In the past, financial services on the World Wide Web were available only to PC users. Not anymore. Two familiar devices—the mobile phone and the TV set—will greatly expand the market for the electronic delivery of personal financial services. Mobile data communication is already extending the Internet to people on the move; interactive TV could bring it to those who can’t afford to have a PC at home. Financial-services providers keen to compete on the Web need to understand how these two new routes into it may evolve.

Banking on the move

Consumers like the flexibility a mobile device can deliver: for example, access to their money anytime, anywhere; instant notification of movements in a given company’s share price; and the ability to transfer money into a bank account and to shop on the go.

Not surprisingly, financial institutions are scrambling to develop mobile-banking services using the two main technical standards currently available: the Short Message Service (SMS), a simple but effective standard for brief text messages, and the Wireless Application Protocol (WAP), a more recently developed standard providing access to the Web, though in a less elaborate form than PCs do (see sidebar, "Wireless protocols"). Most mobile-banking services using these standards are still extremely basic, offering information such as account balances and stock prices or permitting customers to trans-fer money between accounts. But more complex transactional services are rapidly appearing. Customers of brokers as diverse as Fraser Securities (Singapore), Fidelity (the United States), and Fimatex (France) can now trade stocks using a mobile phone or personal digital assistant (PDA). Banks ranging from HSBC (Hong Kong) to MeritaNordbanken (Scandinavia) offer mobile bill-payment services.

Yet in the rush to achieve a first-mover advantage (or to avoid being left behind), banks and brokers are in danger of overlooking the way they can create lasting value from mobile-communications technology. Since the basic services banks are putting together are mostly undifferentiated, a given bank’s competitive advantage is likely to be temporary. And it isn’t clear how much it will cost banks to provide such services. The lion’s share of the value that even mobile personal banking creates could still go to other participants in the value chain—most probably consumers and network operators. Bankers won’t be able to avoid supplying mobile services, but if they are to provide a return, it will be necessary to think hard about how to make the services distinctive.

Mobile banking for beginners

The first movers in mobile banking will undoubtedly acquire new customers. For example, the Barclaycard-BT Cellnet joint venture, offering a customized handset and mobile access to account information, has acquired about 500,000 customers since 1997—50 percent of them new to Barclaycard (Exhibit 1). But in some markets, the opportunity to be a first mover is long gone. Most of the major banks in Hong Kong, for example, now offer basic mobile information services and some transactional functionality (Exhibit 2). Like telephone banking, first-level mobile banking has become an admission ticket to the industry.

To retain existing customers, to say nothing of attracting new ones, banks will have to keep up with the fast-developing capabilities of mobile technology. The breadth and complexity of the banks’ mobile services will probably increase rapidly as they exploit the ability of WAP and the increasingly flexible SMS to support secure transactions.

The nature of future mobile services will also depend to a large extent on the relative penetration rates of PCs and mobile phones (Exhibit 3). In countries such as the United States, where Internet access via PCs is well established, banks are likely to provide complementary mobile services. Customers will be able to configure a service on their PCs and have it delivered—or "pushed"—to them over their mobile phones at the required moment. Investors, for instance, could ask to be alerted if the price of a specific stock or index fell below a certain level; a small business could ask to be notified of important financial events—for example, the receipt of a big payment.

In countries like China or even Italy, where far more people have mobile phones than computers, "pure" mobile banking, independent of PCs, may well take off. It will be a challenge for software designers to develop simple Web navigation tools and information-display techniques that allow users in those countries to configure ambitious services on small screens.

Yet it is easy to overestimate the importance of this constraint. Subscriptions to SMS-based services are growing at a phenomenal rate—over 30 percent a month in many markets—despite the crude keyboards and limited displays of current mobile devices. The next wave of devices, combining the strengths of PDAs and telephones,¹ will be far easier to use.

So will banks make money from mobile financial services? On the revenue side, how much banks can charge customers for them will vary by market. Most market research shows that customers are understandably unwilling to pay for mobile services (for example, account balances) that they already receive free through another channel. But they will pay for mobile transaction services such as stock trading and for new pushed services they couldn’t receive any other way.

