TURMOIL IN PAYMENTS - CU TodayTurmoil+in+Payments.pdf · TURMOIL IN PAYMENTS ... “warm handoff”...
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TURMOIL IN PAYMENTS Keys to Credit Union Success
Transcript of TURMOIL IN PAYMENTS - CU TodayTurmoil+in+Payments.pdf · TURMOIL IN PAYMENTS ... “warm handoff”...
TURMOIL IN PAYMENTS Keys to Credit Union Success
KEY TOPICS
▸ Overview of the payments market landscape and economics
▸ Ecosystem stakeholders–strengths, weaknesses, motivations of each
▸ Consumer priorities–changes in behavior given tech evolution
▸ Key Credit Union considerations for Apple Pay, other digital wallets
▸ Technology scan–key factors to consider, including fraud/security
▸ The path forward–opportunities for Credit Union collaboration
The traditional FI economic model remains under attack
▸ Little sign of interest rate environment returning to the “old normal”
▸ Interchange revenue under downward pressure, especially debit
▸ NSF/Overdraft revenue down more than 40% from 2009 peak
▸ Regulatory burden (and uncertainty) complicates the creation of new revenue streams to replace declining ones
» Consumer expectation of free for new services is another hurdle to overcome
▸ Value is increasingly viewed as residing in the information surrounding the payment, rather than in the payment itself
» Many market entrants show willingness to give away services FIs typically charge for, in pursuit of adjacent value streams
3.0
3.5
4.0
4.5
5.0
20141984 1994 2004
HISTORICAL NET INTEREST MARGINS (%)
COMMONLY CITED FEE INCOME OPPORTUNITIES
▸ Increased market share for debit/credit spend ▸ P2P, expedited payments ▸ Real-time payments, Same-Day ACH ▸ Courtesy fees ▸ Reloadable debit cards
Payments are critical to Credit Union P&Ls – particularly in a low rate environment
▸ PAYMENTS ARE A $290 BILLION BUSINESS
▸ Most Credit Unions report generating >50% of their non-interest income through payments
HOWEVER…
▸ Payments rank in the middle of the pack among Credit Union strategic priorities
▸ This may be because few Credit Unions perceive member willingness to pay for new services
0 1 2 3 4 5 6 7 8 9
Members expect all new payments features/online capabilities to be free
Opportunity to bundle innovativefeatures into a monthly fee
Significant fee revenue opportunityfor value-added features/services
0 1 2 3 4 5 6 7 8 9
Membershipgrowth
Loangrowth
Improvedchannel delivery
Measurablevalue to members
Compliance/Security
Asset growth
Payments
Expandingfield of membership
Mergers
RANK YOUR STRATEGIC PRIORITIES (1=most important, 9=least important)
Source: Filene Credit Union Survey, February 2015, n=148
Source: Federal Reserve Payments Study
Noncash payments have shifted away from checks to other forms of payment, particularly cards
2003 2006 2009 2012
Checks (paid)
TOTAL
Credit card
Debit card
Prepaid card
ACH
2003–12 2009–12
4.7%
-7.6%
10.9%
3.7%
13.0%
30.7%
18.3
22.1
26.2
47.0
9.2
24.5
19.1
21.0
37.5
5.9
30.5
14.6
21.7
25.0
3.3
37.3
8.8
19.0
15.6
0.8
4.4%81.4 95.2 108.1 122.8
-9.2%
5.1%
7.6%
7.7%
15.8%
NONCASH PAYMENT TRANSACTIONS BY PAYMENT TYPE, BILLIONS CAGR*
*Compound Annual Growth Rate
The Payments Value Chain has a long (and growing) list of players
Economics are most attractive at the poles
▸ Direct access to consumers/merchants drives value (data, value-added services)
Participants risk commoditization toward the middle of the chain
▸ Lack of brand visibility, inability to differentiate
Consequently, the FI’s turf is attracting the greatest attention from disruptors
▸ Not for core banking functions, but adjacent value-added services
Customer(payor instrument)
Financial Institution
(or new interface)
IssuerProcessor/
Svc Provider*
PaymentNetwork
Acquirerprocessor*
FinancialInstitution
(or new interface)
Merchant(payee device)
C2B, B2B, C2C
Cash
Credit/Debit
Prepaid
Check
Digital Wallet
Bank
Credit Union
Green Dot
Bluebird
Starbucks
PayPal
Fiserv
FIS
Jack Henry
Symitar
Dwolla
Visa/MC
Amex*
Discover
ACH
Bitcoin
First Data
Global Pmts
Elavon
Heartland
Bank
Credit Union
Square/Shopkeep
POS terminal
Lockbox
Cash register
Online interface
Square/PayPal
* Several firms serve multiple roles, e.g. American Express is both a network and an issuer, Fiserv/FIS are processors and service providers, etc.
