June 06, 2013

Now more than ever before, banks need to be able to offer their customers innovative digital services, and bank IT spending trends point to this conclusion. According to U.K. analyst group Ovum, mobile banking is the clear IT investment priority in 2013 among the digital channels, as retail banks attempt to capitalize on the features unique to mobile, such as location-based services. According to a report from the firm released earlier this year, spending on digital channels, which includes mobile, will grow 6.7% in North America in 2013 and rise at a compound annual growth rate of 8.2% between 2013 and 2017.

But for smaller institutions, it can be costly and time-intensive to build out digital technologies on their own. Most banks outside of the very biggest generally don't have the technical resources or specialized knowledge to develop sophisticated mobile banking platforms.

So how are most banks rolling out mobile capabilities? According to Ed O'Brien, director of banking channels at Mercator Advisory Group, they're looking to third-party vendors to help them meet the demand for mobile banking in a quick and efficient manner. O'Brien says the recent trend of banks looking at hosted systems is one of the most significant developments in financial services IT outsourcing.

"A lot of the small and medium-sized banks don't have the resources in-house to do this," he says. "One of the tipping points recently to these banks moving toward outsourcing mobile capabilities is RDC [remote deposit capture]. Some small banks and credit unions have been slow to market with this service, and they're trying to be competitive and offer it to their customers, who are asking for it."

O'Brien notes that one of the benefits that smaller banks can realize from outsourcing their mobile applications is a quicker time to market, which helps them stay competitive by allowing them to offer customers the latest mobile banking capabilities. "If they go with a third-party vendor solution, it can be deployed in two to three months, as opposed to a multiyear effort," O'Brien adds.

Regarding security, O'Brien believes "inherently, there's no difference in security" between a bank using a hosted system or creating its own mobile app in-house. "The systems are just as secure," he adds.

Another benefit of outsourcing mobile banking is that the bank's IT staff doesn't have to worry about updating the mobile app for every new device or operating system that may come out, O'Brien notes, as its vendor partner would take care of that.

Focus On Core Competencies

In general, outsourcing mobile systems allows banks to concentrate on facilitating better customer service, says Serge van Dam, VP of mobile services for Fiserv.

"Banks that choose to outsource their mobile banking solutions can focus on providing great service to their customers," he says. "They do not have to invest in the capital to run a Tier 3 data center or the resources required to run ITIL-compliant support processes. They can also rely on their vendor to help ensure compliance with the latest codes of practice from the industry and its regulators. In other words, they can focus on banking, while the vendor focuses on technology."

When looking for an outsourcing partner, banks should rate candidates on scalability, performance, and risk and security management, van Dam recommends.

"Another way to frame this is, if your financial institution and its outsourced mobile banking platform are audited by an external third party as part of a review, will you be confident and certain of your compliance against industry standards, regulatory requirements and general best practices?" he asks.

Even with such tough questions to resolve, for any smaller financial institution, the decision to outsource mobile is an easy one, says Arun Ramamoorthy, VP of product management for banking software provider Fundtech.

"For banks less than $50 billion [in total assets], it's a no-brainer," he adds. "The main reasons banks look to outsource mobile is that they understand they need a lot of resources to get into that space themselves. It would mean having a much bigger staff, just to keep up with the technology changes that are happening in the mobile industry. Just keeping up with the iOS and Android versions, that in itself is a big task."

One small bank that has begun to realize the benefits of mobile outsourcing is Generations Bank (Seneca Falls, N.Y., $265 million in total assets). Generations Bank launched its first mobile app in January, partnering with technology services provider Banno to implement its Grip application. Since launching the app, Generations has gained more than 600 mobile banking users, representing about 30% of its total online user base. According to the bank, adoption of the mobile app is growing at about double the expected rate.

Derek Dyson, a project analyst with Generations, says the bank started looking seriously at offering a mobile app last year based on customer feedback and demand. "We recognized mobile is an evolving platform, and more and more institutions are implementing mobile services," he notes. "We saw this as a competitive move."

During August and September 2012, Generations compared different vendors and ultimately went with Banno, attracted by its personal financial management capabilities and the fact that it doesn't require a core systems integration. Grip offers mobile functions such as balance inquiries, transaction listings, notifications of account limitations and branch/ATM location searches; an analysis of available funds at a given location based on historical records; and predictive analytics showing a potential purchase's impact on finances, including variable outcomes from interest rate and cash/debit purchases.

According to Dyson, outsourcing the app allowed the bank to roll out the service quickly to capitalize on customers' appetite for mobile banking.

"Time to market was absolutely a factor," he says. "We were starting to get feedback from customers, asking about when we were releasing mobile banking and when it would be coming out."

Cost was also a factor, Dyson adds. The cost of implementing Grip was affordable enough to allow Generations to "test the waters without plunging too far," he says. Now that the mobile offering is a hit, Dyson reports Generations is considering mobile RDC functionality as the next add-on to its mobile service.