Smartphone technology is forcing rapid change and is challenging traditional business models across scores of industries. But nowhere is the pace of change more evident than in the world of banking. And while much of this rapid evolution is being embraced by the financial institutions, some popular mobile apps represent a competitive challenge against which the banks are fighting back.
Photo — Please put this mug shot of Chris Hopkins of Barnett & Co. in our system to use every other Wednesday when it will run with his column.As of September, 192 million Americans owned smartphones according to data firm comScore. 75 percent of those smartphone users accessed the Internet on their devices, and a startling one third rely primarily on their phones to go online. Given the ubiquity of mobile access to the Internet, it is hardly surprising that banking and financial services applications have experienced dramatic growth. A survey conducted by the Federal Reserve Board in 2013 found that 51 percent of smartphone owners used mobile banking services in the previous year. That number has almost certainly increased since then. In fact, more people now conduct banking activities via smartphone than online using laptops or desktops.
This has major implications for the banks. On the bright side, mobile and Internet transactions are considerably cheaper than traditional branch interactions, so the trend is driving significant cost reductions for the big financial institutions. A recent paper from Bain and Co. made the stark assertion that the traditional bank branch is doomed on the strength of statistics like the following: customers who rely primarily on branch banking are three times more likely to switch banks than mobile users. And Bain found that customers are consistently more satisfied and less aggravated with their mobile experiences than with branch or call center interactions. In the United States, 2,600 bank branches were shuttered in 2014, but nearly 95,000 remain. Expect that number to continue contracting.
Aside from routine transactions like balance transfers and deposits, the next frontier in mobile banking will be product sales. Already, 26 percent of mobile banking customers globally use their smartphones to research or purchase financial products. It is at this crowded intersection that big banks are colliding with independent smartphone app providers and are beginning to throw sharp elbows.
A crop of personal finance apps have sprung up the help track spending, saving and investments all in one convenient location. Smartphone applications line Mint, Digit and Level Money access your various accounts (with your permission) and aggregate your financial information for quick review and analysis. Many of those apps assist you in reviewing your spending patterns to suggest areas of improvement, and many partner with firms offering financial products like mortgages and automated investment portfolios (so-called “robo-advisors”). Adoption of these tracking apps is growing at double digit rates, and is now threatening to steal food from the banks’ dinner tables. Some of the banking behemoths are now swatting at these pests with a sledgehammer.
The Wall Street Journal reported in November that JP Morgan, Wells Fargo and Bank of America had intermittently cut off the flow of clients’ account data to the independent app providers. Ostensibly, the issue was concern over security, and it is true that some banks are rolling out more robust identity verification algorithms. Still, there have been no reported breaches of customer data at any of the app companies (so far at least), and the banks’ actions have been perceived as a shot across the bow.
Ultimately, customers will decide. As these useful apps gain in popularity, users will insist that banks allow their data to flow across platforms. And in the end, consumers stand to benefit from the eternal cycle of disruption and reinvention that characterizes our remarkably dynamic economy.
Christopher A. Hopkins, CFA, is a vice president and portfolio manager for Barnett & Co. Investment Advisors.