Maybe a banker will find a new iPad or Kindle Fire under the Christmas tree this week. Or maybe one got a Samsung Galaxy or new iPhone for Hanukah. They are the new marvels of technology, the future with a view screen.
And your bank is a floppy disk.
One of the biggest hurdles that banks are facing is mobile payments. We’re not talking about online banking, where the customer is tethered to a desktop computer or even a laptop. This is where consumers are using their phones as their wallets. And it’s where banks are falling dangerously behind.
“As mobile payments evolve, non-bank mobile payments providers may start to capture greater market share from financial institutions and alter bank/customer relationships,” writes Robert C. Drozdowski, a senior technology specialist at the FDIC, in the latest issue of the insurer’s Supervisory Highlights. “Financial institutions should not assume their place in the new mobile payments marketplace is assured because they are an integral part of the existing payments infrastructure. Non-bank mobile payments providers are devising ways to streamline the current payments system and reduce transaction costs by limiting the role banks play in mobile payments or eliminating them from segments of the payments process altogether.”
Take, for example, Square. The San Francisco-based upstart has made significant headway in being a credit card processor for small businesses via its little square that connects to Smartphones and iPads through the headphone jack. But Square is a full payments processing company, and its recent deal with Starbucks should make bankers tremble with fear.
Like businesses, consumers can have a Square account. And if they have Square on their Smartphones, as soon as they step into a Starbucks, the cashier’s system will be alerted. It will also know if they regularly want a Venti Latte, and put the order in for them. All Joe Consumer has to do is show his face – did we mention the facial recognition feature? – grab his caffeine jolt, and bolt out the door. He never has to reach for his wallet, because it’s all done automatically for him.
No cash needed. No hassle needed. No bank needed.
Worried Regulators
The FDIC is a little flummoxed over the rise of mobile banking. It realizes that the world is changing. But it also knows there’s no carve-out for banks’ regulatory responsibilities. For instance, how do banks get all the required disclosure notices onto those tiny Smartphone screens? How do they adequately safeguard against fraud? If the bank is using a third-party provider, and that vendor goes belly up holding the customer’s funds, is there account insurance?
Yet unless banks figure this out pretty quickly, they’re going to get muscled out of the business by entrepreneurs who aren’t quite so hampered by regulatory red tape. Even the FDIC owns up to this. In the Supervisory Highlights article, its authors admit that “banks could increasingly find themselves displaced by non-banks in the mobile payments marketplace. This evolution could result in the gradual disintermediation of banks as the primary provider of mobile payments.”
Of course, this is less of a problem for the big money center banks than for community institutions, which have lower budgets to afford the technology and technologists necessary to make all this happen. But even that can’t be a full excuse. There’s no ducking the future. According to Javelin Strategy & Research, “mobile banking gained 10 million new users in 2012 and currently reaches one-third of the mobile adult U.S. population.”
Javelin also found that credit unions are doing a much better job of adopting mobile banking options for their customers than are banks.
“Last year’s Bank Transfer Day saw over 600,000 U.S. adults move their accounts from large banks to small [financial institutions]. It was a wake-up call for credit unions and community banks to beef up their offerings,” said Javelin President Jim Van Dyke.
Credit unions are outperforming community banks in mobile banking, with nine out of 10 credit unions offering web-based mobile banking. Meanwhile, three out of 10 community banks reviewed do not offer a single form of mobile banking.
So if there’s a wake-up call for community bankers, it’s this: That tablet, that Smartphone, that souped-up e-reader? It’s not a new toy. It’s a revolution. Start fighting.
Vincent Michael Valvo is CEO of Agility Resources Group LLC. He can be reached at vvalvo@agilityresourcesgroup.com.
