What’s the Future of Loan Payments?

There are notable generational differences regarding e-payment adoption.

August 2, 2012

When members make loan payments, they expect a variety of options. Increasingly, they’re making payments electronically.

According to Aite Group, the average U.S. household pays 12 bills per month, totaling roughly $18 billion per year. Credit card, mortgage, and auto and student loan payments represent the majority of those bills, with more than 50% now paid electronically.

There are notable generational differences regarding e-payment adoption. Younger members, particularly Generation Y (those born between 1983 and 1995), show a much stronger preference for online bill presentment and payment than other groups.

As electronic payment adoption has grown, different consumer behaviors have also emerged, categorized by four types:
1. Convenience seekers: Members who want to make bill pay a low-effort experience;
2. Payment avoiders: People who are casually or habitually late in their payments;
3. Refund receivers: These are e-payers when their financial institution owes them money (e.g., a cash-back program); and
4. Relationship builders: These members make e-payments each month and expect the credit union to remember their preferences.

Credit unions should aspire to convert members into relationship builders, as they’re more likely to engage in the most cost-effective behaviors such as paying early in the pay cycle, suppressing paper, and setting up recurring payments.

There are proven strategies to help credit unions convert more members into relationship builders, such as actively promoting the benefits of enrollment while not requiring it and clearly articulating the security of the payment experience.

When a member enrolls in electronic payments, the process should be as streamlined and effortless as possible. Credit unions should also recognize that members’ e-payment preferences can change from time to time. In fact, 23% of e-payers report changing their behavior in some way each month.

For instance, a typical relationship builder may temporarily change to a convenience seeker while on vacation, so it’s paramount that credit unions have solutions in place that recognize members and their payment histories and preferences across channels.

The growing impact of mobile

The mobile channel continues to gain momentum. Canalys, a technology research firm, reported earlier this year that there were 73 million more smartphones sold than PCs during 2011. It is also predicted that mobile commerce will grow at a rate of 39% each year, reaching $31 billion by 2016.

This makes it imperative for credit unions to implement a mobile payment application to remain competitive. Members of Gen Y, in particular, are twice as likely as the average consumer to be mobile bankers.

Mobile should benefit credit unions in two ways: higher member satisfaction from existing e-payers who switch from another channel, and member adoption and growth.

The industry is also seeing a “mobile triple play,” whereby some mobile payers prefer a downloadable app for their smartphone, others prefer to use a mobile browser version of their website, and still others prefer to use SMS text.

Providing all of these options, and the ability to switch between them, will ensure your credit union meets all of your members’ needs.

To build or not to build?

To respond to payment trends, credit unions must determine whether to build a flexible, seamless payment system in-house or invest in an outsourced system. Many credit unions have internal information technology (IT) departments that might be capable of managing a complex system conversion.

Adding each new capability is doable, however, internal IT departments often fail to realize the overall impact of multiple, disparate legacy systems. It’s often more cost effective to work with experts who are skilled in this arena.

Working with a proven outsourcing organization can accelerate payment innovation and solution delivery. It eliminates the need to maintain internal expertise and ensures technologies will meet the changing financial environment.

In addition, having an experienced team to implement your technology solutions minimizes your effort to offer a full suite of services. Total cost of ownership is reduced, best practices learned from other billers are leveraged, and deployment and operational risk are reduced.

While outsourcing has its benefits, it’s important to understand how to manage the outsourced relationship. Credit unions must ensure the experts have consistent multi-channel experience and can complete the entire project.

This makes for fewer vendor relationships, contract administration, and IT connections to manage. It also allows for a single system of record, streamlined reconciliation, and reporting.

Whether credit unions build in-house systems or outsource, the changing payments landscape has made it imperative to maintain a flexible electronic billing and payment system designed to meet members’ needs, as well as internal needs.

Those that do will increase member satisfaction and lower costs.

BILL KINNELLY is senior vice president, product marketing, for Online Resources Corp.