The banks and credit card companies have spent 50 years building a proprietary, locked-down system that handles roughly $2 trillion in credit card transactions and another $1.3 trillion in debit card transactions every year.
Until recently, vendors had little choice but to participate in this system, even though like a medieval toll road, it is long and bumpy and full of intermediaries eager to take their cut.
A new paper from the CUNA Operations, Sales & Service Council, "A Brave New World of Plastic and Payments," noted that all began to change in 1998 when PayPal and other vendors opened the door on a brave new world of payments for the American consumer. Since that time, PayPal made it possible for people to transfer money to each other instantly. And in 2009, PayPal gave a number of developers access to its code and new companies launched.
Moving money, once a function managed only by the biggest companies in the world, is now a feature available to any code jockey.
The code jockeys and entrepreneurs have developed companies that are moving money and making payments for a lot less than banks, credit card processors-and yes-credit unions. More than a billion people worldwide lack access to traditional financial services, yet in 2009, 68% of the world's population had mobile phones. Industry experts predict that 364 million people will use mobile payments by 2012.
Lessons From Developing World
Mobile banking has gained acceptance in the developing world more so than in industrialized nations. To a large extent its popularity in developing nations can be traced to a lack of access to the formal banking sector as well as the relatively high fees of that sector.
For example, Dwolla allows users to swap cash transferred from a bank account with one another via their mobile phones and social media at restaurants and retailers that accept its payments. The founders say that Dwolla is a social experience. Dwolla charges 25 cents per transaction.
Google Wallet is the search engine's entrÃ©e into mobile payments which they are marketing as giving users the ability to "tap, pay and save using your phone and Near Field communication." It will also offer users the ability to store credit cards, offers, loyalty cards and gift cards without the bulk. By taping one's phone, the user can redeem offers and loyalty points.
While mobile payments are a fast moving train in developing countries, consumers in the United States have yet to jump onboard. The availability of traditional financial services is part of the reason. An additional factor is that income from this form of payment systems appears to be limited; at least that is the perception of many in the financial services industry. Consumers in the United States are also accustomed to using credit and debit cards for payment.
The credit union business model for credit and debit cards is evolving as there are economic and regulatory pressures that are dictating change. The current business model, which offers free checking, is paid largely with interchange income, which is likely to decline due to new rules required by provisions of the Dodd-Frank financial reform law, which calls for debit card transaction fees that are "reasonable and proportional to the actual cost incurred."
There are numerous payment options for members and potential members; but how do credit unions stand out in a crowded field-the payment systems market? Plain-vanilla credit and debit cards might be an answer. A number of consumers are looking for a plain-vanilla card without rewards. For CUs, offering simplicity is a real value. Statistics show that credit unions, on average, offer 2% lower rates on their credit cards than banks.
CUs At Tipping Point
American banks are aggressively moving into mobile banking. A look at U.S. Bancorp's offering underscores this strategy. A variety of choices awaits its customers, including mobile banking for users with Blackberrys, Androids, iPhones or other mobile devices. In addition, iPhone customers can deposit checks from anywhere, pay bills "whenever, wherever you want," and use the iPhone app to send money to "family, friends or almost anyone."
As credit unions plan for their future with plastic and other payment methods, they need to take into account the various constituencies they serve. Members' and potential members' concerns are part of that mix, but so are merchants'. Many merchants say that credit card issuers and financial institutions-including credit unions-are taking unfair advantage of merchants, especially when it comes to interchange fees.
Credit unions are at a tipping point and have been for quite some time. Net income and the number of institutions continue to decline. New and innovative income streams are needed. The changes ahead in plastic and mobile payments offer an opportunity to be on the side of the consumer.
Jim Jerving is a freelance writer and frequent contributor to Credit Union Journal. For more info: www.cunacouncils.org