For the past two decades, financial institutions have fostered incredible improvements in the way consumers handle their payment businesses, as well as driven a positive shift toward comfort and trust in these new options.
Yet too often, credit unions’ payment capabilities run up against a barrier of aging hardware, software, or legacy system limitations, a discombobulation of responsibilities and liabilities among various parties, increased regulator scrutiny and risk concerns, or even a laissez faire leadership mentality.
For many years, the role of credit unions and banks were well-defined in the minds of consumers, perhaps because of a lack of outside competition. But those definitions are rapidly dissolving, and the only future payment market share credit unions can count on is the market share they begin defining today. Understanding your institution’s capacity for change, and members’ capability to embrace change, starts with fully understanding the payment space today.
Credit Unions’ Current Payment Trends
As of 1Q 12, 71.7% of the industry offered ATM and debit cards programs, and roughly half offered options for bill payment, check cashing, low-cost wire transfers, and money orders, according to Callahan & Associate’s Peer-To-Peer Software. Over all, 53.7% of credit unions offered credit cards, earning the industry 4.6% of the nation’s total market share.
Other less common, but still important payments services included international remittances, offered at 10.6% of credit unions, and electronic cash options, offered at 5.0%. These services, tracked and reported to the NCUA in 5300 data, encapsulate just a few of the various options for peer-to-peer (P2P), eCommerce, and point-of-sale (POS) payment options that credit unions, banks, and non-bank peers are pursuing.
Ready Or Not, Plastic Is Evolving
Rapid shifts in market share, with debit overtaking credit in 2008, credit overtaking debit in January 2011, and then debit once more toppling credit in January 2012, indicates consumers are readjusting their saving mentality and their spending practices, says Richard Bandebo, vice president, economist, and chief advisor for payment processor First Data Corporation, speaking to attendees of the 2012 Payments Source Conference in Orlando, FL. Because consumer spending increased in the past few years, without a corresponding increase in earnings, control is a more critical component than ever.
Driven by these sentiments, prepaid is moving beyond the typical arena of retailers and the unbanked and making a serious appearance in the typical consumer’s world.
A government shift to prepaid benefit cards for cost savings has resulted in nearly 3.2 million cards issued, and 100,000 more cards are enrolled each month, said Steve Middlebrook, general Counsel for FSV payment systems and a second panelist. This alone has increased prepaid familiarity and prevalence among Americans of all ages and demographics, including senior citizens, and users have reported a 95% satisfaction rate with the cards.
American Express, Capital One, Wells Fargo, and most recently JP Morgan Chase will all offer a prepaid option. And the addition of rewards, increased requirements for disclosure (REG E), remittance protection (Frank-Dodd), and even the ability to reload funds via remote deposit capture (RDC) for some cards will break down many existing barriers between prepaid cards and the traditional checking account.
Many credit unions have also begun to offer low-cost, non-predatory prepaid options.
Some programs like AMEX’s Make Your Move campaign even allow frequent, consistent prepaid users with no previous credit history and who refill low balances promptly the ability to transition into a true credit product.
It’s not just card usage that is shifting. Card hardware is as well. Physical cards are a steady aspect of credit union business but still rely on a magnetic stripe technology that is more than 50 years old. Advanced options like chip technology, including Europay-MasterCard-Visa (EMV), and contact-based or contactless authorization, including Radio Frequency Identification (RFID) and Near Field Communication (NFC), have been around for years, but recent mandates from cards issuers will now shift fraud liabilities and help push merchants and financial institutions rapidly forward toward secure options.
The value chain for chip technology is a long one, with three to five years from initial research to flawless implementation, and around five to seven years to realize full fraud prevention, says Michael Chalifoux, former chair of the Canadian Chip Trial Steering Committee and another Payments Source Conference panelist. But rather than viewing EMV as a burden, credit unions would be wise to consider it a critical stepping stone for future payment capabilities.
“This technology is like a Swiss Army Knife,” says panelist Oliver Manahan, vice president of MasterCard Worldwide. Beyond global interoperability and increased security, “it’s a toolbox for things that can be implemented and a foundational layer for innovation.”
Next Moves In Mobile Wallets And Online Payments
According to The Federal Reserve’s March 2012 Consumers and Mobile Financial Services study, 87% of U.S. consumers are mobile phone owners, and 12% have used their phones for a mobile payment in the past year. Bill pay made up 47% of this activity, and payments to a bank, credit card, or PayPal account made up 21%.
Some credit unions have been able to offer at least basic online P2P payment services, and the rare handful have even been able to provide mobile-based options. Although P2P is an essential part of the checklist for an eventual leather wallet replacement, it will not likely be the primary function that drives adoption.
“P2P activity doesn’t drive transactions,” said Priya Dozier, market product manager for global banking software company FIS, but added it can be an important feature in reaching certain markets, including college campuses.
Rather, P2P, ecommerce, and POS payments, processed either through software (storing payment credentials in the cloud, creating tokens or single-use payment codes, generating 2D barcodes, etc.) or hardware (NFC or acoustic proximity), must develop holistically before consumers see value in switching from their existing payment method.
For credit unions to succeed in this space, they need to look beyond their in-house concerns for payments to the outside customer experience and consider how the technology can work within retail as a whole.
The ability to control consumer experiences and transaction data within a proprietary, branded environment is the true benefit that many parties involved in mobile wallet initiatives are seeking. Whether there’s room enough for each to successfully share these resources is yet to be determined.
From a consumer perspective at least, credit unions do have one upper hand on their wallet competitors. A study by consulting firm Oliver Wyman indicates that while only 25% of consumers currently say they want mobile payments, 78% percent of that pro-mobile group wanted their financial institution to be the one that provides the solution, rather than a card issuer or a third-party like PayPal.
“A financial institution’s relationship with consumers is built on trust, and that trust is critical to growing the mobile wallet,” said Frank Young, Google Wallet’s commerce business development manager, speaking to conference attendees.
Credit unions know their members’ financial priorities better than behemoth technology or phone companies, but their challenge is to expand that expertise to areas outside their traditional lines of the payment business.
Not every credit union is in the position to develop their own mobile wallet solution or partner in development with a vendor or CUSO. But the first generation of pioneers are already laying the blueprints for peer and point-of-sale trials and rollouts and are defining their roles in the future wallet rather than letting roles be defined for them. As credit unions cooperatively pool more expertise in this evolving field, the movement stands to gain ground in emerging payments for itself and its members.