A New Payments Paradigm

Where will CUs fit in this new era of service delivery?

March 5, 2014

The rapid adoption of mobile devices and the brisk pace of innovation are changing consumer behavior in ways that are shaking the foundation of financial services. Payment systems are undergoing a drastic transformation—some even call it a revolution. It will dramatically transform the concept of banking, much like the Internet transformed the branch.

Mobile payments reached $1 billion in 2013 and are expected to explode to $58 billion by the end of 2017, according to Javelin Strategy & Research.

“History has shown that new payment systems arrive and old ones decline but don’t disappear,” says Paul Fiore, CEO of CU Wallet, a credit union-owned venture offering a complete mobile payments platform.

“Our current payment methods will seem antiquated 10 years from now,” says Fiore. “It will seem odd that we once embossed numbers on plastic cards, gave those cards to complete strangers such as waiters, performed no authentication, and asked for signatures but never validated them.”


Given the lack of security and efficiency, it’s easy to understand why merchants are considering current technology options as a replacement for the systems and equipment introduced decades ago. A point-ofsale, touch-screen system once costing $5,000 per terminal can be easily replaced today with a cloud-based tablet system for less than $100 per terminal.

But are consumers ready to make the leap to the new systems and the opportunities they offer? Given the right incentives, Fiore believes so.

“Initially, merchants will offer incentives to consumers to use new payment systems such as mobile apps,” he says. “And they’ll place surcharges on more expensive, less efficient methods such as plastic cards.”

Although the offer of incentives can be motivating, a look at current consumer behavior suggests consumers are more inclined to adopt mobile banking than mobile payments. Experts attribute this to the lack of established standards for the payments industry, its complexity, security concerns, and terminalization issues with merchants.

“As merchants, processors, and telecommunications companies battle for dominance, consumers are reluctant to use mobile payments until some standardization emerges,” says Fredda McDonald, executive vice president and chief creative officer at PSCU.

McDonald points out, however, that consumers have embraced mobile banking. She sees it as the platform on which mobile commerce will be built.

“Mobile banking will familiarize customers with mobile transactions,” McDonald says. “It will be instrumental in establishing the new mobile baseline.”

Caroline Willard, executive vice president of markets and strategy for CO-OP Financial Services, also acknowledges the lack of standardization but recognizes the still-to-be-tapped potential that mobile payments will exert on the industry.

“Payment solutions for consumers is a fragmented market,” she says. “There is no clear winning approach or leader, particularly in the area of mobile payments. But as soon as the kinks for mobile payment apps are worked out, usage will increase.”

The mobile mandate

The percentage of American adults with an Internetenabled smartphone reached 56% in 2013, according to a Pew Internet & American Life survey. With more consumers using their tablets or smartphones to manage finances, the demand for more sophisticated mobile apps will grow.

Fiore says it’s important to think of a payment transaction in two ways: “The promise of a successful payment [settlement of money], and the value-added services for consumers and merchants that can become part of the payment transaction.”

Mobile apps that are limited to only managing accounts will eventually prove their inefficiency and grow obsolete.

“In the very near future, perhaps even this year, the mobile channel will eclipse online for transactional banking,” McDonald points out. “This surge in m-banking poses some challenges to credit unions who might not be offering m-banking apps of sufficient quality and functionality. And consumers have very little patience for apps that don’t work as expected.”

Credit unions will have no choice but to offer mobile solutions just as they needed to offer online banking solutions, ATM networks, and POS networks for debit cards, says CU24 President/CEO Mansel Guerry.

“Mobile applications will become a fundamental requirement for financial institutions,” says Guerry. “In the near term, mobile apps will help you reach key demographic groups. Eventually, everyone will want those capabilities. Singular applications, however, won’t be enough.”

NEXT: It's about the data

It’s about the data

Mobile apps that are purely informational will go only so far. “Transactional apps that combine both information and ecommerce represent the larger value to consumers,” Guerry says. “On the back end (financial institutions, merchants, carriers, and marketers), the focus will be on leveraging the behavior and activity data to add value and inform marketing activities.”

The real value of the transaction resides in the data; the payment itself is simply a commodity, says Guerry. “Credit unions will need to organize, understand, and leverage this data to provide added value to both the member and the credit union,” he says. “Credit unions shouldn’t ignore or dismiss the value of this data. They need to digest it and use it to improve the value proposition to the member.”

“Mobile banking solutions need to be part of a credit union’s entire range of mobile engagement,” says Willard. “Credit unions need to be thinking beyond payment services to marketing opportunities via mobile platforms.”

Mining this data while keeping it safe continues to be a daunting—and essential—task. More than half of respondents to a recent CUNA survey of smartphone users say they use their mobile phones to make payments. And nearly 92% of those smartphone users say “ease of use” is the greatest benefit of mobile payments. But more than three-quarters of respondents say security is their most serious concern.

In his book “Digital Bank,” Chris Skinner looks to the “Internet of things” as the next big wave of change and opportunity that will affect banking.

The “Internet of things” refers to Internet communication— both wired and wireless—that will be enabled through an embedded microchip in everything from cars to watches. It’s in this world, where everything is connected and can trade and transact, that Skinner sees huge opportunities for banking because it will enjoy an unparalleled and unprecedented view of human behavior.

Making payments via smartphones, whether that involves bitcoins or dongles, produces vast amounts of consumer data that will become accessible to financial institutions. Mining and analyzing that data will radically transform the current banking paradigm.

Traditionally, the trust guarantee in banking has been to keep your money safe, Skinner notes. In the future, the trust guarantee will be to keep our data safe. Assuming financial institutions get that level of trust, Skinner suggests that data will replace the currency they now store in their vaults.

The data vault

Banking is ripe for a technology revolution, but it hasn’t occurred yet, according to Jignesh Patel, professor of computer sciences at the University of Wisconsin- Madison. “A lot of the technology in banking is far behind the rest of the technology field in terms of optimizing the efficiency with which that network moves,” he says.

His biggest concern, however, reaches beyond security and to the exorbitant amount of data that’s accumulated from consumer behavior through smartphones, geo-tracking, and social media.

“I don’t think people understand how much data they’re giving away as consumers,” he says. “I think if they realized what they were doing, they’d behave differently.” Patel says it all comes down to education.

If unbridled personal information is going to become the new currency in the future world of financial services, then member education and data security should top a credit union’s list of priorities as it forms its own payments strategy.

“Credit unions have a unique advantage and therefore a great opportunity to connect with a new generation of members who share their core values of service and community,” says PSCU’s McDonald. “Credit unions have a high trust factor in their communities.”

“If it’s done right, members will benefit and even welcome the opportunity to save time and money,” says CU Wallet’s Fiore. “Credit unions can begin with simple programs to present mobile offers on behalf of reputable merchants, earning revenue and determining if they’re striking the right balance between privacy concerns and providing value to members. Mobile apps make it easy for inpidual members to opt-out of any such promotions if so desired.”

While the trust factor gives credit unions a distinct advantage, it also hands them a great responsibility, not just in the way they provide member convenience, but also in the way they manage members’ data.


WALT LASKOS is Credit Union Magazine’s editor-in-chief. Contact him at 608-231-4225 or @waltlaskos.