By Ray Birch
RANCHO, CUCAMONGA, Calif.—More so than banks, credit unions have rushed to sign on with Apple Pay.
That’s good, say analysts who spoke with CUToday.info—but that doesn’t mean there aren’t issues ahead related to interchange, how examiners will view CUs’ hasty contract signings, and whether a CU’s brand will be overshadowed by the powerful Apple brand.
Also lying ahead now are decisions around how to communicate with members and manage their expectations around the new payments platform—since most CUs enrolled with Apple Pay won’t go live with the service until late in the year or in 2015.
Credit unions, as well, will need to address the bite Apple is taking out of CU interchange and card branding, and in the process develop an effective long-term mobile payments strategy. Meanwhile, there is the question about how to respond to examiners probing for whether the CU followed third-party due-diligence guidelines in evaluating the Apple relationship before signing the contract. Apple gave most FIs less than a week to decide (see related story).
Analysts concede that credit unions needed to make the move to remain relevant with members due to the Apple brand’s influence on consumers—especially Millennials—and to add an important new service.
“To sit on the sidelines . . . While I don’t want to go as far as saying that is a mistake, with two-thirds of consumer spending power belonging to Apple users, it does not seem like a good idea not to participate,” said Michelle Thornton, manager of core products for CO-OP Financial Services.
The $8.2-billion Security Service FCU in San Antonio is among those that have in enrolled with Apple Pay. “Apple is a formidable force—a tsunami of change that has the user base and power to reshape the payments experience at virtually every point of sale in the country,” said CEO Jim Laffoon.
Laffoon said member service is the primary reason SSFCU enrolled. “If we failed to have new mobile solutions for iPhone and Android users free of charge—and as soon as possible—we would be denying our members the benefits of what may turn out to be the most important innovations in retail banking since the introduction of ATMs.”
CUs Ahead Of Banks
Michelle Thornton, CO-OP FS
While Apple has not released a list of enrolled institutions, reports have indicated that credit unions make up the majority of the 500 or so FIs that have signed on (http://www.cutoday.info/Fresh-Today/CUs-Rushing-To-Enroll-In-Apple-Pay). Analysts, looking at Visa’s list of Apple Pay enrollees confirmed that CUs are aggressively signing on with Apple.
Barney Moore, senior portfolio consultant at CSCU in Tampa, Fla., thinks what may be driving the big move by credit unions is Apple at rollout saying it was limiting the number of financial institutions that could initially enroll.
“I believe that created some angst among credit unions,” said Moore, who added that when Apple then opened the door wider, CUs rushed through.
David Hall, SVP of vendor alliance partnerships at PSCU in St. Petersburg, Fla., sees the recent decisions by credit unions as “a relevancy play to their membership. For credit unions focused on growth and the Millennial market, this is a good thing for sure. Aligning with the Apple brand is pretty compelling.”
Brandon Kuehl, senior product manager at The Members Group, Des Moines, Iowa, pointed out that credit union interests in mobile services has markedly risen in the last two years. “When we launch anything related to mobile, credit unions have jumped on it.”
Kuehl, as well, contends that Apple Pay, which is convenient and secure, is a “complete” mobile solution.
“It has piqued credit union interest. And when you compare it with building your own wallet, it’s relatively inexpensive.”
Like other experts, Kuehl is another who sees offering Apple Pay as good member service. “It’s best to enable your card in as many wallets as you can. You don’t want to limit member usage. Shutting off ways for members to pay does not seem advantageous for the credit union.”
Kuehl cautioned that if members attempt to enroll their CU card into Apple Pay and are turned down, “who says they won’t enroll another card and then never come back to the credit union’s card?”
Thornton sees enrolling in Apple Pay elevating credit unions’ ability to compete with the big issuers. “This somewhat levels the playing field.”
Analysts agree that Apple Pay is polarizing credit union opinion.
Kuehl, who acknowledged that issuers will lose some of their branding within Apple Pay, said, “Some credit unions think this is the greatest thing and there are some who say they will never enroll.”
A good example of that divide can be found in Pennsylvania. When the Pennsylvania Credit Union Association put to its members the question, “Is your credit union going to offer Apple Pay to members?,” responses fell this way: Yes, We Are Already Signed Up, 12%; Maybe, We Are Researching It, 42%; No, 40%, and What’s Apple Pay?, 3%.
Apple Only A Bridge
Richard Crone, principal of Crone Consulting LLC, San Carolos, Calif., sees Apple’s solution as a bridge to where the bank or credit union needs to be with mobile payments.
