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Cashing In on Cards
Urrico, Roy WSound strategy lies in building programs and in emerging payment options.
American consumers have voted in electronic payments by increasingly pocket-vetoing checks and cash in favor of credit and debit cards. Industry experts suggest credit unions can take advantage of the $2.1 trillion consumers spend annually using credit and debit cards. They can do so by shoring up existing services and setting their sights on emerging payment options such as stored-value and contactless technologies.
"There's a shift from paper-based transactions to electronic transactions," says Kim Bishop, executive vice president of First Data Corp., Greenwood Village, Colo. The evolution in the U.S. is dramatic. Check payments were at 49% in 1998, 41% in 2002, and by 2010 could drop to only 20%, according to The Nilson Report.
Meanwhile, according to Boston's Dove Consulting, credit (21%) and debit (31%) transactions combined surpassed cash (32%) and checks (15%) for in-store purchases last year.
The major factors driving consumer conversion to plastic: Once-cash-based businesses now accept cards, and consumers seek more electronic payment options.
Consequently, financial institutions can capture additional fee income on transactions that at one time were currency only. "The way we look at innovation will lead to an increase in volume," says Tolan Steele, vice president, product development and management for Visa, San Francisco. "Sometimes low-tech with high volume fills the bill," he adds.
Expanding card use also means members are open to expanded payment methods. "When members go to stores, they're using credit and debit cards," says Bill Mathis, senior vice president of the member relations group for MasterCard, Purchase, N.Y. Developments showing the most promise in attracting more users are either new wrinkles on existing processes or different methods to tap into proven payment channels.
Rewarding debit cards
Debit remains the fastest growing segment of the payments industry, growing two-and-a-half times faster than credit cards. Debit will top $1 trillion by 2007, says Mathis.
"If credit unions haven't rolled out a Visa Check Card or a debit MasterCard, they should do so," states Kendall Workman, alliance manager of EFT Services for IntegraSys, a Fiserv unit in Plano, Texas (formerly EDS Credit Union Industry Group). Workman believes debit cards not only help increase revenue but also provide more flexibility and member satisfaction.
A reduction in interchange rates brought about by the so-called "Wal-Mart lawsuit" resolution affects all financial institutions. The estimated monthly decline in interchange revenue is $4,054 per month per credit union for signature-based debit (personal identification number secured debit earns about half that amount) because of the price decreases the settlement mandates, according to the CO-OP Network, Ontario, Calif.
However, this isn't the time to abandon the debit program. "Credit unions should migrate every check and ACH [automated clearinghouse] transaction they can to card-based transactions. Some interchange is better than no interchange" from ACH transactions, says James A. Hanisch, executive vice president of CO-OP Network.
Processors such as CO-OP Network; STAR Systems, a First Data company; and Genpass Technologies, Irving, Texas, offer surchargefree programs to encourage use.
CO-OP Network, for example, has 18,000 surcharge-free automated teller machine (ATM) locations, 10,000 of which are credit unionowned. This is an important option for $263 million asset Air Academy Federal Credit Union, Colorado Springs, Colo., a CO-OP Network member.
"Our membership is all over the place.... CO-OP Network is nationwide, and CO-OP members don't get surcharged," says Karin Kovalovsky, Air Academy Federal's vice president of marketing.
Genpass introduced MoneyPass, a surcharge-free network, in October 2003 and since has signed up 200 financial institutions representing 6,500 ATMs. "It has had great reception among credit union members," says Peter B. Davidson, director of marketing for Genpass Card Solutions.
Credit unions also need to differentiate their wares such as through rewards programs, which generally are turnkey. "Customization of products is important," suggests Steve Beckerman, senior vice president, product management, for Certegy Card Services, Alpharetta, Ga.
Sixty-percent of credit cardholders prefer rewards-based programs, explains Mathis. So it follows that a debit-card-based rewards program would attract cardholders. But so far only 13% of all debit programs offer incentives, because many institutions have yet to comprehend the connection between rewards and loyalty.
