Opportunities for Action in Financial Services. The Next Wave: Wireless Financial Services

Transcription

1 Opportunities for Action in Financial Services The Next Wave: Wireless Financial Services

2 The Next Wave: Wireless Financial Services Wireless financial services, an important part of m- commerce, can offer consumers a new level of convenience in an increasingly busy world. With a mobile device, such as a telephone or a personal digital assistant (PDA), and good wireless service, consumers can research their financial needs and transact virtually anywhere, anytime. The wireless-financial-services channel is attractive to people who are on the move often busy, affluent, and young as well as to those with limited access to bank branches. Financial executives should make wireless services a part of their multichannel offering one that provides efficient and cheap interaction with valued customers. But they should also recognize that in certain cases, notably in payments and insurance, the wireless channel could fundamentally change the economics of their business. Consumers are likely to use the wireless channel more as new technologies overcome current limitations. Today s second-generation (2G) wireless service is gradually giving way to higher-speed 2.5G technology. The new technology will bring greater bandwidth and will therefore allow a much richer customer experience, including interactive video, graphics, and always on capability. Bluetooth, another new technology, will permit wireless devices to talk to and synchronize with one another. As a result, customers will be able to access wireless financial services through smart devices, such as PDAs and other electronic wallets (which allow customers to store units of value). Voice recognition technology is advancing rapidly, too, increasing the convenience and functionality of the wireless channel.

3 The value of the wireless channel is readily apparent in person-to-person payments. Hand-held wireless devices could become the preferred method for making payments, providing consumers with the electronic wallet of choice. Wise to wireless s potential to erode traditional barriers, telephone companies (such as NTT DoCoMo, Sonera, and MobileOne) and credit card companies (such as MasterCard and Visa) are rapidly building microbilling and electronic wallet businesses. Other new competitors recognize that e- mail payments are readily transferable to the wireless environment. X.com s PayPal business, a leader in online person-to-person payments services in the United States, plans to dominate such transactions in wireless as well. In stark contrast to such newcomers, many financial institutions view the wireless channel as merely an additional cost of doing business. The wireless offerings that banks and brokerages have launched are often meager and poorly differentiated. Only a handful of financial institutions including MeritaNordbanken in banking and Progressive in insurance are using wireless services to change their businesses fundamentally. A Broadening Band of Customers Today, given limited bandwidth, customers use wireless services to access simple, time-sensitive information and entertainment. Checking balances, trading stocks, paying bills, buying books, and ordering tickets and fast foods are common uses. Customers connect for shorter periods on the wireless channel than they do on the Internet and use wireless services from many different access points. The early wireless

4 adopters have tended to be those who are already online, a relatively wealthy and well-educated group. Wireless offerings can help attract and retain such valued customers. As wireless technologies improve, the opportunities for financial institutions will be substantially greater than they are today. The Boston Consulting Group estimates that within just a few years hundreds of millions of people worldwide will use m-commerce applications, generating business-to-consumer revenues of up to $100 billion as much as $300 per person. (And, as in the case of the Internet, businessto-business revenues should exceed those from business-to-consumer ventures.) Europe and Asia lead in wireless-financial-services use worldwide. In Europe, millions of people use wireless services, and more than one-third of the largest 100 retail financial institutions have wireless offerings. In Asia, millions more access wireless services, with one-fifth of the top 100 retail financial institutions offering wireless services. Big banks and brokerages are evaluating wireless strategies and are sometimes partnering with telephone companies to build wireless businesses. Meanwhile, several large U.S. and European financial institutions plan to use the wireless channel to penetrate markets far from home. The United States currently lags Europe and Asia. Recent surveys indicate that approximately half of the 100 largest U.S. financial institutions intend to offer wireless financial services by 2004, but many have yet to devise a wireless strategy. Nevertheless, if new technologies fulfill their promise, the United States is likely to embrace wireless rapidly since many U.S. consumers are already at ease with online services.

5 Finding the Frequency Many financial institutions have yet to find ways to generate profits from wireless services. Most still consider them simply an extension of their online offerings. But the wireless channel offers a unique opportunity to enrich interactions with customers, deaverage pricing, and create new revenue streams. Meanwhile, telephone companies are using wireless services to create additional revenues and to expand beyond traditional industry boundaries into core banking businesses such as payments. DoCoMo s i- mode wireless offering, for example, charges a fixed 9 percent fee for all goods and services purchased through its wireless system. It also offers microbilling services that generate fees ranging from 5 to 15 percent of a transaction. Such revenues help DoCoMo support the marketing of its content providers. Brand strength has persuaded nearly 75 percent of i-mode customers to charge their wireless purchases to their monthly phone bills, bypassing traditional bankpayment methods. DoCoMo has extended its financial services interests with a 5 percent equity investment in an online bank. New competitors in the United States are also planning to use the wireless channel to extend their business models into financial services. They therefore represent a threat to profitable banking businesses, particularly payments and credit cards. For example, X.com s online service, PayPal, provides increased security with its accounts, which allow customers to make online payments without sending credit card details over the Internet. PayPal, which dominates the person-to-person payments market, already has more than 4 million customers, and that figure will reach 10 million in just a couple of years at

