What New Payment Players Can Teach Credit Unions

Social media and prepaid cards that function like bank accounts are transforming payment services.

To glimpse the future of payments, credit unions need only look to the 59 startups that raised $492 million in financing for new payment technology, a five-year high, in the first quarter of the year. Clearly, payments are an area ripe for more innovation,with new players flooding the marketplace, and that’s good news for credit unions.

View it as an opportunity to provide customers with valuable and attractive new products and services, says Jason Oxman, CEO of the payments industry trade group Electronic Transaction Association. There are more mobile devices inthe US than there are people in the US.

In fact, financial institutions and traditional payments companies have so much to gain from new technology that they are partnering with startups to improve service.

One of the reasons these technology companies are successful with payments is because the underlying mechanism that funds many of these wallets is a credit or debit account, he says. And credit unions, as issuers of cards, want tomake sure their cards are used.

Many credit unions already partner with PayPal and Google Wallet to offer payment innovations to members, but those players are no longer the new kids on the block. Instead, credit unions might take their cue from the following companies that are makinga play for market share in the payments space. Here’s what credit unions can learn from them.

Embrace The Social Side Of Payments

If PayPal is the compact disk, Venmo is the mp3. It more or less achieves the same result as PayPal, but Venmo builds on mobile payments by combining them with social media like Facebook. Venmo users exchange payments easily and safely with people intheir social circles using a smartphone.

The app, which can be downloaded, and the transactions are free as long as the account is linked directly to the user’s bank account or debit card. Venmo charges a 3% transaction fee to link to a credit card. The payment application, which launchedin March 2012, can be used in connection with Facebook friends and email contacts, making it easy to split checks, share expenses, and send money. If a friend owes you $15 for a concert ticket, you can send a subtle money request through Venmo.

Paypal, of course, also allows users to send and request funds, but Venmo’s value is its simplicity and social features. It takes four taps of an iPhone to open Venmo, select a friend, and send money. The app’s intuitive interface has seta new standard for mobile technology. Venmo has received a 4.5 out of five rating from users who downloaded the application from iTunes or Google Play app stores online.

The Venmo news feed similar to a Twitter or Facebook feed streams charges happening nearby, both yours and those of friends. Similar to Facebook, friends can like and comment on your Venmo activity. Users who don’twant their purchases broadcast to all their acquaintances can choose to hide that activity from the news stream.

One feature Venmo offers is the ability to trust friends. Trusting gives the user permission to withdraw money from another person’s account, a helpful way for couples or parents with kids in college to share funds.

Although broadcasting the amount spent on utilities or to purchase a new toaster may seem peculiar to older adults, Venmo’s social payments platform appeals to a younger generation accustomed to sharing the mundane details of daily life on socialmedia. If credit unions want to attract younger members, the Venmo model offers a potential way to do it.

Tap Into Facebook’s Network

After hiring former PayPal president David Marcus, Facebook founder Mark Zuckerberg announced on an earnings call in July that the social media giant was experimenting with its own payment service. A buy option would allow Facebook usersto purchase items advertised on their newsfeed, transfer funds to another person, or pay bills. Although it’s still unclear how the payment service will work, card issuers like credit unions could benefit if their debit or credit cards are usedfor the transactions.

The buy option is currently in beta testing with a few small and medium-size US businesses, and Zuckerberg himself said the payments feature is far from ready to be rolled out. But when it is, Facebook’s global audience of 1.28 billion users offersone of the largest platforms for launching the new service.

We could take the cheap and easy approach and just try to put ads in and do payments and make some money in the short term, but we’re not going to do that, Zuckerberg said on the earnings call. We’re going to take thetime to do this the way that we think is right over multiple years.

Facebook’s biggest hurdle will be gaining the trust of users. The company has already damaged its reputation by sharing user information with advertisers and changing privacy settings with insufficient notice. For its payment service to succeed,Facebook will need to regain consumers’ trust.

Many payment startups face a similar problem in that potential users don’t know their company well enough to trust it. Even PayPal had to overcome the initial wariness of users, but the company quickly established a well-trusted brand that becamethe payment mechanism for millions of Americans, Oxman says. If Facebook can follow in PayPal’s footsteps, it could become a major player for delivering payments.

Add Perks To Prepaid Cards

Although they were once considered perks, online and mobile banking applications have long since become essentials, and now many of those apps are available on prepaid cards.

With more payment perks than some standard debit and credit cards, the new Serve card from American Express essentially functions like a portable bank account. The full-service, reloadable prepaid card allows free ATM withdrawals at more than 24,000 locationsas well as free online bill pay. Plus, the American Express Serve Mobile App gives users the ability to check the card’s balance and any recent transactions, pay bills, deposit checks, and send money to other Serve card users from a computeras well as a mobile device.

The Serve card doesn’t require a background check or a minimum balance, and can be ordered free online or purchased at participating retailers, including CVS, Duane Reade, Walmart, and 7-ELEVEN. The card costs $2.95 to purchase and $1 a month tomaintain, though the fee is waived if $500 is directly deposited onto the card during the statement period. Users can add between $20 and $500 on the card for free online or at any of the 27,500 participating retailers nationwide. To make a depositat a retailer, the cardholder hands the money and card to the cashier, and the cash is immediately added to the card’s balance.

December 17, 2014

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