Soon members will want better information. "Technology has to lead to better reporting back to the consumer," says Glen Lee, senior vice president of sales and marketing for TNB Card Services, Dallas.
He's referring to the more specific transaction details available on typical credit card statements, compared with most debit statements. "The more consumers move to debit transactions, the more they'll want that detail."
Stored-value cards
"The prepaid category for Visa is our high growth area," says Steele. Visa estimates stored-value cards will represent $55 billion in incremental volume within three to five years.
At one time, cards that retained value were chip-based. Now they're mostly magnetic stripe cards that identify consumers to a database holding account data. Stored-value cards include prepaid phone, gift, student, and payroll cards. (See "Payroll cards for the unbanked," p. 58.)
"This gives consumers three ways to pay-pay later by using credit, pay now by using debit, or pay before by using a stored-value or prepaid card," says Mathis. He adds by 2005, plastic will capture 80% of the gift certificate market alone.
For financial institutions, implementing prepaid cards isn't complicated. "It's a turnkey application available to be sold and activated in their branches," says Mathis.
Air Academy Federal is considering using prepaid cards as giveaways to help drive membership and product campaigns for specific products and services, says Kovalovsky.
Stored-value products also can improve awareness of other banking channels. They "allow credit unions to drive members and nonmembers to their Web sites," says Leslie Rowe, assistant vice president for Certegy Card Services.
Potential snags exist, however, for financial institutions wanting to get in the gift card business. "If you want to receive breakage (the amount remaining unused on the card) and fees, you must have the infrastructure," says Michelle Thornton, president of Liberty Card Services, Mounds View, Minn. "That's where credit unions are holding back. Are they looking at it as a revenue generator, or are they looking at it as a member benefit?" As a result, she says, "You'll see a lot of third-party processors focusing on this market this year."
Connecting with contactless
Contactless or proximity payments using radio frequency identification (RFID) devices comprise plastic cards, key fobs, watches, and cell phones. Millions of drivers use vehicle tags for prepaid accounts. More than six million consumers carry an ExxonMobil SpeedPass. And Datamonitor, New York, reports the transaction volume of contactless transit devices will grow from $55 million in 2002 to $200 million by 2006.
"We'll see a bypass of the contact card and go right to the contactless card," predicts John E. Ekers, product marketing director for Fargo Card Identity Solutions, Eden Prairie, Minn.
Contactless device pilots include:
* MasterCard PayPass. Consumers tap or wave their payment card on specially equipped terminals. In 2003, MasterCard worked with three large banks, 60 retailers, and 16,000 cardholders in Orlando, Fla., to pilot PayPass. The banks issued and reloaded the cards. In Dallas, Nokia SmartCover mobile phone users with PayPass embedded in their phones can pay through a wireless device brought to their tables when dining out.
* Contactiess services in development using nearfield communication technology from Royal Philips Electronics, Amsterdam, and Visa's Verified by Visa authentication system include the possibility for music lovers to download songs to a personal digital assistant or a Visa payment card by holding the device close to a "smart" poster embedded with a microchip.
* Watches featuring a miniature SpeedPass transponder enable users to pay for purchases by waving their timepiece in front of a sensor.
"RFID enables easy entry in areas where cards haven't done well, such as quick service restaurants-where pilot programs from MasterCard and American Express have lifted spending from 10% to 33% and reduced checkout time up to 50% over cash payments," says John Gould, director of the consumer lending and bank cards practice at TowerGroup, Needham, Mass.
"The business model for issuers is to give consumers something they can get excited about and want to use," explains Randy Vanderhoof, executive director of the Smart Card Alliance, Princeton Junction, N.J. He adds that contactless payment has industry interest right now because consumers like using the card.
