By Gary Schwartz

This holiday season we witnessed the continued and painful decline of main street retail as consumers increasingly shop on their mobile devices. Retailers are deploying omnichannel strategies to mitigate lost sales in their stores and move their customers to more efficient and cost-effective cloud-based, mobile channels. 

Should the corner bank be concerned?  

 

Some say, no. 

Bank managers still see cradle-to-grave customer affinity. At the same time, the bank?s marketing department has managed to move many accountholders into a mobile relationship and own a unique real-estate position on the smartphone.

 

The future seems positive for banks, according to a Salesforce whitepaper on banking behavior in May 2016, with 75 percent of millennials dependent on their mobile banking applications. Customers are opening their larger screen and mobile app daily to check their account, pay bills, deposit and transfer funds.

 

However, it is this very advantage that makes the banking industry more precarious now more than ever before mobile services entered main street. The incumbent may be up for grabs.

 

More than before, there are more opportunities for alternative financing companies to shake up the banking industry. Remember that these are the same customers that abandoned their Facebook account for Snapchat, their iTunes for Spotify, their Tinder account for Bumble and Twitter what? 

 

Loyalty is increasingly fleeting.

 

Let us look at the incumbent banking sector.  

Forward-thinking banks are retrofitting their bricks-and-mortar branches with more automated functionality. They are attempting to act as a financial concierge. Their staff are re-trained to guide customers into the cloud. And well they should. Young consumers are looking to skip the line and deposit their checks and perform other banking services instantly.

 

Tech leaders such as the Bank of America (?BOA?) and ING have successfully created an agile technology environment to enhance their digital services and increase responsiveness to customers.

 

Tangerine of Canada and Fidor Bank of Germany have shed their physical footprint and gone digital native. These are full-fledged banks that are built and branded on technology and communications platforms. They have subbed their teller window for engagement channels such as video chat.

 

On the fringe, banks are going beyond mortgage calculators, digital check deposits and fraud alerts. 

Innovative banks are not only mobilizing existing services, but adding mobile-first features such as with Scotia Bank of Canada, embedding consumers? shopping receipts and vouchers into the mobile bank ledger. 

America First Credit Union of Utah allows customers to search for their next car purchase and apply for financing without leaving the mobile banking app.

 

Leviathans such as BOA have the ability to migrate their 25 million online customers using an internal technical team. However, it is not feasible for most smaller banks to build, deploy and maintain a leading-edge mobile banking platform. 

To go beyond optimizing digital processes, banks invariably find they need to partner, acquire and outsource mobile development to technology companies.

 

Regardless, the bank will never win based on technology alone.

 

Any marketing rep will tell you the most important aspect of a mobile strategy is the constant contact that digital affords and, in many cases, demands.  

A bank customer wants to hear about her bank activity. Younger customers demand immediate alerts when a transfer clears, an overdraft fee has been charged or a check bill is paid. 

Nearly half of millennials want to receive SMS alerts from their bank and when they have a mobile app on the phone-top, 28 percent of millennials would prefer push notifications, per Salesforce.

 

It is the relationship behind the technology that is crucial to master. It is the trust that the bank manager establishes at the branch that needs to be ported to the cloud.

 

To this end, the bank has a diehard weapon. It can lock the consumer in short-term with deposit accounts and long-term with loans and mortgage. This allows the bank a daily, monthly and annual relationship with its customer. The bank has multiple retail touch points providing ample opportunity to continue to cross-sell and upsell additional services.

 

These same consumers, according to a "Consumers and Mobile Financial Services? study in March by the Federal Reserve, are checking mobile or online account balances and recent transactions on a daily basis and are receiving alerts such as a text message, push notification or email from their bank on a regular basis.

 

Among all respondents with bank accounts, mobile banking has already overtaken telephone banking. 

While here is still an omnichannel relationship with branch ? ATM and online banking accounts for the lion?s share of contact ? over the next few years mobile will undoubtedly make these touch points redundant as well.

 

There is a consumer trend to ?anytime? financial awareness and access. The bank has become one of five essential apps on the phone: social, entertainment, messaging, search and payment.  

 

However, you only need a bank license for one service: to take government-insured deposits. That is the bank?s strength. 

You do not need a bank license for most bank services: lending money, moving money, investing money. The bank?s strength in managing a consumer?s deposits is also its weakness. 

Nearly every bank is geographically and regulation-restricted, while alternative services are increasingly nimble and unrestricted. 

Banks incur significant compliance and security costs that make it difficult for the bank to effectively put this consumer cash to work.

Outside of insured deposits, banking products are becoming increasingly commoditized. In response, banks, in an attempt to recapture their declining revenues, have increased their service fees across accounts.  

As the same time, bank challengers continue to deliver these same services with a better tech experience for lower fees. These alternative financial service providers are attacking the last bastion of the bank: the daily interaction and trust that the deposit account brings. 