Co-Op, CSCU, PSCU
EXAMPLES —NOT AN EXHAUSTIVE LIST
Each participant in the ecosystem has unique motivations, strengths and weaknesses
WEAKNESSES
STRENGTHS
DRIVERS
Consumer Financial Institution
IssuerProcessor/
Svc Provider
PaymentNetwork
Acquirerprocessor Disruptors Merchant/
Retailer
Source: Filene Credit Union Survey, February 2015, n=148
Views vary on which group wields the greatest ecosystem power… but it’s not the FIs
▸ Consensus that power is shifting from networks to retailers
▸ Executive interviews placed consumers and retailers in the top positions
▸ Virtually no respondents believe FIs hold a strong position in the power dynamic
» “Whoever has the customer’s ear holds the power”
» “Visa held all the cards until Apple made it clear where the power really resides”
▸ However, networks realize only a small share of overall payments revenue
0 1 2 3 4 5
Consumers
Retailers
FinancialInstitutions
New marketentrants
Credit Unionservice providers
PaymentsNetworks
0 25 50 75 100
75%InstrumentIssuer
17%TransactionAcquirer
8%Network/Processor
WHO DO YOU BELIEVE HOLDS THE MOST POWER IN THE PAYMENTS ECOSYSTEM?
ESTIMATED REVENUE SHARE
1=most powerful, 6=least powerful
Source: Accenture Payment Study
Current dominant payment forms are slated to decline, with most of the shift coming from cash.
+3%
6%
9%
+2%
6%
8%
+1%
7%
8%
+10%
8%
18%
+2%
11%
13%
+7%
14%
21%
0%
17%
17%
-3%
52%
55%
-6%
53%
59%
-12%
54%
66%
Future
Future
Today
Today
Ranked by Instrument Usage Levels Today
At least daily + At least weekly
Popmoney®/ClearXchange
WireTransfer/Western
Union
MoneyOrder/
CertifiedCheck
DigitalCurrency
Prepaid/Gift Card
PayPal Check CreditCard
DebitCard
Cash
THE USE OF PAYMENT INSTRUMENTS IS DIFFERENT TODAY THAN IT WILL BE IN 2020
Q: How often do you use the following payment instruments to complete a transaction? Q: How frequently do you anticipate you will use the following payment instruments to
complete a transaction by 2020?
Source: Accenture (2014)
The trend toward consumer unbundling is unlikely to abate
▸ As consumers unbundle their financial services, the threat of bank disintermediation multiplies
» This is particularly true for the under 35 segment, whose formative financial experiences are less likely to be with a financial institution
▸ Numerous success stories, mostly with Gen X adoption
» PayPal, Amex Bluebird, Venmo, LendingClub, Credit Karma
▸ How can Credit Unions collaborate/co-exist in such an environment?
» Don’t fight irresistible forces, determine where partnering makes sense
HOW LIKELY WOULD YOU BE TO BANK WITH A NON-FINANCIAL INSTITUTION?
PERCENTAGE OF RESPONDENTS WHO WOULD BE LIKELY TO BANK WITH AT LEAST ONE NON- FINANCIAL SERVICES COMPANY
0 25 50 75 100
27%
72%
Boomers (55+) Millenials (18–34)0 25 50 75 100
28%
58%
77%
18–34 yr olds 35–54 yr olds 55+ yr olds
Source: American Bankers Association
The regulatory landscape continues to evolve—creating new complexities
WHAT’S CHANGED?
▸ OCC Guidance on Third Parties
▸ Federal Reserve guidance on Third Parties
▸ New focus on Operational Risk Management
▸ CFPB focus on DDA fee structures & overdraft
▸ Mortgage Lending Reform & Basel III for banks
▸ Dodd Frank Act pace accelerated through 2014
▸ Consumer Protection + Surveillance + Aggressive Regulators = Increased oversight
▸ Governance, Risk & Compliance focus areas are affecting all size organizations.
