FIs Open Up About Mobile Payment Practices

Despite the glaring evidence that mobile banking has become table stakes to even be a player in the competitive financial ecosystem, there’s still plenty of smaller FIs who haven’t pushed mobile banking — and mobile payments — to the top of their to-do list.

While the big banking players already have the basic mobile features in play (mobile check deposit, mobile apps, P2P payments, etc.), it’s the smaller banks and credit unions that have catching up to do. To better understand where, why and how the gaps in the FI mobile payment practice gaps exists, the Federal Reserve Bank of Boston brought in GMCG Consulting to produce a report that breaks down the results of FIs in five federal reserve districts (Atlanta, Boston, Dallas, Minneapolis, and Richmond).

While the results of the survey — which took into account 433 banks and 192 credit unions — revealed what many of the major players in the financial sector already know, it did provide a few surprising insights into why those smaller FIs aren’t quite as quick to adopt mobile banking and mobile payment options as second nature.

More importantly to the payments industry is what the results revealed about mobile payments: that most FIs plan to add mobile payments within the next year to two years. It’s important to note this survey was conducted between July and August 2014, two months before Apple Pay was launched.

When it comes to offering mobile payments — meaning a payment made via a device at a physical terminal or point of sale — just 10 percent said they offered mobile payments. Another 47 percent said they plan to offer mobile payments within the next 1-2 years and most interestingly, 43 percent said they do not plan to offer mobile payments.

The value FIs see in offering mobile payments is first and foremost about attracting new customers (33 percent of banks and 37 percent of credit unions surveyed). Competitive pressure was listed by 22 percent of banks and credit unions and retaining existing customers was listed by 20 percent and 21 percent, respectively. Being a leader in technology fell second to last and increasing revenue fell at the bottom with just 4 percent of banks listing that option, and only 3 percent of credit unions.

In general, the strategies for offering mobile payments seem to benefit the third-party providers. The stats breakdown consists of:

  • Partner with third party provider: Banks – 82 percent; CUs – 76 percent
  • Partner with card network: Banks – 24 percent; CUs – 34 percent
  • Partner with digital wallet provider: Banks – 7 percent; CUs – 22 percent
  • Partner with NFC wallet provider: Banks – 7 percent; CUs – 14 percent
  • Partner with retailer: Banks – 6 percent; CUs – 7 percent.

No single institution has the market power to develop and succeed with its own proprietary solution today. FIs will need to build mobile payment systems that are interoperable and work with common standards. This is why partnership is important,” the report concluded. 

So why aren’t more FIs offering mobile payments? The barriers listed include:

  • Market still immature/fragmented: Banks – 80 percent; CUs – 66 percent
  • Security concerns: Banks – 74 percent; CUs – 76 percent
  • Inadequate/not broadly implemented security tools: Banks – 40 percent; CUs – 38 percent
  • Lack sufficient expertise to make informed decision: Banks – 33 percent; CUs – 25 percent
  • Limited value of mobile payments for purchases: Banks – 25 percent; CUs – 21 percent

[bctt tweet=”So why aren’t more FIs offering mobile payments?”]

Speaking with MDP CEO Karen Webster, Marianne Crowe, VP for Payment Strategies Group and CPRC Payments Liaison for the Boston Federal Reserve, gave the inside scoop as to how FIs should use the results of the study to empower their decision-making when it comes to implementing mobile banking and mobile payments plans into their infrastructure. 

“We feel as though mobile banking is mainstream now,” Crowe said. “It’s reached the point where it has become an accepted product offering. So consumers are going to expect to see it when they engage with a bank or credit union. Those who aren’t doing it — or are on the fence — really need to start implementing it. …[FIs] have to consider this has to become a baseline service in the next year.”

Of those FIs surveyed, 78 percent offer mobile banking; 16 percent plan to offer in the next 1-2 years and 6 percent have no plans to offer mobile banking. A majority of those who offer mobile banking options did so more than a year ago, with those who don’t planning to in the upcoming future.

But with small banks and credit unions focused more on security, compliance — and now the EMV card migration — there’s still a large group who haven’t placed enough significance on the power of mobile banking to add value to customer attrition. Crowe said she didn’t think the concept of adding mobile banking practices to a bank’s ecosystem was complicated, but there’s a lot of other matters on the FI’s plates.

Therefore, she said, they often have the tools and infrastructure in play, but not always the will to make it happen. They also aren’t likely doing enough to convey to their customers why mobile banking is needed in their lives, she suggested. 

“The banks, I don’t think, are doing enough to communicate [that mobile banking is] secure, [that] it’s convenient [and that] there’s a value-added service if you use mobile banking,” Crowe said. “They need to be more proactive, even in communicating to the customer who’ve already enrolled to use it more often — and to get new customers.”

