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Emerging Payments:The Next Step in Providing Member Convenience via Channel Expansion

Wh iTE PaPEr

introductionCredit unions are seeing strong interest in P2P and digital wallets by prospective and existing members. In this white paper, we will explore what’s happening in the world of payments that is attracting the attention of credit union members, and thereby requiring the attention of credit unions.

We will look at this issue by first looking at the current market situation, define our terms, review key recent developments, and offer recommendations from CO-OP as we all move forward together into the brave new world of emerging payments.

The SituationSo, what is happening in the world of payments that requires our attention?

The short answer is that consumers have changed. Today’s consumer has a kaleidoscope of options to access their most critical, need-on-a-daily basis data: their contacts, their calendars, their photos and videos, and their finances. With technology, people can connect instantly—and they do. Mobile devices might as well be an extension of consumers’ arms.

It’s no wonder that consumers want to connect with their money differently as well.

In the same way that people once wouldn’t dream of leaving the house without a traditional wallet, they’re now looking at navigating the world with digital wallets. By storing and maintaining this information digitally, consumers access and use their payment tools wherever they want—whether at a virtual place like a shopping site or a traditional retailer with the technology to process these payments.

Payments are a natural priority, but they’re also an area of concern, as consumers and financial institutions alike worry over the security of digital payments.

And so far, though it’s easy to see how these emerging payment tools are going to grow in importance, this remains an emerging opportunity. Most people aren’t already dedicated to a particular option. And no one has launched a multi-institution, multifunctional “killer” app in this category.

Credit unions are actually in a good position to capitalize on these changes. Why? Because credit union members already enjoy access to technology above and beyond what the average bank customer has:

■■ More credit union members use online banking three times or more per year—73 percent versus 70 percent for large national banks.

■■ Credit union members are much more likely to say their financial institution does an excellent job of providing innovative technologies—60 percent versus 49 percent for big banks.

■■ 85 percent of credit union members say their credit union is excellent at providing online and mobile access.

Clearly, credit unions are already doing a good job of providing online and mobile convenience to their members. And that’s a great position to be in as our society moves into the world of emerging payments.

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If you look at the types of activities consumers want on the fly, they’re fairly straightforward:

■■ They want to be able to check their balances and account histories, to see what’s going on with their accounts.

■■ They want to be able to transfer money between their accounts.

■■ They’d like to transfer money to a friend, even if that friend has an account at another financial institution.

■■ They want to deposit checks remotely—no visiting a branch or ATM.

■■ They’d like text alerts when something significant is happening.

■■ And they’d like to be able to pay their bills digitally.

If you look at this list, it’s almost a ready-made blueprint for engaging your members with convenience. These are simple, everyday transactions that your members want to perform in the most convenient way possible.

Defining Emerging Payment ComponentsLet’s take a look at what emerging payments actually consist of. There are different pieces to the puzzle, so let’s look at them one at a time.

P2P

We’ve been hearing a lot recently about P2P—or Person to Person—payments. These are just what they sound like—payments that go from one account to another. They include Me2Me transactions (between one of my accounts to another of my accounts), Me2You (between my account and yours), and C2B, which moves money from a consumer’s account to a business.

P2P payments work in a couple of basic ways. Some P2P applications use a prepaid debit or credit card. Some pull funds directly from an account at a financial institution.

Most P2P solutions available in the market today rely on the ACH to facilitate the actual movement of the funds between the parties.

Here are some P2P providers you may have heard of:

■■ PayPal, which is probably most familiar, especially if you’ve ever purchased anything on eBay

■■ Dwolla Serve, which is backed by American Express

■■ Popmoney

■■ ClearXchange, which is a P2P plan that links customers of Bank of America, Chase and Wells Fargo

They’re all facilitating the virtual movement of money between individual account holders and their other accounts, other individuals or merchants.

Digital Wallets

Another term you may be hearing lately is “digital wallet.” That might lead you to wonder what a digital wallet actually is.

A digital wallet acts a lot like a regular wallet: It’s a place to keep payment information, along with receipts, coupons, rewards and

loyalty cards, special offers—maybe even passwords and insurance information. The idea is that people can use their digital wallets to store and access multiple accounts and payment tools.

At their core, digital wallets are account aggregators: They keep different account and merchant information all in one place.

But the ultimate value of digital wallets lies in their ability to use

this information to interact with merchants and for consumers to see benefit from that interaction. So, imagine that you’re buying something—either online or at a store—and you use your digital wallet. Your digital wallet enables you to pay for your transactions with your preferred card, and it assembles any relevant coupons or rewards programs and presents those as well. It’s more convenient and, if you’ve ever misplaced a coupon or gone to the store without your rewards card, more effective than a traditional wallet.