In the small to midsize business (SMB) space, some companies have effectively challenged the bank?s daily deposit business. 

Walmart and American Express prepaid cards, for example, act as a virtual checking account. Square, Intuit, Groupon and PayPal are offering merchant accounts and, like the local bank, garnering a share of an SMB?s deposits and more face time with the customer. 

In the consumer sector this has been more difficult. Consumers are hard pressed to move away from deposit accounts such as mobile bill payment and e-check deposit services.

 

One way outsiders have attacked the banks is via payment services. Payment aggregators have worked hard to become the go-to consumer wallet. PayPal, Amazon, Walmart and ApplePay have all battled for shopper mindshare, disintermediating the bank and bank partners wherever they are able.

 

In 2016, Facebook started a ?Send or Request Money? services in its Messenger app allowing for instant peer-to-peer fund transfer by tethering a debit card: pay for rent or split a dinner bill. Add this to the list of non-bank cash-transfer apps: PayPal?s Venmo and Square Cash.

 

Disintermediating the bank?s daily cash relationship with the consumer hurts.  Chase launched QuickPay to try to compete and woo digital consumer back. United States big banks banded together with a money-transfer service called Zelle.

New technologies are challenging the cash economy. Abra, an international money transfer app, has seen success disintermediating the high-lucrative remittance business using blockchain technology. Consumers use the service on a regular basis to send funds abroad saving time and avoiding forex fees.  

Venmo and Square Cash are startups with meager revenues. If these non-banked digital apps succeed in growing their business, they may jeopardize the bank?s traditional service ladder. 

 

Lose a customer on one rung of this ladder and the bank may lose the customer upstream with loans and mortgage opportunities.

Upstream, many alternative financing companies are cannibalizing the bank's longer-term leading business.

 

Alternative financial services have moved from subprime or near-prime lending to the underbanked and unbanked, to mainstream financing using innovative technology and processes to make it easier for consumers to get access to capital when they need it.  Financing should be available when the big ticket purchase is being made.   

 

Alternative financial players are attacking the bank?s long-term lending relationship with their consumers, eliminating slow approval times and hidden fees, and providing simple, online credit facilities easily accessible via online and mobile portals. 

More consumers originate long-term mortgages through brokers or other alternative avenues to the point that the product is no longer profitable for many banks.  

Many banks have left auto financing and their margins are being squeezed in its mainstay mortgage business. 

Prime lending by banks on a loaded cost basis is not very profitable but it helps puts deposit capital to work. The challenge is that deposit capital needs to go to work quickly to manage a reasonable margin. This forces banks to focus on low-margin products, which are then used to acquire and retain customers. Is this a losing battle?

Bank challengers are using increasingly sophisticated algorithms to know their customers. The Big Data extracted from these algorithms are informing risk models and new loan product. 

However, this technology, data and statistics analytics will help the company credit model effectively, but will not necessarily help it cultivate a close and trusted relationship with the customer. 

 

The ?open banking? data movement starting in Europe ? part of the Payment Services Directive ? in late 2017 along with pressure from mobile-first customers globally will compel banks to make information accessible to third-party developers and bring new non-traditional players into the market. 

Financial technology firms will now be able to access data and innovate as we have seen with open data models in smart cities globally. 

Simple services outcomes may be best-price shopping models for banks similar to flight and hotels portals such as Kayak and Bookings.com. An open banking system will also empower competitors. It will give alternative lenders a better profile of an applicant and more fluid onboarding into new services. 

In the U.S., the Office of the Comptroller of the Currency will start granting limited-purpose bank charters to alternative financing companies in 2017 with the intent of managing high bank-like standards for new entrants.

Money is becoming ubiquitous and with so many non-bank choices, an evolution to consolidators may be on the horizon where consumers can get the best-of in one spot. The market is moving rapidly to favor consumer choice.

 

This data will allow an alternative financing company to have a better picture of the customer?s behavior, but will it allow the consumer to better understand their lender?  

While data may provide for a long-term financing relationship with the consumer, there is little to no daily, even monthly, interaction outside of payments and statements. Promotional inserts usually land unviewed in the trash. 

New financial service companies are challenged to have the same intimate and relevant interaction as a bank with their consumer. These companies need to find a way to become relevant on a daily basis and avoid being relegated to unopened folders on the phone-top: out of sight and out of mind.  

 

THE GOAL for a new entrant into the market is to, like the bank, forge a short-term (daily) and long-term (annual) relationship with the consumer. Instead of owning one rung of the ladder of banking services, have consumer touch points at the bottom and top. 

 

This is not a trivial task. Both demand different skill sets. 

Ultimately, it is the company that can cast the widest net across services and relationships and build the go-to trust to cross-sell and upsell that will be the winner.