Smaller banks are turning to mobile payments in droves, though the services still mostly resemble Web banking on a mobile device — support for full-featured mobile wallets is still in its infancy.

Thirty-seven percent of community banks offer mobile payments, an increase of 23% over 2011, reports the Independent Community Bankers of America in its 2013 ICBA Community Bank Payments Survey. Another 43% intend to offer mobile payments by 2015, the survey says.

The fast growth is a relationship play more than a competitive response to digital payments startups, and indicates a desire among smaller banks to broaden their appeal to more consumers, says Cary Whaley, vice president of payments and technology policy for the ICBA.

"There’s an entire new generation now that doesn’t know of life without the Internet," Whaley says. "And they have a different expectation. Mobile is a key part of how they interact with companies and with other people."

The most common play by community banks currently is to offer services similar to online payments, which allows the banks to maintain vendor relationships and minimize IT disruptions, Whaley says.

At First State Bank, a $300 million-asset bank based in Barboursville, W.Va., "we are riding on the coattails of our bigger brethren," says Samuel Vallandingham, president and CEO. "We don’t have the ability to develop our own proprietary wallet."

The bank is responding to changes in payments technology by offering a suite of mobile banking services that includes e-commerce payments. It leverages Visa’s V.me digital wallet, which the bank has modified to include its own branding. The bank has not yet adopted P2P payments or contactless mobile payments.

"We’re always concerned about non-bank providers, but to date, nothing from that segment has the market penetration that would have us concerned," Vallandingham says. "That doesn’t mean it won’t happen. We think it will eventually."

Nine percent of community banks polled by the ICBA are using mobile payments as part of merchant acquiring, 4% offer a mobile wallet and 2% have adopted Near Field Communication payments. These numbers are nudging up—Whaley says no community banks offered NFC payments two years ago.

"A lot of these deployments are vendor driven. The community banks want to work with existing vendors if they can, and more vendors are offering these products," Whaley says.

The association also found that electronic person-to-person payments are now offered by 40% of community banks, up from 27% in 2011. Another 28% of community banks plans to implement P2P in the next two years, with higher rates of planned deployment among larger institutions. And debit cards are essential to community banks’ customer relationships—99% of community banks rate debit cards as important, and 87% rate them as very important. Relationship-building is also gaining against profit motive, with 59% of community banks indicating that profitability is one of the most important factors, down from 70% in 2011, the ICBA reports.

Community banks consider the incursion of alternative payment providers to be less important.  Only 23% of community banks rated non-bank payment providers as a "most important" threat, far behind compliance (68%) and staying current with technology trends (39%), according to the ICBA.

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