The huge popularity of mobile communication devices and their growing sophistication probably make mobile wallets (cell phones used to pay for transactions) inevitable. And that confronts CU executives with a strategic dilemma. It’s time to get ready. It’s time to get set. That much is clear. But whether it’s time to go or time to wait is a choice that splits the experts.
$2.9 billion OnPoint Community Credit Union in Portland, Ore., has decided it’s time to go. It has become one of the first CUs in the country to offer a first-generation mobile wallet—one that lets users make online purchases with their smartphones. It’s real, and it’s working. Here’s how: You take out your smartphone and go to the Apple or Android store and download an app for mobile banking that contains OnPoint Community CU’s mobile wallet application. You just download the app, register and you’re good to go, explains Jim Armstrong, SVP/technology and human resources and a CUES member.
Click on the mobile wallet tab and you can see merchandise eligible for purchase. “Suppose I want to send my nephew in Seattle a $25 gift card for Nike merchandise,” Armstrong explains. “I indicate what I want to buy and fill in my nephew’s name, his email address and, if I have it, his cell phone number. The system confirms that I have funds in my OnPoint checking account and then authorizes the purchase. My account is debited immediately and my nephew gets an email or text message that he has $25 of credit for Nike purchases.”
The nephew can go to a Nike store and, depending on the merchant’s technology, present a print-out of the “card” or enter the number manually in the POS terminal.
Behind the scenes, the buyer’s smartphone app connects to a server at Tyfone, OnPoint Community CU’s mobile banking/mobile wallet vendor, also based in Portland, and that server connects to a gift card consolidator partner. The consolidator issues the digital gift card. Tyfone connects to the CU’s core banking system to debit the buyer’s account and then passes the funds on to merchants through the consolidator.
It sounds slick, and it is—in a limited way. The original users making live transactions were a handful of OnPoint Community CU employees who initially kicked the tires to make sure everything was working. The mobile wallet went live to all members Nov. 22. For now, a user can only choose from about 50 popular retail chain gift cards.
“This is the first release phase,” Armstrong says. “We are excited to launch with stored-value gift cards.”
The Case for Waiting
OnPoint Community CU’s Northwest neighbor, Seattle-based BECU, is holding back on making any mobile wallet move. Big ($9.6 billion) and technologically advanced, BECU has no tellers in 40 of its 42 branches and a robust mobile banking program. It also has close ties to some of the biggest and most sophisticated players that are alert to developments in the mobile payments space. And BECU’s managers offer an unequivocal message about offering mobile wallets: Wait.
“It’s way too soon to consider jumping on any one bandwagon,” says Ken Myhra, senior virtual banking manager.
“We’re regularly having conversations with partners who figure to be big players in this space, and they all agree that it’s still unclear what the best solution will be,” says Tom Tyson, BECU’s mobile banking channel manager. “The big payment processors are still waiting for clarity. We were sharing roadmaps with a very sophisticated partner recently, and they agreed with us that mobile wallets should be in our plans for 2014 and beyond.”
The big unknown is not so much mobile payments technology as merchant acceptance, says Shirley Taylor, BECU’s virtual banking payments channel manager. “What’s holding up adoption is the merchants,” she says. “We could pick a technology today and shove it out the door, but without widespread
merchant acceptance, there’s not much point.”
Myhra cites this article as describing the CU’s perspective well.
In the meantime, is there a danger that players could develop mobile wallets that shut out credit unions? It depends on who you ask.
BECU’s Myhra says it’s already happening. “We’re definitely being disintermediated, and there is revenue at stake. Starbucks has a wonderful mobile payment application that is a good example. If one of our members has a Starbucks card reloaded automatically through a mobile app for $50 every two or three weeks, that’s $50 each time it’s reloaded that we are no longer receiving interchange income on, as opposed to having that $50 spent at the point of sale by swiping a debit or credit card.”
In contrast, Chris Cox believes CUs will have the opportunity to play in a variety of third-party mobile wallet solutions as they evolve. VP/mobile commerce solutions at First Data Corp., Atlanta, which is closely involved in the Google Wallet project, Cox says the goal with any mobile wallet solution will be consumer and merchant acceptance. So providers, he says, will have to accommodate whatever cards a consumer carries in his or her physical wallet today, including CU-issued credit and debit cards.
Physical cards have a mag stripe and digital cards don’t, which raises questions about what happens when a mobile wallet contained in a smartphone is presented at the point of sale of a physical merchant. The answer, Armstrong suggests, will be near-field communication chips, which use radio frequency wireless communication to a POS reader if the phone has the chip and if the merchant has the receiver. “‘Tap and go’ is the end game, but it will take several steps before most merchants have the reading pads available,” he says. “It doesn’t really matter to us whether the add-on chip is detachable (part of a plastic card) or embedded on an add-on chip in the hardware of a smart phone.”
Google is flying high now and its mobile wallet initiative is attracting attention, but Armstrong has doubts Google will dominate this market.
One reason may be a recent Viaforensics report that shows some concern about security in the Google offering. The problem, the report says, is that the app stores too much unencrypted data bad guys could use in a social engineering attack against the user.
Still, the security risk around a fully loaded e-wallet is less than the risk of losing a physical wallet loaded with the same cards, points out payments consultant Les Riedl, president of Speer & Associates, Atlanta. “It takes a password to get into an e-wallet, and the big networks like Visa and MasterCard will offer the same fraud protection they currently offer on physical cards.”
