is not necessarily good business The face-to-face conversations with agents, whether in branches or at businesses and homes, provide value for customers and more fee income for banks

“The idea of ‘omnichannel’ is that you need to employ absolutely every available channel in your package,” says Mr Wolberg-Stok of Citi “You need

to make sure that customers can reach you on the channel of their choice at any given time.”

Mobile may also offer important new business opportunities For a large segment of the population, mobile will become the platform of choice for personal financial management The

Apple and Android app stores are already packed with mobile apps for record-keeping, budgeting, financial education and decision-making But few

of these services are offered by financial institutions

“Banks and their regulators are going to have to embrace technology-driven innovation Otherwise

it will simply happen by stealth, driven by players outside the industry,” wrote Peter Sands, chief executive of Standard Charted, in the Financial Times in 2013 “Too much of the debate about banking is about not repeating the mistakes of the past We risk missing the opportunity to make banks much better in the future.”

If the violent shocks to the retail and publishing industries have anything to teach us, it is that disruption can happen much faster than we expect—especially when the product can be easily digitised Few things are more easily digitised than money Banking’s mobile revolution may be closer than we think