A New Payments Paradigm

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

March 05, 2014
KEYWORDS payments , technology
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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

What is the risk

Chris Otey
March 12, 2014 3:10 pm
The biggest risk for credit unions today is simply doing nothing. Allowing members to find third parties for wallet solutions welcomes the risk of disintermediation. The CU then becomes a transaction processing commodity.

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