Mobile devices in the U.S. are becoming ubiquitous. Over the last four-to-five years, smartphones have grown in adoption to make up nearly half of all handsets. These devices are technologically sophisticated and are altering consumer behaviors with respect to shopping, marketing, banking, payments, and other financial services. This in turn is changing the ways consumers interact with commerce-enabling entities such as banks, credit unions, credit card companies, and retailers.
Many financial institutions entered mobile with basic, online banking capabilities then expanded their offering to include more sophisticated, mobile-centric solutions. For example, First Annapolis studies indicate that from 2010 to 2011, 23 of the top 100 banks and credit unions with pre-existing mobile offerings added one or more advanced features (e.g., mobile bill pay, mobile P2P, small business support and mobile loan management).
A Comparison Of Mobile Banking, Payments, And Commerce Offerings Between The Top 100 Financial Institutions
*Credit unions in the Top 100 financial institutions include Navy Federal Credit Union, State Employees' Credit Union, Pentagon Federal Credit Union, Boeing Employees Credit Union (BECU), and Schools First Federal Credit Union. Top financial institutions are ranked by total deposits.
Sources: First Annapolis Consulting 2011, 2010 Top 100 Mobile Banking studies
In addition to typical mobile banking offerings, location-based technology is also being developed to enable new services. This technology can be used to send consumers targeted offers when they are near a store in a process called geo-fencing. This offer sourcing may occur via a third party such as Groupon, but may also come directly from a larger merchant who wishes to maintain control over the consumer experience (and related economics). These offers may also be linked to a particular payment type. For example, Target or Macys may link an offer that is tied to their co-branded or private label credit card.
Mobile Wallets And Emerging Scenarios
Many of these use cases will likely be enabled by a wallet, but the experience may still be controlled by the issuer or merchant. While several key use cases can be expected to generate consumer uptake, the market could follow several paths as it continues to develop. Based on market forces, three potential scenarios emerge. These three scenarios can be described as Fits and Starts, Open Wallets Win, and Retailers Strike Back.
Fits and Starts: A proliferation of competing solutions, players, and technologies slows the development of the overall market. If realized, this scenario would mean more payment pilots using closed-loop products such as gift cards and closed wallets.
Open Wallets Win: The largest and best-funded wallet initiatives become standard use products for consumers.
The Retailers Strike Back: Retailers (such as Walmart, Target, Best Buy, Home Depot, etc.) largely reject wallet initiatives in their current form and work to establish proprietary standards. The formation of MCX, the mobile commerce group of more than a dozen retailers, could support this scenario, though it is unclear whether MCX’s solution will operate as an open or closed wallet.
There are common themes in each of the three scenarios. Every scenario suggests a timeline of three-to-five years or more for piloting, trialing, and deployment. Merchants are key players in every scenario, not only because their approaches and preferences remain unknown, but also because they drive promotional activity. Likewise, neither NFC-based nor cloud-based technology has a clear edge for the long term. Both would require significant shifts by most parties in the payments value chain.
Implications For Financial Institutions
Financial institutions will play a critical role in the development of mobile payments and, to a lesser extent, mobile marketing applications. Consumers trust financial institutions more than any other solution provider for mobile payments. This trust will be critical to the development of mobile payments products. The networks will also play an important role with their own wallet platforms, as they have the benefit of existing relationships with issuers. Furthermore their wallet platforms run on the existing payments rails and utilize the same authorization, transaction, and settlement infrastructure making integration easier. However, specific implications of mobile development for credit unions vary by scenario.
In a Fits and Starts scenario, credit unions will benefit from a longer timeline to evaluate responses and implement solutions. Credit unions will be able to take a measured approach to product development. A possible approach would be to follow the path of early-moving financial institutions: Enable basic online banking capabilities for the mobile channel and then incorporate more sophisticated, mobile-centric solutions. However, credit unions following this model may struggle to grow their member bases if consumers expect advanced mobile capabilities commensurate with those of larger banks.
In an Open Wallets scenario, both timing and service providers will be critical. Credit unions will need to gain access to the de-facto standard (or standards) for open-loop mobile wallets and integrate with the platform (or platforms). Ideally, credit unions will be able to select a mobile wallet solution based on their selection criteria, but credit unions may have limited options for wallet integration, at least within the immediate future. In such circumstances credit unions may opt to leverage relationships with processors and other service providers to gain access to the most popular wallets. Processors’ expertise in account onboarding, processing, and servicing make them a natural enabler of mobile technology for credit unions.
In a Retailers Strike Back scenario, credit unions may experience longer timelines before integrating into the retailer wallets. Retailers will focus on the issuers of their own proprietary payment products (GE, Citi, etc.). These merchant-oriented payments products may become "top-of-wallet" for consumers at those retail channels. If there are enough unique and valuable incentives tied to another payment product, consumers may shift their spending away from traditional debit and credit cards. Credit unions could participate in this scenario by leveraging their processor and major partner relationships. It is likely that these third-parties would act as both an intermediary and a source of leverage to enable smaller issuers to participate in the retailer wallet initiatives.
Regardless of the ultimate outcome, mobile presents opportunities for credit unions to expand geographic reach and increase the range of services offered to members. With mobile payments, digital wallets, and now the ability to send payments as an email attachment, the mobile space is constantly evolving. Prepare today for what tomorrow will bring.
To learn more, download the full white paper from CSCU and First Annapolis Mobile: Background and Implications for Credit Unions at www.cscu.net/whitepapers.
Robert Hackney has been president of CSCU since 1998 and has more than 15 years of card industry experience including 5 years with Fidelity/Certegy where he held the positions of Vice President-Controller and Vice President-National Accounts. Mr. Hackney served on Visa’s Deposit Products Executive Council, comprised of executives from the largest debit card issuers in the US from 2002-2006. He also served on the Visa U.S.A. board of directors from 2006 –2007 and the Visa International and Inovant boards of directors in 2007.
CSCU is the credit union industry’s advocate, partner and leader in total payments solutions. Created by and for credit unions, CSCU is driven by the same principles that guide the industry. CSCU’s services and offerings are focused on driving the growth and success of our 2,700 member credit unions.