6 current growth rates. PayPal has recently expanded into person-to-person international payments and into the business-to-consumer and business-to-business worlds. PayPal payments especially when they are made from one PayPal account to another cost pennies to execute, making them much cheaper than credit card payments. To date, PayPal is an online phenomenon, but its business model could easily be adapted to wireless commerce. As m-commerce grows, such services are likely to attract millions more customers, cutting into banks credit-card revenues. PayPal, for example, already offers interest on deposits and insurance fraud protection. It also plans a branded debit card. If PayPal is successful, such offerings promise to change not just the payments business but the broader financial industry as well (see the exhibit The Adoption of Wireless Services for Person-to-Person Payments Could Change the Rules of Competition ). Telematics, the synchronized transmission of information between cars and other sophisticated machinery, provides another example of how wireless is likely to disrupt established economics in the financial services industry. This technology is expected to have profound effects on automobile insurance, altering customer acquisition costs, claims management, customer service, and the pricing and underwriting of automobile policies. Thus far, telematics has focused mainly on safety and diagnostics. But automobile companies are already investing in partnerships that will provide Internet services in vehicles. Insurance policies could be sold along with vehicles, giving auto companies a critical advantage in customer acquisition. Auto companies and their insurance-company partners would also be

7 able to track actual driving behaviors and car usage and use the data to de-average pricing. Progressive piloted such a program in Texas, called Autograph. The impact of telematics on claims management is also likely to be very significant. Seventy percent of automobile insurance premiums are currently spent on claims management; telematics will allow vehicles to self-diagnose damage, cutting out many claims costs, such as delays and expensive loss-adjusting services. The technology will also allow insurers to direct customers to appropriate collision repair shops even to schedule appointments electronically. The Adoption of Wireless Services for Person-to-Person Payments Could Change the Rules of Competition The consumer is introduced to payments through marketing or the receipt of cash Full bank services consumer, asset, and information gathering are complete Broad functionality interest payments electronic bill payment credit accounts Person-to- Person Offering Payment advantages security ease The consumer must join the site to receive payment Bill payment is a logical offering for consumers Expanded consumer offerings business acceptance wireless rewards Confidence increases as the transaction is processed effectively Increased services add to adoption rates The consumer begins using the site for payments and entices others to join

8 Ensuring Good Reception As the wireless channel opens up rich opportunities, financial institutions may well endanger their own businesses particularly their payments and insurance franchises if they fail to respond to the new opportunities. Financial institutions should respond by considering the following approaches: Build a strong wireless business, carefully integrating it with other delivery channels. Financial institutions should use the flexibility of the wireless channel to provide customized offerings that combine electronic wallets with the best security features, information, and entertainment. The offerings should provide customers with proactive financial advice and timely execution of brokerage trades. Financial institutions should exploit the capability of the wireless channel to collect data, to segment customers better, and to develop tailored offerings. Develop a payments strategy that includes the wireless channel. Financial institutions should leverage the low cost of wireless payments services and use the channel to attack vulnerable margins and win customers. Recognize that credit card charges, key revenues for many banks, are vulnerable to cheaper wireless-payments services. Financial institutions can also use wireless services and the information they bring to undermine high-cost claims management in insurance by de-averaging pricing. In the wireless channel, executives can offer cheaper stock trades and attract asset management business. Partner with others including telephone companies, portals, and software ventures when it makes economic sense. Financial institutions may want to consider partnering with other types of institutions, if the fees and terms are attractive, to draw more traffic to

9 their wireless offerings. Such partnerships can be used to exploit brands and billing relationships and even to enter new industries. For example, financial institutions can partner with telephone companies to become mobile network operators. Many telephone companies lack the capital and the will to tackle wireless financial services alone. Ambitious financial institutions ignore wireless financial services at their peril. Wireless services are an increasingly important channel one that could radically change parts of the traditional financial-services industry. John Garabedian Andreas Regnell Scott Desmarais John Garabedian is a vice president in the Chicago office of The Boston Consulting Group. Andreas Regnell is a vice president in the firm s Stockholm office. Scott Desmarais is a vice president in BCG s Singapore office. You may contact the authors by at: garabedian.john@bcg.com regnell.andreas@bcg.com desmarais.scott@bcg.com The Boston Consulting Group, Inc All rights reserved.

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