The Risk of Waiting
So as the technology comes to the fore and continues to be evaluated, when should a credit union jump? CUES member Bob Van Abel, VP/chief information officer at $900 million CoVantage Credit Union in Antigo, Wis., sees risk in moving too soon. But CoVantage CU has decided to move anyway.
“If you don’t move soon, you won’t have a vote in how that service evolves,” he notes. “You’ll be the consumer of someone else’s solution instead of a developer. We want to have a voice and help build a channel that supports credit unions.”
The big players—Google, MasterCard, Visa—are all jockeying to grab as much of the mobile channel as they can in proprietary ways that won’t necessarily benefit credit unions, Van Abel says. “They’re circling each other like sumo wrestlers. That gives us time to work on alternatives that would be better for credit unions. Tyfone has a more open model that lets credit unions get in on the ground floor.”
CoVantage CU is shooting for a mobile wallet introduction in the third or fourth quarter of 2012. CoVantage CU doesn’t charge members for Internet banking and doesn’t plan to charge them for mobile banking or e-wallet services. The driver is good member service, and the side benefit is moving transactions to a lower-cost delivery platform, he explains. Mobile banking is the least expensive delivery channel, he notes.
“We think members want financial services, including mobile wallets, when and where they need them,” Van Abel says. “With Internet banking, you’re tied to a PC. Mobile goes anywhere.” That’s particularly important in rural northern Wisconsin, where broadband connections are iffy, but mobile phones nearly always work, he adds.
Standing behind his OnPoint Community CU and CoVantage CU customers, Tyfone CEO/Founder Siva Narendra is all for moving now. Waiting, he thinks, means letting middlemen claim a large stake in the market and then resell their product to small and mid-sized CUs and banks. It’s better to get there first, avoid the middleman and claim a richer revenue split, he says.
“Google is working with Citibank, not a $1 billion credit union or bank,” he points out. “Internet banking evolved without a middle man. Mobile wallets can do that too. Why wait for someone else to develop it when you can have it now and have it on your terms?” Of course, he has an entry-level mobile wallet application that is ready to go and is actively selling it to banks and CUs.
Tyfone chose OnPoint Community CU for its first mobile wallet test because of its size. “A mid-sized institution can move faster than a large one,” Narendra says. “They don’t have all the silo issues.” And he picked a CU instead of a bank because “they are generally healthier.” Both OnPoint Community CU and Tyfone being in Portland was an additional but minor advantage.
When you move on mobile wallets may influence the revenue split you get. “Mobile banking is a hard-dollar expense with a soft value,” says Don Bloodworth, Tyfone’s CFO. “Mobile wallet brings in hard-dollar revenue from day one.” A CU can expect to average as much as 3 percent per transaction, he claims.
“The economics are interesting,” Armstrong agrees. If a member buys a $10 electronic gift certificate to Sears through OnPoint Community CU’s mobile banking offering, Sears might pay (the CU, Tyfone and the gift card processor) the average reseller gift card processing fee of 9 percent for selling it.
Armstrong says the CU’s portion of that makes having members use the mobile wallet more financially attractive than having the member buy the certificate with debit. Plus, “this is just the start of the kinds of commerce coming out of mobile banking.”
Don’t overlook the immediate opportunity provided by the unpopularity of fee-hungry banks, advises Riedl.
“Credit unions are picking up members because people are disenchanted with the big banks,” Riedl says. “Normally, big banks take the lead in introducing new payments technology. Credit unions have traditionally been conservative followers. But the technology around using smartphones to make payments is evolving quickly, and it might be time for credit unions, especially those that want to attract the younger generation, to become fast followers. It will make you more attractive to young people at a time when they are ready to leave banks if they can still get the services they expect, and they do love to use their Androids, iPhones and BlackBerries.”
Moving in Steps
The choices are not limited to leaping or sitting. Getting to mobile wallets should be a series of steps, not a dive, says Kelly Rodriquez, director of digital channel strategy at Brookfield, Wis.-based Fiserv, a CUES Supplier member.
“Mobile banking is readily available today from providers that are credit union friendly, and nine out of 10 large credit unions offer it,” she notes. “The next step is to introduce mobile bill-pay, which many credit unions have done. Then person-to-person mobile payments with services like ZashPay. Mobile wallets would be the logical next step,” she says.
The initial differentiator will be simply offering a mobile wallet, Riedl says, but over time, the differentiators will become rewards. Competing brands will negotiate with merchants to offer discounts and reward points. A consumer may carry two or three different mobile wallets and use the one that offers him or her the greatest discount or reward, he suggests.
While the personal communication devices used as alternatives to wallets may be new, the infrastructure used to settle transactions will be the same credit card, debit card and direct debit networks that are widely used today. The idea, Riedl notes, is to turn the plastic cards people carry in their wallets into digital payment devices, not replace them with something entirely different. So CU managers should talk with the vendors that bring them those services to see what they are planning in the way of e-wallets. They should also read trade literature, attend conferences and talk to CUSOs and CU trade groups about e-wallet brands they may be planning.
“It’s important now to scope out where your e-wallet product might come from and what and when those sources are planning to offer something. Stay informed so that you are ready to move quickly when you think the time is right,” he advises.
Richard H. Gamble is a freelance writer based in Colorado.
