What's in Your Wallet Strategy?

A ubiquitous TV ad ends with the question, “What’s in your wallet?” For credit unions, the quandary is not just what position their debit and credit cards occupy in members’ billfolds, but whether and how best to help equip them with a service that may someday replace plastic payments.

Even with many questions about what form mobile payments will ultimately take, some observers suggest CUs should be following developments with this new service and weigh the potential gains in being among the first financial institutions to offer mobile wallets.

“We’re already seeing a major shift in the way our members are doing business,” readily evident in the decline in check and card transactions, says Jeff Kennedy, CSE, president/CEO of $890 million TwinStar Credit Union, Olympia, Wash., with 101,000 members. “It’s important that we grab hold of this new technology.”

More to the point of timing, Kennedy admits, “Google Wallet scares the crap out of me.” Credit unions are just starting to get the hang of using payment data analytics for targeted marketing, he notes. If Google gains access to that same information through its mobile wallet, members could be flooded with financial services pitches from other providers before their credit unions can get a word in.

Beyond Google, PayPal has a large foothold online and keeps chipping away at interchange income by replacing card transactions with ACH payments. And cell phone providers are trying to take charge in the payments arena with their own.

With all these new entrants in mobile payments, “we don’t have to worry about becoming insolvent. We have to worry about becoming irrelevant,” Kennedy warns.

Even as Visa and MasterCard begin transitioning from magnetic strip to EMV chip cards to enhance security, TwinStar CU is looking beyond debit and credit cards to a future in which members wave their smartphones to make payments. It has signed up with CU Wallet as that company begins a mobile payments pilot.

“Right now, there are so many players in the mobile wallet market,” Kennedy says. “CU Wallet has an opportunity to be a leader in our industry, but lots of it is based on merchant acceptance, on scale. We’d like to be in the position of helping to shape solutions for our members. We don’t just want to be handed the fee schedule by other big players.”

CUs have an advantage with such emerging technologies as mobile wallets, suggests Sabeh Samaha, president/CEO of Samaha & Associates, Inc., Chino Hills, Calif. “Credit unions are a good place to start, because they are small and nimble, though getting big merchants to buy in may be a challenge.” (There’s still a lot of point of sale infrastructure work to be done to allow members to use their mobile wallets to pay for in-store purchases.) Even there, CUs with sponsor or SEG ties to big merchants or retail chains may be able to create partnerships for developing solutions, he notes.

Ginger Schmeltzer, SVP/emerging payments with Fiserv, a CUES Supplier member based in Brookfield, Wis., agrees. “I think credit unions in theory could partner up with a mobile wallet and start to drive members to participating merchants in their areas. Compared to the big banks, credit unions really have an opportunity to drive some interesting things. At the end of the day it doesn’t mean that solution will be the ultimate winner, but they’ll be interacting with their members in this space and developing their understanding of what is possible.”

Wallets in the Works

Hundreds of e-wallets are in the works or have been introduced, from those that facilitate online shopping (like V.me from Visa) to solutions for small businesses (think Square) to Google Wallet. One in five Americans, roughly 43 percent of smartphone owners, used some form of a virtual wallet in 2013, and that number is expected to double by 2017, according to a survey by market research firm Parks Associates. Here’s a sampling of mobile wallets in development in the CU industry.

Developing a wallet to connect through mobile banking: CU Wallet was scheduled to roll out a mobile payment pilot in March, enabling a Nevada CU’s members to buy Subway sandwiches with their smartphones.

This pilot is the next step in the initiative CU Wallet is leading within the industry in partnership with Boston-based Paydiant on its white-label mobile wallet app, developing a solution that can be integrated into credit unions’ existing mobile banking services. Paydiant is also working with participating merchants to develop discount and loyalty/reward programs as part of its mobile wallet, says Paul Fiore, CEO of CU Wallet.

Interest in mobile wallets is evident in the fact that CU Wallet’s subscriber base went from 15 credit unions serving 2 million members in September to 45 subscribers with a total 5.5 million members in January, says Chris Otey, VP/sales.

Devising an e-wallet that works with multiple mobile banking apps and core systems is a tall order, but may be the best path to gather a large enough member base to draw in big retailers, Fiore says.

Piloting mobile payments at the pump: Florida-based CUSO United Solutions Co. is partnering with mShift’s AnyWhereMobile Payment Network to develop a mobile wallet with the aim of streamlining payment processing and passing along the resulting savings to merchants and members. AnyWhereMobile does not run on existing “payment rails” but rather works directly between merchants and member credit unions, says Jim Giacobbe, president of United Solutions.

Citing “a lot of secret sauce” in the patent-pending payment pipeline mShift is developing, Jeffrey Chen, VP/business development, declined to discuss specifics. The company’s mobile wallet is currently in closed beta testing with a CU whose members can use its app at a participating gas station chain. By routing mobile payments through the lowest-cost electronic channels, the goal is to support cutting merchants’ interchange fees to half the standard credit card rate as an incentive to sign on to the AnyWhereMobile network—and to offer members a discount at the pump when they pay with their mobile wallets.

