16 minutes
The nearly stalled movement toward mobile payments lurched forward in the last quarter of 2014 with the rollout of Apple Pay and signals that CU Wallet and the merchants’ MCX alternative (CurrentC,) would be ready to go in 2015.
Now CU executives are preparing to enter a highway that soon will be busy with vehicles that are partially road-tested, but still somewhat experimental. Getting up to speed safely will be a top priority for the new year.
Payments veterans are convinced that Apple Pay is a pacesetter. “This is the first solution to combine mass consumer access with the existing financial and payments ecosystem,” notes Greg Cohen, president of iPayment Inc., Westlake Village, Calif. “It’s out of the gate with a smartphone, full constituent interest and an installed, at least to some extent, retail payment operating system all working together. Other solutions require workarounds.”
“This is the first mobile payments solution that has the potential to take over the market,” agrees Bob Roth, managing director with Cornerstone Advisors, a CUES Supplier member and strategic provider based in Scottsdale, Ariz. The others—Square, Google Wallet, Visa wallet—were “1.0 solutions, not ready for prime time,” he says. “Apple Pay is 2.0.”
Even with 2.0 technology, the potential lies as much in Apple’s market share as its technology. “Apple could capture 35 to 40 percent of all mobile purchases,” he points out. “The others are struggling to get to 5 percent. Even when they report strong growth, it’s from a tiny base.”
There also are contractual and financial differences between Google and the others that could be important. Many of the earlier mobile payment apps were open to anyone, notes CUES member Thomas H. Gosling, president/CEO of $108 million Bellco Federal Credit Union in Wyomissing, Pa. Bellco FCU members could enroll or not, as they wished, without involving the CU.
But Apple Pay requires a contract with the CU, with a slice of the CU’s interchange revenue going to Apple whenever members use Apple Pay, and that gives Gosling pause as he tries to weigh the tradeoffs. On one hand, Apple Pay will reduce Bellco FCU’s revenue if members use it often. On the other hand, it should reduce fraud losses due to its security features. Will the CU come out ahead financially? “That’s hard to calculate, but it looks like we’d do well” with Apple Pay, Gosling concludes.
There are different ways to calculate the true cost of providing Apple Pay. Apple’s interchange slice yields a modest number. When Richard Crone, founder and CEO of Crone Consulting, LLC, San Carlos, Calif., analyzed things like ad revenue from mobile commerce relationships and other factors, he got a higher number—$300 per active user per year on average.
“For every member that Apple or Google or another third party enrolls, that’s a $300 per member per year donation to Apple—or Google or PayPal—money lost to the credit union,” he says. CUs can avoid losing revenue to third parties or being overwhelmed by large players with large budgets by collaborating through a credit union service, which is how CU Wallet would be offered, Crone says.
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CU Wallet vs. Apple Pay Will Apple Pay knock out CU Wallet, the CU-centric mobile payments venture? Probably, some say. Others are not so sure. “The jury is still out,” says David Hall, SVP/vendor alliance partnerships at CUES Supplier member PSCU, the St. Petersburg, Fla., payments CUSO. “But Apple Pay has sharpened the focus and moved us closer to the point where other ventures will fail or succeed. CU Wallet carries the CU brand. There could be an opportunity for them to succeed alongside Apple Pay, but probably not as the alternative to Apple Pay.” CU Wallet is stuck in 1.0 status, says Bob Roth, managing director with Cornerstone Advisors, a CUES Supplier member and strategic provider based in Scottsdale, Ariz. “It was a good idea at a good time, but it has been overtaken by market developments”—the 2.0 products, Apple Pay and perhaps CurrentC, he explains. Kirk Drake, president/CEO of Ongoing Operations LLC, Hagerstown, Md., and co-founder of the CUSO that sponsors CU Wallet, rejects the idea that Apple Pay will undercut the 2015 launch of the CU-branded initiative. Apple Pay presents “the same old approach we saw in Google Wallet, and it’s running into the same merchant resistance