▸ Examination oversight and market reaction are creating risk of broader change than specific regulations themselves
DFA-RELATEDREGULATORYPROPOSAL PAGES
DFA-RELATEDFINAL REGS &
GUIDANCE PAGES
6,304 8,231
as of January 6, 2015
and counting
REDUCED FI BANDWIDTH TO ADDRESS CRITICAL BUSINESS NEEDS (E.G. INNOVATION)
THEREFORE
The mixed blessing of the “Branch of the Future”
▸ 62% of respondents of Filene survey report seeing declines, 52% report changes in the nature of that traffic
▸ Opportunity for cost saving
▸ All demographic segments still coming to branch, only for different reasons than before
▸ HOWEVER we have yet to identify an effective substitute for the “warm handoff” of a qualified lead
REMOTE MODELS MUST DEMONSTRATE THE ABILITY TO IDENTIFY AND CONVERT “MOMENTS OF TRUTH”THEREFORE
Source: McKinsey Consumer Financial Life Survey
0%
20%
2009 2010 2011 2012 2013 2014
40%
60%
80%
Withdraw cash at ATM
Use online banking
Use branch monthly
Deposit checks at ATM
Ever use mobile banking
Remote check deposit
-1%
+2%
-4%
-2%
+3%
+2%
ADOPTION OF CHANNEL USES, % OF BANKED HOUSEHOLDS
ANNUAL GROWTH 2011—2014
Source: McKinsey Consumer Financial Life Survey, 2014
Two thirds of US consumers' payment preferences align with digital wallet capabilities
▸ Many consumers are loyal to one method; others use a variety depending on the circumstance
DEBIT CARD USERS28% of U.S. households27 POS transactions/month
22% of U.S. households24 POS transactions/month
19% of U.S. households28 POS transactions/month
11% of U.S. households34 POS transactions/month
10% of U.S. households35 POS transactions/month
4% of U.S. households20 POS transactions/month
4% of U.S. households21 POS transactions/month
2% of U.S. households27 POS transactions/month
CASH USERS CREDIT CARD USERS CREDIT & CASH USERS
DEBIT & CASH USERS
DEBIT CASH CREDIT CHECK PREPAID DEBIT EBT CARD PAYPAL OTHER
CHECK WRITERS EBT & CASH USERS PREPAID DEBIT CARD USERS
83
74
4 3
79
10
53 3
58
18
12
75
4536
11
5 3
4924
10
106
87
64 3
14
56
16
74 3
14
4524
8
6 4
POS PAYMENT BEHAVIORAL CLUSTERS
% of POS payments made using each method1
1 “Debit” does not include “Prepaid debit”
A successful digital wallet will bring a seamless, elegant interface to a complex tangle of sub-systems
Participants’ mobile expectations at the 2013 Filene Colloquium proved optimistic, but 2015 respondents remain bullish about mobile’s prospects
Respondents still foresee “A Thousand Flowers Blooming” scenario
▸ Adopt solutions tailored to member needs
▸ Use new channels to enhance trusted partner role
▸ Small merchants could be a logical Credit Union niche
▸ How to get Credit Unions to rally around a small set of solutions?
▸ Need full integration to cement value proposition
Some regression to the midpoint, especially on open vs. closed systems
▸ “Walled Garden” scenario places a premium on Credit Union collaboration
▸ Would also make a Credit Union- specific solution challenging
WALLED GARDENS
FORTIFIED OUTPOST NO ONE COMES TO THE PARTY
fast/high
slow/low
open/diverseclosed/consolidated
# OF WINNERS & LEVEL OF OPENNESS
SPEED OF ADOPTION &DEPTH OF PENETRATION
A THOUSAND FLOWERS BLOOMING
Apple pay: hype vs. reality
▸ First, kudos to Apple Pay’s MANY breakthroughs
» Single-handedly revived NFC
» Fraud approach may be the hidden breakthrough
» Broke the Google Wallet/MCX/Softcard logjam
» Did not attempt to re-invent the payment rails
» Remarkable success on awareness, FI/merchant participation
▸ However, jury still out on consumer adoption
» 85% of iPhone 6 owners have not yet tried/loaded
» 2/3 of consumers express no interest in cellphone payments
» Highly favorable marks among small base
▸ Cook: “Still first inning,” “start of roadmap”
▸ Lack of loyalty component is critical (see above point)
▸ iOS market share still only ~40%
▸ Friend or foe to Banks/Credit Unions?
» Interchange door now cracked open?
» Don’t fight forces of nature?
