Is There A Return for Bankers on Mobile Commerce Investments?

Technology and business disruptions are harsh. Sometimes, there simply is no way a set of industry leaders in one era can survive in the era that comes next. You can see this, as a historical matter, in the canal industry, the railroad industry, the steel industry, the auto industry, mainframe computing, mini-computer and now even the PC business. 


The point is that there was virtually no amount of investment or creativity that would have allowed industry leaders in one era to prosper in the succeeding era. The only conceivable survival strategy would have been to abandon the original business, entirely or substantially. 


Telecom service providers face precisely that problem with voice services, which historically have provided 70 percent of all revenue. The existential problem is that it might not be possible, under any circumstances, to sustain or revive a business model under intense pressure from a variety of forces.


Some might notice that international long distance calling, among the first segments of the business to feel the gale winds, saw pricing drop from $60 a unit to 10 cents a unit over a few decades. Over time, a wider range of voice products have seen that pressure start to erode revenue and profit margin, ranging from domestic calling to local access to enhanced features. 


"Forget about return on investment" is the advice some would give to banks struggling to find a return on mobile payments or mobile commerce investments. At one level, the advice makes sense. Pilot programs, even though it might be hard to figure out how many different types of pilots should be conducted, make sense as a defensive move.


At another level, "forget about ROI" is the key question. Sometimes such questions are existential. 


Telcos face other existential problems as well. In many cases, there is no solid business case for building a new fiber-to-home access network, as the incremental revenue simply is insufficient to justify the investment. 


The voice function doesn't benefit at all. New broadband access services might bring in more money, as will video entertainment services. But the issue has been that the new revenue really doesn't justify the investment. Some might even question whether the return even meets the cost of capital. 


Banks might face the same issue with mobile banking, commerce and payment. It might turn out that the struggles over "return" on investment will never be answered. In other words, there might simply be no real way to earn a return from mobile projects, as such investments only represent incremental channels. 


That means more cost, and identical revenue. There is, in other words, no business case to be made. Still, some have tried to quantify the benefits.


Forrester analysts Brad Strothkamp, Alexander Hesse, and Peter Wannemacher have pegged ROI for mobile banking of 15.7 percent, for a hypothetical bank with 500,000 customers.


But note that most of the return comes from the estimated value of reduced costs, retained customers and cross-selling of new products, though that admittedly is minimal. 


The Forrester consumer survey relies heavily on reduced service costs to drive the return. When U.S. users of mobile banking were asked how mobile has changed their use of other banking channels, 43 percent said they had made fewer phone calls to their bank’s call center since adopting mobile banking and more than one-third (35%) said they visited branches less often than they did before adopting mobile banking. 


The bank with 500,000 retail customers in Forrester’s model could achieve a savings of more than $150,000 by the reduced traffic in branches and call centers. The return, one might argue, would have been better if the hypothetical bank could have closed call centers and branches. 

Some  30 percent of U.S. mobile banking users say mobile banking has made them more likely to stay with the bank from which they receive the service. Forrester analysts project that a bank with 500,000 retail customers could save more than $450,000 in annual revenues from reduced attrition, for this reason.

The case for mobile banking increasing cross-sales for a bank is weaker and represents only three percent of the benefits. Forrester’s survey found that 18 percent of mobile banking users say they are more likely to buy more products from the banks they use for mobile banking. 


This could bring a bank additional revenue of $20,000 from cross-selling products like credit cards to mobile banking users, the analysts estimate.


Of course, the argument about operating cost savings was made by Verizon when it sought to justify its FiOS fiber to the home network as well. Verizon could not make the business case work based strictly on revenue enhancement, so sought to add in operating cost savings. Many would argue Verizon simply hasn't gained as much as it thought on the opex front. 


That, many argue, is why Verizon has halted further FiOS builds and is selling off assets where the business case is even worse than in the big metro areas. 

Telecom executives already have had to confront such choices, is the point. Telcos could have fully embraced new technologies that had the practical effect of destroying gross revenue and profit margin in their single most important business. In the international long distance example, providers could have willingly and immediately slashed their own prices, literally destroying most of the existing business. 


The alternative was simply to harvest the legacy business as long as possible, before cannibalizing the remainder of the business. That is what AT&T essentially did with its long distance business. 


There might, in the final analysis, be no way banks actually can win the mobile commerce and mobile banking game. The costs of implementing might never produce any significant new revenue. There could be some cost savings, but supporting more channels will be necessary. It isn't possible to replace any existing channels. 


In that sense there also is an analogy to the telecom business adopting voice over Internet Protocol services that cannibalize legacy voice. The only contenders that actually win are the attackers.


They have zero market share and revenue to begin with. If they can create lower-cost business models, the incremental revenue, even when at vastly-lower gross amounts, still is a net win. 


Mobile commerce and banking might be that sort of issue for banks. Perhaps the best case scenario is that banks invest capital only to protect what they already have. In the worse case, they invest to no avail. Attackers begin to take market share despite everything banks do to protect themselves. 


When business eras change, the impact on industry leaders can be catastrophic. One simply wonders if that is about to happen in the banking business, driven by new payments methods. 


Sometimes, there is almost nothing former leaders really can do to save their businesses.