Participating CUs would receive lower interchange—21 cents instead 50 cents for CUs exempt from the debit interchange limits imposed by the Durbin amendment—but their net per-debit transaction would not change, Chen says. “By lowering processing costs by eliminating those pennies collected by middlemen, credit unions would maintain their margins.”

The mobile wallet app is being piloted with gas stations because “they have tons of repeat customers and the most pain in processing transactions. They pay exorbitantly high fees for credit card transactions at the pump, to the point that they make no money there,” he explains. “And drivers are price-sensitive about gas. They’ll drive a few extra blocks to save a few cents a gallon.”

Your brand on Google Wallet: CUES Supplier member PSCU, St. Petersburg, Fla., has adopted a white-label partnership with Google Wallet so member CUs can connect their members to this service while keeping their own brands front and center. “The service is free, so we offer the assistance, education, and implementation of a Google Wallet presence,” says Kristin Scharf, VP/innovation.

If a CU’s members are already signing on for this wallet, the partnership allows the CU to maintain a brand presence and the top-of-wallet position of its debit and credit cards, Scharf says.

With about 10 percent of PSCU’s member CUs signed up, the adoption rate for CU-branded Google Wallets is below expectations, likely owing to the slow acceptance of near-field communication technology at the point of sale and the many other mobile wallet options currently in development, she notes. PSCU continues to explore other mobile wallet opportunities, including investing in or partnering for a CU industry solution or building its own.

“We want to make sure our members can offer their members as many options as possible to transact in the way they want to transact,” she says. “Members are going to be searching out these alternative payment methods. We want to make sure credit unions are represented no matter what channel or device their members want to use.”

Online with MasterPass: MasterCard’s digital wallet, MasterPass, has both an online component (an eight-digit code that populates both payment and delivery information) accepted at 30,000 e-commerce sites and a point-of-sale capability currently in development.

$1.6 billion Lake Trust Credit Union, Lansing, Mich., was the first CU to pilot its own branded MasterPass site, in partnership with MasterCard International, a CUES Supplier member based in Purchase, N.Y., and PSCU, in April 2013.

Registration has been fairly slow, with 417 members signed on as of December, about half of whom had added cards to their online wallet, says Noreen Schafer, Lake Trust CU’s virtual solutions sales and product manager. Still, participating in this pilot “has allowed us to learn more about this evolving space, establish a presence, and assess member interest. They are going to drive adoption as new solutions roll out.”

Every CU should be devising its own e-payments “road map” to address issues from member loyalty to the revenue implications of alternative payment paths, says John Ainsworth, group head of MasterCard’s independent bank and CU team. “From a relationship standpoint, they want to be the ones that are engaged with their members. And because the adoption curves can be so fast, the cost and effort for them to maintain or catch up in market share are going to be significant.”

Managing multiple wallets: Members eager to embrace mobile payments are likely juggling multiple e-wallet and merchant apps. Fiserv is developing Master Wallet as part of its Mobiliti mobile banking platform to provide members with a one-stop shop to manage all their mobile payment options.

“There is so much fragmentation around digital wallets,” Schmeltzer says. “Financial institutions of all sizes are anxious to get involved in the space, but there really isn’t a clear winner and no leading technology. Consumers are confused; banks and credit unions are confused. The idea behind Master Wallet is to give financial institutions the opportunity to engage in the space without having to commit to one particular player or technology.”

Fiserv is developing Master Wallet as an “agnostic” interface enabling consumers to choose which mobile payment wallets they wish to participate in and how. CU members could use Master Wallet to add card information to wallets and payment apps in which they are already enrolled, and allow them to manage their accounts by doing such things as setting dollar limits on transactions. The product retains the financial institution and its mobile banking app at the center of the user experience for cloud-based and NFC mobile payments.

“We’ve developed a prototype, and we have it ready to bring to the product stage, but we have not seen clearly if there is a market for this approach,” Schmeltzer says. “We have gotten lots of interest, but relatively little commitment at this point.”

Time to Test the Waters

TwinStar CU’s Kennedy says he’d like to put all the mobile wallet providers “in the same room and lock the doors until they figure out a common solution.”

“Credit unions have to be relevant in the payments space, or we’ve got a much bigger fight on our hands,” he says. “Today we’re worried about getting to the plate. In the future, we may not even have a seat in the stadium.”

PSCU’s Scharf says there’s no question that Google is taking a loss on its wallet offering to leverage transaction data. While CUs don’t need an unprofitable offering, they might lose if they turn their backs on this service and distance themselves from members who are eager to take the next step with mobile payments.

“We need to make it about members and their choice about how they want to transact, not about preserving data for the credit union,” she says.

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.