Credit unions now vie with new players that make up the rules as they go.
Managing payments used to be a lot like checkers: You had to match your strategy with your opponent’s moves, but the rules were relatively simple. These days, the payments space feels more like a chess match. With half-a-dozen players on the board. All playing by their own rules.
Keeping pace with these shifts presents a complex challenge for credit unions to aggressively manage their payments strategies with the dual aims of (a) capitalizing on opportunities to generate incremental revenue and (b) mitigating the impact of revenue reductions as a result of disruptors grabbing a bigger share of the payments market.
CUs are no longer competing just with big banks and other financial cooperatives in their bids to win members’ payment business. Think PayPal, which processed 2.2 billion transactions in the first quarter of 2018, times 10. Retailers like Amazon and Starbucks are offering their customers in-house payment options. Mobile communication giants are promoting ApplePay and Samsung Pay, while fintech companies like Venmo and Affirm extend their reach.
Big banks and a few CUs are aiming to counter these disruptors with their own payment app, Zelle. That’s just one more player in a hot market aiming to become your member’s go-to payment solution and to move beyond payments into lending.
CUs need to monitor and address three primary competitive challenges in the payments space. The first is traditional financial services providers. Does Chase or your CU have a better payments lineup? What do the big banks offer that you don’t, and vice versa?
The second challenge comes from the retailers looking to reduce or divert some of the interchange and interest income your CU has been earning through members’ card use. Amazon, Walmart and other big chains view payments as a large enough expense that they’re looking to migrate to lower-cost solutions. Merchants with sufficient clout are striking deals with signature and PIN payment networks that are having a direct and significant impact on the revenue generated from card transactions by CUs and other card issuers.
Retailers have the option to route card payments through whatever network the card can support. Typically, they prefer debit payments to go through PIN networks like STAR, Pulse or NYCE, while credit payments are routed through Visa and Mastercard pipelines. For every signature transaction that becomes a PIN transaction, your CU loses about half that interchange revenue. Beyond steering customers toward PIN networks, high-volume retailers also negotiate better interchange rates with networks, which means another income reduction for CUs.
In short, the squeeze is on. On one side, CUs face competitive pressure from big issuers that command 90 percent of the credit card market. On the other, retailers are working hard to pare down card processing fees, which cuts into credit unions’ interchange revenue. In Canada, Visa and Mastercard have agreed to cut credit card interchange fees by 10 basis points to 1.4 percent, beginning in 2020. And the largest U.S. CUs, those with more than $10 billion in assets, also face debit card interchange limits established by the Durbin Amendment to the Dodd-Frank Act.
As if that weren’t pressure enough, now fintech disruptors are a third key group of competitors. They could cut CUs out of the payments business altogether by offering customers the option to set up deposit accounts with payment privileges. Apple and PayPal have launched debit products. While it’s unlikely many consumers will adopt Apple Pay as their primary payment vehicle in the near future, it is one more threat to monitor.
Elevate Your Payments Strategy
Payments used to be “set it and forget it.” Members who opened a checking account got a debit card and put it in the front of their wallet. About 25 percent signed on for a credit card, too, and took advantage of CU offers to earn points or cash back. And the CU could count its interchange revenue and interest income and thank members for their business.
Those days are over.
CUs that got used to adding another 25 to 30 percent of their non-interest income from card interchange are now watching that revenue shrink. We estimate that, without growth in payments volume, CUs will see net income from debit cards drop by 3 percent annually, largely due to margin compression challenges. That estimate is primarily from the migration of card transactions from signature to PIN networks, PIN-less debit transactions (which generate about half of what a transaction that historically would have been processed on the signature network would have generated), and merchant deals with networks. This does not even consider the impact of fintech disruption non-traditional players like PayPal, Venmo, or Square Cash.
What can CUs do to turn those revenue losses around? First, make payments a strategic priority. The more members rely on other forms of payments, the less they will turn to your CU. Also develop and execute a payments strategy. Your marketing staff needs to find ways to develop new payment relationships by making those products so appealing that new members sign on for them.
A bigger challenge is increasing existing account-holders’ use of your cards. What are you doing to incent active members who don’t keep your cards top of wallet? Seasonal promotions, from summer vacations to holiday shopping, can be effective. And what about their virtual wallets? Your payments strategy should encompass digital payments as well. When members use PayPal, ApplePay and Amazon, have they saved the numbers for your credit and debit cards to make those payments?
In short, give payments the same attention as building other product volume. Your CU has a wealth of information about how members are using their cards—and when they may be turning to other payment solutions. Keep in touch with them to find out what they find compelling about your products and what might be missing.
Don’t be afraid to borrow marketing ideas and product design features that work for others. Some CUs have seen an uptick in payments volume when they tie debit card usage to an interest-rate bonus on checking. For example, when members use their debit cards 15 times a month, they earn 1 percent on their checking accounts. Or they might get a small cash-back reward when they charge at least $1,000. Scaled rewards are another option, offering an escalating range of give-backs depending on the number of transactions done with CU accounts.
The reality is that coming up with unique payment product offerings is tough because they’re so easy to copy. Success often comes down to good member engagement. Make your checking and credit card products easy and rewarding to use. Aim to put your cards in the wallets of every qualifying new member. Continue to evaluate and refine your product offerings based on the market and how your members’ payment patterns and preferences are evolving. And be vigilant in monitoring how your growing field of competitors is changing the rules of the game.
Tony DeSanctis is a senior director for CUES Supplier member and strategic provider Cornerstone Advisors, Scottsdale, Ariz.