The growing number of payments options provide both a threat and opportunity for credit unions.
Credit unions cannot rely on deposit accounts to protect transaction revenue any more. Instead, they must observe, accommodate, and reward member activity.
Competition for the payment transactions at the center of every credit union’s financial viability is changing and growing. Just last week, the OCC granted its first national bank charter to a fintech, Varo Money.
The startup says the charter, although conditional for now, will pave the way for it to become the first fully licensed, mobile-only bank in America. Other threats include Venmo, Amazon, and the Target REDcard, just to name a few.
Some of these challengers offer partnership opportunities either formally, like Zelle, or by extension like the other P2P offerings that require a depository account. That includes all the Pays, Apple, Google, and Samsung to name but three.
Other new payment options disintermediate entirely. For example, Target’s debit REDcard takes funds directly from a checking account via ACH, preventing the cardholder’s financial institution from earning interchange income.
Each option poses its own challenges to credit unions seeking to preserve their interchange income and hang on to their status as primary financial institution and holder of the deposit account.
CU QUICK FACTS
Wright-Patt Credit Union
Data as of 06.30.18
HQ: Beavercreek, OH
12-MO SHARE GROWTH: 15.3%
12-MO LOAN GROWTH: 12.3%
So, what to do? One big Midwest credit union is staking its claim as a front-runner. Wright-Patt Credit Union ($4.3B, Beavercreek, OH) supports multiple mobile wallets and was the first financial institution in the nation to support the Apple Watch.
The Dayton-based credit union began offering P2P payments in 2014 as part of its conversion to the Digital Insight platform and expects to begin offering Zelle next year.
Wright-Patt is also looking at emerging payments players like Facebook and keeping up with advances in blockchain and card enhancements. That includes card proximity security, in which a card won’t work unless it’s close to a phone or other designated security device.
Darrick Weeks, Chief Operating Officer, Wright-Patt Credit Union
We see fragmentation as the biggest threat in the market right now, says Darrick Weeks, Wright-Patt’s chief operating officer for the past eight years. It seems like every day I read about a new market entrant in the payments space. We’re responding by watching closely and being a fast follower.
For Wright-Patt, payments is part of its overall service strategy, just like branches, the call center, and digital.
Our service delivery strategy is key to our success, Weeks says. It’s how we serve our members. We want to meet them where they’re at, which means making sure they can do business with us how, when, and where they want.
That member-centric approach jibes with Jenn Addabbo’s perspective as a consultant with CU Engage. According to Addabbo, credit unions must reinforce their values while leveraging technology to deliver on their promise and succeed in this market.
Members who get the service they expect, including up-to-date delivery channels and generous usage rewards, will reward the credit union by keeping their primary checking account as the funding account for P2P and interchange-producing transactions, Addabbo says.
Strategically, that means using new payments tools because they add to the quality and depth of service a credit union can render, not just because the technology is there. It also requires having a holistic payments strategy in place and designated staff to think about and execute on that strategy.
Addabbo and another veteran credit union consultant say that’s often not the case.
I don’t see payments as a high-enough priority at many mid-size credit unions, says Scott Butterfield of Your Credit Union Partner, whose clients tend to fall in the $100 million to $300 million range. My message to them is that, given the rate of change, there should be a technology theme in their strategic planning.
Butterfield, who conducts approximately 50 planning sessions a year, says a great way to start is to stay current on who the competition is and what they’re doing and to concentrate on growing earnings to the point where they can pay for expanded payments offerings.
I’m a strategic planner, not a payments guy, but it’s pretty clear there’s a risk in being too slow and too far behind, Butterfield says. That’s especially true with the millennial generation and those behind them.
Even keeping the checking account might not be enough, as younger consumers eschew cash and checks for payment options that cost credit unions balances and transaction fees.
An informal Callahan office poll digs into the differences in attitudes about paper payments across the generations. See the poll results in What’s In Our Wallet?
No Wallet. Big Problem?
CU QUICK FACTS
Data as of 06.30.18
HQ: Milwaukie, OR
12-MO SHARE GROWTH: 1.7%
12-MO LOAN GROWTH: 14.2%
That’s the situation faced by Providence Federal Credit Union ($140.2M, Milwaukie, OR) and its chief operations officer for the past two years, veteran credit union technology strategist and app developer Brett Wooden.