But to get to that level of service, you’re going to need both account aggregation and merchant acceptance—and that’s a bit of a mixed bag right now.

For credit unions right now, the key challenge is getting your cards top of wallet. You want to encourage your members to place your card information into whatever digital wallets they’re using. And you want to encourage them to choose your card as their preferred method of payment.

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Fitting Wallets into Overall StrategyWhere do digital wallets fit into your overall member strategy?

Think about your member experience across all channels, then look to see where digital wallets might intersect. For instance:

Digital wallets are potentially relevant to every channel. That makes this a complex product, but it also means there’s a high degree of influence at stake. Digital wallets make connections.

Where Do Credit Unions Fit in? Where do credit unions fit into this marketplace?

The first thing to remember is that there is no mature, dominant wallet product. That’s not a bad thing for credit unions. In fact, it’s probably good news. It means your cards can participate in a variety of wallet programs, even without specific promotion on your part. It also suggests that if you do promote having your members use a particular product, they’ll probably be open to it—and not already wedded to something else.

Security is a concern with all wallets: This is emerging technology.

It also remains to be seen which wallets consumers will like using the best.

Meanwhile, though, your cards can be enabled in multiple wallets. And—if you look at it from the opposite angle—each wallet can have many participants. If one of your members uses Google Wallet, your card is likely to be stored along with other cards.

Taken all together, the state of this technology is such that:

■■ Credit unions can participate whenever members “place” their cards into digital wallets.

■■ Credit unions have to look for ways to compete within wallets for “top of wallet” status.

If you’re interested in looking at digital wallets to see what they’re about, here are a few of the big names in play:

■■ Two of the biggest players out there today are Google and PayPal. Google wallet launched over a year ago in September 2011, and PayPal moved their digital wallet into the brick and mortar space earlier this year.

■■ Isis, a joint venture between AT&T, T-Mobile and Verizon, officially launched in October in Salt Lake City, Utah, and Austin, Texas, after initially being announced two years earlier.

■■ American Express and Walmart teamed up and announced Bluebird this past October.

Other Types of WalletsAs P2P payments and digital wallets are beginning to catch consumer interest, we’re also seeing other types of emerging payments being developed.

Again, these payment solutions bypass cards and are driven entirely by data. For instance, customers at Home Depot no longer need to bring a card to pay for their purchases. Using a phone number and PIN, customers can now pay in-store using their PayPal accounts.

You may be familiar with Square: They’ve had a number of commercials on recently promoting their payment device that turns your smartphone into a POS terminal. It’s hugely popular with more than two million small businesses and Square is now handling more than $10 billion worth of transactions annually. Square also launched Pay with Square, which is an app that allows consumers to make card purchases without their cards at selected merchants.

The process is seamless—and it’s pretty cool. You link a credit or debit card to your Square account and open “tabs” at places you’d like to buy things. When you go to one of those locations, your phone automatically sends your name and photo to the merchant’s register.

When you’re ready to buy, you tell the cashier your name; they check your photo against the one Square sent them; they make a few taps on screen and you’re done. Not only do you bypass your regular wallet—you can leave your phone in your purse or pocket.

As mentioned, this only works at selected merchants—as of July, there were 75,000 Pay with Square merchants.

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What is NFC? Another option you may be hearing about is NFC, or Near-Field Communications. Simply put, this is technology that allows for the communication between two devices in close proximity to one another. Typically, when we’re talking about mobile payments, this means communication between a merchant’s system and a consumer’s phone.

NFC has the advantage of sounding very plausible. Consumers already have phones. Merchants want mobile payment capability.

Card issuers like this system, too, because NFC technology operates according to traditional card issuer/acquirer relationships. Financial institutions are still involved in the value chain. Wallet providers like Google, Isis, MasterCard and Visa are all banking on this technology.

But NFC has a few obstacles:

The U.S. is nearly a decade behind the European Union in adopting chip reader terminals at the point of sale—and that’s slowing down NFC adoption. What happens in this segment is going to depend on how quickly and enthusiastically merchants, phone manufacturers and consumers take to it. Gartner, Inc. estimates by 2015, more than 50 percent of the handsets will have NFC. But potentially, if another technology takes root more quickly, NFC could be lost in the shuffle.

recent Developments in the MarketplaceSo, we’ve already seen that the marketplace for emerging payments is a little like a swap meet: There’s a lot of activity, a lot of interesting things to see, and quite a bit of fragmentation.

It’s really impossible to capture everything that’s going on in this marketplace right now, but we thought we’d look at a few significant developments that have happened recently.

First, there was a lot of speculation before the iPhone 5 came out about whether Apple would include an NFC chip in it.