» Top of wallet implications!Source: comScore MobiLens
TOP SMARTPHONE PLATFORMS
*Total U.S. smartphone subscribers Age 13+
ANDROID 52.0 0.6 52.6APPLE 42.0 -0.2 41.8
MICROSOFT 3.5 -0.1 3.4BLACKBERRY 2.3 -0.3 2.0
SYMBIAN 0.1 0.0 0.1SHARE %AUG.2014
SHARE %NOV.2014
POINTCHANGE
“Acceptable risk given likely
share of overall transactions”
“Better than getting a higher
percentage of nothing”
“I realize we’re sleeping with
the enemy”“I trust Apple
...for now”
Source: McKinsey Consumer Financial Life Survey
▸ Android comprises over 50% of handset market, but its open architecture complicates logistics
» Sufficient opportunity for a coordinated large-scale rollout?
» Apple holds an awareness benefit, plus wallet share advantage
▸ Similarly, can CU Wallet generate enough critical mass?
▸ Can Google leverage Softcard’s infrastructure to jumpstart its own wallet?
▸ Does LoopPay provide Samsung with a logical “bridge” solution?
▸ Will CurrentC eventually deliver on its vision (lower merchant cost, higher consumer rewards)?
▸ How will an Android solution impact share of wallet?
Credit Unions are concerned about Apple Pay’s economic implications…in the long term
▸ Small share of transactions limits exposure, facilitates sandboxing
▸ Differing opinions on whether fraud savings can offset interchange
▸ More concerned with data ownership/ trust factors with Google Wallet
▸ “Interchange is going away anyway”
▸ WILL AN ANDROID SOLUTION EMPLOY THE SAME ECONOMIC MODEL?
There is a clear opening for an Android-based wallet; However its path to mass adoption is less clear
All other FIs Primary DDA FI
77 74 68 69 67 66
23 26 32 31 33 34
+11
2009 2010 2011 2012 2013 2014
TOP-OF-WALLET STATUS PRESENTS INCREASING OPPORTUNITY (OR RISK) TO CONSUMERS' PRIMARY FI
Percent of credit card users1
1 Credit card users are households that made a POS purchase using a credit card in the last two weeks
Source: Accenture (2014); n=4,000
Consumers lack consensus on a logical mobile payments provider; FIs fare better than Telcos, but not as well as PayPal or the card networks
CONSUMERS PREFER NETWORK CARD PROVIDERS AS THEIR MOBILE PAYMENT PROVIDERS—FOR NOW.*
Q: Which of the following types of companies would you prefer to use as a mobile payments provider?
* Preference levels shown are not indicative of the companies listed as examples.
Network Providers
Emerging PaymentProviders
Established Retail Bank
Larger TechCompanies
Large Merchant/Retailer
Large TelcoProvider
Tech Start-Ups
Network Providers
Emerging PaymentProviders
Established Retail Bank
Larger TechCompanies
Large Merchant/Retailer
Large TelcoProvider
Tech Start-Ups
% OF ALL RESPONDENTS BY AGE % OF ALL RESPONDENTS BY INCOME LEVEL
55+ 35–54 18–34 $150,000+ $50,000–$149,999
<$49,999
61
7376
44
66
76
44
6264
36
5767
3652
59
3248
56
1234
50
81
7664
74
68
61
72
6450
69
6050
6254
47
60
5239
5140
29
Tech Start-Upsi.e., Square 36%
Large TelcoProvider
i.e., U.S.–Verizon, AT&T,Sprint Canada–TELUS, Rogers & Bell
48%
Large Merchant/Retailer
i.e., BestBuy, Walmart, Target52%
Larger TechCompanies
i.e., Apple, Google, Amazon 57%
EstablishedRetail Bank
i.e., JP Morgan, USBancorp,TD & RBC
59%
Emerging PaymentProviders
i.e., PayPal66%
NetworkProviders
i.e., Visa, MasterCard, & Amex 72%
Sources: Seventh Annual Billing Household Survey, Fiserv, Inc., 2014; 2013 Fiserv Consumer Trends Survey
A successful wallet will appeal to a broad cross-section of consumerbehaviors—and/or create sufficient incentive to change behavior
TODAY’S CONSUMERS ARE BILL PAY OMNIVORES
VIEWING ACCOUNT INFORMATION, PAYING BILLS AND TRANSFERRING FUNDS TOP ONLINE BANKING ACTIVITIES
Number of bill payment methods consumers use monthly as a percent of all U.S. households.
Online banking users: Please indicate which of the following features of online banking you used last month.
