When it comes to mobile internet, app stores are the hottest thing since sliced bread. Apple's App Store (and now Google's Android Market) have created an entirely new marketplace for mobile software, the size and diversity of which is truly astounding.
So it's not surprising to see other technology segments gaze longingly upon these new franchises and look for ways to replicate their success. And why shouldn't they? These app stores are providing their purveyors with a new source of revenue, low distribution costs, and platform innovation and lock-in--all good things for sure.
As proof, look no further than the financial technology industry, where we have started to see app stores pop up inside third-party online banking systems in the past 12 months. Both Yodlee and Open Solutions have app stores up and running, and I know that other OLB companies are not far behind in releasing app stores of their own.
A recent Booz research report on retail banking even talked about the power of "Apponomics" and how retail banking needs to move given the new app-driven reality of the consumer online experience.
So what does all this mean for online banking? Will the app store concept be the key that allows banks to crack the code on online product sales/revenue generation? Or will it serve primarily as way for online banking providers to extend their platforms and access innovation via third parties? Both? Neither?
It's too early tell. But before we get too excited about the app store's potential for online banking, we need to point out a few differences--and challenges--to keep in mind when thinking about current app stores vs. the online banking app stores currently in production (and on the drawing board):
1) Apple's App Store and Google's Android Market are vehicles for enhancing the usefulness of a device (a smartphone or computer), not for enhancing the usefulness of a service (like Apple's Keynote or Google Docs). I think this is an important distinction. Many software services have extensible features (font libraries, add-on's, Excel's data pack, etc.), but they are almost always peripheral to the user experience.
The smartphone app store is successful because apps have become a critical part of the core user experience. They are not peripheral--outside of phone functionality, dowloadable apps often provide the most-used and most-loved user functions. So the lesson here is clear: for online-banking app stores to be successful, their apps will have to be core to the user experience, not periphery.
2) Smartphone OS's were designed with app stores as part of their DNA. Online banking systems have no such functionality in their DNA, which means vendors will have to rewrite/redesign their software to do so. Vendors will be reluctant to undertake such a major rewrite, so they will be forced to bolt on an app store concept to their current software, which will make it very difficult to make the app store a core component of the service (see #1 above). The good news is this may create opportunities for new entrants into the marketplace.
3) App Stores still haven't solved the challenge of "free;" in fact, they have probably made it worse. The ratio of free to paid apps in both stores is quite high (33% for Apple and 65% for Android), and this doesn't give us the ratio of free vs. paid app downloads, which I'm sure is highly skewed towards free. Free apps are a huge part of smartphone apps, and both Apple and Google are fine with this--remember, they are primarily in the business of selling devices, not apps.
So any way you slice it, counting on paid apps to generate significant revenue within online banking seems highly doubtful. Having said that, there is certainly an opportunity to leverage free apps from financial product/service providers to create ancillary commission/fee income that could be shared with vendors and FI's. But that would mean FI's actively introducing their customers to third-party product providers, which they have historically been very reluctant to do.
Despite these challenges, I'm bullish on the "Apponomics" of online banking. I look forward to seeing how current online banking vendors deal with the integration and user experience challenges app stores present, and I'm even more interested to see if--and if so, how--FI's embrace the opportunities created by app stores.