Crone feels CUs have no choice but to enroll their BINs with the new payment method or risk being perceived by members as not responsive to the marketplace.
But the payments consultant emphasized that FIs must have, or must begin forming now, a payments strategy to offer a digital wallet solution that allows for strong credit union branding—protecting the relationship, the member data and revenue stream—things not offered through Apple Pay, he said.
Citing Jefferies and Co., Crone said that FIs are rebating 15 basis points for credit and a half a cent for debit for every Apple Pay transaction.
“Most of (the credit unions enrolled) are under $10 billion in assets, so in essence Apple Pay negates their interchange protection (factoring in the lost credit interchange) created by the Durbin amendment with the remuneration directly to Apple,” offered Crone. “For many credit unions, debit and credit card interchange contributes more than half of their shared earnings from transactions accounts.”
Another problem is “the primary payment and financial relationship is now going to be controlled and branded by Apple,” Crone said.
These concerns, posited Kuehl, could be driving what appears to be a more cautious approach to Apple Pay by banks.
“My guess is Apple Pay’s cost component, giving up that slice of the pie, probably affects banks’ decisions more,” offered Kuehl. “Credit unions are all about the member experience and providing services. Banks are more about the bottom dollar. Since the bottom dollar is taking a hit here, my guess is they don’t want to jump until they have to, when people are knocking on their doors for Apple Pay.”
What’s Down The Road?
Like Crone, Laffoon thinks CUs should also be looking at a more long-term mobile payments strategy.
“Cost is a concern, but so is the fact that Apple controls the member relationship while the credit union becomes simply a card issuer,” said Laffoon. “That is not the case with CU Wallet, and every credit union should give it consideration as a potential solution.”
Apple Pay launched with some glitches (http://www.cutoday.info/Fresh-Today/Apple-Pay-Launch-Hits-Snags), including double billing and cashiers not knowing how to accept the new payment form. Three large merchants—Walmart, CVS and Rite Aid—aligned with the Merchant Customer Exchange (MCX) that’s expected to launch its CurrentC payment platform next year are not accepting Apple Pay.
“One of the biggest questions we get from clients is about when will merchants widely adopt Apple Pay,” said Kuehl. “I have heard firsthand from Walmart and Target that they are not opposed to Apple Pay, but they do have MCX looming over their heads. There are also some issues with routing debit transactions with Apple Pay. These retailers’ stance is that until these things get ironed out, they are not going to adopt Apple Pay.”
Without widespread merchant acceptance of Apple Pay today and enrolled CUs not going live with the service until next year, member education is important, emphasized PSCU’s Hall.
“We have 138 member-owners of PSCU that have signed up for Apple Pay and the majority of them are now focused on educating members,” he said. “They are saying, ‘Put your card into iTunes and be prepared. There will be more to come.’ Some are doing marketing campaigns.”
In San Antonio, Security Service has outlined plans to inform members through social media and on its website. In Cincinnati, Kemba Credit Union is notifying members that Apple Pay is coming.
Barney Moore
“Soon you will be able to use your Kemba debit card with Apple Pay, the easy, secure, and private way to pay,” Kemba’s website states. “Use Apple Pay with iPhone 6 to pay in stores without swiping your cards and in apps without entering payment and contact information. Just pay with a single touch of your finger using Touch ID . . . We'll share more information about how to get started using Apple Pay with Kemba cards closer to availability.”
Kemba, too, is emphasizing the extra security of tokenized payments with Apple Pay.
Explain Apple Pay
CSCU’s Moore reminded that communication around Apple Pay will have to be very strong, as well, once members begin to use the new service, saying efforts then should shift from setting member expectations to how to use Apple Pay.
“This won’t be dissimilar to what credit unions will face when EMV rolls out fully in the U.S.,” said Moore. “It will take time for members to become accustomed to the technology.”
Overall, Apple is shining a much-needed light on mobile payments, say experts who think mobile payments competition will increase, and that in the next few years consumers will decide the winners.
“In a year from now we might have a somewhat confused consumer,” said Hall. “We will have Apple Pay, CurrentC and other models. Apple Pay is clearly the focus now—but what will be the most successful solution in 18 months?”
Security Service’s Laffoon sees many unanswered questions with Apple Pay, CU Wallet and other providers.
“But, clearly, the convenience and improved account security of mobile payments technologies is so compelling that financial institutions not offering the services are going to be at a competitive disadvantage in the very near future,” he said. “By implementing Apple Pay by year-end and CU Wallet in 2015, SSFCU hopes to provide the solutions before our members ask for them.”
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