The New Top of Wallet

illustration of blue glowing donut made of connected data points
By Tony DeSanctis

9 minutes

How credit unions can maintain a role in the payments ecosystem amidst friends, frenemies and enemies.

The gold standard for winning on the payments front has long meant finding ways to encourage members to keep your credit and debit cards top of wallet. But how do those strategies shift when consumers are no longer pulling cards out of their wallets to make purchases? 

Digital payments have arrived. The rate of transactions completed without the physical presentation of a card or card number is projected to grow at three or four times the rate of traditional point-of-sale purchases. Amid all the buzz about mobile payment options like Apple Pay and Samsung Pay and the dominance of PayPal in e-commerce, the challenge for credit unions remains the same: No matter how members choose to pay, make sure that your debit and credit cards are part of that pipeline.

The term “digital payments” spans all the alternatives to traditional card payments. Utility and mobile phone companies now auto-pull credit and debit card data instead of requiring customers to supply their card numbers when they pay their monthly bills. Consumers push a button to complete Amazon purchases and authorize prepayment on stored card data when they place orders before even arriving at Starbucks, Chipotle and Nordstrom. And the long-heralded age of mobile commerce may have finally arrived, as shoppers wave their smartphones at payment terminals in checkout lines instead of digging out their wallets. 

Know Your Competitors

Should you be worried that your credit union’s cards are stuck in members’ back pockets, buried deep in their purses or left sitting on top of their dressers as they opt for digital payments? As long as members have stored and selected your credit and debit cards as their go-to choice for purchasing with their mobile wallets, PayPal, Amazon, Venmo, SquareCash, and coffee shop and other retail apps, you’re still part of the digital payment ecosystem. 

It is true, though, that these digital wallets are creating a wedge between your credit union and members. At the very least, these companies aim to capture and parlay valuable data about consumers’ purchase patterns and preferences, burnish their brands and build loyalty with consumers. 

Toward what end? Some of these digital payment players would like to cut credit unions out of the payment stream altogether. 

Apple has launched a virtual debit product called Apple Cash through Green Dot Bank, and Amazon is partnering with Synchrony Bank to offer its own line of “store cards” and a secured credit account called Amazon Credit Builder. PayPal offers branded credit cards and credit lines, and T-Mobile just announced its own debit card product. And Facebook aims to take digital commerce a step beyond, launching its subsidiary Calibra to create a whole new cryptocurrency. 

Not all emerging competitors are new to financial services. Goldman Sachs has been acquiring fintechs to power its digital suite of financial products, including no-fee personal loans, online savings accounts and the Clarity Money app to help users manage and cancel subscriptions, from streaming services to gym fees, all offered through its Marcus brand.  

In short, the digital payments space is getting more crowded and diverse. Venmo and Square promote their debit products on their websites and offer to become their customers’ “bank” to handle their everyday transactions. Chime promotes its direct deposit services as a way to “get paid two days early” and the option to round up debit purchases as a strategy to build savings. Aspiration Financial LLC bills its Spend & Save Account as a no-fee “cash management account” alternative. The financial services offered by these providers are not revolutionary, but their marketing messages may be persuasive. These disruptors are looking to replace traditional financial institutions, so it’s worth your while to monitor how they’re aiming to differentiate themselves. Is their chief value proposition a noteworthy digital experience, a high interest rate on deposits or a novel payment vehicle? 

It might be helpful to classify all the players in this diverse field according to their apparent intentions—and relative success—to lure your members away and the potential overlap of their business model with your products and services.

Gauge the Threat Level

It might be helpful to classify all the players in this diverse field according to their apparent intentions—and relative success—to lure your members away and the potential overlap of their business model with your products and services. 

In the “friends” category are those businesses that allow your members to use their credit union cards to make digital payments without posing a significant immediate risk of courting those members away. In this group, your aim is to encourage members to register your credit and/or debit card as their primary form of payment on their Starbucks app, on Amazon, with PayPal and in their Apple Pay or Samsung Pay digital wallets, to name a few common examples. As long as your cards remain the top payment choice under the wrappers of these digital payment channels, you can maintain your position in the market without losing significant ground.

Next come the “frenemies.” These are the payment provider equivalents of acquaintances that you might invite to a dinner party but not for an overnight stay. Companies like Venmo and Square are positioning themselves as disruptors to traditional financial services providers but also offer services that may not be readily available to your member base or that may not be economical for you to offer. 