Wooden’s credit union primarily serves employees of Providence Health Services, a national healthcare provider with major facilities in Oregon and Washington. Many of those members are nurses and doctors and other round-the-clock staff who bank at odd hours.
Our busiest time for online loan applications is 10 at night, Wooden says. Many don’t carry wallets, and they use their hospital badges to swipe at the in-house Starbucks, gift shops, cafeterias, and lunchrooms.
Brett Wooden, Chief Operations Officer, Providence FCU
Those funds come directly out of the staff paychecks, bypassing the credit union and every other financial institution completely.
In response, Wooden is working on an app that will allow members to scan their phones at the point of sale. Additionally, the credit union will deploy ITMs to supplement the three branches it now has in Providence facilities. Wooden hopes to take that concept across the organization’s nationwide network, which will require an expansion in the credit union’s field of membership, an effort that’s underway.
Wooden does not see his sponsor’s badge-swiping service as competition. In fact, Providence FCU employees are Providence employees themselves, and he sees strengthening the credit union’s payments and other service options as a way to strengthen the partnership itself.
What he does see as competition flying under the radar are merchant-branded apps that provide easily secured transactions that avoid interchange and are easily re-loaded. He pointed to Fandango and Panera Bread as examples. Others are grocers like Kroger that offer incentives to consumers to use a store-issued credit card to fund the app.
So how can credit unions respond?
Watch consumers in their environment, Wooden advises. See how they spend their money. Then design your response to be there when they do that.
To watch consumers in their environment does require an understanding of that environment, and the payments space is complex and diverse.
Mark Sievewright, the veteran consultant and former Fiserv credit union division president, looks at the payments space as three layers.
- Foundational blocking and tackling. Harvest what’s in your backyard, Sievewright says. Some clients put strong marketing initiatives around activation of payments products. Those are the programs that provide revenue and stickiness from the ground up.
- The middle layer. These are the new entrants who compete for the existing business. Zelle is expected to top $100 billion in volume this year, easily rivaling its middle-layer rival Venmo, Sievewright says. The Target REDcard is another good example. Sievewright says 33% of payments on it are not producing interchange. Instead, they come directly from consumer accounts as ACH items. This is an area to compete in with rewards and other incentives.
- New technologies. New technologies for artificial intelligence, biometrics, analytics and more are going to influence payments over the long haul. Throw blockchain in there, too, Sievewright says, with the caveat that distributed ledger technology is not yet seeing mass applications the way those other new technologies are so far.
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Keep An Open Mind
Longtime payments specialist and consultant Glen Sarvady at 154 Advisors in Atlanta, GA, says to keep an open mind about new entrants in the payments space. Consternation about the OCC approving fintech charters might be premature and even misplaced, he says. The former CheckFree and Deluxe Corp. executive says he hears there aren’t a lot of applications flooding in, and he has a theory why.
These fintechs are not banks, Sarvady says. A lot of them are probably thinking, Why would I want to get mixed up with that?’
Fintechs and financial institutions might instead find themselves gaining a new appreciation and appetite for engagement for what the other can bring to the table. For example, what if a credit union could get involved with something like SimplyCredit, a service that sets up automatic transfers from high-interest department store and other credit cards to a lower rate at community financial institutions?
It’s ingenious, says Wooden, who’s looking at SimplyCredit for his Oregon-based credit union.
Keep On Learning
Big picture, the deployment of billions of new devices connected to the internet will enable the mobile payments explosion long predicted to finally take place, says former Fiserv exec Sievewright. He sees the possibility of a great marriage between payments and digital banking if those things can co-exist in the same app.
Just one example: Techy members today can already use Alexa to do things like pay bills and transfer money. Credit unions that want to keep those payments need to pay attention to the market and work with other credit unions and vendors that get it, too.
Also read: Alexa, How Does Numerica Do Payments?
The best advice is to be educated, says Addabbo at CU Engage. Don’t continue with what you’ve always done because that’s all you know. The market has changed. The vendors have changed. Credit unions owe it to their membership to continue to learn and evolve.