Can This Be Bank of America's New Revenue Driver?

Big banks like Bank of America  (NYSE: BAC  ) and Citigroup (NYSE: C  ) are going mobile -- but does it matter to investors?

According to a recent press release from the Federal Reserve Board, 33% of all mobile phone owners use mobile banking services as of December 2013, an increase from 28% a year ago.

Most of the transactions had to do with checking account balances and transactions, or transferring money between accounts. To a lesser extent, mobile deposits are starting to catch on, as this was used by 38% of mobile banking users in 2013.

These services are certainly convenient, but as an investor, we want to get right to the point: Will this have a significant benefit to a bank's bottom line?

Who uses mobile banking, and how the banks can capitalize
One thing is for sure here: There is definitely a large, growing market for mobile banking services. According to the Aite Group, the number of people who use mobile banking will grow at a 30% annual rate until at least 2016, when there are projected to be 96 million mobile banking customers. The challenge to the banks is to be able to monetize this, and there are several ways that they could benefit.

The first way is by increasing their customer base. A disproportionately large amount of the "underbanked" population (those who either don't have bank accounts, or have bank accounts but still use check cashers, payday lenders, etc.) use mobile banking services. In the U.S., this is about 75 million people that are potential mobile banking customers.

By the same logic, there is a tremendous potential customer base for mobile banking services in the developing world. For instance, in Kenya, about twice as many adults use phone apps to manage their finances and only about a quarter of adults have actual bank accounts. According to World Bank, there are 1.8 billion people worldwide with a mobile phone but no bank account. It's easy to see the tremendous potential for banks to reach an enormous new customer base.

Of course, this would be in addition to the mobile services provided to the customers they already have.

How money can be made
So, there are definitely customers out there, but how can the banks make money from mobile services? Allowing customers to check balances or transfer funds is convenient, but it doesn't really benefit the banks' bottom lines. However, some mobile services could indeed prove to be lucrative if they become more widely used. Mobile check deposits, mobile wallets, and mobile payment services are the top contenders for making the banks money.

Mobile check deposits are a particularly interesting case, because they don't really make the banks any more money, but they do eliminate a lot of expenses. According to one recent report, the per-transaction cost for an in-branch deposit costs community banks between $2 and $4, and virtually all of this cost is eliminated by a mobile check deposit. In addition, some banks charge modest fees for mobile deposits. For example, U.S. Bank charges $0.50 per mobile check deposit.

Mobile wallets and mobile payments are another potentially lucrative area, because they could generate several new streams of income. The issue of how to best monetize mobile payments has been a topic of intense debate among those in the banking industry, but some combination of fees (maybe to the consumer, but more likely to the merchant) and cost savings will be the result.

Who will strike first?
As mentioned, some banks, like U.S. Bank, have already figured out how to create a nice revenue stream off of their mobile services. However, the big winners here will be the first banks to figure out how to use mobile services in order to expand their customer base and with it the volume of deposits and transaction fees.

For example, Bank of America has already begun targeting the underbanked population with its new SmartBalance checking account, which eliminates both minimum balance requirements and the possibility of overdrafting. Banks with a lot of international exposure, such as Citigroup, which depends on overseas markets for more than half of its revenue with a lot of emerging markets exposure, also have a very unique opportunity to take advantage of the mobile revolution in banking.

At this point, it's anyone's game, but the entire sector should be able to increase their revenue and trim excess costs of handling paper checks over the next several years.

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