There has been an unprecedented level of disruption within the corporate credit union industry over the past year — particularly regarding the financial crisis led by the collapse of subprime mortgages and mortgage-backed securities.
On Sept. 25, 2010, the federal government announced changes to the market that included $30 billion in federally backed bonds that are to be repaid over time, and the seizure of three corporate credit unions in addition to the two already placed in conservatorship last year. Among the five seized institutions were four of the largest in the industry.
Faced with the many challenges this crisis brings, how will the industry regain momentum and prosper? Innovations in processing payments may be the answer.
While banks have made great efforts in building and streamlining payment processing throughout the years, corporate credit unions have relied on paying partners to do the processing for them. Many times, these "partners" were the competition. Consequently, while others were creating revenue streams by processing payments, corporate credit unions were simply generating cost.
Herein lies the silver lining: corporate credit unions have an opportunity to begin generating new revenues and create opportunities to attract new member credit unions, rebuilding their capital reserves through processing payments. The credit union industry is unique in terms of its structure and that will certainly play a role in how new innovations in payments are adopted and deployed, particularly in response to economic factors.
The credit union market has existed in a tiered structure comprised of the U.S. Central Corporate Credit Union, corporate and member credit unions. In the credit union payments world, most corporate credit unions have historically turned to U.S. Central Corporate Credit Union to manage their payments needs (such as ACH).
Corporate credit unions, in turn, manage payments needs for the majority of individual member credit unions, with only the very largest individual credit unions processing payments themselves. On the check side, the credit union industry had relied on a combination of regional banks and aggregators like SVPCO and Endpoint Exchange.
Rethinking Payments Processing
When NCUA took control of U.S. Central and announced the pending elimination of its central service for payment systems, corporate credit unions that had relied on their service were forced to look for alternative solutions. This has required corporate credit unions to reconsider how they should process payments because solutions are still needed for ACH, image cash letter processing, etc., but it is now up to the corporate credit unions to deliver and manage those solutions.
Compounding the issue is the fact that corporate credit unions are feeling a resource squeeze as their individual member credit unions continue to downsize in the current economy. Because smaller credit unions do not have the financial resources or personnel to acquire the payment systems necessary to compete with larger financial institutions, having wholesale services are critical for any member credit union's success.
There is a great need for wholesale payment processing service providers to deliver solutions that aggregate payments and drive down costs through least cost routing and image exchange via a cost structure that enables credit unions to pay on an as-you-go basis.
Corporate credit unions are serving a vital role in allowing member credit unions to originate and process transactions. Today, there are some corporate credit unions that take image cash letter files and perform least cost routing of items and others that may do ACH. With automated technology available in the market today, an opportunity exists to aggregate all types of transactions, identify endpoints with the largest volume and reduce costs significantly by performing least cost routing and exchange of transactions at the corporate credit union. The potential is to create a network of credit unions and key direct exchange partners that could significantly reduce the cost of processing payments for all.
The Potential From A Pilot Test
The NACHA Deposit Check Truncation (DCT) pilot is another opportunity for corporate credit unions. The DCT Pilot facilitates the truncation of deposited member checks up to $250. The DCT pilot will ultimately determine the possibility of further cost savings as well as the ability of the ACH Network infrastructure to support these truncations. As credit union check payments tend to be smaller transaction amounts, there is a greater opportunity for more low-dollar payments to be converted to ACH. Early pilot results have shown that savings can be significant.
Credit unions have historically proven to be early adopters of technology and, in particular, consumer remote deposit capture.
Enabling members to capture items using a flatbed scanner or mobile phone positions credit unions well in the mobile payments space. Prior to Check 21 legislation, business members had to utilize a bank for remote deposit capture needs. Credit unions today need to take a proactive stance with their business members in making them aware that the corporate credit unions can handle all their payment needs.
The biggest challenge for credit unions today is deciding of whether they have the ability to process payments at the corporate credit union level or if a partner is needed. Technology is making payment processing easier and requiring fewer resources to perform.
Corporate credit unions need to look closely at what other wholesale service providers are doing to generate fee income and to attract new customers with emerging payment options. Ultimately, the best decision is the one that affords a competitive advantage combined with a cost-savings to credit unions.
Eric Dotson is executive vice president of Sales for Rockwall, Texas-based Aptys Solutions. He can be reached at
