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Credit unions should be wringing their hands over PayPal, Capital One and the like, which are siphoning off interchange revenue from credit unions, according to one technology leader.
“I sense incoming missiles, and I think the industry needs to wake up,” said Butch Leonardson, CIO for BECU here. “At a recent gathering of CIOs, I was the only one who thought the disruptive threat to payments was important.”
Online merchants are increasingly attracted to PayPal, which charges either low or no card interchange fees.
Payment volume for merchant services increased more than 50% last year, to $4.4 billion in the first quarter, at the online payments provider.
Leonardson sees several problems with the PayPal picture. “What if Amazon bought PayPal? Hundreds of merchants might start accepting PayPal, which would be a big disintermediation to credit unions,” he said.
And Capital One, a top card-issuer, launched its “decoupled” debit card, which links to any bank account and lures consumers with the promise of better rewards. Transactions are processed via the automated clearing house network, thereby eliminating the interchange income to which credit unions are accustomed to.
“The Cap One debit card could get serious in a hurry,” Leonardson said.
The payments threat extends from an army bigger than PayPal and Capital One, however; rounding out the force are online payment providers such as Google Checkout, Bill Me Later and Revolution Money, and mobile payments players such as mFoundry.
“Credit unions trying to fight the likes of Capital One are going to be like the boy scouts facing Atilla the Hun,” Leonardson said.
But fight they must, it seems. Credit unions earned 19% of non-interest income from debit card interchange and 12% from credit card interchange for a total of $4.8 billion by the second quarter of 2007, according to Callahan’s 2007 Non-Interest Income Survey. Simply put, CUs need interchange revenue to survive.
“Interchange fee is a material part of our revenue stream,” agreed Leonardson.
So what’s a David to do when pushed up against a Goliath? “I don’t have a brilliant answer,” Leonardson said. “But we need to give members alternative payment options.”
A number of credit unions recently told Credit Union Journal they are setting their sights on a new secure, multi-brand, multi-purpose payments and smart card called XCalibur, in partnership with X-Card Systems LLC.
Another option may be the budding mobile payments industry. Embedded chips in mobile devices now allow consumers to transmit a payment from a mobile device to a merchant reader via radio-waves–which could eventually reduce the impact of plastic card payments.
In preparation for the day of radio-wave payments, credit unions should partner with transaction processors that not only offer item processing but are strongly invested in mobile payments and the array of mobile banking carriers, suggested Leonardson.
That way, credit unions will be ready when merchants begin to install the readers that accept contactless payments, he said.
“We need to work together on all forms of wireless payment devices, or we risk becoming irrelevant,” said Leonardson.
MORE
Read more about payment systems at cujournal.com and search the following bolded terms in the archive:
Pay Online-But Don’t Use Credit Card
The Odd Decouple
Google Seeks Patent on Payments by Text Messaging
CUs, CUSO Advance With Plans For Novel ‘Xcalibur’ Card
Answering The Call e-Payment System That Uses Banks and CUs and no Cards
For info on this story:
* www.becu.org
* www.billmelater.com
* www.capitalone.com
* www.google.com
* www.mfoundry.com
* www.paypal.com
* www.revolutionmoney.com
* www.xcaliburcard.com (c) 2008 The Credit Union Journal and SourceMedia, Inc. All Rights Reserved. http://www.cujournal.com http://www.sourcemedia.com
