In the latest entry into the payments market, Apple is expected to introduce an i-Pod for Christmas that will have the capacity to be a cell phone, provide video on demand, and even serve as a payments mechanism.
The new i-Pod will join together the pay-by-touch of biometrics and the cell phone itself, which are expected to revolutionize the payments systems over the next couple of years, according to Mark Sievewright, senior VP-payments systems, for Fiserv.
These revolutionary payment mechanisms are not to be feared by credit unions, but to be harnessed, Sievewright told attendees at CUNA's annual Future Forum last week. They are part and parcel of the evolution of the payments systems from paper-based to electronic-based, in which credit unions are right in the middle. Harnessing the new mechanisms will enable credit unions to retain members, attract new ones, save on efficiencies, and earn new income, in the long run, he suggested.
The new i-Pod will have an RFI, or Radio Frequency Identity, chip in it, the same kind of device that is used in contactless payment cards. "It's not only a payment device, it's an online banking tool," Sievewright explained. The RFI i-Pod is one of several emerging payments mechanisms introduced by Sievewright, who also explained that portable Play Station electronic games, cell phones, and even common wristwatches are being equipped with RFI devices that give them payment capabilities on par with the ubiquitous credit cards and debit cards of today.
Several credit unions are already participating in the biometric fingerprint service introduced by the company Pay By Touch, which allows supermarket shoppers to debit their credit union or bank accounts without a plastic card-but with the touch of a finger. MasterCard has introduced plans to allow consumers to make payments by cell phone, something that has been in use in Europe for several years.
As for the paper check, it's a dying business, according to the well-traveled payments consultant, a former executive at MasterCard, Europay, HSBC and The Tower Group, who referred to the present as "the beginning of the end of the check."
The die was cast two years ago, 2003, when electronic payments exceeded payments by check for the first time ever in the U.S., said Sievewright. "It's a business that must have looked a lot like Encyclopedia Brittanica looked when the CD-ROM came along," he remarked.
The other payments trend, he said, is the emergence of debit over credit cards as the method of choice. This year the value of debit payments is expected to outstrip credit card payments for the first time. And younger people, the fastest growing market, favor debit as a method of payment. If a credit union is not offering debit as a payment option it is in danger of falling behind, way behind, the marketplace, according to Sievewright. "There are a number of financial institutions that don't use debit at all. Those financial institutions stand to lose relationships if they don't offer debit," he said.
Credit unions should ride this trend and find promotions and other incentives, such as rewards programs, to help drive more debit transactions, said the payments guru. This will do two things: it will help cement a relationship with members, and it will create interchange fee income. "If you can let your debit holders build up some kind of cash reserves that they can exchange for merchandise, you're going to drive usage," said Sievewright.
But perhaps the biggest market trend challenging credit unions is not revolutionary or evolutionary, but the continued dominance of the credit/debit market by a shrinking number of giant competitors.
At the beginning of 2005, 10 giant banks, including JP Morgan Chase, Citicorp, Bank of America, Wachovia and Well Fargo, controlled two-thirds of the credit card market. That means thousands of smaller players, including credit unions, had just one-third of the U.S. consumers to fight over-and those 10 giants held 86% of all the credit card balances outstanding.
"This market is gone," said Sievewright. "The only thing that's going to happen is the top five will get more market share," he said, noting that since the first of the year giant Bank of America has acquired MBNA, and Washington Mutual has purchased Providian.
But just as importantly, the huge credit card portfolios have given these financial giants access to the biggest financial relationship a consumer can have, their home mortgage. The strategy from here, according to Sievewright, is to wrap all a consumer's finances around these two major relationships. "Is it possible to package a relationship around consumer lending? A credit card to go with a mortgage? Wrap-around the account at the same rate?"
It's already being done in England, he noted. Barclay's Bank is adding up all account balances and charging them against balances in a wrap-around account, before they charge the consumer interest. The British bank charges a single interest rate-the mortgage rate, because it is the lowest. Barclay's has developed three million new accounts with this product.
The major difference between the British product and one that could be developed in the U.S. is that the British eliminated mortgage interest deductions for income taxes a decade ago.
This kind of product-relationship marketing-gives the bank or credit union a vast majority of customer data with all of the members' financial information on it.
If a U.S. Bank is able to figure out a way to deliver this product, "they just lock up the marketplace," said Sievewright.
That's why those credit unions that were in a hurry to sell their credit card portfolios may have acted too hastily. Credit cards, said Sievewright, "are one of the most powerful relationship developers you can have," he said, adding that "all we are doing at the end of the day is giving gunpowder, or ammunition, to fellows who are looking to roll up the market."
