Disintermediation In The Time Of COVID-19

How five cooperatives ward off disruptors, an imperative that takes on new urgency now.

 
 

Consumers fearful of direct contact with everything from snail mail to drive-thru receipts are just one example of why credit unions need to pay attention to disintermediation.

That’s the term in the financial services space given to what happens when consumers choose non-bank providers for financial services, especially payments.

As COVID-19 sweeps across the country, credit unions are shuttering lobbies and urging members to use digital channels, opening the door to non-bank competitors promising an easy way to pay without leaving home.

It’s not that credit unions weren’t already responding to disintermediation. The Strategic Resource Management (SRM) consulting firm polled its client base of hundreds of credit unions and banks in late March and found eight out of 10 rated their online and digital channels as “vital” to their operations. The rest chose nothing less than “important.” 

And, 79% of the same group of respondents say they’re educating their members and customers on using the channels, “as a means of providing consumers unfamiliar or uncomfortable with digital channels access to their money and needed financial services during a time of high economic anxiety,” the Memphis, TN, consultancy says.

But the threat of new competition remains. So, how are leading credit unions responding? Here’s what five had to say.

Lisa Larson, Vice President of Payments and Operations, Amplify Credit Union

Lisa Larson has been vice president of payments and operations at Amplify Credit Union ($994.5M, Austin, TX) for the past year. She’s been with the Texas credit union for the past 25 years.

What is the biggest disintermediation/competitive threat to your payments business?

Lisa Larson, Vice President of Payments and Operations, Amplify Credit Union

Lisa Larson: Our biggest competitive threat in the payment business is finding a way to exceed members’ expectations and differentiate our payment products from other payment competitors. 

We compete with the large financial institutions, Amazon, Venmo, PayPal, and many others. These competitors offer seamless ways for our members to transact, so we must be able to offer a convenient, consistent experience; secure, superfast transactions; and a value incentive. 

What are you doing to address those threats?

LL: Our advantage over the payment competitors is the relationships we build with our members. However, this means we must have the products and services they are looking for to keep them engaged. We must create a brand, be convenient, put emphasis on security, be transparent, and offer incentives. 

Amplify recently implemented a three-year strategy that included a payment strategy. We just received the results from a market research on what drives primary checking account product preference among current and potential new members.  

Chris Chippindale, Chief Operating Officer, Canvas Credit Union

Chris Chippindale oversees payments and branch operations as chief operating officer at Canvas Credit Union ($2.7B, Lone Tree, CO). He’s been with the Colorado cooperative for five years. 

What is the biggest disintermediation/competitive threat to your payments business? 

Chris Chippindale, Chief Operating Officer, Canvas Credit Union

Chris Chippindale: Venmo, Zelle, and PayPal are bigger threats than digital-only banks right now. As evidenced by recent events, people of all generations still want to come see us. Although we’ve temporarily shut our lobbies over the past week, our drive-thru volume and appointments have remained high. 

However, consumers do care about ease of use. Whereas we believe the experience at Canvas is both engaging and easy, the disrupters — Venmo, PayPal, Zelle — do a good job making the movement of money easy and quick. 

People are comfortable conducting small- to medium-sized transactions through these services. We know there is risk when those dollars leave us. They might never come back but continue to bounce around in this evolving ecosystem.

What are you doing to address those threats?

CC: We have P2P capabilities through our online banking provider that uses the ACH rails. It’s slower than Venmo or PayPal but does allow for this type of money movement. We continually look at options in the marketplace but have not added anything. The costs and other considerations have not been worth it up to this point when compared to member requests of these services, specifically Zelle. 

Members, of course, can access the other popular ones by linking their accounts and cards. We have the ability to instant-issue debit cards, which is a competitive advantage. We encourage members to set up their card with their online retailers as well and periodically run campaigns to encourage this.

Prepare your credit union's response to COVID-19 using the Ideas In Action: Pandemic Response page, a hub for all of our articles, webinars, and policies concerning the COVID-19 outbreak.

Paul Benjamin, Director of Digital Products, First Tech Federal Credit Union

Paul Benjamin is director of digital products at First Tech Federal Credit Union ($13.1B, San Jose, CA). He joined the credit union in 2015 after five years as the co-founder and product manager of a mobile app startup. 

What is the biggest disintermediation/competitive threat to your payments business? 

Paul Benjamin, Director of Digital Products, First Tech FCU

Paul Benjamin: Societal shifts caused by macro-impacts like COVID-19 will make people question whether they want to replace their physical wallets with digital ones. 

