With credit and debit cards facing growing price and competitive pressures — as well as the potential for increasing fraud costs from data breaches — credit unions cannot afford to leave their payments programs on autopilot anymore.
That's according to research from Cornerstone Advisors, a Scottsdale, Ariz.-based consulting firm that found credit unions without a laser-focus on payments have a lot to lose.
The latest "Cornerstone Report" found a big revenue gap between CUs that give payments the right amount of attention and those that do not.
The report focused on 16 operational areas of 62 credit unions with assets of $250 million and above and found that high-performing credit unions in the payments space (75th percentile) garner 56% higher revenue than low performers (25th percentile).
"If we just look at debit, the median debit card fee income per checking account is $76 per year," said Cornerstone Senior Director Sam Kilmer. "When you figure there is a 56% gap between the 75th percentile and 25th percentile, that tells us there is a lot of money being left on the table."
What high-performing credit unions are doing, according to Kilmer, is giving payments greater visibility within the credit union.
"I am not sure that many CUs have a clear view of how much of their revenue is associated with payments," he said. "For example, if you ask lending executives about their lending results they will rattle numbers off the top of their head—tell you how many loans they have, charge-offs."
Ask about payments and the results are different, said Kilmer. "A lot of credit unions don't track payments closely. It's simply not in the conversation of the credit union."
For payments to flourish, the program must have visibility at a high strategic level, he stressed. "Credit unions need a payments scorecard and a payments roadmap."
What is driving the need for focused attention here, said Kilmer, is growing earnings pressure due to new interchange rules that are reaching down to all credit unions and lowering swipe fees, as well as competition increasing from banks and alternative financial services providers, such as Walmart, T-Mobile and possibly the fledgling Merchant Customer Exchange (MCX).
'Storm Brewing'
"Looking forward, there is a storm brewing," said Kilmer, who noted that the high-performing credit unions are executing strategies that rely on benchmarks and metrics.
Bob Roth, managing director of Cornerstone's payment solutions group, said that effective credit unions understand the four primary "levers" they can pull to drive payments revenue: activation rate, penetration rate, average ticket price and number of transactions per year.
These credit unions, added Roth, know which levers need to be pulled, and by how much, based on the makeup of the membership and how their cards are performing.
"For instance, if the credit union's activation rate is lower than the industry average for consumer debit, the credit union might consider an instant issue program," said Roth. "But if the CU's activation rate is higher than the industry average, the credit union directs money toward another lever where it is below the industry norm."
Too often, according to Roth, CUs simply "throw ideas against the wall" and see what sticks. "That's why credit unions need to learn the industry benchmarks — what is the average penetration rate, the average transaction rate... and measure against them. At some point in time, if the credit union is to excel in payments, it has to start measuring itself against peers. Then it can choose the right levers to pull and the tactics that follow."
Roth added that before a tactic is executed the CU should "maximize the value" of what comes through the payments pipe: Make sure the institution receives the most favorable interchange rates, have the correct networks on its cards and take advantage of any payments network's incentive offers.
Cornerstone contends that what has led many credit unions to place payments on autopilot is the steady growth the program has enjoyed over the years.
"In the past you could just eyeball payments and know it was doing well," said Kilmer. "But a lot of that growth over the last decade has come from the move to a cashless society. Therefore, whoever is in charge of debit looks like a hero because the numbers just keep going up — maybe until those numbers don't go up anymore."
What could contribute to numbers dropping, reminded Roth, are payment alternatives, especially ACH and bill pay. "ACH could possibly be tomorrow's platform for getting interchange, we don't know. It is a payment method, and ACH may be the vehicle MCX uses."
Then it's time, according to Roth, to not only track payments the credit union can take action on — debit and credit — but also begin tracking the ones that are not actionable.
"You want to be ready to react. All of a sudden you see more payments volume coming through ACH that originated at a major retailer, it could be a sign someone is piloting MCX and stealing your debit transactions. Look at the payments picture as a whole to see what is bleeding."