What about costs? In some ways, mobile should be a bargain channel for banks, since the customer will bear most of the expense of accessing the services. Moreover, pushed SMS messages are a cheap and effective way of reaching individual customers—much cheaper than outbound telephone calls or letters and more effective than e-mail for short, time-sensitive communications. But this doesn’t mean that banks will reduce costs once the channel is established. Many bankers are haunted by their experience with telephone banking and automated-teller machines (ATMs). Both promised to be low-cost channels. Banks invested hugely in them. But while unit costs per transaction plummeted, the volume of transactions rose because customers found these channels so convenient. Transaction costs per customer spiraled accordingly (Exhibit 4).

Advanced mobile

Will banking on the move turn out to be ATM round two—a service that banks must provide to compete but that benefits customers and technology providers alone? This may happen, but only to banks that fail to grasp the bigger opportunities. For the advent of mobile data communications gives banks a chance to offer entirely new products and services and to reconfigure, radically, the kind of assistance customers receive. Bolder banks are already pursuing a number of m-commerce ideas:

1. Providing the payments infrastructure for mobile-commerce services. Banks start with huge advantages in m-commerce services such as ticketing, auctions, and value-added information: they control the existing payments infrastructure and understand the security issues. But unless banks assertively shape the technical standards and value chain of this new business, they risk playing second fiddle to network operators such as France Télécom and Sonera (the Finnish telco), to handset manufacturers such as Nokia, or to payment security specialists such as VeriSign and RSA Security (both based in the United States).

   MeritaNordbanken, having adapted its established Internet payment system, Solo, for WAP, is a pioneer in this area. Deutsche Bank is working with Nokia and Visa to develop "dual-slot" devices for m-commerce payments. One slot accepts the usual SIM (subscriber identity module) card, the other a "smart card" (such as Visa Cash).2 Customers of France Télécom can now pay for their purchases by inserting cartes bancaires charge cards into the second slots of their handsets. In effect, the mobile phone becomes a payment terminal.

2. Using mobile phones as point-of-sale (POS) payment devices. The Pepsi vending machine piloted by Finnish mobile-security specialist Sonera SmartTrust is a striking example of another use for mobile phones: as POS devices. The company’s service allows the user to buy a drink from a vending machine by dialing its number on a mobile phone. In effect, the user makes a premium-rate call and pays a tariff equal to the price of the drink and the call.

   Bluetooth, the emerging standard for short-range radio transmissions, will make it even easier for consumers to make POS payments through mobile devices. Without having to surrender the card to a stranger, a user could, for example, pay for groceries by debiting the sum owed from a card or a bank account or by adding the sum to the phone bill. Users could even employ mobile handsets to direct payments for parking to Bluetooth-enabled parking meters. Support for such services could not only provide a new revenue stream for banks but also reduce the amount of cash they handle and the accompanying costs.

3. Launching mobile portals. The small screens of mobile devices make it hard for users to enter complex search instructions. So mobile portals—in other words, Web sites that aggregate information and help users navigate the Web—will be even more important for mobile users of the Net than PC-based portals are for people who use personal computers to surf. Mobile portals will thus be highly valuable for those who develop them.

   Although a bank or a brokerage house might have a harder time than a network operator developing a mobile portal with mass-market appeal, either one would be well placed to target particular market segments. Either could craft attractive portals for individual investors, traveling executives, or owners of small businesses as well as for corporations that wanted private portals for their employees. Neither a bank nor a brokerage house is likely to have all the skills needed to create such portals on its own, but one could assemble the right set of partnerships with, for example, a mobile-network operator, a specialist portal provider, or a handset manufacturer.

Banking on the box

The mobile handset may not be the only new route to on-line financial services. Another challenge to the PC comes from interactive TV, which could introduce them to a much bigger market. Although pundits have been announcing the advent of this technology for several years, it has generated little interest in the United States: most Internet surfers there value the versatility of the PC. But in Europe, viewers have begun to adopt interactive TV on a commercial scale, prompting avid interest in the medium among financial-services companies. Even in the United States, interactive TV is looking more lively: this year, America Online will offer AOL TV, which marries Internet services with conventional TV programming, to its 20 million users. One US market research firm, Jupiter Communications, predicts that 30 million US households will have interactive TV by 2004.

To subscribe, viewers must be able to receive digital TV signals³ and have set-top boxes that convert their televisions into two-way data terminals. As subscribers, viewers can send orders, payments, and inquiries via phone line or cable to companies marketing goods and services through the channel. Interactive TV can also turn a television into an efficient, fully fledged Internet access device.