As it turned out, they didn’t.

Bringing NFC to the iPhone 5 would have been a massive boost to that technology. Since it didn’t happen, many are wondering if Apple is planning to leapfrog NFC altogether—and also wondering whether NFC will find any traction without iPhone capability.

In another development, Bank of America announced this past fall that they were looking into using Quick Response or QR codes to enable mobile payments. Are they also giving a pass to chip technology?

Earlier we mentioned Pay with Square (see “Other Types of Wallets”). This payment system recognizes account holders by name and identifies them by photo. Starbucks is now using it to create a personalized, seamless customer experience:

■■ Square recognizes wallet holders as they approach the register.

■■ If that customer has a “usual” order, the sales associate sees it and can offer it as an option.

■■ The customer pays without using either a wallet or phone.

■■ Because it’s linked to a debit or credit card, this app doesn’t need to be reloaded separately.

If you think about the value of being recognized at a place you visit every day—not just by the same barista, but by the store itself—that is a very powerful customer service tool.

recent Developments: isis/Google Wallet and BluebirdWe’ve already talked about a few digital wallets that are available right now. If you don’t have a digital wallet yet, it might not be because you’re lagging behind the technological curve. It might be because this marketplace is still in flux. Two major ventures—Isis and Google Wallet—have great pedigrees and significant backing, and neither pilot seems to be off to a dominant start.

In a twist on positioning, Walmart and American Express offer Bluebird—a payment account that’s billed as an alternative to debit and checking. Daniel Eckert, vice president of financial services for Walmart U.S., said in an interview that Bluebird is for “those customers who are waking up to the skyrocketing costs of having a checking account.”

But really, it also capitalizes on consumers’ growing comfort level with digital payments. Bluebird offers:

■■ A digital wallet

■■ P2P payments

■■ Mobile app functionality

■■ The ability to control subaccounts for friends and family from a smartphone

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recent Developments: Paypass/PayWave, ClearXchange and MCXOffering new types of payment processes doesn’t guarantee success. Both MasterCard Paypass and Visa PayWave have underwhelmed consumers so far. Not surprisingly, both MasterCard and Visa are working on wallet products around these programs.

ClearXchange marks an interesting turn for these three big banks—Bank of America, Chase and Wells Fargo. They’ve actually teamed up to offer ClearXchange, which will enable P2P payments between customers of any of these banks. The payments are powered by ACH.

Also in the works: A large group of top retailers are banding together on a mobile commerce platform called MCX, or Merchant Customer Exchange. The retailers include 7-Eleven, Best Buy, CVS, Target, Walmart, Dunkin’ Donuts and Gap. MCX will enable customers to use branded credit and debit cards, proprietary credit and loyalty cards across the system on any smartphone. The idea behind this was for merchants to reduce their transaction costs, but the cooperative model is also interesting.

recent Developments: EMV Finally, all card issuers are looking at the issue of EMV. Europay MasterCard and Visa is on its way to becoming the standard in the U.S.—although the rate of conversion is still fairly slow, with full conversion years away.

For those of you who aren’t familiar with them, EMV-enabled cards house their own microprocessor chips. Because of that, they simply can do more than a traditional magnetic stripe card.

It’s very likely that as EMV becomes more the standard, and merchant POS platforms are upgraded, the infrastructure will exist to support NFC contactless payments, as well as biometric verification and other payment innovations. Like all of these technologies, though, EMV is still in its infancy in the U.S.

CO-OP’s View: recommendations, Vision and SolutionsWith so much in flux, where does CO-OP see the industry going from here? There are no crystal balls here, but one thing we are confident in is that the playing field as we know it today will be different in six or 12 months. Given that and all of the unknowns, and the emerging nature of these payment types, we have a couple of suggestions.

The first bit of advice is to keep it simple, and we might suggest a combination of education, awareness and strategic planning.

This is a great time to familiarize yourself with the tools and options that are in the market today. If you haven’t been using PayPal, check it out. You might even consider using the services in the market today. Download a digital wallet and see how it works. Pay close attention to the experience—the type of information that is being requested on both the sending and receiving end of any P2P transactions. Look for new developments in the news.

Third, communicate with your members about these issues by discussing wallets—how they work and what members should consider when signing up for any electronic wallet. You might want to discuss security and what type of information they provide—and to whom—during any registration process. Showing them that you’re familiar with emerging technology and that you can help them plug in via your credit union is important now. You want to establish your credit union as a source of information.

Fourth, take a small first step. This may include participating in credit union sponsored wallets and maybe even employee pilots to test out both the experience and the acceptance of digital wallets in the market. This field is still very much up for grabs. Until clear leaders emerge, it’s anybody’s game. Investing too heavily in any one option can be risky.

