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Disruption Plagues Payments

By Tina Orem | January 31, 2016

The act of using money to pay for things goes back thousands of years, but in all that time there have been only a few instances of dramatic changes in the way people pay.

Now is one of those times, and it’s putting credit unions at a crossroads like never before. Here are five things about payments that experts say credit unions should expect in 2016.

1. A huge fallout in mobile wallets.

Joe Bizzarro, CEO of payments advisory firm Vizant, said that there are too many competing wallets in the market and they won’t all survive 2016.

“I think one of the big mobile wallets will fail this year, just like Google Wallet did in the past before it got rebranded,” he said. “There’s just too much fragmentation.”

Members don’t decide whether to stay with a credit union because of its mobile wallet options, and credit unions should avoid betting the ranch on one mobile wallet in 2016, Bizzarro added.

Joan Pendleton, director for State Department Federal Credit Union, said she anticipates operational changes in 2016 because of mobile wallet adoption. State Department, headquartered in Alexandria, Va., has $1.7 billion in assets and 71,000 members.

“Mobile wallets, like other technologies being developed or in place, should impact our businesses profoundly,” she said. “Mostly in member satisfaction but potentially in our back offices where fewer and fewer checks are being processed. More members will have access to alternatives than U.S. Mail and brick and mortar.”

2. The proliferation of same-day payments.

In the fall of 2016, same-day ACH is scheduled to phase in, which will eventually increase the movement of funds between financial institutions from once a day to three times a day. The new rules require depository institutions to accept same-day ACH transactions, and there’s a $0.052 interbank fee per transaction for originating depository institutions.

“I think as these processes mature, we will see more and more efficiency in the money transfer industry,” Pendleton said.

One of those efficiencies will likely involve a boost in P2P adoption. According to Javelin Research, the number of mobile P2P users will mushroom from 69 million in 2015 to 126 million by 2020. And by 2019, more than half of all mobile device owners will use mobile P2P. Javelin said those users will likely attract more nonbank competitors, however (think Facebook and Snapchat).

NAFCU Executive Vice President of Government Affairs and General Counsel Carrie Hunt said she expects controversy over same-day ACH to linger in 2016 as well.

“While NAFCU and our members believe that ubiquitous same-day ACH capability represents an improvement for the nation’s payment system, we continue to have significant concerns regarding the inadequate interbank fee and for credit unions to affordably receive, process and settle these payments in near-real time,” she said.

3. More debit rewards programs.

Debit rewards programs took a hit after the Durbin Amendment capped interchange rates in 2011. However, the rule only applies to financial institutions with at least $10 billion in assets. Bizzarro said that will make for an interesting 2016, given that debit was the most popular noncash form of payment in 2015, according to a study from the Federal Reserve.

Large banks overreacted to Durbin by killing off their debit rewards, he said.

Keith Brannan, chief marketing officer at the Austin, Texas-based Kasasa by BancVue, a financial services and technology firm that operates rewards programs for financial institutions, including about 375 credit unions, said it’s a great opportunity for credit unions, especially when it comes to attracting millennials.

“The way to sway somebody to a credit union or a community bank is to offer rewards that a big bank can’t,” Bizzarro explained.

Millennials also don’t mind it when someone makes them better and better offers, Brannan added.

“They are very attracted to it from a loyalty brand standpoint, and all the research says that if you make an offer and you continue to make those offers of loyalty and rewards to them, they are more and more loyal to you,” he said.

4. More plug-ins for credit unions.

Experts said the need to build programs and technology in-house will continue to decline in 2016 thanks to application program interfaces. APIs make it easier for credit unions to integrate new payment options from third-party vendors that carry the credit union’s label.

Prepaid programs are the fastest growing segment of card-based payments, according to Mercator Advisory Group, and the barriers to entry for credit unions in 2016 could get lower.

“A prepaid program is not as difficult as it used to be, because there are a lot of service providers that credit unions are already working with that can handle these,” Bizzarro said. “They don’t need to invest in the infrastructure they would have to for a new mobile wallet platform.”

Christian Spaltenstein, general manager at global payments company AFEX, agreed.

“You can partner up with the international payment service providers and through the API, this information goes to the payment service providers, which specialize in making payments,” he said. “You can build a network of specialized services and with today’s integration technologies, it’s … I don’t say simple but, it’s not so difficult to create certain user interfaces and to partner up with each other in providing services in different things. Due to that, you’re taking a little bit of the purchasing power away from big banks.”

5. Another round of EMV deadlines.

The Oct. 1 liability shift isn’t the last of the EMV transition. Coming in 2016 is another deadline – this time for ATMs. After Oct. 1, 2016, MasterCard will no longer bear the cost of fraud at ATMs that aren’t EMV-compliant. That means credit unions and other financial institutions may need to change their ATM hardware and/or software – and they only have about eight months to do it.

“As each day passes, it’s only going to become more difficult,” Dolphin Debit Executive Vice President and Co-Founder Gary Walston told CU Times. “Most credit unions and banks are in the same boat and so focused on EMV as a card issuer that they haven’t thought about the ATM. What you’re doing is just condensing all of these ATMs that need to be touched and serviced and upgraded into a more compact period of time. That means the resources are going to be stretched, and chances are that the longer you wait, the bigger the chance obviously is that you can’t get it done in 2016.”

Walston warned that credit unions that don’t convert should prepare for a jump in skimming activity.

And while credit unions start work on upgrading their ATMs, another payment technology is on the horizon: Cardless cash access. That may require upgrades, too, CU24 Vice President of Operations Chris Poole said.