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Dawn of the digital wallet

Credit unions assess another disruptive innovation

Gene Blishen, general manager of Mount Lehman Credit Union ($45 million in assets, 2,000 members) remembers well the epiphany of a senior who keeps her money at his small Fraser Valley credit union in British Columbia: the “ah-ha” moment when her cell phone connected with her bank account.

The 65-year-old woman, who had always paid for goods and services either by cash or cheque, was given the credit union’s debit card but was hesitant to try it, says Blishen.

“I don’t want to use it. I don’t know that technology,” she told him. “When I pay cash, I hand it over and they give me back change. But with a debit card, I never see anything happen.” Then she signed up for Mount Lehman’s MemberNote, an award-winning innovation Blishen developed for his single- branch credit union in 2005, which is now in its third iteration. The service sends out an email or text message to the woman’s phone any time she makes a purchase, confirming that the funds have been withdrawn from her account. “Now I get this beep on my cell phone,” she later told Blishen. “I can see the money come out of my account. All the dots are connected.”

That was then. Today, Blishen is even more bullish about the future of new payment technologies for financial services institutions – a revolution the consulting company Accenture called “a disruptive innovation” with the potential “to revolutionize the way people discover, research, choose, purchase and repurchase products.”

But the $64,000 question for Blishen and other financial cooperative executives is how can they keep adapting to the fast-changing world of gadgets and providers? Will the road ahead be filled with lots of potholes or costly wrong turns leading to dead ends, or will Canada’s credit unions manage to capitalize on their collaborative history and develop a comprehensive and enduring electronic value transfer system that will benefit all their members?

A ‘wallet’ by many other names

digital wallet
A mobile wallet lets people make transactions that extend well beyond banking

At the centre of this ongoing debate is a concept that goes by several names, including digital wallet, e-wallet and mobile wallet. For our purposes, let’s stick with mobile wallet. The mobile wallet is a system comprised of three major parts: electronic infrastructure, software and smartphones. Together, they let a person make commercial transactions, effectively eliminating many items in a person’s physical wallet. Say a parent wants to send his child some funds. With the right technology, that transfer can now be made from one mobile phone to another. Today, however, it’s perhaps more common for value transfers to take place between consumer and merchant or merchant to merchant.

Note the use of the word “value” as opposed to “money.” The reason: money isn’t the only thing that can be exchanged via smartphones. Coupons, loyalty points and special offers can also be transacted with hand-held devices. In simple terms, a mobile wallet means consumers can – in theory at least –store and manage their credit, debit, prepaid and gift cards on their smartphone using a single application. Eventually, this application might include other personal items such as health cards, driver’s licences, car insurance and even health records.

Two big Canadian institutions already have moved forward with versions of mobile wallets. Both use near field communication (NFC) technology, which works with Android and BlackBerry smartphones (but not iPhones) and allows consumers to simply wave their devices a few centimetres from a merchant terminal to make a purchase. There’s no need to insert a card or enter a PIN.

The communications giant Rogers has unveiled its take on a mobile wallet called suretap™, an app for smartphones that promises to replace all kinds of cards, from payment to loyalty to gift. Meanwhile, PC Financial™, which is affiliated with CIBC, has partnered with TD Canada Trust to launch Ugo™, a multiple payment and loyalty programs service for mobiles. The application is expected to be ready for consumers any day. Loblaws is its first retail partner and the PC Plus™ loyalty program will also be part of the wallet. Using Ugo will require a TD Visa™ or a President’s Choice Financial MasterCard™. It is expected to eventually accept loyalty and payment cards from a variety of sources as more and more retailers buy in.

Finding a coordinated payment strategy

Mobile wallets sound like a convenience that could be real assets for members. So where does the credit union system stand when it comes to universally adopting them? Many issues remain for credit unions to sort out before that can happen, says Ben Rogers, director of research for Filene Research Institute, the not-for-profit U.S. firm that serves the credit union industry. Filene compiled a brief that summarizes work commissioned by the Members Development Company, a U.S. organization owned by credit unions and dedicated to improving the sector’s products and services. The research found that one of the biggest hurdles is how to settle on a coordinated payment strategy. One issue: should credit unions build their own infrastructure or should they partner up with existing systems?

