As more and more aspects of consumers’ lives migrate onto mobile devices, it’s no surprise that banks and their challengers have latched onto the trend. But as with many new technologies, adoption lags behind the hype, and while we are in an exciting moment for mobile banking, there is still significant room for innovation and growth. As each country forges its own fintech path, mobile banking will certainly fit in—one way or another—and how that looks in 10 years will surely be different from today’s landscape.
The head start in developing countries
It can be tempting to generalize that developed countries are ahead in every sector, but in fact, the lack of infrastructure in developing countries has led to significant growth in financial services and financial inclusion—and specifically mobile banking. From M-Pesa in Kenya to Tigo in Tanzania, the lack of affordable and accessible traditional banking services led to rapid adoption of these alternative mobile money solutions, which typically allow for money transfer, mobile wallet storage, and lending.
Unlike in many developed countries, mobile money services like M-Pesa aren’t simply a convenience feature for the already-banked, but rather an innovation that’s allowed tens of millions of people to move and store their money in a form other than cash for the very first time. The situation is similar in China, where consumers have long preferred cash over bank accounts—more due to a lack of trust in centralized systems like banks than for unaffordability or inaccessibility. As a result, mobile money solutions such as Alipay have risen quickly, not only being used to make payments on Alibaba’s platform, but actually acting as a full-fledged financial services company.
While mobile banking certainly holds potential to bring the unbanked into the fold in developed countries, these markets are more focused on improving the banking experience with the use of mobile—for those who, in many cases, have held bank accounts for years.
Challengers in more developed banking markets
In developed countries, banks have been building up infrastructure and services for centuries, and widespread use of banking products is a given—but mobile banking lags behind in many ways. While it’s common for residents of developed countries to use their bank accounts to get paid, send money, and pay for purchases, much of this happens without the use of a mobile phone. As such, a number of so-called ‘challenger banks’ have latched onto the opportunity to create mobile user experiences by leveraging a lack of legacy infrastructure to leapfrog over incumbents.
The Open Banking Standard in the United Kingdom, which requires leading banks to share customer data with third parties, has enabled a new wave of challenger banks that not only accept deposits, but also hold the potential to serve as the hub of consumers’ financial lives. In the last few years, the likes of Monzo, Starling Bank, and Revolut (not to mention others such as Atom and Tandem) have created digital, mobile-only banking solutions that immediately captured early-adopting millennials. Each challenger has—or at least started with—a unique angle: Monzo began by offering a prepaid card coupled with a sleek mobile app; Starling took a B2B approach by launching merchant payment services early on in addition to their B2C offering; Revolut started by targeting international travelers, offering free international transfers plus fee-free spending abroad. Just a few years in, however, they’ve all begun looking rather similar, launching mobile-first current accounts (the UK version of checking accounts) and either marketplaces for financial products (in the case of Starling and Monzo) or partnerships with other fintechs to expand their offerings.
At the end of the day, these challenger banks aren’t truly revolutionizing banking—but they’ve been able to build simple and sleek interfaces unlike what traditional banks, who are hamstrung by legacy systems, can provide. And the lure of an enjoyable (and mobile) user experience has so far been enough to attract tens of thousands of customers. In the words of one ex-bank CEO, “my Monzo app does nothing more than tell me how much I spent at Starbucks, right after I go to Starbucks. How useless is that? But everyone still loves it.” For many consumers, it’s the small things that make the difference between an acceptable and a delightful experience, and challenger banks have managed to ‘delight’ customers in a way that traditional players haven’t yet been able to replicate.
In the US, challenger banks have been a much smaller part of the fintech conversation for a few reasons. To begin with, it’s more difficult to acquire a banking charter in the US than the UK, which in turn makes it harder for startups in the US to raise the initial funding necessary for launching a mobile bank. Some startups such as Simple have partnered with larger banks to overcome this hurdle, but this represents a significant barrier to entry for any company hoping to truly compete, rather than partner with, banks. In addition to direct “challengers”, other fintech companies have started moving into the banking space with a less direct approach—Square Cash, for example, recently rolled out direct deposit for paychecks. Regardless of the approach, experts also cite lack of consumer trust, concerns around profitability, and the need for a better value proposition as reasons that challenger banks have struggled to take hold in the US.
Even outside the US, the question around profitability is a significant one for every challenger bank, particularly given high user acquisition costs and tough competition. While UK players appear to be focused on growing their user base for the immediate future, the tradeoff between hockey stick growth and cash conservation is a tricky one which shouldn’t be ignored—even if venture funding is readily available in the short-term. Looking ahead, it’s also unclear whether challenger banks will launch their own expanded set of financial services to cross-sell more profitable products to their existing users, or simply continue with the marketplace model, encouraging users to spread their financial lives across a variety of products that serve their unique needs.
Traditional players fight back
For their part, banks aren’t just sitting back and waiting for fintech challengers to eat their lunch. While most offer at least some sort of mobile experience, these are mostly bare bones apps which can’t compete with feature-heavy, user experience-driven fintech solutions—so many, if not all, traditional banks have started their own forays into fintech.
In the United States, where peer-to-peer payments drive a bigger conversation than challenger banks, a consortium of banks launched Zelle, which is designed to compete with other free payments services like Venmo. Less than a month in, Zelle moved more than twice as much as Venmo, highlighting the strategic advantage of having an existing user base—and conversely, the huge challenge of new user acquisition for newcomers to the scene. While Zelle certainly doesn’t make a non-mobile bank mobile, there’s a good chance that participating banks are thinking of it as a way to keep consumers’ money in their ecosystem, as well as a preemptive strategy to compete with P2P apps that start accepting deposits—or otherwise looking more like banks.
In the UK, top banks (such as Lloyd’s, HSBC, and the Royal Bank of Scotland), are in various stages of launching their own money management apps to counter the threat posed by millennial-friendly challenger banks. These banks are even building capabilities into the apps that allow users to pull in their data from accounts with competitors, suggesting that they value the success of their mobile banking initiatives above winning existing clients over in additional product categories.
Regardless of how banks are fighting back, it remains to be seen whether they can develop flexible technology that successfully competes with their challengers—not to mention whether consumer trust in banks surpasses their excitement about disruptive technologies enough to keep them banking with traditional players. While it’s impossible to know how the landscape will evolve over coming years, we can count on it being an interesting ride—and, chances are, we’ll all end up with more elegant, more integrated, and more useful personal finance products on our mobile devices, regardless of who’s built them.
There’s no doubt that mobile banking—in its many forms—will have a significant impact on how banks interact with their customers, fintechs’ ability to win over banking consumers, and financial inclusion in developed and developing countries alike. As the technology continues to evolve and consumer adoption of mobile banking products continues to rise, it will be interesting to see which traditional players keep up, which newcomers capture new generations of banking customers, and, ultimately, what the banking journey and experience looks like when fully controlled via a mobile device.