The changing payments landscape presents adaptive challenges for cooperatives. There are regulatory requirements that seem to change daily, delivery channels that drastically evolve from one version to the next, and priorities and expectations that vary from member to member. But credit unions have an unprecedented opportunity to expand their presence in existing payment channels and seize new business models. They don’t have to do everything when it comes to payments, but they’d better be able to do a few things well.
In addition to the old guard of paper checks, plastic remains the lifeblood of the payments business. According to Callahan & Associates’ Peer-to-Peer analytics, as of first quarter 2013, more than 73% of cooperatives offered an ATM. Slightly more than 54% offered credit cards. And for the 69 cooperatives surveyed as part of Callahan & Associates’ 2012 Non-Interest Income Survey, credit card interchange and fees comprised 10.3% of total non-interest income. Debit interchange and fees equaled 22%.
The average credit card market share for the credit union industry is 5.4%, but rewards, customer segmentation, and retailer partnerships are producing better results for many institutions. For example, Maps Federal Credit Union ($460M, Salem, OR) averages a 15.62% credit card penetration. It ramped up both the value for membership and its debit and credit transactions through a Buy Local partnership that includes more than 70 area small businesses.
As of first quarter 2013, only 4.9% of the industry offered an electronic cash option such as direct deposit, ACH, or gift cards. However, 64.3% offered wire transfers, 53.4% offered check cashing, 51% offered bill payment, and 11.6% offered international remittances. These latter offerings often serve as affordable alternatives to predatory services. They also help credit unions engage unbanked or underbanked members and supplement non-interest income earnings.
WHAT PAYMENT OPTIONS ARE CREDIT UNIONS CURRENTLY OFFERING?
Generated by Callahan & Associates' Peer-to-Peer Analytics
Liability shift dates for non-Europay, MasterCard, Visa (EMV) transactions are now in place from the major card companies. By October 2015, credit unions must convert their card portfolios to EMV — which uses an embedded microprocessor rather than a magnetic stripe to secure plastic card transactions — or bear the full financial consequences of fraudulent transactions made without this technology.
The changeover will present its share of difficulties, but according to Stephanie Ericksen, head of authentication product integration at Visa and a panelist at the 2013 BAI Payments Connect Conference, credit unions should not overlook the fraud-prevention value of EMV. Hackers using stolen prepaid debit card information are responsible for the recent theft of $45 million from ATMs across the globe. Such a heist demonstrates to an unprecedented degree how easy it is to exploit magnetic stripe technology. Counterfeit fraud has dropped roughly 50% in regions where EMV was introduced; however, much of that activity has migrated stateside. In the United States, fraud has increased roughly 300%, Ericksen says.
The potential cost savings of EMV extends beyond individual transactions. According to a survey by ACI Worldwide and AiteGroup, more than 10% of U.S. consumers who were unhappy with their financial institution’s response to a fraud situation changed card providers. Those that did stay changed their behavior and usage in many cases. After receiving a replacement card — at an average cost of $3 to $5 to the issuer — 44% of consumers used the card differently. A full 33% used the replacement less than the original card.
EMV is the next generation of plastic card, and credit unions must anticipate and manage many factors to prepare for its implementation. For example, the first few rounds of EMV cards will likely retain their magnetic strip. Thus, some vulnerability will remain. However, chip technology will allow credit unions to focus their resources where they’ll likely be needed the most — non-EMV transactions.
As EMV decreases card fraud, criminals may also shift their focus to more vulnerable areas of the portfolio, meaning institutions might not initially see a dramatic cost savings.
Thirdly, financial institutions are only one part of the equation as merchants must embrace EMV as well. Despite evidence that suggests otherwise, there are fears that EMV will slow down checkout times. Consequently, there’s a risk some merchants will resort to magnetic stripe even when EMV is available. To make EMV more attractive to merchants, credit unions could consider increasing cardholder verification limits.
Lastly, EMV was created decades ago with pin functionality for offline transactions. Some of these capabilities are unnecessary in today’s environment and can add cost or vulnerability.