Big banks and credit unions have established infrastructure and financial products, whereas neo-banks and niche fintechs focus on experiential differentiators. Big technology companies — like Apple, Amazon, Google, and PayPal — are pushing the boundaries to dematerialize payments. This creates opportunities and pitfalls, including effortless, seamless transactions and new ways to get defrauded.  

What are you doing to address those threats?

PB: First Tech blends the digital and physical worlds of payments to satisfy members at every life stage. Our cards are enabled in major digital wallets like Apple Pay, and we serve our members through mobile and online channels. We focus on end-to-end service satisfaction, from digitally opening an account to clicking to pay for groceries and securing those transactions confidently.

Eric Leighhow, Director of Visa Services, PSECU

Eric Leighow has been director of Visa services at Pennsylvania State Employees Credit Union ($6.3B, Harrisburg, PA) for the past two years. He’s been with PSECU for 18 years and currently is responsible for credit and debit card operations.

What is the biggest disintermediation/competitive threat to your payments business? 

Eric Leighhow, Director of Visa Services, PSECU

Eric Leighow: Digital payment providers and digital-only banks continue to evolve and target specific revenue segments of our business. Overall, we see more transactions moving to the online/ecommerce space and the roll out of contactless cards. Now more than ever, there’s opportunity to work with fintech providers to offer added value.

What are you doing to address those threats? 

EL: We aim to provide value by having some of the lowest fees in the industry, coupled with competitive interest rates. We offer free checking accounts that pay dividends and a debit card product that pays rewards. And, a balance transfer offer has a low interest rate and does not include balance transfer fees or cash advance fees. 

Erin Mulkins, Vice President of Operations and Payments Services, Rogue Credit Union

Erin Mulkins has been vice president of operations and payments service at Rogue Credit Union ($1.7B, Medford, OR) for two years and has 25 years of experience in the credit union movement.

What is the biggest disintermediation/competitive threat to your payments business?

Erin Mulkins, Vice President of Operations and Payments Services, Rogue Credit Union

Erin Mulkins: The biggest threat I see to our payment strategy is alternative payment methods — PayPal, Venmo, etc. — that use ACH rails or other means that may bypass financial institutions altogether. Although Rogue has seen a very steady, year-over-year growth in our card usage and interchange income, we are anticipating more disruption from these providers in the future.   

A possible scenario is that disintermediation will occur as the alternative payment method delivery companies are able to remove financial services organizations from the payment’s transaction chain. Ultimately, the solutions that allow customers to interact directly with retailers with fewer intermediaries will win, as those solutions will be cheaper for both ends of the transaction. 

Once an alternative payment method can gain enough traction to become more convenient for consumers and gain ubiquity by aligning these services with devices that almost every person in the developed world uses, the need for credit unions and banks as payment intermediaries will most likely decrease significantly. The alternative payment channels are not as popular in our market as in other larger markets, but we’re predicting more usage of these options by our members soon. 

What are you doing to address those threats?

EM: Rogue has loyal members, but it’s imperative we deliver exceptional experiences while enabling them to conduct payment transaction when, where, and how they want.  We plan to focus on educating members about the benefits and protections they receive by using their cards versus other types of transactions. 

We also anticipate an increased focus on our card products from a product management perspective. We will be marrying feature and function incentives to drive usage with analytics to help us develop and maintain strategies for keeping our card products at the top of our members’ digital wallets.

**BONUS QUESTION**

How are you using analytics to identify threats and inform responses?

Erin Mulkins, Rogue: Rogue Credit Union is early in its data analytics journey. We’ll be leveraging our business intelligence team to analyze granular member transaction information to develop new products and benefits for our members. 

We’re currently building models using machine learning analytics techniques to gain deeper insights into multiple aspects of our business and enable the delivery of the right product, at the right price, to the right member, at the right time while managing the associated risks. 

These models combine external macroeconomic and census data with internal member information and years of transaction history to form a basis for analysis leading to more informed insights into member needs.

Chris Chippindale, Amplify: We have a strong BI team that watches our members’ usage of these services. The team has developed a dashboard that shows the volume and number of members broken down by each of the more popular providers. 

We also watch debit spending and have run promotions to encourage members to make their Canvas Credit Union debit card top of wallet at various retailers, including many that take other providers such as PayPal.

Eric Leighow, PSECU: We heavily use analytics to recognize and respond to fraudulent activity,  including recognizing transaction patterns that are abnormal and identifying a common point of card compromise.

These interviews have been edited and condensed.

 

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