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Mobile banking


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This document describes the impact of mobile technology on the retail banking industry.

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Mobile banking

  1. 1. The Rise of Mobile Banking.Gaetan Lion, May 23, 2012Introduction.This is a summary of an 18 page report from The Economist (May 19th – 25th 2012) titled“Retail Renaissance.” The Internet and mobile banking technology has now become adifferentiating competitive advantage among banks.Retail banking is generating the majority of banking revenues.McKinsey indicates that retail banking accounts for more than half of banks’ worldwideannual revenues ($3.4 trillion in 2010). In some regions, it accounts for more than half.Retail banking revenue in % of total bank revenues:Latin America 70%North America 63%Eastern Europe 55%Western Europe 51%Africa 44%Asia 43%Retail banking profitability is less volatile than wholesale banking. A ranking of theworld’s biggest banks by return on equity correlates closely with the proportion ofrevenue they make from retail banking.Retail banking is increasingly technology driven.The Economist argues retail banking will not be swept away by the Internet likebookstores or music stores. True Internet banks have come and gone without everreaching adequate scale. This is because retail banking relies on consumer trustpromoted by physical branch networks and liquidity facilitated by proprietary ATMnetworks. Also, banks are tech-savvy and are leveraging technology.Branches still play a key role.Quoting John Stumpf, Wells Fargo Chairman and CEO: “location is till the first and mostimportant decision-maker when you choose your branch. After that you might bankonline, you might not go back to visit that bank again… but that location is where youthink your money is.”Where a bank has lots of branches, it attracts more customers. JPMorgan Chase openedmore than 200 new branches in 2011 and plans to add 150-200 p.a. over the next fiveyears. Most of these will be in areas where it already has a big share of the market.Jamie Dimon stated: “it always has been more valuable to increase your market share inan existing market than it is to go to a new market.” Having a dense branch networktranslates into high market share and high spread between loan yields and deposit rates. 1
  2. 2. The economics of branch banking are changing.Retail banking profitability is under pressure. First, with low interest rates banks’spreads are compressing (loan rates decline, but deposit rates can’t go negative). Second,higher capital requirements result in lower return on equity. Third, regulations arecurbing fee income. A bank consultant indicates that within this environment 15% of thecurrent US branch network is unprofitable and transactions conducted at US branches arefalling by 5% a year.Mobile banking is taking off.Smartphones are causing customers to visit branches less but increasing the number ofinteractions with their bank. Intuit indicated that mobile banking has increased monthlyinteractions per customer from 9 to over 30. Smartphone allow customers to pay bills orsend money to family members abroad while they are away from home.Mobile banking is associated with tremendous operating efficiency for banks. With aspecial app, customers can now deposit checks with their smart phones. JPMorganindicated that in 2011 customers deposited 10 million cheques with such app. Furtherahead, phones will displace cheques as customers will make payments with their phoneand small businesses will accept card payments over smart phones. Bradesco, a largeBrazilian bank, indicates that handling transactions over smart phones vs within a branchreduces operating costs by 94%.Branches will look different.Citigroup has developed a 26 branch network in Singapore that looks like Apple stores.Citigroup hired Eight Inc, the firm that had designed Apple stores. Those branches havequickly won an outsized share of the retail banking business. Citigroup is nowreplicating this Apple-like network in Hong Kong.The world leaders in efficiency and information: Spanish banks.Santander has huge data centers that provide the computer networks to support aninternational banking network. Specific computer clusters support different countries(“Brazil’s on this one, Britain on the other” says a campus guide). Santander’scompetitive advantage comes from standardizing computer systems and proceduresaround the world and driving down costs. “We have the exact same systemseverywhere” says Mr. Saenz, Santander’s boss. Other banks are attempting to replicateSantander’s systems standardization including Citigroup, HSBC, and Standard Chartered.Santander has substantial businesses in 10 countries. Almost 90% of its profits aregenerated outside Spain. Santander and BBVA (another large Spanish bank) manageover 20,000 branches, most of them outside Spain. Spanish banks prefer focusing on fewcountries where they have a strong presence (minimum 5% to 10% market share) to reapsuperior efficiency.The Spanish achieve superior efficiency by not having to process cheques or handletransactions in their branches thanks to having invested in the latest computer systems. 2