Anticipated hurdles aside, the first few rounds of EMV cards will be essential in providing a stepping stone to the next generation of payment options. In the next five to 10 years, half of all payments will occur via a mobile phone rather than through plastic, Ericksen says.
Engaging The Cash Economy
According to University of Wisconsin professor emeritus Edgar Feige, the amount of currency held per capita in the United States has not diminished over the past 20 years. In fact, despite a wealth of new payment options, that number has swelled by 82%.
According to Feige, there is a large disconnect between the amount of domestic currency individuals and businesses hold and the amount these groups admit to holding. Such a disconnect suggests that not only are funds being held abroad but also that an “off the books” financial ecosphere is thriving. This means cash is playing an increasingly large role in the lives of many Americans — including credit union members.
Credit unions should also take note of the boom in prepaid card use. After meeting basic qualifications, many prepaid cards are exempt from Durbin restrictions. And the evolution of benefits such as FDIC insurance and the ability to load funds at a retailer or through a mobile phone means some cards are capable of replacing the type of full demand deposit accounts consumers typically hold with their financial institution.
In addition to physical cash and prepaid cards, a new digital currency called Bitcoin is growing in scope despite concerns regarding valuation, security, and usability. According to Forbes, more than 15 million aggregate transactions — approximately 50,000 per day — have taken place through the Bitcoin network. And in the past six months, the number of merchants who accept Bitcoins has increased 10 fold.
Large players in the ecommerce space are taking note of the digital currency trend. To promote its currency, Amazon gives its Kindle Fire owners 500 Amazon Coins, valued at one cent each, to make in-app purchases. Amazon customers can also buy the coins directly from the online retailer’s website.
For financial institutions, finding ways to capture the best practices from these alternative payment models and ultimately pull more of these transactions out of the shadows and into the banked economy will be essential
Gauging Opportunity In The Mobile Wallet
There’s little question the mobile wallet is coming, but many credit unions are still considering whether to build versus back a provider. According to a ComScore.com survey, PayPal dominates the digital wallet market in terms of consumer awareness. A full 50% of the general population is familiar with its service versus 41% for Google Wallet, 13% for Mastercard PayPass, and single-digit awareness for other providers. However, it’s worth noting these preferences vary among regional marketplaces.
The investments made now in the next generation of payments will carry financial institutions through upcoming changes in the retail space.
To ensure they can retain their member relationships, some credit unions are collaborating with cooperative companies and developing their own wallet rather than hopping in the wallet of a big provider. For example, Fiserv offers brand control through its Mobility Master Wallet, which turns any existing mobile banking solution into a hub to integrate, aggregate, and control third-party wallets. From this master wallet, users can add, activate, deactivate, and remove cards, set transaction limits, or specify the use of certain cards for certain merchants.
Sprig — the offspring of a mobile wallet concept from Maps’ CU Wireless CUSO and the shared branching capabilities of CO-OP —allows users to connect with and pay other credit union members as easily as a member of their own cooperative. Such credit union-focused companies hope to help cooperatives not just hold onto but increase their hard-earned piece of the payments pie.
Finally, new developments are putting the mobile channel in the position to fully replace branches and online portals for a majority of transactional financial activities. Mitek’s photo bill pay solution allows users to snap a picture of an invoice, enroll the company as a new payee, and pay the bill … all from their phone. It promises to do for mobile payments what remote deposit capture did for check deposits.
Anticipating Next-Generation Commerce
The investments made now in the next generation of payments will carry financial institutions through upcoming changes in the retail space, including the growing tablet market and television-based commerce. The idea of buying something you see on a show or advertisement, either through dedicated applications or directly from the TV remote, is the new buzz in merchant circles and it should be on the radars of financial institutions too.
From the mobile wallet, to Google Glasses, to whatever comes next, payments and the channels in which they take place will continue to evolve. Credit unions must lay the technological tracks today so they don’t miss the train tomorrow.