By Richard Crone and Heidi Liebenguth
Tim Cook, the CEO of Apple on Monday announced that more than 500 “banks” were participating in Apple Pay. Yet a closer look at the flash of logos on the screen reveals that the majority of those participating financial institutions are actually “credit unions.”
Funny thing, most credit unions are pretty offended if you refer to them as banks. The nomenclature is not taken lightly by credit unions. Credit unions refer to themselves as a movement, not an industry. They don't have profits, but shared earnings. And at the root of their value proposition, they serve members, not customers. One of the logos that imperceptibly flashed across the screen in the less than two second video display of 500+ black and white logos was CEFCU, whose service mark is “Not a bank. Better.”
What is the relationship like between Apple and these credit unions? Without the customary due-diligence required by the NCUA and FFIEC for a new processor contract, most of them had less than a week to examine and execute a non-negotiable agreement directly with Apple that required, according to Jefferies and Co., that they rebate 15 basis points for credit and a half a cent for debit for every Apple Pay transaction. Most of these institutions are under $10 billion in assets, so in essence Apple Pay negates their interchange protection created by the Durbin amendment with the remuneration directly to Apple. For many credit unions, debit and credit card interchange contributes more than half of their shared earnings from transactions accounts.
For most, the added expense was justified by the risk of losing their most prized members, the transaction-rich and less-loyal millennials. Committing to Apple Pay was more of a defensive move, because numerous studies indicate more than half of the millennials are likely to switch their primary financial institution relationship for a mobile wallet.
The problem with that strategy is that the primary payment and “financial” relationship is now going to be controlled and branded by Apple.
This should be of great concern to the chief marketing officer of a credit union as members will be repeatedly receiving Apple brand impressions all around the payment event – an experience that is markedly different today with the member having most of their mobile financial interactions through the credit union’s own branded mobile banking app. Credit unions must separate their business from their charities. Donating control of the mobile user interface and experience, with its potential to inform and motivate members to use preferred tenders and activate new products, loyalty rewards and offers, in hopes of being chosen the invisible “default tender” in Apple Pay (or Google Wallet, Softcard (ISIS), PayPal, Amazon or any other 3rd party intermediary) is not a mobile payment strategy.
The Risk of Delegation
This new scenario with Apple Pay is another illustration of the risk of delegating payment interactions to a 3rd intermediary. It's going to cost more, and inserts several new mouths to feed into the payments revenue stream for credit unions.
Credit unions are used to relying on third parties for processing and other services, many even relying on the cooperation of other credit unions through shared branches and ATMs. But Apple Pay is different. Here’s why. Mobile banking is growing five times faster than Internet banking ever did; it is already becoming the most important service channel and branded interface that the credit union has with its members today. The typical member interacts with the credit union mobile app as much as 20 to 30 times per month, compared to maybe one or two visits to the branch per year (even less for a shared branch). Payments however, from a service interaction standpoint, occur 30 to 50 times per month, easily the most important touch point that a member has with their credit union and their money. There isn’t a credit union that shares its branded mobile banking user interface (UI) with another credit union or bank.
In signing up for Apple Pay, there’s no question that the member is enrolling with Apple. Apple controls the UI and the branding of Apple Pay, subordinating all other brands behind it.
What A Strategy Can Do
Careful review of the fully burdened cost of participating in Apple Pay requires that the credit union have a clear mobile payments strategy beyond Apple Pay to eventually offering payments through its own, branded mobile banking app. In this way, the credit union can:
- Avoid the interchange costs paid by the credit union directly to Apple
- Eliminate the tokenization fees to Visa, MasterCard and American Express by using their own tokens in their own credit union branded wallet
- Circumvent the new processor charges for accounting and paying the fees to Apple, Visa and MasterCard
- Minimize the cost of providing tier one customer service since Apple, Visa, MasterCard and the processors have all insulated themselves contractually from this responsibility for Apple Pay
- Recapture the upside revenue potential from ads and offers, estimated to be worth about $300 per active mobile wallet user per year. The mobile wallet provides its greatest value to the member as a marketing and on-demand servicing platform, not just a wallet
- Reduce the risk of losing the User Interface (UI), with its relationship-building customization, revenue-building tender steering and marketing options that come with a direct connection to credit union members, vs. reaching them through a 3rd party intermediary like Apple iAD or Google Wallet
Credit unions are going to prefer using their own branded wallets to avoid all the costs listed above, and also gain new revenue streams through closer direct relationships with retailers. In the end, credit unions want Apple’s marketing buzz, but not the Apple Pay transactions.
