Payments Predictions for 2017

Payments Predictions for 2017
Posted: Feb 6, 2017
Comments: 0
Author: Paul Castner

CSCU payments prognosticators are at it again!

It’s time to put our carefully laid plans for 2017 into action. What will 2017 bring? We asked two CSCU thought leaders to share with us their predictions for the year and implications for the credit union community.

Tom Davis, CSCU’s SVP of Finance & Technology, gave us his top predictions:

Checkout-less shopping will proliferate.  Merchants like Chipotle and Taco Bell have already released their “order ahead” and “checkout-less” shopping apps.  Sam’s Club joined the party when they released their “Scan and Go” app in 2016.  Amazon’s new checkout-less grocery store is taking all of this a step further.  These apps and shopping experiences provide real conveniences that consumers value.  Not only can consumers benefit from the time savings, but merchant gain valuable data and knowledge of their consumers.  These benefits have significant advantages over the “Pays” and may very well leapfrog the “Pays” all together as the preferred way to pay at the point of sale.  And when combined with loyalty, look out.  The only downside I see right now is the need for all those merchant apps muddying up my phone.  Prediction:  I expect more than a handful of top 100 retailers will jump into the checkout-less shopping game in 2017 and they will see increased sales volume due to their new payment / shopping strategy.  Implications to credit unions:  These transactions are processed like card not present transactions.  Unfortunately, EMV does not help with fraud on these transactions, so credit unions need to look at strategies like card controls and alerts to help keep the cost of fraud down. Visa and MasterCard’s efforts to tokenize these transactions should provide some fraud cost relief if merchants are on board.

We will enter the era of the personal assistant, but what will it do for commerce? We’ve seen the Amazon Echo and Google Home devices flying off the shelves during the 2016 holiday season.  Microsoft is jumping into the game with a Cortana-based home smart hub that should hit the market sometime in 2017.  It seems like everyone will now have their own personal assistant (or maybe more than one).  Now we get to see how these devices will make a difference in our lives.  Most of these devices will be used to answer questions (the most common question asked of the Amazon Echo is “Alexa, tell me a joke”) or to play music (Microsoft is partnering with high-end audio provider Harmon Kardon for their smart hub). But in 2017 we should start to get an idea if these devices can be valuable asset in commerce.  Will merchants begin investing in development of skills, apps, and tools to be used by these devices to leverage their capabilities to grow their sales volume?  Will consumers feel comfortable and safe using these devices for shopping? Prediction: I predict that eventually these devices will become a valuable companion asset in the commerce ecosystem.  In fact, in 2017 I predict that sales volumes on purchases initiated from an Amazon Echo will grow faster than Apple Pay sales volumes at the point of sale (I know, not saying much here). In the end, I believe the real winner here are smart home device manufacturers.  Implication to credit unions: As people set up their new smart hubs, they will be adding payment credentials and attaching already existing services to their personal assistants. These transactions are processed like card not present transactions.  Unfortunately, EMV does not help with fraud on these transactions, so credit unions need to look at strategies like card controls and alerts to help keep the cost of fraud down. Visa and MasterCard’s efforts to tokenize these transactions should provide some fraud cost relief if merchants are on board.

2017 will see a dramatic shift in the regulatory and legislative environment.  The new administration has its sights set on repealing or stripping several initiatives put into place by the prior administration.  Net neutrality, the CFPB, and the Durbin amendment are in the crosshairs along with the affordable healthcare act.  Changes in net neutrality could turn the internet into a “pay-to-play” domain and, some claim, ultimately stunt innovation. Portions of the Durbin amendment could will be stripped, especially debit swipe fee reform, and the CFPB’s powers could be curtailed, or possibly be completely dismantled. Prediction:  I expect the new administration will be successful in reforming, but not repealing Net Neutrality, CFPB and the Durbin amendment in 2017. Implications to credit unions:  As regulations reduce, the compliance burden should decrease as well.  This should benefit credit unions as well as big banks.  Credit unions should take advantage of consumer sentiment to do business with community financial institutions in order to stay competitive.  Less savvy financial institutions need to beware or risk failing or being acquired.  Expect industry consolidation to continue. Credit unions with healthy balance sheets, great marketing plans, good brands, and strong product offerings should benefit and grow.