17%
23%
23%
18%
9%
5%
5%
ONE
TWO
THREE
FOUR
FIVE
SIX
SEVEN
63%View real-timeaccount information
52%Use online bill pay
52%Transfer funds betweenmy accounts (same bank)
48%View monthly statement
28%View cleared checks
28%Alerts regardingaccount activity
21%Transfer funds between myaccounts (different banks)
18%Receive electronic bills
16%Online customer service(e.g., to order checks)
Sources: Bain Online Survey 2013; Bain/Research Now Retail Banking NPS Survey, July 2012 (n=~10,000)
Purchasing power and demographic metrics make a strong argument for a mobile strategy
0yrs
10yrs
20yrs
30yrs
40yrs
50yrs 3.0
1.3
2.1
1.4
2.4
1.41.5
1.21.3 1.3
1.6
2.0
1.0
0.0$0K
$20K
$40K
$60K
$80K
US UK Germany
Those interested in mobile payments are getting younger... ...generally more affluent...
Payment method of total in-store spending per month
...and spend twice as much in retail.
France
Users UserWilling WillingUnwilling
Spain US UK Germany France Spain US UK Germany France Spain
Average age of survey respondents by mobile proximity payments usage
Average income of survey respondents bymobile proximity payments usage ($US)
Ratio of spending compared with nonusersunwilling to try mobile payments
US
Average Mobilepayment
users
UK
Mobilepayment
users
Average
Germany
Mobilepayment
users
Average
France
Mobilepayment
users
Average
Spain
Mobilepayment
users
Average
CASH OTHERDEBIT CARD CREDIT CARD MOBILE PHONE AS REPLACEMENT FOR PAYMENTPREPAID VOUCHER
0
20
40
60
80
100
CONSUMERS WHO USE MOBILE PAYMENT TEND TO BE YOUNGER, MORE AFFLUENT AND MORE LIKELY TO SPEND MORE ON RETAIL
NOTE: Data pre-dates Apple Pay launch
Source: Bain Online Survey 2013
However, international use case data indicates mobile wallets may initially be a defensive play more than a revenue opportunity
Payment method of total in-store spending per month
US
Average Mobilepayment
users
UK
Mobilepayment
users
Average
Germany
Mobilepayment
users
Average
France
Mobilepayment
users
Average
Spain
Mobilepayment
users
Average
CASH OTHERDEBIT CARD CREDIT CARD MOBILE PHONE AS REPLACEMENT FOR PAYMENTPREPAID VOUCHER
0
20
40
60
80
100
EARLY USE OF MOBILE PAYMENTS SUGGESTS CONSUMERS USE THEM MORE LIKE CREDIT CARDS THAN CASH
Percentage of monthly spending
APPLE PAY GOOGLE WALLET SAMSUNG PAY CU WALLET CURRENTC (MCX)
UBIQUITY awareness
Apple approach
(member) driven
HANDSETS devices capable smartphones like enrollment trigger
smartphones
smartphones
MERCHANTS
POS presence at any card POS
provide near ubiquity merchant base
PROCESS authentication
newer terminals
POS terminals
“tech agnostic” “tech agnostic”
ECONOMICS of interchange
plans to monetize thru data access
Samsung will receive share of interchange
quo likely
merchant interchange savings (steering)
in flux
SECURITYadvancement
enrollment fraud
Pay (tokenization?)
data
Apple Pay
approach?
REWARDS existing programs
to make a key feature
merchant level
DATA OWNERSHIP
existing models
on Google’s access to data share for revenue split
The rapidly evolving Digital Wallet landscape...
Paydiant Backbone
>75% of respondent Credit Unions plan to have Apple Pay live in 2015.
Nearly half will offer a digital wallet by 2015.
▸ Focus is on security, seamless user experience
▸ Little traction for loyalty, coupons
» Yet MCX is deemed an “awake at night” threat; inconsistency?
Example of the“hype cycle”: in a February Technology Association of Georgia poll of industry experts, over 60% believe Apple Pay will capture 5% of POS transactions within 12 months
▸ This would match the POS share of Amex or Discover!!
Digital wallet rollouts are focusing on “bread and butter” features
0 1 2 3 4 5
Debit & CreditCard Availability
Easy selection ofmultiple card options
Best of breedsecurity
Ubiquitousacceptance
Seamless,single-step use
Loyaltyprograms
Coupons/targeted offers
WHAT ARE THE MOST IMPORTANT FEATURES FOR A DIGITAL WALLET?
