This document describes the impact of mobile technology on the retail banking industry.

1. The Rise of Mobile Banking.
Gaetan Lion, May 23, 2012
Introduction.
This is a summary of an 18 page report from The Economist (May 19th – 25th 2012) titled
“Retail Renaissance.” The Internet and mobile banking technology has now become a
differentiating competitive advantage among banks.
Retail banking is generating the majority of banking revenues.
McKinsey indicates that retail banking accounts for more than half of banks’ worldwide
annual revenues ($3.4 trillion in 2010). In some regions, it accounts for more than half.
Retail banking revenue in % of total bank revenues:
Latin America 70%
North America 63%
Eastern Europe 55%
Western Europe 51%
Africa 44%
Asia 43%
Retail banking profitability is less volatile than wholesale banking. A ranking of the
world’s biggest banks by return on equity correlates closely with the proportion of
revenue they make from retail banking.
Retail banking is increasingly technology driven.
The Economist argues retail banking will not be swept away by the Internet like
bookstores or music stores. True Internet banks have come and gone without ever
reaching adequate scale. This is because retail banking relies on consumer trust
promoted by physical branch networks and liquidity facilitated by proprietary ATM
networks. Also, banks are tech-savvy and are leveraging technology.
Branches still play a key role.
Quoting John Stumpf, Wells Fargo Chairman and CEO: “location is till the first and most
important decision-maker when you choose your branch. After that you might bank
online, you might not go back to visit that bank again… but that location is where you
think your money is.”
Where a bank has lots of branches, it attracts more customers. JPMorgan Chase opened
more than 200 new branches in 2011 and plans to add 150-200 p.a. over the next five
years. Most of these will be in areas where it already has a big share of the market.
Jamie Dimon stated: “it always has been more valuable to increase your market share in
an existing market than it is to go to a new market.” Having a dense branch network
translates into high market share and high spread between loan yields and deposit rates.
1

2. The economics of branch banking are changing.
Retail banking profitability is under pressure. First, with low interest rates banks’
spreads are compressing (loan rates decline, but deposit rates can’t go negative). Second,
higher capital requirements result in lower return on equity. Third, regulations are
curbing fee income. A bank consultant indicates that within this environment 15% of the
current US branch network is unprofitable and transactions conducted at US branches are
falling by 5% a year.
Mobile banking is taking off.
Smartphones are causing customers to visit branches less but increasing the number of
interactions with their bank. Intuit indicated that mobile banking has increased monthly
interactions per customer from 9 to over 30. Smartphone allow customers to pay bills or
send money to family members abroad while they are away from home.
Mobile banking is associated with tremendous operating efficiency for banks. With a
special app, customers can now deposit checks with their smart phones. JPMorgan
indicated that in 2011 customers deposited 10 million cheques with such app. Further
ahead, phones will displace cheques as customers will make payments with their phone
and small businesses will accept card payments over smart phones. Bradesco, a large
Brazilian bank, indicates that handling transactions over smart phones vs within a branch
reduces operating costs by 94%.
Branches will look different.
Citigroup has developed a 26 branch network in Singapore that looks like Apple stores.
Citigroup hired Eight Inc, the firm that had designed Apple stores. Those branches have
quickly won an outsized share of the retail banking business. Citigroup is now
replicating this Apple-like network in Hong Kong.
The world leaders in efficiency and information: Spanish banks.
Santander has huge data centers that provide the computer networks to support an
international banking network. Specific computer clusters support different countries
(“Brazil’s on this one, Britain on the other” says a campus guide). Santander’s
competitive advantage comes from standardizing computer systems and procedures
around the world and driving down costs. “We have the exact same systems
everywhere” says Mr. Saenz, Santander’s boss. Other banks are attempting to replicate
Santander’s systems standardization including Citigroup, HSBC, and Standard Chartered.
Santander has substantial businesses in 10 countries. Almost 90% of its profits are
generated outside Spain. Santander and BBVA (another large Spanish bank) manage
over 20,000 branches, most of them outside Spain. Spanish banks prefer focusing on few
countries where they have a strong presence (minimum 5% to 10% market share) to reap
superior efficiency.
The Spanish achieve superior efficiency by not having to process cheques or handle
transactions in their branches thanks to having invested in the latest computer systems.
2