Debit or credit cards provide the authorization for contactless payments, so financial institutions can capture additional fee income on transactions that were previously cash only. However, Davidson approaches contactless cautiously. He believes RFID technology needs more locations before credit unions can get involved. "It's different when it's opened up. It needs to be proven first, but there's potential there."
When it does arrive, cost shouldn't be an issue. "The cost to convert to contactless is really very small. It makes sense from all perspectives," explains Thornton.
Other technologies
Other services making news:
* Photo cards. A new Liberty Card Services program features a photo on the front of debit and credit cards. Thornton says Liberty provides digital cameras and information on how to take a good photo for financial institutions. She says studies show photo-card programs have higher application and usage rates, lower attrition rates, and greater potential for fraud protection. Liberty also features translucent, glow-in-the-dark cards and Visa minicards, which consumers can carry on a key chain.
* Combo cards. These cards feature multiple functions. Starbucks' Duetto card mimics the Starbucks card within the coffee shop to register loyalty points, but cardholders also can use it as a Visa credit card at other businesses, says Steele.
* Smart cards. Although widely implemented in Europe and Asia, smart cards' role in the U.S. payments market still is unclear, Gould says. One possibility is to use smart cards to control card fraud. Some industry experts believe that as businesses implement smart cards internationally to control scams, the U.S. payment system increasingly will be the target of fraud schemes aimed at magnetic stripe's authentication weaknesses. This would force smart card adoption in the U.S.
Card fraud in the U.S., however, is at an alltime low (only six cents per $100 of volume, according to Visa), so it probably won't be anytime soon. "Mag-stripe technology is still king in the U.S. and is likely to be for the foreseeable future," says Hanisch.
The bottom line
Many credit unions have sold their credit card portfolios or outsourced their card programs. "For a credit union our size, it doesn't make much sense to have the credit cards in-house," says Ed Daley, CEO of the $55 million asset San Diego Firefighters Federal Credit Union, which always has outsourced the process to Certegy. "We have a full range of cards. [Certegy] makes all its programs available to us, and we decide." The credit union also is part of the CO-OP Network.
For credit unions that have retained their portfolios, staying in the business is about "getting back to fundamentals-pricing and management," says Lee. (See "Credit card vital signs: measuring portfolio performance," p. 84). He adds, "It's the wrong time for credit unions to experiment with unproven technologies."
Improving performance of card portfolios, suggests Bishop, means "building that one-to-one focus with credit union members." A great deal is at stake. "So much of the cards products are tied into the relationship with the institutions," says Rowe, who explains industry research shows deposit and loan balances are higher among cardcarrying members. "When credit unions lose that card relationship, they also may lose other portions of the relationship."
RESOURCES
* Certegy Card Services, Alpharetta, Ga, 800-215-6280, ext. 75125, or www. certegy. com.
* CO-OP Network, Ontario, Calif., 800-782-9042, ext. 2564, or www.co-opnetwork.org.
* Credit Union 24 ATM/POS Network, Tallahassee, Fla., 850-701-2824, ext. 2421, or www.cu24.com.
* Diebold Inc., North Canton, Ohio; 800-222-6900 or www.diebold.com.
* Genpass Technologies, Irving, Texas; 972-677-5460 or www.genpasseft, com.
* IntegraSys, a Fiserv unit, Piano, Texas; 888-287-3371 or www.integrasys. fiserv.com.
* Liberty Card Services, Mounds View, Minn.; 800-607-2435, ext. 7319, or www.libertysite.com.
* MasterCard, Purchase, N.Y.; 914-249-6607 or www.master cardintl.com.
* Smart Card Alliance, Princeton Junction, N.J.; 800-556-6828 or www.smartcardalliance.org.
* TNB Card Services, Dallas; 972-3916284 or www.tnbcard.com.
* Visa, San Francisco; 415-932-2166 or corporate.visa.com.
Copyright Credit Union National Association, Inc. Jun 2004
Provided by ProQuest Information and Learning Company. All rights Reserved
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