1 = most important, 7 = least importantCurrentlyin market
22% 15%
Rolling outin 2015
55% 31%
Interested, butnot 2015
20% 45%
No plansto offer
3% 8%
APPLEPAY
DIGITALWALLET
Source: Filene Credit Union Survey, February 2015, n=148
Source: Accenture (2014); n=1,577
Rewards have lagged behind on the wallet roadmap, but may be the key to consumer adoption
CONSUMERS ARE INTERESTED IN INCENTIVES TO USE MOBILE PAYMENTS
Q: Would you increase the amount you use your phone to make a payment if the following services were offered?
(% of respondents who chose definitely increase or may increase usage)
You are offered discount pricing/coupons basedon past usage of your phone as a payment device
Upon purchase, your payment device receives andstores all receiptsin a secure database and
seamlessly tracks spending habits
You have the ability to scan a product and are provided theoption to purchase immediately through your payment
device, eliminating the requirement for checkout
You receive a special offer of rewards pointswith your reward card stored on the phone
You receive valued customer treatment,such as a separate line to speed payment
You are able to pay for public transportationand receive reward points towards a free use
You receive notifications for upcomingevents and/or product releases at the store
You are able to scan a product and are presentedinformation about the product (consumer reviews,
comparable products, retailer price comparison)
79%
77%
71%
69%
67%
66%
66%
61%
Source: Bain Online Survey 2013 (n=562 US consumers who are unwilling to try mobile payments)
Apple Pay’s rollout approach addresses some but not all of consumers’ payments concerns
NOTE: Data pre-dates Apple Pay launch
SECURITY
PRIVACY
CONVENIENCE
UNATTRACTIVEBENEFITS
ACCEPTANCE
Don’t trust that my paymentdetails will be secure
Don’t want mobile payment providersto have access to my personal details
Don’t believe using mobilepayments is more convenient
Sounds more complicated thanmy current payment methods
Setting up payments on my phone soundscomplicated and time consuming
Don’t find additional features attractive(e.g., availabilty, price, location of items)
Targeted discounts and rewardsI could get are not attractive
Places I like to shop do notaccept mobile payments
Major reason Minor reason Not a reason
0 25 50 75 100
CUSTOMERS' CONCERNS CENTER AROUND SECURITY, PRIVACY, CONVENIENCE AND ACCEPTANCE
Percentage of respondents unwilling to try mobile payments for these reasons
Source: Federal Reserve Payments Study
Fraud is a growing concern, particularly in the growing online commerce (CNP) area; This provides an opportunity for mobile wallet value-add
Despite Apple’s (accurate) portrayal of early Apple Pay fraud as a shortcoming of the onboarding process rather than of the technology itself, the resulting publicity may nonetheless hinder adoption
▸ This also speaks to the delicate balance between enabling mass adoption and maintaining effective fraud controls
▸ The distribution of fraud is very different from the distribution of total payments
▸ A card-not-present transaction was at least 3 times more likely to be unauthorized than its card-present counterpart
GENERAL PURPOSE CARDS* ACH CHECK
5% 3%
92%
19%
16%
65%
NUMBER VALUE
DISTRIBUTION OF UNAUTHORIZED TRANSACTIONS (THIRD-PARTY FRAUD) IN 2012
* General-purpose cards include credit, debit, and prepaid payments as well as ATM withdrawals.
3.722.83
0.87
11.82
9.48
GP creditcard
GP signaturedebt
GP PINdebit and
ATM
GP creditcard
GP signaturedebt
CARD-PRESENT CARD-NOT-PRESENT
RATE OF UNAUTHORIZED GENERAL-PURPOSE CARD TRANSACTIONS (NUMBER) IN 2012
Basis points.
GP denotes general-purpose. Basis points: the # of unauthorized transactions per 10,000 transactions or the value of unauthorized transactions per $10,000 spent
Technology Review
TOKENIZATION
Apple Pay’s “hidden gem”; foreshadows a future
without plastic?