3. Santander and BBVA experience operating cost to revenue ratio under 50% despite
running huge branch networks, about 10 percentage points lower than the norm.
Operating cost to Revenue ratio at a few large international banks:
Standard Chartered 68%
Credit Agricole 67%
HSBC 62%
BNP Paribas 61%
Barclays 53%
UBS 51%
BBVA 48%
Santander 45%
Spanish branches have access to a lot of information. A branch manager can pull on a
PC, a customer account balances and profitability, what services that customer needs, and
who is the staffer serving this account. The branch manager can also see how profitable
the whole branch is. Each morning the branch manager leads a staff meeting to strategize
what products to market to whom and who to contact because of special events
(borrowers missing a payment, depositors receiving unusually large deposits). Also,
Santander, through its analysis of internal data, sends out weekly lists to its branches of
customers who may be interested in particular financial services.
Another small but tech-savvy Spanish bank, Bankinter, uses video technology to leverage
a few mortgage specialists across their entire branch network. Accenture indicates that
Bankinter has a higher cross-sell ratio and its customer relationships are more profitable.
The advent and threat of mobile payment.
Square and Intuit allow small business to accept credit card payment using smartphones
for a fraction of the cost of traditional bank merchant card processing. They offer
merchant customers free card readers that attach to a smartphone and charge a 2.7%
transaction fee. Banks instead charge hefty monthly fees for the card reader and often
higher transaction fees. Square has already signed up one million customers since its
launch in 2010.
PayPal provides a virtual wallet to pay for retail purchases using a smartphone or online
using a PC. It is arguably the world’s biggest bank, with more than 100 million account
holders. PayPal also offers its own line of credit to customers who want to borrow
money to pay for things they have just bought.
PayPal has a smart electronic wallet features whereby it recommends to customers which
card to use to minimize costs and maximize rebates. Such advice turns bank credit cards
into commodities.
Google is currently developing its own smart electronic wallet. Both Google and PayPal
are working towards developing the ability for retailers to target shopping offers to
customers. They both would stand to profit handsomely from such offerings. Some
3

4. banks are joining Google wallet to make sure their credit cards will have a preponderant
place among Google’s offerings. Other banks are working on developing their own smart
electronic wallet. And, a few are doing both (Citigroup). “I am not sure any of us will
carry wallets ten years from now,” says Michelle Peluso, head of internet banking at
Citigroup.
The retail business of sending money across borders is changing.
Western Union, a money-transfer agent (MTA), is the major player in this business. It
handles close to 20% of the worldwide volume. Other MTAs also have a strong
presence. They typically undercut the banks in pricing (about 9% to send remittance vs
12% for banks). Yet, MTAs still have very high margins associated with opaque pricing
and high fees at both ends (to send and receive payments). Most wires cost between $15
to $40 (for sending only).
Xoom, in San Francisco, charges only $6 per transaction. The reason it can charge so
little is that Xoom customers make their transfers from bank accounts instead of cash.
This renders the service more efficient. Customers send money from their bank accounts
to their relatives across borders using their phones. Last year, Xoom handled $1.7 billion
in remittance. This year it expects to double this volume.
High net worth investment management is changing too.
Before the 2007-08 financial crisis banks generally earned fees about 1% of assets under
management. Since the financial crisis, such fees have declined as clients are shying
away from complex investments with higher margins. Also, online upstarts may
influence further decline in fees. Wealthfront manages money for only 0.25% per year.
It uses sophisticated algorithms to measure a client’s risk tolerance and structure a
corresponding diversified portfolio. MarketRiders offers a competing service to
Wealthfront and instead charges only $15 a month regardless of the portfolio size.
4