From the Mouth of Banks is an interview series where we share our real conversations with banking leaders from around the world.
by Paul Brandner
Director of Marketing
When:December 2, 2014
Where:The Kennedy Public House, Toronto, ON
Q: How can big banks successfully navigate mobile payments while contending with infamous innovation-killers: size and bureaucracy?
It differs in Canada and the US. Let’s look at the context:
In Canada, customers might feel they’re not getting the best deal but they’ve been at a bank for 20 years, and their parents banked there. Maybe they’re paying a percent more, but they think, no big deal—they’ll just stay. In Canada, RBC leads everything – it’s the original thinker, pushing the envelope.
In the US the business is not as sticky—the whole share of wallet is not as sticky. It’s very competitive: if you’re not offering the best service and the best price, the client will literally walk. Customers who go to a national bank switch constantly. If a large bank gets bought out, they might lose half of their deposit base right away. Huge numbers will go out the door.
In Canada there are many people working at banks who don’t know what they’re doing. Their job is to sell as much product as they can because that’s how they get paid. They look at it like a box to check off: I check this box, I check this box… It’s administrative. In the US you have career bankers. There are 8,000+ banks in the US. US customers at smaller local banks are incredibly loyal. People like to walk into the front door and recognize the people they deal with.
Canada has 35 million people—less than the state of California. The US has 360 million people. What works in Canada doesn’t necessarily work in the US.
There are 8,000+ banks because people are so different in every region. There are more than enough people and more than enough room for the regional banks.
Florida is a great example: big banks there, like Regions Financial, are a great operation. They’re good at what they do. A regional bank will take deposits, issue cheques, debit or credit cards. They don’t do many things though. Much of their lending business is leaned against assets.
You can’t do that on a national level. These regional banks know their clients. Their clients tend to be shareholders of their company. That gives the clients a sense of ownership.
Large national banks are nameless and faceless and they’re in every line of business all over the country. It’s not the best model for such a diverse country. People in Los Angeles are fundamentally different than people in Chicago, and people in Chicago are fundamentally different than people in New Jersey. If you can’t treat those people differently then you can’t get that whole business.
In the US, most business is small to medium sized. Big businesses in the US do 60–65% of their business outside of the North America. So really, the guy that’s driving the engine that is America is a small to medium enterprise. Those people tend to be state-based and biased, and prefer to deal with the local branch.
Take Zions Bank in Utah. It’s a major bank in Utah, but not anywhere else. If a guy has a manufacturing company in Provo, UT—what does a national bank, headquartered in NYC, know about serving him? Very little. He’s 15 states over, two time zones away—he doesn’t want to deal with them. The manufacturing guy would rather deal with Zion—its head office is here, their CEO is here. He wants someone who knows and cares about his business. It is a lot more service oriented, and that allows those banks to exist.
So to answer your question:
I think that’s where there’s an opportunity for a mobile payments offering—if you could make that accessible for a guy who lives in Arizona. He travels around the country a few times a year and wants to pay for things on his phone, but will only do it through his home institution. He would go for it in two seconds. But if he has to have a separate account with a big national bank to do his mobile transactions, then he’s not as interested and won’t do it.
Young entrepreneurs are comfortable with Google or Apple Pay. But the people who have money—people who are 55 or older, business owners, baby boomers—aren’t comfy with moving substantial amounts of money through those avenues.
I think they would be more comfortable with a mobile payment application that is branded through their home bank. I think that would give them the level of comfort they need to feel that what they’re doing is secured.
They think, “Why can’t I just deal with this one bank and have all my stuff with them? They can offer mobile payments, issue credit cards and if anything goes wrong I can walk into my local branch and speak with my branch manager who’s been working there for 15 years.” I think that’s the better model. I think that’s what will work in the US.
As for big banks, they can specialize in the US. In the US, you have the big guys like Citibank, Bank of America, and JP Morgan with the deep pockets to do whatever they want. Because you have a fragmented system in the US, if JP Morgan wants to get into mobile payments in a big way, they’ve got all kinds of money to throw at it. They want to grow.
In order to grow revenue 2–3% at a company like that you have to do a ton of business. So they are always looking for ways to make things more efficient, and to bring their clients closer to them.
Q: Now that Apple is in the game, mobile payments are finally set to take off in the US. Just a few months in, what’s been the effect on banking in the US?
I think Apple Pay is taking some market share.
They are trying to provide a service to their existing client base. If they can provide that service, there’s an opportunity to grow. Look, in a country of 340 million people, there’s an opportunity for everybody to grow.
Can Apple take 5% of mobile payment share from whatever it is today over the next year? Absolutely. Can they take 10% over 2 years? Absolutely. Maybe they can grow as high as 15% share. They need to make sure it’s a secure system, with no breaches and continue to reinvest in product all the time.
I’m an Apple believer. If someone can do it, they can do it. Apple’s brand is synonymous with offering quality products. Can they continually take market share? Absolutely.
Let’s be honest, if someone came to me and asked “Would you rather deal with a national bank or Apple?” I’d say Apple. I don’t care how big a bank is, if their security systems are poor, if management’s poor, if structure is poor, then the way they look at new forms of payments are poor. I think Apple could steal business if they wanted to.
Q: What share will Apple Pay take globally?
Europe is a very mobile oriented continent, so no problem there. In the Middle East there’s a government risk, but if Alibaba can do it, Apple can do it.
Apple’s biggest challenge is China: will Apple conform to what the government wants them to do? Who knows.
Let’s be honest, China is a black market economy for the most part. Microsoft has been operating there for 20 years and doesn’t make any money. Why? Because most people buy black market. Why can’t Apple grow in China? Well, you can’t grow because there’s too much black market. People don’t want to pay for premium products. They’ll pay for the service on a phone but won’t pay for the phone.
People think “There’s a billion people there, so you can sell a billion phones.” But the mobile technology is poor—it’s 3G in main cities, and 2G or nothing in rural areas.
Q: If you had to choose, what’s more important: being in Apple Pay or having your own branded wallet?
A bank will always prefer their own branded wallet. Do they want to source something out to Apple? Only if they don’t see any other alternative.
They would rather build their own products. Often they don’t spend on the best technology or good branding, and they don’t have the best service around it. So when consumers compare the two they will most likely say, “I’m going to Apple.”
Apple will spend the time to develop a really good experience—because they know the first impression is the most important impression. I think the banks’ mentality is totally different. They are trying to make it “good enough”—I don’t think they are trying to be the pioneer. The banks are often the last to the games.
Q: How much technology should a bank outsource?
Super easy question. It’s hard to attract innovative people to banks. The pay doesn’t compare and they build with the wrong question in mind: “What can we do for this price?”
You don’t go out and say “Hey, we want to do an app, we have $100K to spend.” You go out and say “What’s the best app we can make to bring these services to our customers, and where are we going to find the money to do it?”
If you don’t spend money on the best technical talent and you don’t invest in infrastructure, how much should you outsource? Banks should keep the 20% that is systems maintenance and operations and branding to themselves, and the other 80% should go out the door to the people who are experts. I think it’s the fairest way to say it.
Q: Anything you would like to end with?
In the US, companies have to work ten times as hard to get and keep your business. Competition and price in the US are way more competitive. Service is going to win every time—trust and loyalty.