APPetite for Disruption-Should Financial Institutions Consider iPhone Applications?

By Nick Holland, Aite Group

The Apple iPhone is indisputably a "disruptive technology"- one that has redefined what a cell phone is and does, has expanded Internet reach, rekindled data revenues for mobile operators and brought a whole new phrase to our lexicon: "App Store."In short, the iPhone is sexy, and companies, including those within the financial services industry, are very excited about being a part of the phenomenon. However, there are a number of aspects that banks need to consider before committing time and money to developing and launching an iPhone application for banking clients.

Why are we doing this? One of the biggest criticisms of mobile banking services from financial institutions relates to the business case. A couple of years ago, mobile banking could be justified as brand extension to an exciting new medium, developing user behavior that could lead to mobile payments and other forms of transactions and reducing traffic to call centers and other more expensive channels. Today, however, the economic climate means a much closer scrutiny of projects and a high likelihood of indexing to concrete ROI models. Will an iPhone application generate revenue for the institution, tangibly increase customer satisfaction and retention, and build brand awareness in an exciting and innovative manner? Is it a necessary step in the overall evolution of the institution's mobile strategy? If the answer to these is no, the project is a non-starter.

Do we have enough iPhone users as customers? To justify development of an iPhone application, the number of potential users needs to be calculated. Current adoption of mobile banking services is reported to be in the range of 4 percent to 8 percent of online banking users. An institution with 25 million customers and a 60 percent online banking adoption rate would have an estimated 900,000 mobile banking users. Assuming one-third of these mobile banking users own smartphones, and half of these smartphones are iPhones, the addressable iPhone user base for this bank is 150,000 customers. Assuming a tenth of these iPhone users become active users of the service (accessing their bank accounts via the app more than once a week over the course of a year), the total usage for this application will be 15,000 people-0.05 percent of the bank's total customers. For an institution of 250,000 customers, there would be 150 active iPhone application users. For an institution of 25,000 customers, there would be 15 active iPhone application users. With $99 iPhones in the market, adoption of mobile banking via the device is likely to increase and it may be that an iPhone mobile banking application outnumbers mobile banking services for generic devices given the tech savvy nature of users. Certainly Bank of America and USAA have had notable success with their iPhone applications. But while a very large institution may see viability in developing an iPhone-specific application, the vast majority are unlikely to see adoption levels that make the case.

Can we monetize this? Retail banks in the United States have rolled out mobile banking as an extension of online banking, which has created a perception issue: If online banking is free, then consumers expect mobile to be free as well. With the bar already set as low as it can go for mobile banking services, charging for an app may be difficult. Assuming the financial institution developing the application can provide some value add for which the end-user is willing to pay, an institution is unlikely to be able to crack the de facto $0.99 price-point for which most applications sell on the iPhone App Store. As such, the hypothetical institution with 25 million customers would generate around $15,000 in revenues in the first year (approximately half of the cost of developing the application). Conspicuously, no U.S. banks are charging for iPhone apps today.

Can we stand out? There are currently 65,000+ applications in the iPhone store. Unless your financial institution's application makes it to the top 20 free or paid application screens (determined by number of downloads), it will likely remain undiscovered without committing marketing dollars to develop customer awareness outside of the App Store environment. The iPhone App Store is also a great leveler in that users can rate applications and provide feedback. Mediocrity is often rewarded with scathing comments from users, which can negatively impact adoption, and may have a corrosive effect on the financial institution's brand. Is your institution prepared for such a reality check?

Why an application? Apple started the ball rolling for the full HTML browser experience on a mobile device-meaning, the Internet you see on the iPhone is not cropped and chopped for the mobile device but is the full blown Internet experience that you would get via a laptop. With a little tweaking for the iPhone form factor, web pages can render a very similar experience to an application at a fraction of the cost and without the requirement for App Store positioning. For an example of just how sophisticated this can be, have a look at the Google iPhone-specific mobile experience.

There are, Aite Group believes, opportunities for financial services iPhone apps in certain banking customer segments. Recent Aite Group research indicates that small-business owners are likely to pay as much as $10 to $15 per month for mobile banking solutions offering remote capabilities such as transaction initiation and authorization. Small business owners are also significant users of smartphones and the iPhone in particular. Again, the emphasis must be on value addition-a poor-quality experience will not justify a recurring cost for the customer.

It is an exciting time for technology innovation, and the mobile device is at the hub. Nevertheless, there is currently much noise and little signal when it comes to mobile financial services. Institutions need to make decisions relating to their mobile strategy independent of the current level of hype.

Nick Holland is a senior analyst with Boston-based Aite Group.