“I think we are at the stage now where everybody has seen the map, but nobody has started on the hike,” Rogers says. “Very few credit unions have the resources and the personnel to build the kinds of functions needed [to allow for mobile wallets]. you have credit unions who have to work with core processors that keep all of their data files, they have to work with an online provider, which may or may not be the same, and they have to work with their mobile provider, which may or may not be the same company.”

Another question: Should credit unions opt for NFC technology or wait for other systems to mature, such as Apple’s Passbook (an application that is a big challenger in the mobile wallet wars)? Passbook users can store boarding passes, movie tickets, gift cards and so forth, and with more than 400 million iTunes customers, Passbook could put Apple in a position to negotiate with payment providers.

Finally, there is the matter of consumer buy-in, with all these digital alternatives vying for their attention. Perhaps people would prefer to opt for Square™, a device that can turn any smartphone into a card reader, or Coin™, another device, which uploads all credit and debit cards onto a single, swipeable unit.

Many analysts agree credit unions must assess the options – then rapidly move forward or risk being left at the starting gate. That’s why Canada’s financial services cooperatives have been quietly working together to develop and adopt their own first go at mobile wallets, says Stephen Fitzpatrick, chief financial officer at Credit Union Central of Canada (Canadian Central). Between February and May of this year, chief information officers from some of the largest credit unions in the country conducted a pilot project to test their own form of mobile wallet with Conexus Credit Union ($6 billion in assets, 116,000 members) and Affinity Credit Union ($4.7 billion in assets, 140,000 members), both in Saskatchewan.

“Payments are a very profitable business for credit unions. It’s worth up to 50 per cent of our pre-tax profit. If you look at it in isolation, that’s a lot of money”

—Stephen Fitzpatrick, CFO, Credit Union Central of Canada

The pilot employed NFC technology and the group used about 20 mobile phones to test the purchasing experience at point-of- sale terminals. “We learned a lot out of that,” says Fitzpatrick, who also sits on the board of Interac™, the Canadian organization responsible for developing a national network of shared electronic financial services.

“We are looking primarily at the debit side of things, but we are also considering the credit card side of things. It is one of those scenarios where growth will be slow at the beginning and then it will accelerate as there is more adoption in the marketplace. The challenge for credit unions is to be ready for that and to be positioned. We know that there is a long lead time. Even if we say ‘go’ today, we are probably talking 15 to 18 months before we are in the market in any kind of broad scale way.”

Fitzpatrick says that even a basic rollout could cost millions, if not tens of millions of dollars – and that has given pause to Richard Seres, vice president of marketing at Vancity, ($17.5 billion in assets, 501,000 members). “We are not getting a resounding vote on a particular place where we should be,” he says. “With the kind of investment that adopting the mobile wallet will demand from credit unions, Vancity has to be careful how it spends its members’ money, especially when those members appear to be relatively well served by Vancity’s current systems at the moment.”

But Fitzpatrick cautions that moving forward is necessary. He believes it is a question not of “if” but “when” the new payments system will launch. “It’s going to be a scenario very much like the debit card was [in the late 1980s],” he says. “When the debit card was first introduced there was zero demand for it. People were quite content writing cheques and paying cash. But now Canadians are among the heaviest users of debit cards in the world.”

Protecting revenue

Despite the initial expense, many in the industry agree that introducing some form of mobile wallet is essential to safeguard an important income stream. In the past, financial services institutions held a virtual monopoly when charging for funds transfers. But with more smartphones in play every day, new providers, such as phone companies and phone makers, see a chance to earn fees for negotiating these services.

“Credit unions are beginning to realize that protecting payment-generated revenues and delivering the types of payment products their members expect will be key to remaining relevant in the future,” Janet Gibson Eichner, manager of e-communications for Canadian Central, recently wrote. Adds Fitzpatrick, “Payments are a very profitable business for credit unions. It’s worth up to 50 per cent of our pre-tax profit. If you look at it in isolation, that’s a lot of money.”

