The strong customer demand for mobile banking apps might offer an opportunity to boost earnings at some institutions.
Retail banking customers greatly value their mobile apps, and some may even be willing to pay monthly fees to use them. S&P Global Market Intelligence's Mobile Money survey of 3,897 U.S. bank app users, fielded from Jan. 23 to Feb. 3, found 21% of respondents willing to pay $3 per month for their current mobile bank app and 40% willing to pay $1 per month.
Extrapolating company-specific survey results to mobile user estimates, S&P Global Market Intelligence finds that JPMorgan Chase & Co., Bank of America Corp. and Wells Fargo & Co., which together held 35% of U.S. deposits at year-end 2015, could add hundreds of millions of dollars in revenues by charging small monthly fees for mobile banking. Or they could find that many retail depositors using their apps would be less sensitive to rate changes than some others, allowing institutions to slowly increase deposit costs if rates rise.
Estimating potential bank app revenue
S&P Global Market Intelligence estimated how much revenue the three largest banks could hypothetically generate by charging for the bank apps customers already use. Since competitive market prices are not available for mobile bank apps, we used pricing data derived from the Mobile Money survey. This supplies the percentage of bank app customers willing to pay either $1 or $3 per month to use their bank's mobile app.
The analysis used data from survey respondents who identified as customers of JPMorgan, Bank of America and Wells Fargo. Not only do these banks hold a large chunk of U.S. deposits, they report mobile bank app users in quarterly filings.
S&P Global Market Intelligence estimated bank app users for each of the three banks through 2016, then used these year-end 2016 estimates and reported year-end 2015 bank app user figures to get 2016 average bank app users. Then we multiplied the estimates for average 2016 bank app users by each bank's respective percentage of willing app buyers from the survey results to derive implied mobile bank app subscribers.
To calculate annualized revenue, we multiplied implied mobile bank app subscribers by the hypothetical fee of either $1 or $3 per month. In this analysis, a price of $1 per month generates total annualized revenues of $292.1 million for JPMorgan Chase, Bank of America and Wells Fargo. When the price is raised to $3 per month, potential annualized revenue climbs to $501.6 million.
Survey results sometimes have a tendency to overstate willingness to buy, relative to real world observations, so the analysis also generated a lower bounded estimate based on a much more modest adoption rate. Even if the number of willing app buyers were 10x lower than the survey suggests, it would work out to annualized revenue of $50.2 million at a price of $3 per month and $27.2 million at a price of $1 per month among the three banks.
Demand for mobile bank apps is relatively inelastic between $1 and $3 per month, meaning a bank could theoretically maximize revenue by charging more for its app, despite losing millions of app users. The loss of deposits is a serious drawback if customers unwilling to pay for a mobile bank app decide to take their business elsewhere. But as long as banks are investing in their mobile apps to gather deposits, they may also want to consider other ways of using them to drive revenue.
To charge or not to charge
The decision to charge for a service that is currently free is not a simple one. Unless many banks started charging a fee, customers unwilling to pay for mobile banking could easily move to a competitor. When interest rates rise, the competition for retail deposits is likely to intensify as customers have more incentive to move their money to accounts paying higher rates on deposits. Banks likely will need to offer their customers some yield if rates move higher, but they might be able to increase deposit rates by smaller amounts than their peers if they offer a more attractive app. Alternatively, banks could potentially offset some of the costs with additional fee income if they began charging for their apps, at least for select customers. With net interest margins under pressure and the cost of regulatory compliance weighing on banks, there are plenty of other reasons to look for ways to boost fee income.
Our research has not revealed any banks that charge a flat monthly fee for mobile banking apps. Charging for a previously free service can draw public scrutiny and customer backlash, as Bank of America learned in 2012 when it considered introducing a fee of $6 to $9 per month for many checking customers. Even so, customers now find that there are more strings attached to free checking accounts than in years past, like the need to maintain account balances above a certain level or to utilize multiple products at the bank. If banks wanted to impose fees on basic mobile apps, they could use a similar playbook when deciding which customers would be subject to fees.
Banks could unlock revenue from their mobile banking services by offering premium apps or starting to charge for the apps customers already use. Some banks charge for certain services within their apps. For instance, U.S. Bancorp charges customers using the mobile remote capture tool to deposit checks, and SunTrust Banks Inc. collects fees on person-to-person money transfers within its bank app.
A premium mobile app could involve a monthly subscription fee and offer a superior suite of features that customers want, but don't currently have, such as budgeting tools. About half of the Mobile Money survey respondents were satisfied with their mobile bank apps, but many others identified features that they would like to see.
Various white label technology companies are already helping banks expand the capabilities, features and value of their apps. Moven, which began as a competitor to depository institutions, has pivoted toward leveraging its mobile and technology expertise to partner with banks seeking a more dynamic and competitive mobile app. Its first such collaboration was with Toronto-Dominion Bank in 2016. Moven designed a new personal financial management platform called TD MySpend, a derivation of the mobile budgeting app Moven offers its own online checking account holders. TD Bank does not charge customers for this service.
At the end of the day, the question is whether mobile banking is now part of the industry's customer service baseline or whether depositors might be willing to pay for it in the form of fees or lower yields.