Printed in Wisconsin Community Banking News June 2008
Online banking revolutionized how consumers conduct banking transactions for those who own computers and have Internet access. Although online banking initially stagnated in its infancy, mobile banking is expected to develop rapidly and eventually become a standard product offering by banks.
The nation's largest banks already have developed mobile banking systems that will soon offer unprecedented levels of convenience and value to customers. However, community banks can expect an even greater relative benefit from offering mobile banking solutions. The big five core processing providers have delivered mobile solutions to at least 200 community banks.
For community banks, mobile banking is an excellent opportunity to create or expand a market while building a loyal customer base. Nearly 70 percent of Americans use a cell phone, and the demographics of cell phones users are significantly more diverse than that of Internet users.
The widespread adoption of online banking took years, in part because consumers slowly learned to trust online banking while overcoming skepticism about its security. Because this trust will likely transfer to mobile banking, experts anticipate that consumers will adapt quickly to it.
Mobile banking provides unparalleled convenience. Phones can connect to the Internet from virtually anywhere. But, not all phones support Web browsing, so banks have implemented a combination of the following methods: text messaging, basic sites developed for phone Web browsers, and propriety applications that are installed on the phone.
Each method has its advantages and disadvantages. Text messaging is the most popular method of mobile banking, but its functionality is limited. Browser-based solutions are more sophisticated than text messaging and provide an experience similar to online banking. Downloadable applications, generally created for so-called "smartphones," are the most advanced and secure systems, providing the greatest mix of functionality and speed. Banks should implement multiple solutions to cover the varied capabilities of cell phones.
Currently, mobile banking is limited to balance inquiries, intra-bank transfers among accounts owned by the same person, and basic bill payments. However, upcoming solutions are more sophisticated, integrating banking software into a phone's calendar and address book so payments can be scheduled and monitored easily and wirelessly.
The biggest future development will be the transition from mobile banking to mobile payments. Citibank and other large banks recently implemented systems that allow customers to use a cell phone to send money to others. The phones are linked to prepaid debit cards or Greenlink payroll cards, and payments are initiated via text messages or by using a phone's Web browser.
But, the interest in using cell phones as payment devices is tempered by the limitations inherent to linking it to a prepaid card. Soon, however, some core processing providers will introduce the ability to initiate person-to-person transfers from cell phones that are linked to retail checking accounts.
Person-to-person transfers using text messages and built-in Web browsers are the first step toward converting cell phones into integrated payment devices. Eventually, all phones will include contactless payment chips found on many credit cards. Nokia has already introduced phones with this technology, which could lead to phones replacing credit and debit cards as the primary method of payment at brick-and-mortar stores.
With the rapid development of mobile banking, banks must pause to consider regulatory and security issues involved with implementing mobile solutions. Mobile banking solutions can involve a complicated structure of third-party vendors, some of which might have no experience handling customer privacy information. These vendors include software developers, wireless providers, and telecommunications companies.
Banks should evaluate the risks associated with outsourcing mobile solutions to a vendor. Risks can be mitigated by apprising vendors of the obligations inherent to contracting with or providing services to a bank and its customers. Moreover, some states require vendors to license as money services businesses. Depending on the nature of the vendor's services and the capabilities of the mobile banking solution, banks should examine whether the vendor is legally permitted to provide such services.
Other regulatory considerations involve consumer privacy under the Gramm-Leach-Bliley Act ("GLBA") and anti-money laundering obligations under the USA PATRIOT Act. Although mobile banking data is encrypted, privacy requirements should be contractually imposed on vendors, especially because some might not fall within statutory requirements to maintain the confidentiality of information. GLBA would also apply if the security of the information transmitted over the mobile network was breached.
Security remains a concern, and criminals have found ways to exploit unsuspecting mobile banking users. "Smishing," a variation of the e-mail "phishing," occurs when a person disguised as a financial institution sends a text message requesting personal information. Banks should caution customers against transmitting Social Security numbers or PIN codes via text messages.
Because regulatory and contractual concerns are complicated by the pace at which mobile banking is developing, banks would be wise to consult an attorney before implementing this revolutionary delivery channel.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
