Payments Trends May Alter CU Business Model

The CU business model is in jeopardy. The culprit is the payment ecosystem.

May 10, 2012

The credit union business model is in jeopardy. The culprit: the payment ecosystem.

This ecosystem is defined as “a network that moves money between consumer and merchant bank accounts using computers, software, and communication links.”

While the current payment ecosystem is essentially the same as it was 30 years ago, we now stand at an inflection point where a new wave of innovation is approaching that threatens to undermine the very financial intermediaries that made the payment ecosystem what it is today—intermediaries like credit unions.

In the short term, the regulatory environment governing the payment ecosystem will have a sharper and more dramatic impact on credit unions (think the Durbin Amendment and the CARD Act). However, other trends have the potential to alter your business model more dramatically over the next decade.

What can credit unions expect and how can they compete for what's next in payments?

First, let’s look at the major trends affecting the payments ecosystem:

1. Consumers are going mobile. As of January 2012, according to comScore, 101.3 million consumers had a smart phone.

Smartphone penetrationAs anyone with one of these devices can attest, the utility of smart phones is magical, life-changing, and habit-forming. These devices can change how we pay for things.

2. Consumers are always online. Smart phones and tablets now far outnumber desktop computing devices. These mobile devices, paired with the ubiquity of online connections, transform the business model of payments and other facets of a consumer’s life.

For example, Square, a unique hardware/software solution, allows merchants and individuals to use their iPhone as a credit card acceptance machine.

3. Cloud computing. The cloud is a metaphor for a powerful new means of computing and conducting business. The cloud enables rapid software deployments that disrupt traditional service business, like payments.

The next new killer app that radically changes payments can now be deployed with the simple touch of a screen by millions of consumers.

4. Data mashups. Data hold tremendous value, especially when combined with other data sources. Pair the growth of powerful mobile devices with ubiquitous Internet connections and cloud computing and you've got an entirely new business model.

Google exemplifies a company that profits handsomely from data mashups.

What should CUs do?

These trends are pronounced and impactful. But what should credit unions do in the context of the future of payments?

1. See how these trends point to an inflection point in how payments are conducted (click here to read a good article on this topic).

Like other industries transformed by similar digital trends (travel agencies, music publishing, book publishing, etc.), financial firms should be concerned about payments.

To succeed, credit unions will likely need to collaborate with each other and with specialized vendors to determine how they’ll position themselves for coming payment industry changes.

Examples of payments consortia already coalescing is ISIS, a collaboration between AT&T, T-Mobile, and Verizon.

2. Determine how credit unions could monetize the value of members’ transactional data.

Rich, cloud-based software gives credit unions the tools to easily gather and analyze member data. Credit unions could mine their own data for purchasing trends and, if appropriate, purchase additional external information to create a more complete picture of member information and preferences.

The data could also be used to create partnerships with local merchants—e.g., “We can prove that our credit union’s members buy $50,000 worth of coffee from your shop each year. Give them a discount and help drive higher sales.”

Of course, this approach has many potential privacy, regulatory, and business model roadblocks.

3. Keep up with the trends by reading Filene Research Institute's resources on this topic and aggregator websites such as and

With a significant portion of credit unions’ noninterest income derived from the payments ecosystem, you owe it to your members to be prepared for what’s next in payments.

GEORGE HOFHEIMER is chief research and innovation officer for the Filene Research Institute.

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