  3. 3. Santander and BBVA experience operating cost to revenue ratio under 50% despiterunning huge branch networks, about 10 percentage points lower than the norm.Operating cost to Revenue ratio at a few large international banks:Standard Chartered 68%Credit Agricole 67%HSBC 62%BNP Paribas 61%Barclays 53%UBS 51%BBVA 48%Santander 45%Spanish branches have access to a lot of information. A branch manager can pull on aPC, a customer account balances and profitability, what services that customer needs, andwho is the staffer serving this account. The branch manager can also see how profitablethe whole branch is. Each morning the branch manager leads a staff meeting to strategizewhat products to market to whom and who to contact because of special events(borrowers missing a payment, depositors receiving unusually large deposits). Also,Santander, through its analysis of internal data, sends out weekly lists to its branches ofcustomers who may be interested in particular financial services.Another small but tech-savvy Spanish bank, Bankinter, uses video technology to leveragea few mortgage specialists across their entire branch network. Accenture indicates thatBankinter has a higher cross-sell ratio and its customer relationships are more profitable.The advent and threat of mobile payment.Square and Intuit allow small business to accept credit card payment using smartphonesfor a fraction of the cost of traditional bank merchant card processing. They offermerchant customers free card readers that attach to a smartphone and charge a 2.7%transaction fee. Banks instead charge hefty monthly fees for the card reader and oftenhigher transaction fees. Square has already signed up one million customers since itslaunch in 2010.PayPal provides a virtual wallet to pay for retail purchases using a smartphone or onlineusing a PC. It is arguably the world’s biggest bank, with more than 100 million accountholders. PayPal also offers its own line of credit to customers who want to borrowmoney to pay for things they have just bought.PayPal has a smart electronic wallet features whereby it recommends to customers whichcard to use to minimize costs and maximize rebates. Such advice turns bank credit cardsinto commodities.Google is currently developing its own smart electronic wallet. Both Google and PayPalare working towards developing the ability for retailers to target shopping offers tocustomers. They both would stand to profit handsomely from such offerings. Some 3
  4. 4. banks are joining Google wallet to make sure their credit cards will have a preponderantplace among Google’s offerings. Other banks are working on developing their own smartelectronic wallet. And, a few are doing both (Citigroup). “I am not sure any of us willcarry wallets ten years from now,” says Michelle Peluso, head of internet banking atCitigroup.The retail business of sending money across borders is changing.Western Union, a money-transfer agent (MTA), is the major player in this business. Ithandles close to 20% of the worldwide volume. Other MTAs also have a strongpresence. They typically undercut the banks in pricing (about 9% to send remittance vs12% for banks). Yet, MTAs still have very high margins associated with opaque pricingand high fees at both ends (to send and receive payments). Most wires cost between $15to $40 (for sending only).Xoom, in San Francisco, charges only $6 per transaction. The reason it can charge solittle is that Xoom customers make their transfers from bank accounts instead of cash.This renders the service more efficient. Customers send money from their bank accountsto their relatives across borders using their phones. Last year, Xoom handled $1.7 billionin remittance. This year it expects to double this volume.High net worth investment management is changing too.Before the 2007-08 financial crisis banks generally earned fees about 1% of assets undermanagement. Since the financial crisis, such fees have declined as clients are shyingaway from complex investments with higher margins. Also, online upstarts mayinfluence further decline in fees. Wealthfront manages money for only 0.25% per year.It uses sophisticated algorithms to measure a client’s risk tolerance and structure acorresponding diversified portfolio. MarketRiders offers a competing service toWealthfront and instead charges only $15 a month regardless of the portfolio size. 4