Digital payments are not new. PayPal came to life in 1998 as a money transferring platform. By the year 2000, people were using it to make payments on eBay. Early in 2002, PayPal went public and by August of that year, eBay announced it was acquiring the payment platform in a deal valued at $1.5 billion. At the time, experts called PayPal the “gorilla” of the online payment market, much as eBay was the gorilla in the online auction market.
In 2007, Amazon launched its own Amazon Pay payment processing service which focused on giving users shopping on external merchant websites the option of paying with their Amazon accounts. Since then, the service has undergone a number of evolutions. Today, the company’s Amazon Payments Global Partner Program is branching out to more third-party websites, but PayPal remains the industry’s clear leader.
In 2010, PayPal launched apps for Android and iPhone devices and, in 2011, eBay and PayPal companies announced their systems would be merged to establish a common platform where external programmers could create apps with both e-commerce and payment capabilities for a wide range of devices. In 2015, the company processed 4 billion payments through its system.
Digital wallet use is slowly – but surely – gaining popularity with consumers as they make the tech transition for moving and managing their money. Since 2010, the number of digital payment capabilities and providers has picked up steam and includes Apple Pay, Android Pay, Samsung Pay, as well as an array of retailer-specific apps such as Starbucks, Dunkin' Donuts, and Walmart.
This rise in new payment options and capabilities offers exciting opportunities for financial institutions. Many of those institutions, though, are taking the counter-productive position of trying to prevent it from growing.
When any shift occurs, it’s natural for people – and businesses – to try to prevent it, protecting themselves and the status quo. If financial institutions, including credit unions, want to remain the center of their customers’ financial life, they will need to change their thinking and develop strategies that not only keep them “top of app,” but embrace digital payment innovations.
Even Apple’s Tim Cook acknowledges the base of digital wallet users to date is small. But, he's also quick to point out that there has been astronomical growth for Apple Pay. Which figure financial institutions pay more attention to may mean the difference between their success or failure in a future digital payment world. Bank of America, for example, is (for now) staying on the sidelines, with its head of emerging payments and commerce, David Godsman, saying digital wallets have not demonstrated any meaningful value proposition for customers.
But is that true? Merchant-specific wallets like Walmart Pay and bank-related platforms like Chase Pay are gaining in acceptance, and they represent a real threat to smaller financial institutions. Credit unions now face new, serious challenges in:
Despite what the naysayers bring to the discussion, consumer behavior is changing and, when combined with technological advances, it will continue its slow but steady move away from cash and credit card use to digital wallets. To remain competitive and relevant, forward thinking financial institutions need to realize that the key to success will lie in evolving along with their customers.
Further disruption to the status quo and innovation in payment methods is easy to predict. Credit unions that take their innovation lead from their customers and lessen their reliance on legacy infrastructure stand a far better chance of surviving the digital wallet wars. Better yet? Take the lead and anticipate a customer's pain point before he or she realizes they need a solution. Instead of spending time trying to hold back the tide, you should see the rise in new online payment innovations as a wealth of opportunities. Experts suggest that credit unions can start to adapt by:
Still, what will continue to matter most is what credit unions offer their customers in the way of perks and awards, which drive up operating costs. It’s a Catch-22 situation, and credit unions will need to find a balance between pain and benefit if they are to compete in a fragmented market for online payment systems.
Best Innovation Group
John Best is recognized as a thought leader and visionary of technology advancements and financial application development within the credit union industry.
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