Originally published on CUInsight.com
This post exceeds normal length expectations. Estimated reading time is 5-7 minutes. It’s worth it.
The future of banking looks bright! New possibilities, new technologies, all while serving an ever-expanding portion of the population!
Oh, you’re from a credit union. That introduction wasn’t meant for you. I was talking to the big tech firms, the front-runners in creating banking solutions of tomorrow. What? Are you saying Jeff Bezos isn’t one of my readers? Psh, you don’t know that.
Credit unions aren’t paving the way. Nor are they pioneering the ability to serve the underbanked. Seriously. Many are doing great things, that’s for sure, yet the fundamental change is originating from tech firms. And they’re not doing it alone (more on that later).
Let’s take a look at a super-simplified cross-section of society, with a focus on traditional banking options. Where does the credit union industry fit?
- For the lowest-income and credit challenged (or no credit), they have few choices. A lack of financial knowledge and access to banking resources leads them predominantly to payday lenders or check-cashing stores. This situation, frankly, sucks. People are paying hundreds of percent (or more) in interest (or substantial fees) for access to their money. It’s really expensive to be poor. When I deposit a check, I get every penny. Is that really fair?
- Individuals with sufficient credit to open an account can (and do) go to banks, but many choose a credit union, due to their lower fee structure. Those who choose a credit union tend to carry a higher credit card balance, with more cards and higher total debt. However, and this may be due to lower interest rates, more individualized (and thus forgiving) relationships, or some other factor, they are less likely to become delinquent in their debts.
- Higher-income individuals and businesses are more likely to be with the large banks.
So big tech firms are looking for the path of least resistance into the banking world. It starts at the economic bottom, by offering necessities at far lower rates than the existing solutions. Then, they offer better programs than those that people have today, focusing on convenience. Finally, the companies want to become the lenders of choice for a wide range of needs. By already having successful business strategies, all this can be done at much lower margins than a dedicated banking institution could possibly reach. For example, Amazon barely makes any money on their Kindle or Echo devices (they might even sell at a loss), because they know users will purchase far more once they have them.
The following is a discussion of selected large tech firms changing the banking landscape. Each are planting their own flag in the financial world of tomorrow. Will all be successful? Only time will tell. For aesthetics and readability, each company’s actions are accessible by clicking the name.
Where are the greatest opportunities? And how can a business decision help people the most?
PayPal believes the answer to both those questions lies in that first economic category. As a pseudo-banking institution already, they have held money in online accounts for use on purchases for many years. This money could not be withdrawn at an ATM, nor used at a physical POS. Until now. PayPal now offers a debit card that includes many of the same features your credit union cards have. Want to pay for dinner? No problem. Withdraw money at an ATM? Sure. Deposit physical checks? Grab your phone and take a picture. All with no monthly fee, no minimum balance requirement, and a ~1% fee for deposited checks. PayPal is making it clear this account is not for everyone. It’s mainly for those who you would call “unbanked”. In fact, their COO even said that if you already have a banking relationship, “this isn’t an account for you.” They believe as the digital economy continues to grow, the largest opportunity is in those who aren’t currently “banked”.
So PayPal is positioning themselves for enormous growth, while engaging an underserved portion of society, and minimizing economically stressed people’s reliance on high-fee payday lending. Sounds like the credit union mission, doesn’t it? It should, and not in the least because their CEO keeps saying this at CU conferences.
Other tech firms are taking a different route.
Take Amazon. They want your checking accounts (allegedly…probably…likely).
Why would your members want to switch to Amazon for their checking? It’s not like it would be any different. Except it could (according to surveys) be a fee-based account ($5-10 per month) that provided a series of perks. Perks like ID Theft Protection. Or Cell Phone Damage Coverage. Perhaps it would be integrated into Prime membership. We don’t know. But 66% of people surveyed said they would consider paying or definitely sign up for that account, if it existed.
If only your credit union could do something like that today…But I digress.
It’s not like Amazon is inexperienced in banking concepts. In 2011, they began small business lending to sellers on their site. They are now lending more than $1 Billion per year. And it’s invite only.
Recently, Amazon has also expressed interest in serving the “unbanked” of the US and abroad. Look at them, taking on the jellies! Ok, PayPal. They’re taking on PayPal.
“So you owe me $14.53 for dinner. Cool? Just Venmo me the money when you get a chance.”
Venmo grew so quickly that you can be forgiven if you are still recovering from the windblown hair as it blew past. Think of it as a peer to peer payment platform. It began as a way to send money through text messages, but quickly changed into its own cross-platform app. Users link existing debit cards/bank accounts and send or receive money through the service. In the time it took you to read this paragraph, you could have gotten reimbursed for gas, sent your portion for drinks last weekend, and gotten the money from another friend for the tickets to that awesome concert. They handled nearly $7 Billion in transactions in Q1 2017 alone. Oh, and PayPal bought them in 2013. So giving them their own section is almost cheating.
Besides, there’s a newer service that aims to do the same thing, but with a twist…
Your credit union probably supports Apple Pay. By that I mean your debit and credit cards can be added to Apple Pay on members’ iPhones, iPads, Watches, and Macs. It’s a brilliant payment system that I use regularly (there’s nothing like paying for groceries with your watch…except not paying for groceries). I love the simplicity and security of the process. I don’t love how slowly merchants are adopting the new payment terminals (and then enabling the NFC tech in them to support it). Ugh, different discussion.
Last year, Apple Pay got an upgrade. With Cash. Previously, Apple Pay only worked where a normal debit/credit card could…POS, ie. paying at a merchant. It was useless for P2P payments like Venmo supported (and PopMoney, to speak CU service lingo). Apple Pay Cash links a debit or credit card to a digital stash of cash (you like that?) that you use to send/receive money right through iMessage. Yes, recipients have to be fellow Apple users, but, sheesh, it’s easy. Heck, it works with Siri. No data is available on usage, but given it’s built in to hundreds of millions of devices, I’d say it’s only bound to grow.
To establish these potential checking and/or savings accounts, fund these digital wallets, or receive deposited checks, none of these companies are making themselves a bank. Instead, these companies partner with an established bank, or multiple banks. Why? Think of your preparations when the NCUA examiner is inbound. Enough said.
For example, for PayPal’s new debit card, they use a bank from Delaware for debit cards, another out of Georgia for check scanning, and a few banks in Utah for lending. Note these are all small banks…is opportunity calling for your credit union?
Amazon is in talks with JP Morgan Chase and Capital One for their checking program. Venmo uses your existing banking relationships. Apple Pay Cash uses a Discover debit card powered by Green Dot Bank, a fin-tech which also provides their own reloadable debit card with no minimum balance, no overdraft fees, and no credit check, while still offering things like bill pay.
I feel like I’ve talked about partnering to enhance your strengths while addressing your weaknesses. Ah, well, no worries. We’re all here now.
So the big tech firms all have a strategy to attract the banking customer of today and for years to come. What’s your plan?
PS – You may notice I excluded Zelle, the P2P platform of choice for American banks. It was developed by Early Warning Services out of Scottsdale, AZ, a company formed and owned by 7 banks, with 70 more in the process of joining. It’s their answer to Venmo, and is built in to all their mobile apps. It connects more than 50% of checking accounts in the country and growing. So why didn’t I mention such a large disruptor? Because they’re not a disruptor; they’re a service of the existing banking industry, responding to the popularity of the other platforms. You still have to pay attention to them, though. Competition is competition. So I ask again…what’s your plan?