According to British naturalist and biologist Charles Darwin, “It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is the most adaptable to change.” While intended to support the science of evolution, credit unions today can take it as evidence of their unique qualifications to successfully compete against big banks in today’s evolving payments landscape.
The payments landscape looked much different in the not-too-distant past. Within the last decade, consumers were primarily paying other consumers with cash and checks, while paying merchants with cash, checks, and cards. Fast forward to just a few years ago and a much different picture emerges. A class of fintechs has materialized with varying focuses ranging from mobile payments to loyalty. The rise of these non-traditional players has many financial institutions concerned.
Taking advantage of these shifts is where the industry is headed. If credit unions were to size up their competition, they would see that big banks have deep pockets and seemingly unlimited resources. However, what the big banks lack is the ability to quickly innovate and adapt to the rapidly changing landscape. Credit unions are uniquely positioned to be more nimble and respond quickly.
Let’s take a look at three key areas credit unions should consider when it comes to the future of payments:
People all over the world are trying to crack the code of executing payments as quickly as possible. One of the leaders in this area is the United Kingdom, which uses a new core bank transfer system to facilitate real-time “push payments.” The main platform for facilitating these push payments, Vocalink, is now owned by Mastercard. Early indications point to the possibility of Mastercard leveraging this capability in some of its domestic products, but that remains to be seen. Launched in the U.K. in 2018, Vocalink is now used for over a billion payments per year.
In the U.S., there are currently many different options for faster payments — including Same-Day ACH, Visa Direct, Mastercard Send, Zelle, Venmo, Square Cash, PayPal, and even Western Union. The Federal Reserve recently announced its intent to develop a real-time payment and settlement service, FedNow. The upside: plenty of options. The downside: credit unions are forced to choose whether to go all in on the one or two options they think have the most potential or try to support all of them.
There are pros and cons when it comes to faster payments. From the sender and receiver standpoint, funds move instantaneously. However, credit unions should keep in mind risks including credential theft, address fraud, commerce fraud, non-fulfillment risk, payer error, and administrative error. These risks put the onus on the credit union to make sure it takes the appropriate steps to validate the sender and ensure funds are being directed to the correct recipient.
In-App Digital Payments
In an effort to leverage the mobile wallets many consumers already have, in-app digital payments are becoming more widespread. This move directly supports the multi-channel strategy being deployed by major merchants, and it offers consumers convenience and enhanced security. By using the tokenized mobile wallets already found within mobile phones, in-app digital payments are ready to go without having to wait for NFC (near-field communication) or contactless-enabled terminals that are normally required for mobile wallets. This market is broader than just traditional retailers — hoteliers, airlines, sports venues and more could all stand to benefit — and some merchants are already seeing much higher spend per purchase on these types of transactions.
China is a great example of the potential represented by mobile payments. Alipay was created to help execute payments in China, where few people had credit cards, followed by WeChat Pay. In total, these two platforms are conducting almost $15 trillion in mobile payments a year, compared to just $112 billion in mobile payments in the U.S.
On the in-store side of digital payments, the field is fairly even when it comes to mobile wallets. All the major players are utilizing tokenization through Visa and Mastercard. Biometrics like thumbprints or face ID are used for authentication, as opposed to PINs. For a time, there was a bit of a debate over whether to utilize QR codes, but now nearly everyone except Samsung Pay has settled on NFC. It is now up to consumers to decide which option they want to utilize.
Amazon Go is an interesting example of retail digital payments. While locations are extremely limited for the moment, Amazon Go stores are automated, enabling customers to purchase products without being checked out by a cashier or using a self-checkout station. Another example is Uber Ride Now, which will look to see if users have a mobile wallet in their phones. If they do, it will ask which of those cards they would like to use for their Uber ride, eliminating the need to upload separate card information into the Uber app.
The Future Of Payments
While much has changed over the last 10 years in terms of how we execute payments, any card-based transaction still needs to be routed through a payment processor and ultimately to a financial institution. This means the key consideration for credit unions is to make sure they are getting the transaction. Regardless of the application being used to facilitate the payment, achieving top-of-wallet status should be the primary objective.
When something new is introduced, we can often find reasons to discount it. Credit unions should try to look at things a little differently, embracing some of the new advances and leveraging them to benefit their credit union and their members.
Kent Potterton is VP, Partner Channel Management for Solutions at PSCU. He has been with PSCU for nearly 15 years in the areas of product management, new product development, and solutions consulting. With nearly four decades of financial services experience, he interfaces closely with PSCU’s current and prospective Owner credit unions about PSCU’s card processing capabilities and is a frequent speaker at industry conferences and events.