Credit Unions Need To Think Ahead About Payments, Research Paper Says

ONTARIO, Calif. – A paper researched on behalf of CO-OP Network strongly urges credit unions to strategize how they are going to incorporate payment systems into their overall strategy and not to overlook them. “Payments are a critical source of revenue for credit unions and their importance will only increase into the future,” the paper, called Navigating the New Payments Landscape, wrote. CO-OP Network is the nation’s largest credit union owned, surcharge free ATM network but the paper, prepared by Boston based Dove Consulting and co-sponsored by the California Credit Union League and WesCorp, touches upon all payment methods. Payments are vital to credit unions because they serve as an important source of retained earnings, the paper argued, and because they represent a key channel for building relationships with members. Regulations limiting credit unions access to capital, combined with the most recent round of shrinking loan margins have meant that credit unions must concentrate on payments to supplement their incomes. “As net spreads decline, where can credit unions turn to drive continued growth in retained earnings,” the report asked. “In a word, payments. Payments are an important source of income for credit unions and, managed well, will be an even more important contributor in the future.” The report noted that Callahan and Associates has estimated that non-interest income sources brought credit unions $6.6 billion in 2003, and three of the top four sources were payments related. Checks draw NSF, overdraft, check order, per item and processing fees, the report noted. Debit cards draw interchange income and per-card and per-transaction fees. ATMs bring interchange and surcharge income. Credit cards generate interchange income, interest income, late fees, over-limit fees and account origination fees. Online bill pay earns income from monthly and sometimes incremental transaction fees. In terms of relationships, the paper reported that consumers have begun to increasingly demand more payment options and to judge their financial institutions by how many payment options their institutions provide. “Payments represent an influential customer touch-point,” the report said. “every time a customer uses their credit union’s debit card or online bill pay service, for example, their relationship with their credit union is reinforced.” Individual Payment Strategies The report argued that electronic payments are the biggest winner of the changing payments mix, primarily at the expense of checks which are still dominant but losing ground fast. The report made specific recommendations for each payment area. In terms of checks, the report noted that as the volume of checks processed continues to drop, the per-check price to process will increase. Credit unions that still process their checks in house might consider outsourcing the work to a vendor. CUs that have already outsourced their check processing might consider renegotiating their vendor pricing. When it came to credit cards, the report came down firmly on the side of selling portfolios, not offering any card management strategies and noting that “many credit unions have opted to sell the credit card portfolio to a larger issuer,” but also noting that the number which sold, as of 2003, was still in double digits. In debit cards the report presented a brighter picture, noting that credit union debit card growth is forecast to be higher than either large or community banks and to outpace the industry overall. “Debit will continue to be an important source of income and an important relationship tool for credit unions. As the most profitable payment form available to financial institutions, credit unions need a well-defined debit strategy and plan,” the report said. “Increasing card issuance, activation, and usage while maintaining a flexible strategy and strong vendor relations will be key-until the market stabilizes and beyond.” Given that the report was prepared for CO-OP Network, it offered a somewhat bleak perspective on automated tellers. The report noted that revenue per ATM transaction continue to drop – and may continue to do so as more credit union members migrate away from using cash and toward using cards at point of sale. “In today’s market, credit union ATM deployers face a host of challenges, together with a few opportunities,” the report said. “The biggest challenge concerns a continued decline in revenue producing transactions per ATM.” The report observed that overall volume per ATM has continued to drop and consumers are increasingly using their financial institution’s own ATMs to avoid paying a surcharge. Moreover, consumers are increasingly using their debit cards in lieu of cash and thus reducing the demand for ATMs and also requesting `cash back’ at the point-of-sale in order to avoid surcharges. But when it comes to payments, the paper reiterated that credit unions need to start taking a pro-active stance. “There will always be new products and new technologies changing the payments market and, as with almost any kind of change, it is difficult to project what the ultimate outcome or path will be, the report said. “Rather than waiting on the sidelines for the change to end, credit unions need to accept the constancy of change and be prepared to act on less than perfect information. Being focused on payments and proactively addressing challenges is far superior to being passive and unfocused.” -