The Future of Mobile Wallets

This is a bonus article from "What's in Your Wallet Strategy?" from the April 2014 issue of Credit Union Management magazine.

There are a lot more questions than answers at this juncture about how mobile wallets will work, when if ever members will embrace this new way of making payments, and what it'll all mean for credit unions. Considering some of these questions may help your credit union decide whether, when, and how to begin offering this service.

What is a Mobile Wallet, Anyway?

There is no common definition about what this service entails, and that may work to credit unions' advantage. "There's still time to define what a mobile wallet is for your members," suggests Jim Giacobbe, president of United Solutions Co., Tallahassee, Fla.

"It doesn't have to mean sticking every credit card you have into your mobile device where credit unions wind up competing against Wells Fargo, Bank of America, and Capital One," Giacobbe says. "Credit unions don't typically compete on price but rather on service. A mobile wallet should be a credit union-owned application that gives members access to payments through their credit union accounts, mobile banking, and remote deposit capture-all their financial services in one place."

Is America Ready for Wallets?

It's getting there. There is still lots of infrastructure, process, and security safeguards to lay for e-payment acceptance at point of sale, and both consumers and financial services providers tend to be cautious when it comes to new ways of spending money, says Sabeh Samaha, president/CEO of Samaha & Associates, Chino Hills, Calif.  

Equipping their stores with terminals to accept mobile payments "is a fairly hefty investment for large merchants to make, and for mom-and-pop operations as well, to get that ubiquitous usage you really need to throw those leather wallets away," says Kristin Scharf, VP/innovation for CUES Supplier member PSCU, St. Petersburg, Fla. "If I had to draw a line in the sand, I would say we would see some consolidation and some decision on the direction mobile wallets are going in the next five years."

But that doesn't mean credit unions should wait and see which solution will take the lead, Scharf cautions. "If credit unions are not seen as embracing these technologies, they will be quickly overlooked by the younger generations. They need to get their brand out there and be seen as leading the way to support any method that their members want to transact in."

The tide could turn even more quickly to mobile wallets as more merchants get on board and begin encouraging their customers to pay by phone, says Les Matthews, senior business leader with CUES Supplier member MasterCard International, Purchase, N.Y. "Once point-of-sale acceptance becomes common, that is when you are going to see broad-based consumer adoption. Once I can walk into a Target or a Best Buy or my grocery store and use my mobile device to check out and I know it's secure, easy to use, and offers added value, it's going to take off."

That added value could take many forms, like being able to check out through your smartphone without having to stand in line at the counter or receiving location-based offers as you walk through the aisles (a text message that offers a discount on the product right next to you for the next 30 minutes), he suggests.

What Technological Conduit Will Become the Preferred Path for Mobile Wallets?

At this point, there is no single accepted technology for facilitating electronic payments. Solutions include transmitting data via near-field communication or Bluetooth/iBeacon or using cloud-based apps and QR codes. Until a clear leader emerges, some mobile wallet developers are working to remain neutral on point-of-sale delivery.

For example, CU Wallet's product through Paydiant is rolling out with QR codes, which CEO Paul Fiore calls "the lowest common denominator that works in every retail environment." But ultimately its mobile wallet is positioned to connect with whatever delivery system gains traction.

The AnyWhereMobile solution currently in testing by mShift with United Solutions also uses QR codes but could be adapted for NFC terminals or other systems such as Bluetooth, says mShift VP/development Jeffrey Chen.

MasterCard's digital wallet, MasterPass, is currently accepted at 30,000 e-commerce sites around the world, and its point-of-sale capability is in development. It might use QR codes or Bluetooth, but Matthews is "bullish" on NFC. A growing number of retailers are installing payment terminals with NFC capability, though it might not be activated yet.

"I don't want to have to pull out my Starbucks app at Starbucks, my Apple app at Apple, and my Wal-Mart app at Wal-Mart," Matthews says. "I want to be able to use one app that crosses all of those boundaries, and that is where the industry is going. But there is still infrastructure to build to make that experience ubiquitous."

What Other Problems Might we Solve With This Technology?

Security and cost will be top of mind for wallet users and providers. As you compare your options for mobile wallet providers, pay special attention to security, Samaha recommends. Card transactions take place in a system backed by a tested security infrastructure, government and law enforcement support to track down bad guys, internal workflow processes, and a known loss range of 5 to 7 basis points. Building a similar framework for mobile payments remains a work in progress.

On the cost front, the development of a whole new way of making payments could provide the opportunity to realize new operational efficiencies in processing e-payments and reduce costs that are cutting into already-declining interchange revenue. That is the challenge mShift is confronting as it works to assemble a new "payment rail" for its AnyWhereMobile network-with the aim of maintaining credit unions' interchange revenue margins while reducing fees for merchants so they can pass along the savings to their mobile-wallet-carrying customers.

What's the Big Picture?

The question is not whether but when mobile payments will replace plastic as Americans rely more and more on their smartphones-and how credit unions will be positioned when that transition occurs, Fiore says. Along the way, Google and Isis will be working to insert their brands into financial transactions and to offer alternatives like stored valued and prepaid debit cards. Others, like Quicken, will be offering mobile services with the aim of siphoning accounts and members away from credit unions. As members increasingly define quality of service by their mobile banking experiences, "these entities are going to be in the middle of the way members manage their finances," he cautions.

"CU Wallet is not competing with Google Wallet," he insists. "Each individual credit union is competing on the strength of its brand with members against Google Wallet. Our aim is for a group of credit unions to join together to be able to combine their expertise and resources to develop a mobile wallet to help offer the best experience for their members and to be in a position to attract merchants and generate new streams of revenue as interchange deteriorates."

The demise of big companies like Blockbuster and Borders provides a cautionary example of not proactively preparing for the impact of your base embracing digital alternatives, Fiore says. "The way people interacted with their financial institutions and managed their money 30 years ago is dramatically different from today. It matters who provides this new touch point. It has to be credit unions providing this ecosystem for their members and for merchants as well."

"It could be 3 years, it could be 20," he adds. "It doesn't really matter. The point is that it's 0 percent now, and it's going to be 100 percent in our lifetime. Why wouldn't a credit union want to start researching now and be at that forefront vs. waiting for someone else to get there first?"

Karen Bankston is a long-time contributor to Credit Union Management and writes about credit unions, membership growth, marketing, operations and technology. She is the proprietor of Precision Prose, Stoughton, Wis.