That was certainly the view of George A. Hofheimer, who wrote a Filene white paper called The Future of Payment Systems for Credit Unions. “If credit unions do not play an active and collaborative role in defining the future of payments, we may see a similar fate as wireless phone carriers,” he concluded. “Most all of the innovation that is happening in smartphone development is happening by companies like Apple and Samsung. yet most of us buy our phones from wireless carriers. These carriers are often seen as merely the dial tone of the system. The only time we think about them is when we pay the bill or a call won’t go through because of bad network reception. Credit unions are at risk to be the dial tone of the payments industry – a regulated, profitless repository for a member’s money that provides little perceived value.”

Muscling in on the big boys

At the moment, the names in the payments space are well known, including MasterCard, Visa, PayPal and big retailers like Wal-Mart. But nonfinancial firms such as Apple, Google and Amazon are trying hard to muscle in on the big boys. Fred Cook, chief information officer at the North Vancouver-headquartered credit union BlueShore Financial ($3 billion in assets, 40,000 members), believes in the mobile wallet’s future but argues that credit unions should leave it to these behemoths to come up with a workable technology.

“For a credit union to say we are going to come out with our own wallet strategy is a little naïve in a world where these huge global players are duking it out,” he says. “Our strategy is to work closely with [others] who have leading knowledge of those technologies.”

Cook says BlueShore’s primary focus is doing what is in the best interests of its members. At the same time, credit unions face intense competitive pressures in the marketplace, including competition for members. “From a credit union perspective, we firmly believe that where the payments go, the deposits go, which are important to us. That’s why we are embracing the technology now and staying on top of it. So when the timing is right we can move ahead with a deliverable solution.”

The app’s the thing

For some, the true worth of mobile wallets rests on the applications they can hold. “Anyone can go out there and deliver a wallet,” says Andy Alguire, vice president of information technology at Steinbach Credit Union in Manitoba ($4.1 billion in assets, 80,700 members). “It’s basically a holder for applications. The reality is that the features and functionality that are contained in the apps are the most important things for you and me and our members.” For example, those applications might include personal finance programs that are detailed enough to alert you if the café latte you’re buying doesn’t fit in to your monthly budget.

The question remains whether members want those applications. According to a survey conducted in late 2013 by the accounting firm PwC, just 22 per cent of Canadians currently use mobile banking applications on their cell phones. Although that figure is on the rise, Dave Arrowsmith, chief information officer for British Columbia’s Island Savings Credit Union ($2.9 billion in assets, 60,000 members), says credit unions must remain sensitive to demographics and how these affect their members’ wants and needs.

“Telephone banking goes back 20 or 30 years here,” he points out. “It is pretty interesting to see that 10 to 15 per cent of our members still use telephone banking.” At the same time, he says credit unions must stay ahead of the curve by anticipating what will benefit their members in future. “I don’t think you can say if our members aren’t asking for it you are not going to do it. If you do, you are going to find that your competitors have all got it and your embers are all asking for it because it is prevalent in the marketplace.”

“We firmly believe that where the payments go, the deposits go, which are important to us. That’s why we are embracing the technology now and staying on top of it”

—Fred Cook, CIO, BlueShore Financial

Indeed, if the next generation isn’t writing cheques or stopping at the branch to withdraw weekend cash, credit unions will have to figure out other ways to win them over.

Learning from Kodak

When it comes to the electronic payments landscape, Walid Hejazi, associate professor at the University of Toronto’s Rotman School of Management, suggests that companies that embrace change do far better than those that resist it.

“One of the best examples of this is the case of Kodak, the photography pioneer that introduced the Brownie camera over a hundred years ago,” he says. “Last year Kodak filed for bankruptcy. The reason behind the decline and ultimate demise of Kodak was its failure to embrace change.”

Gene Blishen of Mount Lehman couldn’t agree more. “There are a lot of credit unions that don’t take responsibility for technology. They just wait for the mother ship to arrive. There has to be cultural change. It takes the will of the board, the management and the staff – and also the excitement of the members – to work.” ◊