How Mobile Banking Works

Basic Mobile Banking Technologies

There are four fundamental approaches to mobile banking. The first two rely on technologies that are standard features on almost all cell phones.

Interactive Voice Response (IVR)
If you’ve ever called your credit card issuer and meandered through a maze of prompts -- "For English, press 1; for account information, press 2" -- then you’re familiar with interactive voice response. In mobile banking, it works like this:

  1. Banks advertise a set of numbers to their customers.
  2. Customers dial an IVR number on their mobile phones.
  3. They are greeted by a stored electronic message followed by a menu of options.
  4. Customers select an option by pressing the corresponding number on their keypads.
  5. A text-to-speech program reads out the desired information.

IVR is the least sophisticated and the least "mobile" of all the solutions. In fact, it doesn’t require a mobile phone at all. It also only allows for inquiry-based transactions, so customers can’t use it for more advanced services.

Text messaging
PNC/Getty Images
Text messaging can be used to conduct banking transactions online.

Short Message Service (SMS)
In some circles, mobile banking and SMS banking are synonymous. That’s because SMS banking uses text messaging -- the iconic activity of cell phone use. SMS works in either a push mode or a pull mode. In pull mode, the bank sends a one-way text message to alert a mobile subscriber of a certain account situation or to promote a new bank service. In push mode, the mobile subscriber sends a text message with a predefined request code to specific number. The bank then responds with a reply SMS containing the specific information.

SMS banking has several advantages:

  • It works on virtually every cell phone, regardless of manufacturer, model or carrier.
  • It’s a familiar, ubiquitous technology. There were 1.5 trillion text messages sent in 2007 -- a number that will grow, according to Gartner, to 2.3 trillion by 2010 [source: ZDNet].
  • Sending text messages is relatively cost-effective. Text messages typically cost 10 to 15 cents each (to send or receive) when purchased individually, but can cost as little as one cent or less when part of a monthly calling plan.
  • It accommodates two-way communication, allowing messages to be initiated by banks or by customers.

The disadvantages of SMS are related to the inherent limitations of text messaging. For example, messages can only be 160 characters in length. Plus, there are no guarantees that a message will actually be delivered to its recipient. But most troubling for banks is the inability of SMS to deliver a custom interface. More advanced mobile banking solutions, like those we will discuss in the next section, overcome these challenges.