Wearables will continue to struggle as a payment device. The ability to pay using a ring or article of clothing has been a draw at tradeshows and events (such as the Olympics where athletes were given payable rings provided by Visa). But given that no one goes anywhere without their phone, and that wearables can’t match the processing power or communications capability of the phone, wearables will continue to struggle as a payment vehicle. Prediction:  I expect little to no growth in payment volume in wearables in 2017.  Implications to credit unions: Be leery of investment in this area.

Internet of Things and connected devices. will continue to amaze and make our lives easier. Conversation surrounding the internet of things (IoT) and payments was buoyed tremendously with the release of the Samsung connected refrigerator at the consumer electronics show in 2016.  2016 saw other applications released, such as the smart Brita water filter and the smart pool pump.  These devices can automatically reorder supplies and therefore can initiate payments on a consumer’s behalf.  It didn’t take long for the fraud watchdogs in the payments industry to weigh in about the potential risks these devices could bring to the ecosystem.  Nevertheless, the devices continue to be developed to help make our lives easier and, for merchants, increase sales.  Prediction:  I expect 2017 to see more development in this area, but no significant change in the way payments work or increased sales volumes (for now) with these devices.  These transactions are primarily card on file transactions, which we have been accustomed to for quite some time. Implications to credit unions:  These transactions are processed like card not present transactions.  Unfortunately, EMV does not help with fraud on these transactions, so credit unions need to look at strategies like card controls and alerts to help keep the cost of fraud down.  Visa and MasterCard’s efforts to tokenize these transactions should provide some fraud cost relief if merchants are on board.

Legalized marijuana could present increased opportunities for many credit unions. Already a burgeoning $7 billion cash-only business, California, Maine, Massachusetts, and Nevada legalized recreational marijuana in the most recent election cycle, joining previously approved recreational usage laws in Oregon, Washington, Colorado and Alaska. California, home to Visa… and a Massachusetts, home to senator Warren were important victories for marijuana and banking.  However, the new presidential administration is a wild card.  Since the federal government still views marijuana as illegal along with any money associated with it, banking with the entities involved in this multi-billion-dollar business has been forbidden. That’s where a few credit unions have stepped in, including Salal, Maps, and Numerica. Now that the entire west coast has become an enclave for the business as well as a corner of the northeast, credit unions can capture this market.  Prediction:  I see a stalemate continuing at the federal level, but increased involvement at the state level as far as banking services for the marijuana trade.  Credit and Debit transactions will eventually be accepted at these places of business, but not in 2017. Implications to credit unions: The U.S. Department of the Treasury has provided guidance to banks on doing business in this industry, which helped to raise the number of banks and credit unions willing to handle pot money from 51 in 2014 to 301 in 2016. Credit unions need to examine their charters and assess their board’s appetite for going into this growing business.  Get ready for credit and debit in 2018.

Lou Grilli, Director of Payments Strategy also gave us his predictions:

Payments will become increasingly complex and inconsistent, causing a backlash against emerging payments. Paying used to mean cash, check, or swipe a card. Today we have a vast array of options depending on the merchant: insert a chip card some places, but continue to swipe at others, tap your phone or smartwatch at some terminals but not others, use an app to scan a bar code, or hold up your phone with the bar code to be scanned by the terminal. Only a select few of these various methods offer any benefits to the consumer, and then only to those consumers who are in a loyalty program or who carefully track offers and coupons. 2017 will see a revolt by consumers to harken back to simpler days, forcing emerging payments providers into providing benefits and consistency in years to come.
Implications to credit unions: Usage of mobile wallets at the POS has been notoriously disappointing; credit unions should seriously consider holding off on offering a credit-union branded payment app that does not offer significant member benefits.

