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Rising Above Uncertainty: Opportunities and Challenges for Credit Unions in Payments
 

Rising Above Uncertainty: Opportunities and Challenges for Credit Unions in Payments

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The retail financial services market is in a transformative period where new stakeholders and business models are reshaping the industry. Credit unions still have the opportunity for retention and ...

The retail financial services market is in a transformative period where new stakeholders and business models are reshaping the industry. Credit unions still have the opportunity for retention and growth, but must continue to compete. In this presentation, you will get an in-depth look at key market dynamics, including evolving financial services models and regulatory impact; learn about emerging strategies and their impact to credit unions, including EMV, prepaid, and mobile; and find out how to prepare for the future.

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    Rising Above Uncertainty: Opportunities and Challenges for Credit Unions in Payments Rising Above Uncertainty: Opportunities and Challenges for Credit Unions in Payments Presentation Transcript

    • Rising Above Uncertainty: Opportunities and Challenges For Credit Unions In Payments NAFCU 2013 Congressional Caucus September 9, 2013 Royal Cole, President Vantiv Financial Institution Services
    • Agenda Key Market Dynamics – Evolving Retail Financial Services Models – Regulatory Impact Emerging Strategies – Impact to Credit Unions – EMV – Prepaid – Mobile Preparing for the Future 2
    • Key Market Dynamics  The retail financial services market is in a transformative period where new stakeholders and business models are reshaping the industry.  Legacy financial services are under increasing pressure and reengineering using new technologies that leverage virtual delivery channels is increasingly necessary.  New stakeholders and existing market participants are looking for tighter control over threatened revenue/expense streams.  Credit unions have aggressively competed for and won market share, but members are increasingly interested in the digitalbased experience and services delivered through nontraditional providers.  Credit unions still have opportunity for retention and growth, but must continue to compete. 3
    • Modern Dynamics Shifting Payments Market to Next Generation Products and Business Models Macroeconomic Trends Financial Inclusion Regulatory Control Mobility Merchant Segment Control Consumer Adoption Shifts Fraud/ Risk Payment Efficiencies Network Expansion 4
    • Legislators and Litigators Exert Increasing Influence on the Payments Industry 2009 Card Act goes into effect, requiring issuers to take a longer view of credit risk, limiting access to credit for emerging consumers and sub-prime market. • Consumer credit industry retrenches into smaller opportunity market, impacting credit unions’ ability to compete against institutions with more diversified product portfolios. 2010 Combined impact of Regulation II (Durbin Amendment) and Overdraft Fee Act shifts retail financial services business model towards fee-based services. • Over time, exempt financial institutions realize interchange fee income losses due to merchant control over debit network relationships. 2013 U.S. Courts rule on credit card surcharges, credit card interchange fee reimbursement, and potentially a rewrite of Regulation II interchange fee and network routing rules pending appeal. • Interchange fees, especially for debit, continue to be de-stabilized, but larger impact could be the requirement of issuers to support two debit signature networks. 5
    • Durbin Amendment Ripple Effect Felt Across the Industry Federal Reserve Survey (2011) highlights the true impact of Regulation II on exempt (unregulated) financial institutions. • Overall interchange fee revenue decreased 4% for unregulated issuers and network fees were higher than those of regulated issuers. • The average ticket of a prepaid card transactions was reported to be $34.42, more than $4.00 higher than the average cardpresent signature debit transaction of $30.23 as regulated issuers incorporate these products into their debit portfolios. Supporting dual network routing on EMV-compliant cards add cost and complexity to reissue strategies. Recent court ruling vacating Regulation II rules threaten further disruption and potential for debit card issuers to have to support four networks with no control over final routing. 6
    • Finding a Balance in the New Normal – Lessons Learned Credit unions’ competition may not be a bank or a physical entity; expanding digital service capabilities should be a key near term activity. As financial institutions exit a period of branch expansion, a gap in local services exists, especially in non-metro areas. Partnering for compliance and risk-related activities protects organizations and allows more room for strategic product planning. While credit union needs and values have been communicated effectively so far, credit union lobbying efforts need ongoing support to keep their profile high with Congress and regulators. 7
    • Agenda Key Market Dynamics – Regulatory Impact – Evolving Retail Financial Services Models Emerging Products – EMV – Prepaid – Mobile Preparing for the Future 8