roadblocks that slowed Google Wallet to a crawl,” he says. But he welcomes the Apple Pay buzz because it raises interest in mobile payments, which will help all providers. Perks of CU Wallet CU Wallet has some clear advantages over Apple Pay, Drake insists. One is that it will be merchant-friendly and will support cooperation among CUs and merchants. “Merchants can pay credit unions to put their merchandise in front of CU members,” he says. And that means new revenue instead of reduced interchange, a clear financial advantage for CU Wallet issuers. Also, Apple Pay only works with near field communication technology, where you can pass a phone close to a point-of-sale reader. That’s nifty but expensive for merchants, which is why most merchants can’t accept Apple Pay, he points out. CU Wallet will support multiple device pairings, but will initially rely on reading QR code technology, which only requires a simple software change that is easy and cheap for merchants to make, he claims. “Then an algorithm triggers the wallet app and a token is sent to the cloud. Paydiant settles the transaction,” he explains. When payments are made through Apple Pay, users have to go to Apple, not the credit union, to see a transaction record, which inserts a third party between the credit union and its members. “That’s very bad for CUs,” Drake says. CU Wallet has signed up 80 to 90 CUs and has just started pilots with its first group, Drake reports. Apple Pay is a welcome warning to credit unions that they need to back their own private-label solution quickly or miss out on the action, he says. “2015 will be a critical year,” he insists. Credit union leaders absolutely should be looking at MCX and CU Wallet as well as Apple and Google, says Chris Gardner, co-founder of Paydiant Inc., a Boston-based mobile payment platform provider. MCX members handle a third of all U.S. purchasing transactions, he points out. Since MCX and CU Wallet will be running on the same Paydiant platform, “there’s a lot of potential for them to work together,” he says of his two clients. |
High Interest
But revenue concerns are not holding back many CUs. A lot of credit unions that took a wait-and-see position during the experimentation phase now seem ready to stop idling and start accelerating.
“Many of our clients—half of our credit card group—want to offer Apple Pay immediately,” reports Branden Kuehl, senior product manager at The Members Group, a CUES Supplier member in Des Moines. “We’re preparing to onboard them as quickly as possible. We collect information, do the legwork for them, complete the testing. We have several CUs in pilot. We’re just waiting for Apple to open the gates.”
The powerful Apple brand and concern about security breaches are driving high interest, he explains. “Pretty much everyone we work with wants in. This is more like a land rush than Google Wallet or other mobile payment launches.”
“When Apple announced Apple Pay in October, we scheduled webinars and 138 of our CUs signed up,” reports David Hall, SVP/vendor alliance partnerships at CUES Supplier member PSCU, the St. Petersburg, Fla., payments CUSO. “There is a lot of interest. We have several clients in pilot, ready to turn on Apple Pay with First Data as their processor as soon as Apple gives the green light,” he says.
A Growing Marketplace
Apple picked 10 of the largest issuers for the first wave. A lot more were waiting in line as of January, Hall notes. PSCU is working with the 138 clients signed up for Apple Pay on a top-of-wallet strategy and how they can push their card over all others, he says. “The CU brand aligned with the Apple brand is pretty powerful,” he notes.
CUES Supplier member CO-OP Financial Services, Rancho Cucamonga, Calif., is another CUSO busy helping CUs get ready to sign up for Apple Pay. “The early indications are that many of the 1,100 individuals who participated in our tokenization webinar are planning to move forward with Apple Pay,” reports Michelle Thornton, core products manager. “It’s big. They’re doing it to satisfy members. They don’t want to be sidelined for this one.”
There is a rush, Thornton notes. “Everyone is jockeying to get their card in the top spot in digital wallets. Credit unions are scrambling to get in the early phases of the competition. That’s seen as pretty important. Google and MCX will be strong competitors, but you don’t want to bet against Apple.”
