Mobile Banking: To Charge or Not to Charge

Mobile apps are expensive for banks to produce — from $1 million to $5 million according to numbers from last month’s Mobile Banking Summit in Miami. Yet most banks are still offering mobile services for free. Does this make sense?

“No one is charging for access,” David Albertazzi, senior analyst with Aite Group told Bank Innovation. “Regional banks charge for some components, RDC [remote deposit capture of checks], person-to-person payments. They are recouping investments on added features.”

Banks such as US Bank and Regions are in this category. PNC Bank was said to be considering introducing fees in April, but has not as of this point.

Albertazzi added, “But most midsize banks are paying vendors on a per user basis,” meaning that the large investment fee may not apply to them. With fewer development costs to recoup, Albertazzi believes charging is counterproductive.

Many bankers, it should be mentioned, declined to talk to us about charging for mobile banking, because it is a sensitive topic.

“Banks are under pressure to make money off mobile,” Albertazzi said. “But given adoption rates and potential customer backlash, these banks are on dangerous ground.”

By adoption rates, he is referring to the small number of customers who actually deposit checks via mobile.

“At a typical bank, mobile banking covers 15% to 16% of total DDAs [demand deposit accounts],” Albertazzi said. “And a subset of that is doing mobile deposit. That’s not getting a whole lot of money back. Potential unhappiness outweighs the revenue.”

He also pointed out that RDC is a cost-saver for banks, but not much of one. “It doesn’t save a whole lot,” he said.

It has been estimated that checks deposited in branch cost about $4.00 to process, while RDC can be as little as $0.10.

Albertazzi recommends alternatives to charging for ancillary services. “Better than charging for RDC would be enticing mobile customers to different kinds of accounts, getting them to maintain a minimum balance, or tie direct deposit to the account.” This last item would indicate that the bank is the customer’s primary financial institute.

“People will pay convenience fees for services,” he said, but banks need to weigh whether the benefits outweigh the risks. “Credit unions don’t charge for [RDC],” Albertazzi said, “and I don’t expect to see that.”

Jim Marous, SVP for corporate consulting atNew Control, has a very different take.

“Giving things away for free is not a valid model for doing business,” he said. “Every other industry charges for value-added services. Why doesn’t banking? Just because something saves money doesn’t mean its not also beneficial to users.”

Users, of course, are largely unaware of the cost-savings banks gain from self-service channels.

“In future, there will be a premium on simplicity and ease of use. Mobile saves time.,” Marous said. “Banks need to ask, What do you want your mobile platform to be?”

The basics have to be done well, and the ancillary stuff must add value, and then customers will pay, according to Marous. “RDC saves time. A better value, better experience, I don’t mind paying for that.”

Marous expressed sympathy for bank marketers that want to keep mobile services free to drive up adoption.

“It’s easy to market things that are free.”

For now, most banks seem to agree. Matt Krogstad is the VP of mobile banking and payments for the San Francisco-based Bank of the West, which offers a full-featured mobile app for which it does not charge any fees.

Krogstad described benefits of mobile apps that go beyond cost savings, telling Bank Innovation: “Our  branch-based colleagues tell me all the time about experiences where they are able to retain clients, who, for example, have a child going to college in a non-Bank of the West market, and they choose to maintain their BOTW accounts because of our mobile offering and tools like mobile remote deposit checking.”

But again, the mobile app development is not free.

“That said, mobile banking has very real cost to the bank and delivers very real value to customers,” he said, “and our industry is in a state of constant and rapid change; the ultimate business model for mobile services remains to be seen.  As a result, there might be future opportunities to charge for certain mobile services in a kind of ‘freemium’ model.”