    • Overview of EMV • EMV is a set of international standards developed by Europay, MasterCard, and Visa in 1996 (now joined by Discover, AEXP JCB, CUP) • Standards define interoperability of a new secure transaction type across the international payments enterprise – US and China most recent and largest markets to join • EMV provides comprehensive protection against: – Counterfeit and skimming fraud – US issuers can select to add PIN or Signature as CVM preference • An EMV card is inserted into a terminal, and removed when the transaction is completed. 9
    • Overview of EMV US Roadmap April 2013 • Processors must support EMV April 2015 • 3rd Party ATM must support EMV April 2013 • Processors must support EMV • International ATM liability shift October 2015 Liability shift of counterfeit transactions April 2013 • Processors must support EMV April 2013 • Processors must support EMV October 2015 • Liability shift of counterfeit transactions October 2015 • Liability shift of counterfeit transactions October 2017 • Liability shift for AFD • • October 2015 • Liability shift of counterfeit transactions October 2017 • Liability shift for AFD • Liability shift for ATM October 2017 Liability shift for AFD October 2016 • Liability shift for ATM October 2017 Liability shift for AFD • 10
    • A Business Case for Change Exists in U.S. Market Counterfeit Fraud Volume (Visa only) + 307% 2004 2011 - 56% - 52% Europe Asia Pacific U.S. (Liability Shift in 2005) (Liability Shift in 2006) (Liability Shift in 2015) › Gift cards most popular target after cash › Cross border fraud migration increasing in US as more markets adopt EMV (Canada and Mexico latest to adopt) 11
    • Dual Network Debit Routing Requirement Will Drag on EMV Implementation Timeframes Regulation II has created a unique operating model in the U.S. – The main problem for the U.S. is that EMV is designed to operate as a one to one relationship between the issuer and their network. Regulation II requires that issuers support at least two, unaffiliated networks on their debit cards. – Networks want to retain ownership of their AID (Application Identifier) as proprietary software, but this leaves the industry having to support a wide variety of AIDs. Solutions are converging around inter-operability across networks in 2013, but implementation scope and timeframes remain unclear. – Smart Card Alliance EMV working group agreed to license the D-Payment Application Specification (D-PAS) as a common U.S. debit chip payment solution. – Visa and MasterCard agree to license their AID software. Issuers are grappling with cost differentials between PIN and signature EMV deployment, but recent threats to further decrease debit interchange may swing the market towards PIN. 12
    • Merchant Deployment of EMV Terminals Is Likely To Extend Through The Decade, With Many Uncertainties and Delays We don’t have EMV implementation plan but we are focused on figuring that out now… We need to know whether or not we should invest in EMV. We still haven’t made a decision about EMV and whether to convert our operations by 2015. There is some discussion in the industry of the value of EMV vs. the cost of implementation. We are studying the issues now. It will take at least 2 years to update all the stores, but we will have the EMV capability by the liability shift date. Sources: Mercator Advisory Group Estimates, Vantiv Insights Executive Interviews 13
    • EMV Card Issuance Is Slowly Ramping Up In The US • Own Chip-based Cards for Security (Base = Own debit or general purpose credit cards Not Sure 19% Yes 15% No 66% • While 15% of debit or credit card owners say they own at least one chip card, 19% are not sure if they have one or not, despite seeing an image of one in the survey. Chip cards issued today in the US are more likely to be credit cards given to frequent travelers and/or high volume customers who tend to be among the highest income earners. Source: Vantiv Insights consumer surveys 2012-2013, N=1,200 US adults 14
    • Agenda Key Market Dynamics – Regulatory Impact – Evolving Retail Financial Services Models Emerging Products – EMV – Prepaid – Mobile Preparing for the Future 15
    • Prepaid Card Purchases Continue to Grow, Some To Replace DDAs Type of Prepaid Card Purchased • (Base = All, year refers to year purchased) 63% 2013 60% 52% 50% 2012 • 27% 25% 19% 15% • General General Retailer Any prepaid purpose, purpose, not specific card reloadable* reloadable prepaid card Prepaid cards of all types continue to gain traction with consumers. 23% of consumers report having purchased a prepaid card as a checking account/ share draft account replacement, up from 16% in 2012. 32% of consumers 18-34 see prepaid as a DDA replacement. *Statistically significant difference 2012-2013 at the 95% Source: Vantiv Insights consumer surveys 2012-2013, N=1,200 US adults 16
    • General Purpose Reloadable Prepaid Cards Are Showing Dynamic Growth In the U.S. Amount Loaded onto GPR Cards ($Billions) $180 $168.4 $160 $140 $129.5 $120 $99.7 $100 $76.7 $80 $56.8 $60 $40.8 $40 $28.6 $20 $- $0.4 $1.6 $2.7 $5.3 2003 2004 2005 2006 $12.0 2007 $19.5 2008 2009 2010 2011 2012 2013(f) 2014(f) 2015(f) Source: Mercator Advisory Group Estimates 2012 17