CUs savvy about mobile payments, like $2.5 billion Service Credit Union, Portsmouth, N.H., are lined up to introduce Apple Pay as soon as possible. Service CU has cards in Google Wallet. It supports Visa Checkout, which assists with online commerce. It has held discussions with CU Wallet.
“We try to accommodate whatever members want to use,” says Bill Arnold, chief information officer. “Enrollment in any product is completely member driven.” And so far members aren’t doing a lot of driving. Mobile payment volume is minimal. But Arnold is convinced this is about to change.
“Apple Pay is a breeze to use,” Arnold testifies. “All you have to do is wave the phone by the point-of-sale sensor with your thumb on the ID button. With Google Wallet, you have to unlock the phone with a code and then unlock the app with another code before you can transact. Swiping a card is still a pretty easy way to pay. It hasn’t been easy for mobile payment solutions to improve on card convenience, but Apple Pay does.”
And the mobile wallet is displacing the leather wallet. “I sometimes leave home without my wallet, but never without my mobile phone,” Arnold adds.
Ironically, to test Apple Pay, Arnold and a few other Service CU employees are using other issuers’ cards for now, instead of the CU’s own.
The Security Factor
Arnold sees Apple Pay as a game changer because of security as well as ease of use. It’s all about data control. “You enroll your card number with Google. Apple doesn’t hold your card number,” Arnold notes. “With Apple Pay, the only people who see the data are the people who have to see it—the issuer, the card processor and the payment networks. These have all tested as quite secure. The breaches have mostly occurred around merchant databases. The fewer servers that store our card data, the happier I am with security.”
Security-conscious Service CU went with EMV a couple of years ago and now has over 30,000 chip cards in active use, he adds.
Security is a strong selling point for Apple Pay, Roth agrees. “It’s first rate. It has the biometric authentication through the thumb print, and it uses tokenization. It keeps the data away from the merchants, which is where hackers have been able to break in. The card networks are not easily hacked,” he points out.
“Of course mining the payment data and using it to increase sales is the holy grail for merchants, which is why they will fight Apple Pay.”
Supposedly, Apple Pay is easy for CUs to implement. “With Apple Pay, you plug it in and play,” Kuehl notes. “With alternatives like CU Wallet, there’s a lot of work to do enrolling merchants, which takes time.
“Getting merchants to buy into any mobile wallet’s value proposition is very hard,” he adds, “even for the largest players like Google, Apple and SoftCard . Merchants will struggle with the concept of adopting multiple wallet solutions at a terminal, largely because that involves software upgrades and multiple checkout experiences.”
Still, implementing Apple Pay may not be quite as simple as some CU leaders think. “Apple requires that 95 percent of your credit cards and 95 percent of your debit cards go at the same time if they are the same brand,” reports Tom Davis, SVP/finance and technology at Tampa-based Card Services for Credit Unions, a CUES Supplier member. “Some CUs use different processors for credit and debit, and if one processor is ready to go and the other one isn’t, you have to wait.”
There also are issues around lost or stolen tokens. CU managers are frustrated that there’s more they need to do than they expected, and they’re looking for a vendor that will take on this tier 2 support, but so far there aren’t many, Davis notes. Outsourcing support for Apple Pay would be an expense in addition to what the CU pays Apple and what it pays Visa or MasterCard for tokens, he points out.
Preparation to bite into Apple Pay consists of two big things, Thornton says: The first is preparing card art for the card members will load in their iPhones when they get Apple Pay ability. Users will see a digital image of the card they choose to use with Apple Pay, she explains. The second is training call center staff for the calls that come when the new service is rolled out.
What’s Missing
If Apple Pay has security, ease of use, the most popular mobile hardware and compatibility with the existing payment system infrastructure, there are three important things it lacks to some degree: loyalty and rewards features, merchant acceptance and hardware saturation.
Apple Pay without rewards could be like a hamburger and French fries without the hamburger. “A Macy’s store card offers the cardholder promotions and incentives to use the Macy’s card in Macy’s,” Arnold explains. A customer could pay with Apple Pay linked to a bank card, but they wouldn’t get the rewards. Instead of making one card the default card for all transactions, customers may set up their smartphones to use different cards in different locations, he reasons.
