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Mobile apps ‘silent death’ for smaller banks

Tom Brown said there’s a revolution taking place in banking when it comes to mobile phone apps, and it’s going to shape the future of the industry to the benefit of the biggest institutions.

Brown, the founder and CEO of Second Curve Capital, a New York-based hedge fund that invests primarily in financial services, said the largest banks that can lure customers, especially millennials, with the latest and best phone apps are going to secure a larger share of business.

He served as chairman of last month’s retail banking conference in Las Vegas sponsored by American Banker.

“The mood coming out of the convention was divided,” Brown said from his New York office. “There are people like myself who feel the industry is going through dramatic transformation driven by mobile banking capabilities, and then there’s a group of people who believe that you still have to win by people-to-people in bank branches. I think the people with the mobile transformation are winning that argument.”

Brown said the biggest banks in the 1980s lost share in the retail banking business unless they grew it with acquisitions. That trend of losing business in terms of organic growth continued until 2013 when the revolution took shape, he said.

“In the last three years, we have seen the big banks are now beating midsize banks and one of the reasons is the people who switched banks are disproportionally young and mobile banking,” Brown said.

The last time banks made such inroads in taking customer share in some markets was in the 1980s when a couple of financial institutions led the way in introducing ATMs to their customers, Brown said.

Digital revolution

“Digital is a revolution like the agricultural revolution and industrial revolution,” Brown said. “It’s changing how we communicate and gain information and a smaller example changes how we’re doing our financial services or banking. This is how you go from 6,200 banks (today) to 4,800 banks in a five-year period.”

Brown says banks that aren’t keeping up with technology will be bought out and the proliferation of mobile banking will require fewer branches as well. Their need will lessen and banks need funds from closing branches to fund app technology, he said.

How important are apps? Some 57 percent of the new checking account customers at JP Morgan Chase are under 35, Brown said.

“Millennials love alerts,” Brown said. “They love to check balances. They love to make deposits with their phone, and they love to transfer money from one buddy to another buddy.”

Not only is JP Morgan Chase benefitting but so is Bank of America and Wells Fargo in gaining share, Brown said. Tennis star Serena Williams has appeared in television commercials using the Chase phone app, and that’s important, he said.

“This is a transformation where scale is really important,” Brown said. “It’s not just scale to afford the constant investment of upgrading of your mobile banking capabilities. Where the big banks really have an advantage of scale is the ability to advertise nationally that they have these mobile banking capabilities.”

Brown said a lot of bank CEOs and board members thought that when they introduced mobile banking apps to their customers that was all that was needed. To be successful, however, constant upgrading of applications is required. That’s an investment executives don’t have a mindset to do.

The institutions with less than $100 billion in assets are losing market share to those above that mark and those less than $500 million, especially community banks, are most vulnerable and more likely to be acquired, he said.

Slow to upgrade

The problem for midsize and small banks is they used third-party vendors for mobile banking, and many of those vendors aren’t upgrading the technology fast enough, Brown said.

“It’s kind of like a silent death,” Brown said. “It’s like that frog in a pot of water you turn the heat on. There are about 8 percent of bank customers that switch every year, and those are disproportionally younger. Under 35, about 20 percent of them will switch every year but they don’t have a lot of deposits today. They will over time. The guys losing share don’t feel it as much because they’re losing more accounts than deposits. They’re not reacting fast enough because they’re not seeing their deposits declining.”

The importance of mobile banking for customers and need for constant upgrades hasn’t been lost on Nevada State Bank, said Micah Phillips, the bank’s marketing director. Millennials are big users of that technology but other generations go to it as well, he said.

“They’re want it to check account balances and transfer money between accounts,” Phillips said. “They’re using it to deposit a check rather than go into the branch or transfer to an external account or financial institution.”

NSB fighting back

Nevada State Bank has added a pass code and punch identification to its mobile app, Phillips said. Rather than punch in a password to check a balance, if someone is in line at the grocery store, all they have to do is put their thumb on the device to have immediate access to their account, he said.

“Consumer’s experiences aren’t shaped just by what the banks are doing but shaped by experiences they’re having with other retail service providers,” Phillips said. “You have others who offer quick delivery of services in online and mobile space. I can go online and shop from my phone. I get used to that quick and simple experience that my expectation bleeds from my retail activities right into my banking relationship.”

To stay ahead of the curve, Nevada State Bank added travel notification to enable customers to let the bank know when they’re traveling out of state or out of the country. That way customers won’t have any disruption to their card, Phillips said.

Nevada State Bank uses a third-party vendor for its phone app operations, but Phillips said the bank is keeping up with the latest technology and mapping out a plan. That means upgrades to pay bills via phone and person-to-person transfers, he said.

“You go to lunch with a friend and don’t have cash on you, and you want to pay your portion of the lunch,” Phillips said.

“You have got to keep moving because technology is constantly changing. I think that’s an expectation that (millennials) have. They assume we’re going to deliver that service, and if we don’t, it could influence whether they choose to bank with us or not.”

What’s Brown’s message to millennials and other banking customers in the future?

“Keep your battery charged,” he joked.

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