Disruption in Payments
Where will it come from and how will you prepare?
Credit unions are experiencing pressure from nontraditional payment providers that are trying to position themselves between you and your members. These new payment players are coming up with completely new business models that threaten to disrupt existing business models and payment systems.
It’s not clear yet where the disruption in payments will come from. It could be a company that doesn’t exist yet, or it could be a consortium of existing players. Many companies are jockeying for position to disrupt the traditional payment model—Walmart, Apple, AT&T, Google, Isis, Paypal, Square, Facebook, and many others.
If you haven’t done so already, it’s time to re-evaluate your payment portfolio, infrastructure, and strategies. It’s time to come up with a “Plan B” for when—not if—a new payment model comes along and significantly disrupts your existing business model and interchange income.
Interchange income represents an important source of noninterest income for credit unions. And noninterest income represented 29.3% of total income for credit unions in 2013. Without fees and other income, credit unions’ return on assets (ROA) would have been negative 62 basis points in the year, according to CUNA’s economics and statistics department.
The potential of a significant disruption means relationship building—one of credit unions’ core strengths—has never been more important. High levels of member loyalty will be essential as new competitors offer your members attractive new payment options. Today’s challenge is to deliver the innovative payment products and channels members expect while remaining relevant and profitable.
Members think of their credit unions as safer and more trustworthy than some of these nontraditional payment providers.
Financial institutions offer distinct payment advantages—immediate funds access, heightened risk management capabilities, and more integrated data. But that could all change—and change quickly—as innovative new start-ups reconfigure the payments world in profound ways.
To compete against technology companies, big-box retailers, and social media giants vying for a piece of the payments pie, your payments strategy needs to meet members’ expectations for faster, easier, and more convenient transactions.
Consumers—especially younger consumers—demand immediacy in all areas of their lives. Even email seems too slow for younger consumers. They’ve come to expect the real-time benefits of instant messaging, texting, and social media.
When members have access to instant everything, waiting for anything seems passe. It’s not hard to see why members expect the same instant capabilities—the ability to pay and get paid without waiting—from their credit unions and from payment systems in general. But members are still experiencing wait times of one to three days—sometimes longer—for bill payments, deposits, personal payments, and even transfers.SIDEBAR:
The definition of “real-time” needs to be applied to the duration of the entire payments event, including the movement of funds and funds settlement. The current payments infrastructure was originally designed to authorize plastic cards. As it migrates away from that model, success of the new model will depend on its ability to integrate multiple payments options that provide immediacy and meet regulatory standards.
Delivering real-time payment capabilities to members gives credit unions a competitive advantage, and it also represents a revenue opportunity. Members expect to pay for the convenience of wire transfers and out-of-network ATM services, and many observers believe they’ll pay for the same immediacy when it comes to other services.
Credit unions need to embrace real-time technology to attract new members and strengthen relationships with existing ones. Financial institutions that offer instant person-to-person payment options—in addition to three-day and next-day payment options—see much higher adoption rates among potential users of the service, according to research from Fiserv.
NEXT: Moving to Mobile
Moving to mobile
Rapid technology advances and consumers’ growing acceptance of mobile payments have set the stage for a paradigm shift in mobile financial services. Members will be conducting more routine financial transactions with mobile devices because this channel saves time and is more convenient.
To increase mobile banking’s sustainability and profitability, credit unions will have to invest in the four types of mobile payments, which involve paying:
About 16% of online households made mobile bill payments in 2013—up from about 8% the year before. Smartphone users lead the way, with mobile bill payments among this group jumping 150% from 2012 to 2013. And about 25% of consumers who own tablets use those devices to pay bills through financial institutions, according to Fiserv’s research.
For now, consumers prefer to make payments and send money to others using their financial institutions instead of a specialized third-party. But that might change as more nontraditional players enter the mobile payments arena, including big-box retailers, online payment services, and social media giants.As members move from information-based, mobile banking activities (checking balances) to transaction-based activities (making payments), credit unions need to leverage their existing advantages and assets to retain and strengthen their member relationships.
Some interactions, such as balance inquiries, are shifting to the mobile channel from higher-cost channels, such as call centers. Many of these inquiries represent additional transactions instead of the same transactions moving to different channels. For example, consumers check their balances more frequently via mobile banking than via online banking due to the convenience and availability of their mobile devices.
Tablets, with attributes of both PCs and smartphones, are growing in popularity. The number of U.S. tablet users is expected to reach 130 million people in 2014—a 61% jump since the beginning of 2013, according to a forecast by Parks Associates.
Person-to-person (or “social”) payments make it possible to send money to other people electronically. Social payments let users send and receive money to and from other people using their account numbers, email addresses, or mobile phone numbers.
Research shows that:
More members—especially younger members—think of traditional forms of payment as cumbersome and inconvenient. Those members would prefer to use their financial institutions for social payments, but they’ll be tempted to use third-party services if they offer an advantage.
Product, process, and promotion affect social payment adoption rates. To be successful, your credit union should implement a person-to-person payments service with an extensive, reliable network and infrastructure. This payments service should deliver rich functionality that’s easy to use, fairly priced, and available to online and mobile banking users.
Be sure to put processes in place that address risk and security without sacrificing flexibility in transaction limits and member convenience. Promoting the availability of social payments will give your credit union a significant competitive advantage and will boost adoption rates and profitability. Many financial institutions are marketing social payments as a value-added feature.
The evolution of social payments is far from complete. Whether used for splitting a dinner tab or paying the rent, social payments fill an important need in today’s increasingly digital world. Credit unions that offer and promote social payments will expand relationships and increase member loyalty.
To remain at the center of your members’ financial lives, credit unions must provide the ability to conduct any transaction—on any channel—at the speed members expect in this digital age.
If you focus on real-time, mobile, and social payment capabilities that meet exacting standards for integration and risk management, you’ll remain members’ institution of choice—even in this rapidly changing payments landscape.
Adapted from CUNA’s 2014-2015 Environmental Scan’s payments chapter, written by MARK SIEVEWRIGHT, president of credit union solutions at Fiserv.