Of course, we also recommend that credit unions find a trusted partner to help them make sense of emerging payments—with the unique interests of credit unions in mind.

Getting StartedDigital wallets can already become part of your member strategy. Look across a variety of channels, including mobile, online, wallets, rewards and loyalty. In the big picture, you want your members to be able to access you kaleidoscopically.

And in that big picture, you also want to keep the relationship between you and your members strong. When you provide the kinds of payment options your members want, you keep your credit union relevant.

Remember, too, that getting members to use your existing cards keeps you relevant as well. For now, most digital wallets hold cards much the way traditional wallets do—so keeping overall card usage strong is a great way to build a strong digital presence as well.

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What CO-OP OffersCO-OP is already preparing for the world of emerging payments. If you are using CO-OP Connect, you have infrastructure at the ready to take advantage of new tools as they become available.

CO-OP offers a real-time Good Funds model, which meets member expectations of immediacy. New payment technology definitely isn’t about waiting days and days for funds to move. And CO-OP also offers flexibility, so that you can tailor your programs to fit your members’ needs—and the needs of your credit union. One size doesn’t fit all.

Again, strong overall card usage is a great way to boost digital wallet share. If you’re using CO-OP Total Revelation analytics, you can increase usage by learning your members’ preferences and spending patterns. In turn, use that information to drive digital wallet share. For example, you can offer double rewards points when members use their cards via a digital wallet.

How does CO-OP plan to integrate P2P and digital wallets in the future?

■■ First, by creating an industry asset in the form of a payments network that operates online, and in real-time. That’s the backbone to everything.

■■ Next, make it easy for members to link emerging technologies to their accounts.

■■ CO-OP is looking to form industry-leading strategic partnerships that deliver the maximum number of merchant locations for POS transactions.

■■ We will work directly with credit unions to ensure their cards are top of wallet.

■■ An ongoing priority at CO-OP is creating a user interface that is not only fun and frictionless, but that’s also delightful.

■■ CO-OP isn’t taking an exclusive approach. Our intention is to allow credit unions (and credit union members) to participate in CO-OP’s wallet or anyone else’s.

■■ Our goal is to afford easy integration with existing mobile and home banking applications. If you have CO-OP mobile banking and home banking solutions, you are already on your way to providing some of the services we’ve discussed here.

■■ As always, security is critical.

■■ Finally, in everything we do, we’re keeping credit unions and their members in mind. CO-OP is always looking to provide a solution that’s good for credit unions—and that strengthens the relationship between the credit union and the member.

Currently, CO-OP offers the following solutions:

■■ Pilot NFC programs—MasterCard Paypass and Visa Paywave—are still running, though merchant enablement is low. Look for digital wallet offerings surrounding these products to come.

■■ Our eCom Bill Payment product has a “pay anyone” transfer function, so members who use this product already have a form of P2P payments.

■■ CO-OP branded cards in digital wallets, including Amazon and Apple.

■■ CO-OP is also running a pilot program that offers Me2Me account transfer. Any credit union that’s connected to a CO-OP switch is eligible.

What is CO-OP working on for the future?

■■ In-Network Me2You transfers

■■ Me2Anyone transfers

■■ An expanded authorization format to enable new methods of payment going forward

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introducing SprigWe’re also very pleased to introduce Sprig. Sprig is actually a larger program that reimagines the shared branching interface. It also features a digital wallet product that credit unions can offer to their members. Phase 1 will be available by the end of 2012. It includes:

■■ A place to store accounts digitally

■■ The ability to do transactions between my credit union accounts

■■ Me2You transactions within credit unions

■■ Remote deposit capture

In 2013, CO-OP has additional features in store for Sprig:

■■ P2P with the ability to pay anyone.

■■ P2P will also be available to integrate with current solutions as a standalone.

■■ Remote Deposit Capture will be available as a standalone.

■■ We’ll be offering wallet partnerships that will expand the options you can offer your members.

■■ And we’ll have mobile alerts to help your members keep track of their accounts.

Those are all on the to-do list for 2013. And of course we’ll continue to monitor and bring you up-to-the-minute, relevant products that enable you to be up-to-the-minute and relevant with your members.

ConclusionThrough education and service on digital wallets and P2P, CO-OP intends to ensure credit unions are at the forefront of financial services technology and convenience for their members. Please do not hesitate to contact your National Relationship Manager if we can provide you with greater detail on the information provided, and on emerging products from CO-OP.

To learn more about how digital wallets and P2P can benefit your credit union, visit www.co-opfs.org, email sales@co-opfs.org or call 800.782.9042, option 2.