“It’s still disappointing,” Crowe said about the rate of consumer adoption of mobile banking practices. While a customer may have the app, the gap that exists is getting regular, engaged users. “We still think they need to do a lot more work getting their customers to become more active users of the services — letting them know the value of it,” Crowe noted. And as the Fed’s bank study report reads: “If customers do not recognize or understand the potential value of mobile banking, then they will likely be satisfied with existing options. This is why creating awareness of the value of mobile banking is important to increasing adoption.”

[bctt tweet=”Banks aren’t doing enough to communicate that mobile banking is secure and convenient”]

While FIs are investing more in mobile banking, getting customers to use the service is what really matters. The top barriers for consumer mobile banking adoption as listed in the survey results are:

  • Lack of customer awareness: 70 percent
  • Security concerns: 70 percent
  • Customers’ banking needs met via other channels: 59 percent
  • Phone screen size: 24 percent
  • Login process complicated: 15 percent
  • Mobile app not user-friendly: 12 percent

Even more telling was the security concerns of FIs for mobile banking:

  • Poor customer protection behavior: 53 percent
  • Identity Theft: 52 percent
  • Malware/viruses: 50 percent
  • Data breach: 45 percent
  • Mobile spoofing: 39 percent
  • Unsecured network: 39 percent
  • Insufficient authentication: 19 percent

So how do FIs say they enhance security? Pretty much the same way most the big banks do — except in the case of smaller banks and credit unions, the results are scattered more across the board.

From the FI side, Crowe said that security remains a main concern. While they’ve gotten mobile banking practices down (for the most part), they are slowly starting to think more about mobile payments. But just as some consumers fear mobile payment adoption because of their security concerns, FIs may still worry that consumers aren’t protecting their phone properly, Crowe explained.

“That could also be something that gives them hesitate to not grow to fast,” she said.

How FIs Say They Enhance Security:

  • Multi-factor authentication: 84 percent
  • Time-out due to inactivity: 78 percent
  • Encryption: 54 percent
  • Mobile Device ID: 54 percent
  • Mobile notifications: 53 percent
  • Out-of-band authentication: 36 percent
  • Geo-location: 21 percent
  • Tokenization: 10 percent
  • Biometrics: 6 percent

In terms of keeping consumers engaged on a digital front, a majority of FIs still offer three platforms to connect with their consumers. That consists of a mobile app, a mobile website and SMS texts. The latter of those three, Crowe said, is increasingly only being used for alerts about accounts in most cases (and is being phased out by others). What’s interesting is that more FIs have mobile apps than mobile websites, which shows that FIs realize that when consumers turn online to bank, they look toward apps more than mobile sites.

Support for all three platforms has increased over time as institutions strive to satisfy their customers’ different types of mobile banking needs through multiple access platforms. Today, more than half of the respondents use all three options to present their mobile banking services to the market, although not all services are supported on every platform.

[bctt tweet=”FIs should not sit on the sidelines for mobile payments…”]

While a majority of those surveyed offered basic banking services, there’s still a gap in what they already offer. Checking balances, transferring funds between a user’s accounts, viewing statements and transaction history, ATM/branch locator and bill payments are already offered by 75 percent of the respondents. The remaining 25 percent said they plan to offer them by 2016.

What’s interesting about the reason FIs gave as reasons to offer mobile banking services is that the results were split (almost evenly in some cases) into four categories. The top reason to offer the services was split equally between the option to attract new customers and retail existing customers (30 percent for each), with the competitive pressure coming in second at 24 percent. Being the leader in technology fell last at 14 percent.

Interestingly enough, reducing operational costs was much further on the list of importance. Broken down by region, the results showed that only in Richmond were 44 percent interested in mobile banking to reduce costs. The other three districts received less than a third of respondents who listed that as a reason. Even more telling is that in all four districts, less than a third of all respondents listed increasing transaction volume as a benefit of mobile banking. Improved efficiency ranked second in most cases.

So taking into account the attitudes and perceptions of FIs, what does the Federal Reserve of Boston recommend for those FIs trying to keep competitive in this fast-evolving ecosystem?

“FIs should not sit on the sidelines for mobile payments while startups and large technology providers move forward with their own payment solutions. Instead of waiting for the perfect solution or winners to see which efforts will gain traction, it is important to be proactive and help make the best solutions succeed. FIs will need to investigate alternatives thoroughly to consider consumer convenience and value as well as security, and assess where market successes lie prior to investing in mobile payment services,” the Fed’s report concluded.