Mobile Payments

The single greatest opportunity—and threat—CUs will face in the foreseeable future.

June 1, 2013

Despite their rapid growth, mobile payments still represent a relatively small portion of the total U.S. payments infrastructure: Only 6% of smartphone users have made payments using this device.

But even though mobile payments represent a relatively small share today, the earnings potential makes this an important technology for credit union executives and boards to understand, either developing this expertise internally or through third parties.

Mobile payments offer credit unions a way to retain members—who could opt for other financial providers for the mobile opportunity alone—and realize significant revenue by partnering with retailers. Plus, mobile payments offer some security controls not available through other payment forms.


But mobile payments aren’t just about payments. The technology can increase a credit union’s overall value by building a member relationship management database where members are known and can be contacted before, during, and aft er each payment.

Armed with this data, credit unions can leverage mobile payments to:

The strategic issue revolves around where you want this functionality to reside. Do you want it under your control in your own app, or under the control of unauthorized third parties?

The key strategic point here is that the one who enrolls is the one who controls.

Retailers take the lead

The proliferation of smart devices makes the mobile payment a simpler, more engaging option than fumbling through a wallet for payment cards and loyalty cards. Mobile payments give consumers the ability to have payments, loyalty information, digital coupons, and other information all in one location.

Studies show that consumers are more likely to leave their wallets at home than their mobile phones. The mobile device is always handy and easy to use with a mobile payment app.

As a result, consumer demand for mobile payments is off the charts, as evidenced by the success at some retail locations.

The most dramatic case of the quick uptake of mobile payments isn’t at a financial institution but at Starbucks. Since rolling out mobile payments in 2011, Starbucks has enrolled more than six million customers in its mobile payments program.

This is the most successful launch of a new payment type in history. By March 2013, Starbucks was doing 2.3 million mobile payment transactions per week.

Starbucks’ mobile app uses a QR code that identifies each customer. When scanned at checkout, the QR code deducts the payment from the user’s prepaid Starbucks account.

Such a system helps ensure loyalty as the customer continues to keep the account active. It also negates any need for the merchant to have a terminal with near-field communication (NFC) technology.

Only a small percentage of point-of-sale terminals have NFC capabilities today, which presents a problem for some mobile payments providers. Moving payments from the terminal to the cloud, however, solves this problem.

In August 2012, Starbucks took a $25 million financial stake in the payments provider Square, and Starbucks CEO Howard Schultz was appointed to Square’s board of directors.

Starbucks is the largest of the estimated 250,000 merchants using Square’s mobile wallet. The merchants have about three million customers using the Square mobile payment app.

Other retailers have also been much more aggressive than financial institutions in developing and launching mobile payment apps. Following Black Friday, eBay and PayPal reported 153% and 193% annual increases, respectively, in mobile payments.

Square is piloting a mobile app that lets consumers click on a participating retailer’s icon on their mobile phone before walking into a store. The app then sends the consumer’s account information and photo to the screen on the cash register. The clerk can then use the photo to verify identity and authorize payment.

PayPal and Google Wallet are working with Discover Card to couple the mobile payments with a plastic card. This enables the use of electronic wallets with merchants that don’t have NFC-enabled terminals.


Merchant Customer Exchange (MCX)—a joint venture of Target, Best Buy, Walmart, and several other national merchants—is developing its own mobile payments platform, which will enable the participants to operate their own payment system and avoid interchange fees.

NEXT: Banks enter the fray

Banks enter the fray

Even though retailers are leading the charge into mobile payments, some financial institutions aren’t far behind.

Bank of America, for example, is enrolling 10,000 customers a day on its mobile banking app, and has 12 million users. U.S. Bank launched its own mobile payments wallet in December 2012, allowing mobile device owners to apply for the U.S. Bank Go Mobile payment service.

Customers are provided an iPhone case containing an NFC chip with their U.S. Bank Visa card credentials, allowing mobile payment at any Visa Pay- Wave terminal.

Some financial institutions are piloting a whitelabel solution (one that’s produced by one company and marketed by another) developed by Paydiant that enables mobile payment from any smartphone and requires no new hardware at the POS. Payment credentials are securely stored in the cloud and linked to the mobile banking app for a financial institutionbranded, seamless, and secure customer experience.

Rather than presenting the payment credential as a code, the phone reads the transaction code at the POS and executes the transaction in the cloud, eliminating any Payment Card Industry Data Security Standard concerns.

Mobile payments can allow financial institutions to collaborate with merchants for additional benefits. Cross-pollination enables financial institutions and merchants to share consumer information that provides a more complete picture of customer preferences, financial sophistication, or demographic background. That way, both parties can make more targeted offers.

Remember the key strategic point from earlier: The one who enrolls is the one who controls.

If the merchant enrolls the customer in the merchant’s mobile payment app, the merchant controls the customer experience, including which financial institutions it will work with. But if the credit union enrolls the member, the credit union controls the relationship.

Credit unions also can tie in mobile payments with mobile banking, cardless access to ATMs, and other technologies for additional member convenience. Each channel can reinforce the others because mobile is the cross-channel enabler—it’s present in every other channel.

By aggregating inside its own mobile app, credit unions can benefit from increased spending and the opportunity to advertise and bring in new members. Credit unions can also better understand members’ wants and needs, offer incentives, provide direct and complementary advertising from mobile app partners, and broker connections back to partners from a position of strength.

The mobile advertising and gross revenue opportunity is two to three times greater than the gross revenue available from card-based accounts, and at least five times greater than the revenues available from a simple demand deposit account—a critical factor to consider as credit unions look for additional sources of revenue.

Mobile payments can work for a credit union or against it, depending on who controls the user interface and data. By enrolling members in mobile payments, credit unions have the contact information and data on the member’s spending habits, which helps them offer more targeted messages.

If the merchant or another third party enrolls the member, however, those targeted advertising dollars become potential costs to the credit union, not benefits. The result is incremental revenue if the credit union enrolls the consumer, or incremental cost if the credit union wants to advertise to the consumer who’s enrolled by another party.

And mobile payments can provide an additional layer of security that other forms of electronic payments don’t: identification of the device using one or more unique data elements and the location of the device, as well as multifactor authorization.

Google Wallet mitigated some of the risks and costs of NFC payments when it moved its mobile wallet to the cloud in 2012, storing credit card credentials there. This keeps sensitive credentials behind the firewall of the cloud, rather than on the mobile device itself.

NEXT: Strategy integration

Strategy integration

Credit unions thinking about increasing their involvement in mobile payments should consider their:

An inflection point

Credit unions find themselves at an inflection point in the payments industry.

New technologies have made it possible to replace the current payments infrastructure with mobile devices and low-cost, off -the-shelf hardware and open soft ware solutions.

This inflection point creates an opening for credit unions to redefine the payments infrastructure in a way that eliminates or reduces third parties’ control over the infrastructure deployed in their members’ hands and used at retail locations.

As credit unions help redefine payments, they can reduce costs, increase new revenue streams, and create a better experience for their members.

Adapted from the 2013-2014 CUNA Environmental Scan Report.

RICHARD CRONE is CEO/founder of Crone Consulting LLC. Contact him at 650-740-5239.

HEIDI LIEBENGUTH is managing partner at Crone Consulting LLC. Contact her at 650-740-5253.