OPEN/CLOSED SYSTEMS (E.G. IOS VS. ANDROID)
Inherent tradeoffs re: innovation, adoption, control, security
IN-APP PURCHASES
Logical workflow enhancement for mobile wallets; simplifies
shopping experience
BEACON TECHNOLOGY (AUTO-CHECKOUT)
The logical extension of NFC? Still further in future, but holds potential to greatly improve the
shopping experience
FASTER PAYMENTS/SAME-DAY ACH
Separate initiatives from Fed, The Clearing House; business
case remains challenging
CRYPTOCURRENCY
Bitcoin and potential successors; sound concept facing regulatory
and business case hurdles
EMV (EURO MASTERCARD VISA)
a/k/a “Chip and PIN”; a major (card present) security advancement,
but requires significant capital investment/training regimen
NFC (NEAR FIELD COMMUNICATION)
Replaces swipe with tap; appeared to be near
extinction pre-Apple Pay
“ Fast Follower” is the preferred Credit Union strategy to offset large banks’ R&D spending advantage
▸ Credit unions get no slack- they are expected to compete on a par with large FI competitors on feature functionality
▸ However, most members do not expect “bleeding edge” offerings from their credit union
» “Members want to know that new technology is on the radar”
▸ Still leaves bandwidth challenges, questions of “which horse to bet on”
» “Resources to implement and maintain solutions,” “Making the right call on technology/vendor” rank high among concerns
» “We need to treat these investments as strategic imperatives rather than applying an ROI analysis”
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
ExpectLess
Nodifference
ExpectMore
HOW DO YOU BELIEVE MEMBERS/PROSPECTIVE MEMBERS EXPECT CREDIT UNION PAYMENT CAPABILITIES TO STACK UP TO LARGE BANKS?
Source: Filene Credit Union Survey, February 2015, n=148PERCENTAGE OF THOSE THAT STRONGLY AGREE
Q: Indicate your agreement with the following statements about your investments in mobile/digital.
0% 10% 20% 30% 40% 50% 60% 70%
We have to do it to keepup with the competition
We aim to improve customer relationships through digital
engagement
We aim to attract new customers and upsell customers through
our mobile channel
We aim to reduce costs bymigrating transactions from
the branch channel
64
62
44
47
49
32
21
16
Credit Unions
Banks
Source: Celent NA Retail & Business Banking Technology Survey 2014
▸ Unregulated disruptors
» “A workaround that cuts the FI out of the consumer equation”
▸ A data breach, especially if responsibility can be traced back to a Credit Union
» Major merchant disruption
» “Blame the messenger” aspect even if a breach isn’t Credit Union’s fault
▸ Continuing downward pressure on interchange
» “Plan for interchange to be gone in 5-10 years”
» “Retailers increasingly calling the shots” (MCX concern)
▸ Losing a deep understanding of members
» Have expanded fields of membership contributed to this risk?
▸ Striking a balance across security/convenience/privacy in products
Data breaches head the list of greatest Credit Union fears, but they have company
Fraud/data breaches
Loss of interchange
Disintermediation
Disruptors/ongoing new entrants
Retailers’ growing power (MCX)
Resources to implement/maintain soln's
Making right call on technology/vendor
Top of wallet status
44
17
13
10
8
763
TOP CONCERNS (#MENTIONS)
10010010101001001010001101100101110011010011011011101101101111001010011
10010010101001001010001101100101110011010011011011101101101111001010011
Source: Filene Credit Union Survey, February 2015, n=148
“COLLABORATION IS A NECESSITY—WE SIMPLY DON’T HAVE THE R&D FUNDS TO COMPETE WITH THE LARGE BANKS OTHERWISE”
THEREFORE
▸ Splintering effect across industry confuses (slows) market, diverts resources
▸ Aggregate credit union assets of $1.1 trillion would rank as the fifth largest bank in the US
» Still only 1/5 the combined size of BofA, Wells, Chase
» Demonstrates need for collaboration in order to attain critical mass, attract partner interest
▸ The digital wallet space is a natural opportunity, particularly in regard to local offers/rewards
▸ Only 40% of Credit Unions offer prepaid cards–an opportunity?
▸ Executive interviews feedback surfaced several ideas:
» Credit Unions as facilitator for Lending Club-type offer
» Real-time feedback loop (“safe to spend” balance)
» Provide full self-service control (debit “on/off switch”)
» Use local expertise to serve up timely offers, not spam
Credit Union Payments Product Opportunities
Apple Pay
Digital Wallets*
Mobile Pmts, Mobile gen’l
P2P
Tokenization
Omni-Channel Delivery
RDC
onDot
iPay
Configurable Card Controls
Instant Issue Cards
Online Marketplace
Online Advice/Suggestions to mobile device
19
13
13
8
5
43222111
MOST EXCITED ABOUT (#MENTIONS)
LESS UBIQUITOUS PRODUCTS, %CREDIT UNIONS OFFERING
* Includes 3 Credit Union Wallet mentions
0 20 40 60 80 100
Mobile Payments
P2P (online)
P2P (mobile)
Expedited Payments
Prepaid/Reloadable Debit
84
54
45
45
40
Source: Filene Credit Union Survey, February 2015, n=148
An agnostic, “wait for the winners to emerge” approach will likely leave credit unions behind the curve.