    • American Express/Walmart’s Bluebird Account Is Actively Competing For The Underserved Banking Market • • • • The account is fully electronic, meaning that no checks are issued (the company has stated that checks will be available in 2013). Account servicing and statements are online only. Cardholders use a mobile application that supports money transfer, bill payment, remote deposit capture, text alerts, and account balance and transaction information. Other features include: – – – – – – – – – Supporting up to four subaccounts, controlled from the main account Purchase protection Fraud protection Global assist services for travelers Roadside assistance Entertainment access Live customer service No minimum balance No foreign transaction fees 18
    • Agenda Key Market Dynamics – Regulatory Impact – Evolving Retail Financial Services Models Emerging Products – EMV – Prepaid – Mobile Preparing for the Future 19
    • Consumer Adoption of Mobile Devices Continues to Grow Strongly Mobile Device Ownership by Type: (Base=All) 2013 • 2012 61% 48% Smartphone or tablet* 56% 45% Smartphone* 31% 39% Voice and text phone* Tablet* 27% 12% Basic cell phone 23% 26% Do not own mobile device 7% 6% • • A majority of credit union members should be considered mobileenabled. Over 8 in 10 consumers under age 35 own a smartphone. Due to the speed of growth in device ownership, many are new users who will grow their use of mobile banking apps over the long term. *Statistically significant difference 2012-2013 at the 95% level Source: Vantiv Insights consumer surveys 2012-2013, N=1,200 US adults 20
    • Mobile Usage Has Already Changed How Consumers Interact With Their FIs FI Communication Methods Used in Past Year (Base = All and Smartphone Owners) 79% 83% Went into branch and spoke with a teller Went into branch and spoke with customer service rep 62% 64% 61% 67% Through an ATM Use a customer service website Called 800 service number and spoke to a person Spoke with my personal financial advisor, banker, or broker Called 800 service number and used the phone menu By mail Sent an email to a rep or inquiry address Accessed a special mobile app using my smartphone Accessed customer service website using my smartphone Used online chat on customer service website Accessed a special mobile app using my tablet computer Spoke with advisor or service rep using video conferencing Sent an SMS text to rep or inquiry address 43% 50% 39% 46% 35% 39% 34% 36% 20% 18% 15% 22% 10% 27% 9% 22% 8% 14% 4% 8% 3% 4% 3% 6% Total Respondents Smartphone Owners Source: Mercator Advisory Group CustomerMonitor Survey Series 2011 21
    • Soon, Mobile-Based Payments Will Force Issuers to Think About Their Brands in a Different Way Card Brand Acceptance Marks Mobile Wallet Brands 22
    • Consumers Increasingly Expect Mobile Payments Will Be Common In The Future—But The Form Is Unclear Expectations About Mobile Payments Use (Base = All) Mobile payments will be common (2012) Mobile payments will be common (2013) I will use mobile payments (2012) I will use mobile payments (2013) • 31% 31% 10% 22% 7% 9% 7% • 36% 30% 1-2 yrs 2-5 yrs 18% 5+ yrs 8% 9% 17% 19% No idea Never 18% 37% 21% 18% 20% 33% • Two thirds agree that mobile payments will be common in five years. Nearly 8 in 10 consumers under age 35 expect mobile payments to be common in five years. But just two in five expect they themselves will use them in five years--they do not have a clear picture how mobile payments will work or what their value will be. Source: Vantiv Insights consumer surveys 2012-2013, N=1,200 US adults 23
    • For Those Willing To Consider Mobile Payments, Trusted Financial Providers/ Brands Are The Preferred Sources Preferences for Digital Wallet Provider (Base = All) 50% Bank or credit union Major card network (Visa, MasterCard, AmEx) Online payment provider like PayPal 43% 20% Major technology company like Apple 13% Major eCommerce retailer like Amazon 13% Wireless cellular phone provider (Verizon, Sprint) 13% Major retailer like Target or Walmart • Financial institutions are preferred providers, in part due to their established presence providing online and mobile banking services to members today. • Consumer and industry visions for mobile payments could benefit from the strong support of trusted financial institutions. 12% Third party, independent developer like Google I would never use a digital wallet 9% 28% Source: Vantiv Insights consumer surveys 2012-2013, N=1,200 US adults 24
    • Agenda Key Market Dynamics – Regulatory Impact – Evolving Retail Financial Services Models Emerging Products – EMV – Prepaid – Mobile Preparing for the Future 25
    • Preparing for the Future • Credit Unions have maintained their reputation as trusted financial services providers throughout the economic crisis period. • Banks are disadvantaged in today’s regulatory environment and continue to be a target for legislators and litigators. • Credit unions can effectively compete on a digital basis and also offer local services being increasingly abandoned by banks. • Creating appeal to a younger demographic should be a near-term focus; mobile represents a major opportunity. 26
    • What’s Your Next Step? • Now is the time to plan and start your EMV strategy. • Anticipate the needs and interests of members--match demographics to products as closely as possible. – • Mobile payments are just appearing on the horizon but mobile banking is here now. – • Members want next generation products from their financial institutions, but relevancy is key. Build out as much functionality into your mobile banking services as possible. Accentuate the fundamentals of a credit union. – Members and businesses need credit. Consider new ways to reach the disenfranchised. 27
    • Q&A royal.cole@vantiv.com 28