PayPal: Friend or Foe to Credit Unions?
In a world where everything moves at warp speed, selfies go viral in seconds and “breaking the Internet” is actually a good thing, credit unions that resist changing technology can easily get left behind in a mass of cyber darkness.
Thanks to today's technology and the mentality of younger generations, the ease and convenience of banking online is the new norm, and with so many companies willing to accommodate that lifestyle, it's more important than ever for credit unions to keep up, according to Chuck Fagan, president/CEO of St. Petersburg, Fla.-based payments CUSO PSCU.
“Credit unions in particular have to do their best to embrace technology,” Fagan said.
Credit unions, however, may be feeling a little lost among the many players vying for consumers’ attention in cyberspace. The challenge of competing with P2P lenders and mobile payment providers such as PayPal was a hot topic for credit union executives at this year's World Credit Union Conference in Denver.
Lance Noggle, senior director of advocacy and counsel for CUNA, said PayPal can best be thought of as a credit union's “frenemy.” While PayPal's transactions have essentially made credit unions a clearing house, the concern could involve what's to come.
“Credit unions and PayPal are partners now, but there is some concern about what PayPal could offer in the future,” Noggle said.
Noggle and his colleague, Luke Martone, also a senior director of advocacy and counsel for CUNA, said Google Pay and Apple Pay are friendlier with credit unions, as they allow consumers to use credit union debit cards along with their products.
“Facebook and PayPal are outside of that,” Martone said. “There isn't as much opportunity with them at this point.”
That could be why credit unions have embraced Apple Pay and signed up to work with the product faster than banks have, Noggle added.
Credit union executives have told CU Times that one of the biggest payments-related issues is the regulatory burden, or perceived lack thereof, facing companies such as PayPal and Facebook. According to the 2004 book “The PayPal Wars: Battles with eBay, the Media, the Mafia, and the Rest of Planet Earth,” PayPal survived the dot-com crash only to find itself fighting an uphill battle that every credit union is familiar with: Government-mandated regulation. The company was headed in the direction of becoming a bank, according to author Eric Jackson, but determined that due to cumbersome regulations, becoming a third-party entity designed to facilitate money transfers was more ideal.
PayPal and its competitors do have regulations, however they are not held to the same standard as credit unions and banks are because they don't compete on the same level. According to Jay Mayfield of the Federal Trade Commission, the FTC does enforce the FTC Act, which covers deceptive and unfair practices in commerce, on the company. PayPal may also fall under the umbrella of the CFPB (the bureau did not respond to CU Times’ request for comment on the issue). PayPal is also regulated on a state level and holds licenses in 48 states, the District of Columbia, the U.S. Virgin Islands and Puerto Rico. In some states, PayPal must hold multiple licenses. According to its website, the only states in which PayPal does not hold a state license are New Mexico and South Carolina.
PayPal may appear to cross the line and cause concern for credit unions when it begins to act like a bank. In 2009, PayPal began offering Student Accounts for Teens, which allows parents to transfer money into their child's account, who may then use their version of a debit card to shop online. The program was designed to teach kids how to handle money – something credit unions are also keen on. PayPal also offers credit cards and small business loans.
The FDIC maintained in 2002 that PayPal is not a bank, and therefore does not need to abide by the same regulations or security standards that credit unions do. That also means it does not receive FDIC insurance.
Noggle said while it seems PayPal can use that definition to skirt regulations that credit unions can't, credit unions in fact win in the long run.
“At least credit unions are more protected because of regulations,” he said.
While regulations offer protection, they may also be holding credit unions back from living up to their full potential in the digital space, however, according to Alicia Nealon, director of regulatory affairs for NAFCU.
“The regulatory burden and costs on credit unions more often than not serves to constrain business innovation,” Nealon said. “Additionally, regulators, such as the NCUA, have not updated their rules to recognize the growing trend toward the digital marketplace. While credit unions have taken many steps toward successfully incorporating new technology and social media platforms into their business models, outdated and burdensome regulations need to be addressed so our industry can fully utilize these important tools.”
Noggle also said “not if, but when” there is a major security breach at PayPal or another third-party mobile payment company, the headlines it induces will likely lead Congress to take another look how those companies are regulated.
Fagan said the best way for credit unions to compete with companies such as PayPal is to embrace the technology they use and be aware of the dangers. And as the financial industry aggressively moves toward EMV and attempts to meet the October 1 liability shift date, Fagan said credit unions who acted promptly will see many benefits.
“By the end of the year, 47% of terminals will be EMV-enabled,” Fagan said. “That may seem like a low number, but think about small businesses, such as dry cleaners. The likelihood of fraud in a dry cleaner is pretty reduced. The 47% may sound small, but all of the top merchants will be compliant and that should give some security.”