The interactive difference

European viewers seem to like interactive TV’s combination of entertainment and interactive applications; subsidies for set-top boxes and falling telephone tariffs also have sharpened European appetites. In addition, interactive TV could provide a low-cost electronic channel to the mass market, which financial-services companies struggle to serve profitably. In many European countries, far more homes will soon have interactive television sets than PCs or mobile handsets with Web access (Exhibit 5). And TV viewers are far more evenly spread across age and social groups than PC users, who tend to be young and relatively affluent (Exhibit 6).

Interactive TV gives financial-services companies new scope for marketing: it permits them to display their products in full-length programs rather than commercials lasting a few seconds and to deliver financial advice in interactive formats, even in real time. Such companies particularly value the ability to hot-link traditional TV commercials to sites where viewers can buy products on-line. In addition, service providers on interactive TV can tailor their offers precisely by collecting detailed data about the way customers use the medium. Little wonder, then, that many European banks are jostling for position in this technology (Exhibit 7).

Even US industry observers agree that, eventually, there will be little to distinguish interactive televisions from PCs as devices for accessing the Web. So far, PCs have been better at the job. Being less powerful, interactive TVs have been slower surfers; they lack hard disks for storing downloaded data; and their fuzzier screens render small print illegible from a distance. Nonetheless, the technical performance of interactive TV is improving rapidly.

The current text-heavy Web sites of PFS providers look dowdy on an entertainment medium

Even if interactive TV reaches technical parity with the PC as a Web access device, financial-services pro-viders will have to design custom-made propositions to compete, for their current, text-heavy Web sites and product-based offers look dowdy in an entertainment medium. Designing on-line services for TV requires video and content development skills that few banks have in-house, requiring them, in all likelihood, to join forces with television and media specialists.

Will it be worth the effort?

Early data from the United Kingdom, at least, suggest that investments in interactive TV will pay off. Open, a company providing interactive-TV services via satellite and telephone, was launched in October 1999. Its name may be a misnomer, for it currently gives viewers access to an electronically cordoned-off set of on-line services rather than to the full Web. Well-known retailers, agencies, and banks pay Open for their space.

Open’s premise is that many customers will prefer a branded selection of retailers on interactive TV to the infinite choice of the Internet on PCs. So far, the premise has held good: Open has attracted about 2.6 million subscribers, some 10 percent of UK households—a penetration rate higher than that of Freeserve, a free-access Internet service provider launched more than a year earlier. And Open’s services are growing. During Open’s first three months, the Carphone Warehouse, for example, which sells mobile phones, enjoyed sales four times higher than its budgeted projections. Gameplay.com, a fast-growing computer games retailer, now does half of its business through the service.

The experience of Open suggests that interactive TV will be a useful retail channel. But banks can do more with it than sell. Some are already taking stakes in the emerging interactive-TV infrastructure—by becoming partners in groups developing interactive-TV networks, by providing their payments-handling services, or both. HSBC has an equity stake in Open, operates an HSBC retail site on it, and handles all payments made over the Open network. The bank generates revenue from every network transaction.

Given the variety of competing interactive-TV standards and technologies, it can be hard for banks to commit themselves to a particular version (Exhibit 8). Digital-cable operators would maintain that they offer the greatest technical advantages: high bandwidth, full and fast Web access, and an uncomplicated return path. But digital-cable networks are not ubiquitous, and though it is easier for a cable or dial-up system to provide complete Web access, it is not impossible for satellite and terrestrial interactive-TV systems to do so. Whichever technology is best, financial institutions would do well taking an option on some form of interactive TV now rather than risk being left out of the action altogether.

Spare a thought for the financial-services companies. Just when they were getting the hang of providing on-line services on PCs, along comes another Internet access device, the mobile handset, and then yet another, interactive TV—both demanding that they adapt their on-line offers. Financial-services providers, which must take all forms of electronic distribution quite seriously, can’t ignore these new e-channels. Indeed, the low expense of distributing financial services electronically will eventually drive down the industry cost curve, making the price of e-financial services the reference point for prices in every other channel. As more and more consumers move on-line, some of these channels may cease—as some already have—to be economically viable. Providers must therefore learn to exploit the new channels as they emerge. It is just bad luck that they are emerging in such remarkably quick succession.