Potential scenarios for Credit Union advocacy to define the market and shape ongoing role:
1) Credit Union–specific prepaid/reloadable debit proposition
Pros: Promising source of fee income; rounds out product portfolio; reinforces financial responsibility message; potentially attracts new members
Cons: Sufficient basis for collaborative action? Need to differentiate vs. existing providers
2) Credit Union–specific wallet solution
Pros: Leverage community ties, reinforce “Shop Local” messaging; consider bundling with financial responsibility messaging
Cons: Limited scale to attract major merchants; Lacks handset “pull” of competing wallet propositions; Who manages local merchant outreach?
3) Clearinghouse for direct lending
Pros: Large potential market; addresses incursion by new market entrants; source of new members; can position as a more consumer-friendly solution
Cons: Significant operational undertaking; potential regulatory hurdles; need to develop equitable business model across Credit Unions
Credit Union Collaboration – Hypothetical Scenarios ???
In addition to considering opportunities for collaboration, each credit union should individually assess the following:
▸ Preparedness for a dramatic drop in interchange revenue within 5 years
▸ Avenues for individual member engagement in an era of limited branch visits (identify new cross-sell triggers)
▸ Beliefs on Apple Pay adoption curve, and implications (good and bad) for Credit Union P&L
▸ Adequacy of “fast follower” as a technology strategy, and means of execution (e.g. partnership, level of R&D spending)
▸ Approach to Android market
▸ Approach to rewards/loyalty programs
▸ Segmentation strategy, e.g. “follow the money” vs. “cultivate the next generation of members” (hopefully both!)
Recommendations for individual Credit Unions !!!
About the Author
▸ Co-Lead of McKinsey & Company’s Global Concepts payments unit 2006–2013
» Firm’s subject matter expert on electronic banking, bill payment and e-billing
» Created McKinsey’s Global Payments Map, US Personal Financial Services profit pool
▸ Various senior operating and financial roles at CheckFree 1996–2005 (prior to Fiserv acquisition)
» Negotiated partnerships, integrated acquisitions
» Electronic Commerce Division CFO
» GM of Payment Solutions business
» Investor Relations, Strategic Planning
▸ Led consumer and business check programs at Deluxe Corporation 2013–2014
» Launched e-check initiative through 5,500 FI client base
» Led M&A for diversification in Payments space
▸ 1984–86: Examiner, Federal Reserve Bank of Chicago
▸ 1986–88: Founding Director/Startup Team, University of Pennsylvania Students Federal Credit Union
▸ 2009–present: Board member, Technology Association of Georgia’s FinTech Society
Glen SarvadyFounder and Principal,
154 Advisors
About Filene
Filene Research Institute is an independent, consumer finance think and do tank. We are dedicated to scientific and thoughtful analysis about issues affecting the future of credit unions, retail banking, and cooperative finance.
Deeply embedded in the credit union tradition is an ongoing search for better ways to understand and serve credit union members. Open inquiry, the free flow of ideas, and debate are essential parts of the true democratic process. Since 1989, through Filene, leading scholars and thinkers have analyzed managerial problems, public policy questions, and consumer needs for the benefit of the credit union system. We support research, innovation, and impact that enhance the well-being of consumers and assist credit unions and other financial cooperatives in adapting to rapidly changing economic, legal, and social environments.
We’re governed by an administrative board made up of credit union CEOs, the CEOs of CUNA & Affiliates and CUNA Mutual Group, and the chairman of the American Association of Credit Union Leagues (AACUL). Our research priorities are determined by a national Research Council comprised of credit union CEOs and the president/CEO of the Credit Union Executives Society.
We live by the famous words of our namesake, credit union and retail pioneer Edward A. Filene: “Progress is the constant replacing of the best there is with something still better.” Together, Filene and our thousands of supporters seek progress for credit unions by challenging the status quo, thinking differently, looking outside, asking and answering tough questions, and collaborating with like-minded organizations.
Filene is a 501(c)(3) not-for-profit organization. Nearly 1,000 members make our research, innovation, and impact programs possible. Learn more at filene.org.
“Progress is the constant replacing of the best there is with something still better."
—Edward A. Filene
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Publication #357 (3/15)