The aim with these frenemies is to stay relevant with your members who are using these services so that they continue to use your cards in these transactions, while monitoring the potential that these disruptors pose for migrating business away from your credit union. It might be worthwhile to consider offering your own alternative to these payment forms, such as Zelle, for example.

At some point, companies in both of those groups may work their way into enemy territory—if your members sign up for their debit and credit card services and begin migrating their everyday transactions away from your credit union.  

Put Data Analytics to Work

There is a wealth of data available within your core system and from your card processors on whether and which members are migrating toward the use of all of these payment options. But the level of data analytic capabilities varies widely from credit union to credit union. You can and should hone your organization’s business intelligence gathering to monitor transaction volumes across these digital payment platforms and watch for trends that might signal the need to focus marketing on maintaining—or winning back—member usage of your credit and debit cards. For example, a card manager might generate a report on transactions involving the top six or seven digital payment types in the credit union’s market to determine if volume is on the rise or decline among some or all of those providers. Notable trends could help guide the credit union’s marketing strategies to reinforce some member preferences (such as using their credit union cards for Amazon and Apple Pay purchases) or to recapture members’ card transactions with a targeted marketing campaign or incentive. If a member had been consistently logging 20 PayPal transactions a month and suddenly dropped to three over the last couple months, that might suggest adding that member to a targeted promotion for linking the credit union’s card to that payment vehicle. 

Beyond the opportunity to solidify member relationships, maintaining an inside track as a payment provider also gives your credit union access to a wealth of actionable data about members’ spending habits and preferences.

Test and Learn Which Offers Work

Data analytics is also a useful tool in evaluating which marketing approaches are most effective with different demographic groups as your credit union aims to maintain or expand its role as members’ main payment provider. What we find works best in encouraging members to rely on their credit unions’ cards in conjunction with other payment channels is a test-and-learn or agile environment methodology to monitor performance and make changes along the way.

For example, a credit union offers members a $5 rebate on its credit card or checking account for using its cards to make payments via Apple Pay for their first three mobile transactions over the next 60 days. The credit union then monitors transaction data to determine how many members qualify for the rebate and the rate at which transactions, particularly Apple Pay transactions, increased or decreased over that period as well as farther out, say at 120 and 180 days from the initial offer. The goal is to evaluate whether the offer caught members’ attention and influenced their behaviors and whether the promotion created incremental gains over the long term. 

Hone Your Business Case

Enhancing your credit union’s position as members’ go-to payment provider is not just about interchange income. It’s about staying relevant as their primary financial services partner. Members make payments every day. Their two most frequent touchpoints with your credit union are interacting with your mobile and online channel and authorizing payments, either directly with your cards or indirectly by authorizing their use behind other payment vehicles. 

Given sheer volume alone, payments are among the foremost services that tie members to your CU. T-Mobile isn’t getting into the debit card business because it expects to make a lot of money as a payment provider. Its strategy is to create stickiness with mobile clients and entice them to stay on as customers instead of switching plans every six months because they don’t like some activation fee.

Beyond the opportunity to solidify member relationships, maintaining an inside track as a payment provider also gives your credit union access to a wealth of actionable data about members’ spending habits and preferences. That transaction data is becoming more and more valuable as new business intelligence algorithms are developed. As just one example, the new credit card issuer Petal has developed a model for approving credit accounts based on an evaluation of payment and deposit patterns. 

This emerging underwriting strategy has the potential to disrupt lending by CUs and banks—but also to provide a new tool for financial services providers. It suggests the possibility of additional innovations to leverage payment data to improve service delivery, cross-sell other services or even create new financial products. In an era of persistent rate margin compression, credit unions need to be attuned to this prospective path to profitability. 

The intertwined business imperative for focusing on payments is: (1) to sustain this primary touchpoint with members by making it seamless, easy and advantageous for them to use your cards in their digital payments and (2) to dig for insights from those transactions to find ways to improve your products and service delivery. To keep pace with disruptors in the digital payments ecosystem that aim to shoulder your credit union aside, build on these pathways to demonstrate the enduring value of your member relationships.  cues icon 

Tony DeSanctis is a senior director for CUES Supplier member and strategic provider Cornerstone Advisors, Scottsdale, Arizona.

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