When the FCC adopted Net Neutrality back in 2015, banks were concerned that wireless carriers where going to turn to payments to make up for the lost revenue that the wireless carriers and cable providers were missing from delivering a premium-priced internet package. That not only didn’t happen, but several players with payment application, such as AT&T’s Softcard partnership never panned out. Now, with the repeal of Net Neutrality, there are worries that the carriers can now direct traffic to their payment channels and better compete with banks. This isn’t likely going to happen, and it seems that banks are (and should) be worried about other industries getting into the payment space regardless of internet access. So, what if anything, is the impact of the repeal of Net Neutrality?
Net Neutrality in a Nutshell
Net Neutrality was the formalization of is the internet’s guiding principle – all entities should have free and equal access to the internet. Businesses and content should be reachable equally by everyone. Net Neutrality is what prevented Verizon, ATT&T or others from offering wealthier households faster wireless service for a fee, cheaper service for only certain packages of sites and prevented the carriers from slowing down or blocking connections to certain commercial sites.
All that sounds morally just and egalitarian, but opponents of Net Neutrality argue that the regulations prevented carriers from developing new products, technology, and pricing structures to help all.
While we don’t want to make a political statement, we will leave it at this - we have seen solid evidence supporting both sides of the argument. As concepts, we are for both the equal access that Net Neutrality afforded and the less regulated, more market-driven approach that the Repeal created. In short, we would like to see a regulatory framework that allows for greater competition, particularly in rural markets where internet access is often limited. It is important for our customers to have the most inexpensive and most unrestricted access to the internet.
The Repeal’s Impact on Banking
There will likely be many legal challenges in the near future to the Repeal as well as legislation that will be introduced in the next year bringing some form of Net Neutrality back. This will take years and regardless of what happens, banks should have one primary concern – the cost of internet access.
While this risk likely won’t make a “Top 20” for banks, the cost of high-speed internet access merits consideration for strategic planning purposes. During the course of the next five years, banks need to transition more customers online and to mobile in order to reduce their branch cost. To do that, banks need a plan on how to move customers. Every bank’s plan hinges on the affordability and availability of broadband intent access. At present, 81.4% of our customers have high-speed access to the internet either through wired access at home or at work or via their cell service.
Restrict access or raise the cost of broadband, and digital banking becomes harder to use. The largest drivers of if a customer will utilize digital banking other than training are household income and use of e-commerce. Those two factors account for the majority of digital banking influence. Increasing the friction to get online means slower digital banking adoption.
The real impact of Net Neutrality’s repeal is yet to be seen, and it is too early to speculate. However, should the Repeal result in less competition, reduced access and/or higher internet access cost, digital banking penetration, and bank profitability, will suffer as a result.
Consider if internet access now follows the cost and structure of cable TV. According to Consumer Reports, while the cost of basic cable access has increased an average of 3.4%, or more than inflation, the effective cost taking is much higher. Because of package cost changes and bundle structure, the cost of a static premium package cost has increased 10% to 50% year-over-year. The issue of internet access will be particularly acute in rural markets, a place where digital banking is most needed. If internet access cost goes up that much, we predict digital banking growth rates will slow by half. That means that banks would take much longer to phase out branches.
Higher internet cost and less access would hurt bank’s transition plans away from moving customers online and to mobile. Banks need to continue to digitize loan applications, account opening, mobile banking, etc. and higher internet cost and access would slow that transition and adoption. Banks now need to monitor and take internet access into account when making infrastructure investment decisions.
Submitted by Chris Nichols on December 18, 2017