mobile banking

Banking fees are nothing new – from check cashing fees to overdraft protection, minimum balance charges, returned check fees, and ATM fees, people are simply used to paying money to banks. In fact, the top three banks in the U.S. made an estimated $4.5 billion in overdraft charges in 2015.

Despite charging a fee for anything, mobile banking apps continue to be free offerings. With these apps costing upwards of $5 million to create, it seems impossible that they’re not being monetized. Of course, with anything bank-related, the answer isn’t always a tit-for-tat situation. It’s necessary to look at the bigger picture to see the impact of free banking apps.

The Reduction of Bank Branches

In the summer of 2011, consulting firm KPMG released a report titled “Monetizing mobile: How banks are preserving their place in the payment value chain,” which details the shift of mobile banking to the mainstream market.

The report shows the transaction cost for mobile banking transactions is only $0.08, as opposed to $4.00 for a call center transaction, $0.85 through an ATM, or $3.75 at a branch. So, although the upfront costs of building a secure mobile platform are high, the operational and residual costs are exponentially lower. This started a trend of banks downsizing branch networks.

Bank of America, SunTrust, PNC, HSBC, and Capital One led the pack, closing the large majority of branches from 2010 until 2013, and branch openings significantly slowed throughout the industry in the same period.

In June 2014, FDIC data showed there were only 94,725 bank branches in the U.S., the lowest number since 2005. JPMorgan Chase and Citigroup joined the major banks closing branches though Wells Fargo continued to buck the trend, expanding its brick-and-mortar business.

The Rise of Mobile Banking

According to a 2015 report by the Federal Reserve, 39 percent of all mobile phone owners with a bank account used mobile banking in 2014, and the upward trend would have that number reaching over 50 percent in 2016. These mobile banking users perform an average of 5 transactions per month (checking account balances, transferring money, and depositing checks top the list).

It comes out to around 750 million transactions every month that are processed through mobile banking apps that would otherwise have occurred through a call center, branch, ATM, or online if the option weren’t available, providing up to $5 billion per month (or $60 billion per year) in savings to the banks.

The overall mobile app industry generates over $6 billion per year from paid app downloads and in-app purchases, though many generate revenue through mobile ad platforms. This number is achieved in savings by the banking industry on a near-monthly basis, being divided among exponentially fewer companies.

Despite the possibility to add $6 billion to the pot, banks are unlikely to charge fees for app downloads or usage anytime soon. Charging a fee (even a subscription fee) is likely to hurt a bank’s reputation with customers, driving them to competitors who still offer free services, much like free checking is used as a marketing tool today.

Although with the amount of available services being offered, it’s not out of the realm of possibility that we may see banks adding fees for additional premium services. Mobile check deposits, for example, used to cost a fee back in 2011 when fewer institutions offered the service. Currently, the financial risk is offset by placing limitations on the deposit amount, though this number varies by bank and could change as mobile computing becomes more secure and risk-management models begin to change.

Unbanked Banking

None of this accounts for users of non-banking services such as PayPal instead of bank accounts. The unbanked (people without a bank account, such as myself) make up 7-8 percent of the country’s population – around 23 million people.

At one time, PayPal shifted balances to FDIC-insured banks, but this is no longer the case, and the company operates from a regulatory standpoint as a money transmitter, similar to Western Union. PayPal’s success inspired other companies such as Google (via both Google Wallet and Android Pay), Apple, Samsung, and even WalMart to begin competing with many services traditionally only offered by banks.

Like prepaid debit cards, these bank account alternatives charge fees for transactions such as purchases, ATM withdrawals, and money transfers. It’s essentially an a la carte banking model that takes advantages of banking regulation loopholes to synthesize a bank account without a bank.

Although the unbanked and underbanked market only accounts for a small percentage of the population, it tops $200 billion annually. Banks are forced to compete for this market, and many of the prepaid cards found in stores and online are inevitably tied to one of the major banks. The $5 million investment in a mobile banking project, therefore, serves multiple purposes in reducing operational costs while competing against non-traditional competitors.

Forecasting the Freemium Future

Money markets constantly fluctuate, and banks operate on multiple levels. Looking at current and historical banking trends throughout these reports, it’s only a matter of time before banks can get no leaner and are forced to begin generating profits again.

It won’t happen all at once, but freemium purchases will begin making their way back into mobile banking over the next few years. Mobile security is constantly evolving, and the banking industry is one of the highest-risk industries for cyberattacks. Mobile app development teams will need to be beefed up as branches and call centers are reduced.

Sooner or later, the cost of maintaining the mobile app will necessitate the business model to adapt to freemium mobile banking. We’re already used to paying bank fees, whether banked or unbanked, and regulation is sure to be slow to catch up. Keep an eye out, because if I’ve learned anything from the decade I spent working in the banking industry, it’ll happen faster than you think.

In addition, Microsoft is transitioning Windows to an SaaS model, and banks have to pay a monthly premium to have Microsoft continue providing Enterprise-level service. Having become too big to fail in the 1990s by acquiring multiple regional companies, banks are still running Windows XP because they run multiple proprietary platforms that aren’t compliant with newer editions of the OS.

The increasing need to focus resources toward technology is merging the tech and financial sectors in many ways. These days both money and knowledge are in an everlasting battle for power.

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