We personally lived through a similar scenario in 1996, the early days of the Internet, when Richard was the senior vice president & director of online banking at Home Savings of America, the largest savings bank in the USA at the time. He was part of team that convinced management and the board of directors of Home Savings to spend millions of dollars to be in the initial launch of online banking inside Intuit’s Quicken and Microsoft Money. Home Savings met its first year projections in the first three months of the launch. It helped educate consumers, build awareness and the initial base of online-savvy customers. However, within a year Home Savings was able to connect directly with customers through its own “app:” the Home Savings branded Internet banking site. Needless to say, Home Savings was able to abandon its financial commitment to Intuit and Microsoft and save millions of dollars. Apple may or may not have studied history, but they are doomed to repeat it.
The Key Point
The key point for credit unions: simply signing a contract to issue or accept Apple Pay is not a mobile payments strategy. Just as Intuit, Microsoft or AOL were merely bridges to a financial institution’s own branded Internet banking experience in the mid-90’s, so will it be for their credit union branded mobile banking apps. Because the one who enrolls is the one who controls, the safe bet in mobile payments is on your brand, your accounts in your own app. Ceding the payment UI to Apple Pay or any other third party intermediary comes with great brand, processing and marketing risk.
Apple’s entry into mobile payments now incents financial institutions to begin working directly with merchants, especially the Merchant Customer Exchange (MCX) to renegotiate a new set of clearing and settlement terms for the populating of private label tenders in credit union wallets and the acceptance of credit union wallets by merchants. Retailers and credit unions have an opportunity to work together to connect directly with customers without the cost and risk of using 3rd party intermediaries such as Apple Pay, Google Wallet, PayPal, ISIS Softcard, Amazon, etc.
To negotiate these relationships with large retailers and MCX, credit unions will need to pool their efforts collectively as they have done successfully so many times before. The credit union movement has more than 100-million members that can be leveraged to gain their rightful place at the bargaining table to establish mutually beneficial relationships directly with retailers. Retailers are now motivated to work directly with credit unions, and other financial institutions for that matter, to protect their payment data from interloping 3rd parties, reduce costs and build loyalty for each respective customer and membership base. This provides distribution and adoption reach for both retailers’ private label payment types and financial institutions’ open loop debit and credit accounts.
What If You Don't Have A Boat
Apple's supply creates demand for all mobile payment types. Or in other words, all boats will rise with the rising tide…if you have a boat. If you don't, you're likely to get wet, maybe even have trouble keeping your head above water. The Apple Pay launch is an opportunity to leverage the market-making, educational and promotional power of Apple to sign up members to your own credit union branded mobile wallet, as every major consumer study indicates is the preference for mobile payment services. In doing so, the credit union will be the system of record without having to pay a 3rd intermediary to reach members and tokenize the transaction while building loyalty for the credit union’s own branded user interface.
What all this necessitates is that the credit union have a clear vision and articulated mobile payment strategy. Crone’s rule still applies: The one who enrolls is the one who controls. All new payment types start with merchant acceptance. Apple Pay has renewed the efforts already afoot to redefine the relationships between credit unions and other financial institutions AND retailers, opening the door to new compensation structures and new ways for each to better serve their customers and members through their financial lives and shopping journeys, in their own branded, customer and member-focused apps.
Richard Crone and Heidi Liebenguth lead Crone Consulting LLC, an independent advisory firm specializing in mobile strategy and payments. Crone Consulting has helped define the mobile commerce and payments strategy for all sizes of financial institutions, large merchants and specialty retailers, restaurants, recurring billers, core processors, payment networks, telcos, consortiums and investors. The firm’s payments optimization services have achieved 10 to 30 percent cost reductions and revenue increase through innovative self-service, alternative and mobile payment strategies. Richard and Heidi can be reached at www.croneconsulting.com.