Millennials will not drive spending in 2017. The current 19-35 year olds consistently make news as now being the single biggest generation, with stats that show that this Gen Y will control half of all spending by the end of the decade. But the Fed reports that this generation will be the first to make less money that their parents, will graduate with record debt, and have the highest unemployment rate of any generation entering the workforce. Their money saving rates are below previous generations and more than half can’t currently qualify for a loan, two not-attractive traits for the ideal credit union member.  Implications to credit unions: While it’s still a little early to count on generating revenue from millennials, all the recommendations to attract millennials are equally applicable to tech-savvy Gen X’ers: offering self-service kiosks, e-docs for loan activity; video chat at the ATM, communication via social media and 24x7 online text chat.

2017 will be the year of P2P. The ability to pay family and friends is still bogged down in cash and checks, except for millennials who have already found the simplicity and beauty of the Venmo app. Splitting vacation expenses and group ticket purchases will become much easier when Zelle reaches the market. Even credit unions offering Popmoney or other solutions will benefit from the press and the uptake in P2P payments.  Implications to credit unions: Once the Zelle app launches, be ready to market the ease and security of using an app instead of writing checks (which are more costly for a credit union to process).

One of the big tech companies will become a bank. Google has the Google Wallet, a stored-value account which can be used for P2P payments as does PayPal, which in addition to P2P is primarily a way to pay online merchants. Samsung’s subsidiary Samsung Capital is the largest credit card issuer in Korea. Facebook Messenger enables payments. 2017 will see one or more of the tech giants (Apple, Google, Samsung, Microsoft, Facebook, Amazon, Sony, etc) move much more deeply into the banking space, most likely by buying a bank or one of the card networks. This would move the tech company a major step closer to establishing a new payment rail controlled by the company, for the purpose of owning the purchasing habits data.  Implications to credit unions: This is a far-reaching prediction with less likelihood of really happening.  But if it were to happen, your most tech savvy members would be the first to try-out the new “bank”.

Some credit unions will see margins squeezed in 2017 as rates rise. The Fed has projected three interest rates hikes in 2017 (likely to be 25 bps each); this is significant as there has been only two increases over the last decade. Rate hikes should mean improved earnings for credit unions – higher mortgage rates, car loan rates, and higher credit card revolve interest rates are the biggest components of the credit unions’ revenue. But most existing mortgages are fixed (with the exception of ARM and HELOC), nearly all car loans are fixed, and going forward, credit unions still need to remain competitive with attractive rates which may not rise as fast as the rate increases, all while facing higher cost of funds to buy those loans. And raising credit card interest rates has many restrictions: a 45 day advance notice must be provided on changes to APR for future transactions; APRs cannot be changes within the first 12 months of a card being opened, despite 45 day notice – so “across-the-board” rate increases are inadvisable; and Regulation Z contains restrictions on cards that were advertised with a fixed rate without a time period. Specifically, if a credit union offered a card with a "Fixed 8.99% APR" credit card with no reference to a time period in the same statement, the credit union must continue to honor that 8.99% APR for as long as the account is opened.  Implications to credit unions: Credit unions need to have their compliance staff monitor which cards are eligible for rate increases, and revise marketing and advertising to ensure compliance in the future that allows for rate increases.

2017 will see the rise of a few single use charter banks. Under relaxed regulations, startups looking to offer limited virtual banking services to niche groups will gain the ability to obtain federal banking charters to provide alternative banking service.  Implications to credit unions: Be ready for some very nimble competition by offering competing products - the state of the art in mobile banking, mobile on-boarding, video access to staff and 24 hour chat.

There are many other areas where you may have predictions to add to the list. What will happen to fraud? Will blockchain be adopted in a commercially viable product used by financial institutions? Will virtual reality impact payments? Let us know what you think by logging in and posting your comments.




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