The Importance of a Payments Strategy

Sponsored by Fiserv  

I recently came across a shocking statistic: 87 percent of U.S. banks do not have a formal payments strategy according to the American Bankers Association 2017 Payments Strategy Survey. Given the large number of technology firms entering the financial market and positioning themselves among consumers, merchants and financial institutions, it seems that banks would see the competitive threat and quickly take action. Instead, they may be simply ignoring it and continuing with business as usual.

For credit unions, the survey findings highlight the value of a clear payments strategy for increasing membership. Several factors come into play as you plan for growth, including interchange, credit and debit cards, and person-to-person payments.

Interchange is enormously important to the financial services industry. Based on data from Raddon Performance Analytics, income from the combination of debit interchange (28 percent) and credit interchange (19 percent) now represents nearly half of all non-interest income for the typical institution. Part of the reason for the low numbers is the decline of overdraft. However, Americans’ continued use of cards as their primary method of payment is making an even bigger impact. The result of the shift can be positive for credit unions that have a large number of members using cards and even better if those members are doing so responsibly.

Even though card usage numbers are favorable today, P2P payments, which avoid the interchange rails in many cases, are starting to pose a threat. Consumer use of P2P is growing rapidly, and financial institutions need to recognize that the behaviors of members of tomorrow will have a noticeable impact on the payments landscape.  

According to data from Raddon Research Insights, almost 65 percent of millennials have used P2P, which is almost 20 percentage points higher than the rate for members of the next closest generation, Gen X. These two generations average 50 percent use of P2P, making it clear that credit unions must prepare for this payment type becoming the norm. Older generations are also using P2P, albeit to a lesser degree: 30 percent of baby boomers and 18 percent of traditionalists (also known as the silent generation) have made P2P payments.

The survey data also shows that younger consumers are very comfortable moving their money around in new ways. In fact, 44 percent of members of the youngest generation, Gen Z, think that software and technology companies will supplement traditional banks and credit unions in conducting financial transactions in the future. Because these consumers believe that nontraditional providers will offer additional financial options, credit unions need to be aware of the potential challenges those providers present and increase focus on payments. Meeting those challenges will allow you to compete in the future financial services market.

The advice from Raddon is to think seriously and immediately about a payments strategy. Current and prospective credit union members are thinking about it, as are both traditional and nontraditional competitors. 

Andrew Vahrenkamp is senior research analyst at Raddon, Lombard, Ill., part of CUES Supplier member Fiserv, Brookfield, Wis.

Raddon Research Insights examines the financial behaviors, intentions and attitudes of consumers and small businesses on a national scale. Our proprietary research, studies and resulting analysis are delivered in a thought-provoking fashion to equip you with the knowledge and insight to drive better business decisions. Visit Raddon.com to view the related video, “Do You Have a Payments Strategy?” To view recently published Raddon Research Insights studies, go to www.raddon.com/raddon-research-insights/research-studies.