The share draft account has long been the cornerstone of the relationship between financial institutions and their consumers. It is, in fact, the most important product in a consumer’s choice of a primary financial institution. However, trends in the electronic payments arena have the potential to threaten this long-held relationship. Learn what is happening and how credit unions can position themselves best for success in today’s electronic age.
ACH: Changing the Economics for Credit Unions
Check volumes and values still exceed all other payment methods today. However, they’re declining at a steady rate of 4 to 5 percent annually. What’s happening to them? They’re being converted to ACH payments, replaced by debit, credit and gift cards, as well as online bill payment. Large billers and retailers are driving a great deal of the electronic migration in an attempt to lower operating costs. ACH payments simply are cheaper to process and reconcile than checks, so merchants are doing all they can to move their consumer relationships into the electronic arena.
Take a look at some 2005 ACH statistics:
- 14 billion ACH transactions generated in 2005, up 16.2 percent over 2004 and double the 2000 volume
- 2.15 billion accounts receivable check (ARC) conversion payments
- 1.34 billion internet-related payments (WEB)
- 3.1 billion pre-authorized payments
The conversion of checks into electronic formats will continue. The National Automated Clearinghouse Association (NACHA) just passed a new rule allowing merchants to convert checks accepted at the point-of-sale to an ACH payment in their back offices. This initiative allows merchants to maintain speedy check-out times and attain more efficient methods to electronically switch the checks into ACH payments.
NACHA also is exploring how checks deposited at any financial institution can clear as ACH payments, in lieu of the more costly check image exchange. While there are many issues surrounding notification and providing images of those check deposits, it’s only a matter of time before checks are converted at the point of first deposit.
For credit unions, the ACH growth trend means the process of payments clearing and settlement is becoming more efficient. In other words, payments settlement is accelerating. This could have an impact on your daily funding needs because settlement is occurring more quickly, and may mean less float and investment benefit.
Settlement also is accelerating with the growth in debit card usage, the only payment instrument growing faster than ACH. Consumers like the convenience debit cards provide and merchants like the costs savings offered by PIN debit. PIN debit allows merchants to avoid the high interchange fees associated with credit cards and off-line debits. And, as merchants continue to push PIN debit and file lawsuits, credit card portfolio revenue might be challenged. Greater payment system efficiency means less revenue for financial institutions.
Online Payments: A Future “Must Have”
Yet the most critical trend credit unions must address is the fast-growing (23 percent annually) electronic bill payment market. Savvy financial institutions know they must offer online bill payment in order to protect their primary financial institution status, attract younger and more technologically proficient consumers, and deepen their consumer relationships. These institutions understand that online bill payment is replacing traditional check writing, and they certainly don’t want to lose their primary financial institution status.
Further, they know how to monetize the cost of providing the service. Research has shown that consumers using online bill pay have considerably deeper relationships with their financial institutions. Online bill pay consumers maintain much higher deposit balances, settlement transactions per month and loan balances than non-bill pay users. The differences noted between bill pay users and non-bill pay users can be as much as 114 percent. Therefore, online bill pay users are much more profitable to the financial institution; they consider their online bill pay financial institution their primary financial institution and they are much less likely to leave.
Take Bank of America (B of A), the online bill pay industry leader, for example. They were the first institution to offer online bill pay at no charge. Plus, they’re a for-profit entity, so you can rest assured that this initiative was not developed from some altruistic belief. Instead, B of A was the first financial company to figure out how online bill pay not only pays for itself, but also generates more revenue for the bank through a wider use of its products, as well as higher balances.
B of A continues to provide powerful lessons to us all on how online bill pay drives better, long-lasting and more profitable consumer relationships. They just introduced same-day debiting that debits consumers’ accounts on the day the bill payment is due – which is particularly attractive to those consumers living on tight budgets.
Online bill pay probably is the most crucial service for credit unions to offer in order to retain their primary financial institution status with their members, and to attract younger, more technologically savvy consumers. Let’s face it, younger people have no ties or history with the paper check. They demand convenience in-line and online. To ensure stronger, long-term member relationships, credit unions need to stay update to date with today’s payment trends and position themselves to provide the services that meet the base-line needs of the younger generation.