“Consumer value is the key to success, and Apple Pay offers only modest value now,” Hall notes. Apple Pay currently is a nifty, secure way to pay for purchases, but it hasn’t captured the shopping experience enhancements that are the big selling points of mobile commerce.
“Adding rewards, discounts, coupons, self-service functionality, alerts, transaction-blocking and balance reporting through new features or integration with mobile banking platforms will be what could make Apple Pay or its rivals irresistible,” he says. “You can’t make it as a payment enabler alone.”
Apple Pay in itself doesn’t solve a real problem today, Cohen agrees. Sure, it’s quick and convenient to just put your thumb on the button and walk away with your purchases, but the rest of the check-out process is unchanged. Maybe you shave a second or two off the time it takes to pay. The real value will come when loyalty programs and other shopping incentives are integrated, but you need to let the consumer get comfortable with simple payments before you load in the complexity, he advises.
Apple may have taken the lead, but the race isn’t over. If Apple Pay is the first 2.0 solution, the second probably will be the merchant-sponsored CurrentC. Then the battle will rage between these two big rivals, Roth predicts.
Apple Pay is financial institution friendly and uses the MasterCard and Visa rails for settlement. CurrentC will cut out the financial institutions and the card rails, using FIS, Jacksonville, Fla., as a processor and something resembling PayPal for settlement, he suggests. It will be more complicated and harder for consumers to use, but it will work with any mobile device, not just iPhones and iPads, he notes. It should become available sometime late this year.
“MCX still doesn’t have a product,” Hall notes. “We won’t find out what CurrentC is until later in 2015. The suspicion is that they will settle through the ACH, which won’t be good for issuers that depend on interchange. And the suspicion is that it will be harder to use than Apple Pay, but perhaps richer in loyalty rewards.”
Hardware is still a big limitation. At press time, only the Apple iPhone 6 and 6-plus, as well as the latest iPad release, could use Apple Pay. The iPhone 6 is selling faster than iPhone 5, Hall notes, but it will take time for even iPhone fans to get the hardware in their hands to use Apple Pay.
Roughly 60 percent of American consumers have smartphone access, Roth reports. Of those, 25 percent use Apple phones. Of that 25 percent, just 7 percent use the iPhone 6 or 6-plus, which would be required to use Apple Pay, he points out.
A $250 million CU that offers Apple Pay soon might have just 20 members sign up to use it, Roth suggests, but those 20 early adopters are important; they will work out the bugs and prepare the way for mass market adoption.
Merchant acceptance also limits the range of Apple Pay. Most merchants still don’t have the equipment to capture Apple Pay transactions, Hall points out. And the big merchants that have the equipment don’t like Apple Pay and the way it separates them from customer spend data, so they are backing CurrentC as an alternative. Many merchants will fight Apple, but they won’t fight their own customers if they choose to use Apple Pay in significant numbers, he speculates.
Balanced Approach
All things considered, Apple Pay still looks good to a lot of CU executives. Bellco FCU is ready to wade, but not dive into the still somewhat muddy waters of mobile payments.
“We don’t want to be in the first wave of financial institutions offering Apple Pay,” Gosling says. “We don’t mind missing the double posting and other glitches that come on the Day One.”
But he thinks the glitches will be temporary.
“I’m pretty sure Apple Pay will succeed. When it was tested last fall to pay for World Series tickets, it worked well. The big issuers that have worked with Apple to develop the product are all on board. We’re still in watch mode, but I’m pretty sure we’ll take the plunge soon.”
Gosling’s CU has strong credit and debit card rewards programs, so “it’s important to us to be top of wallet. If our members are using their iPhones to make payments, we want our card to be their first choice. Our top priority is providing the services our members prefer to use. That’s what Apple has done successfully with its customers.”
Richard H. Gamble is a freelance writer based in Colorado.
