This year, PayPal celebrates a decade since it forayed into the world of mobile payments in 2006. Back then, things were a little different. Web-based payments were still the preferred method for ecommerce transactions – and rightfully so. Digital marketplaces were not as technologically capable of supporting mobile transactions as they are now. In 10 years, the mobile payments industry has evolved significantly.

During the infant stages of its mobile payments capabilities, PayPal enabled users to transfer cash through text messaging, not an app. Today, PayPal's mobile payment volume has exceeded more than $66 billion, accounting for 30% of its traffic, Pymts.com reported April 5. In 2011, mobile only accounted for 1% of PayPal's payments volume. The preferences of consumers for an omnichannel experience has largely contributed to PayPal's – and other payment services' –growth. As technology evolves, so do consumers.

This year is a good time for credit unions to pause and reflect on the current state of the payments landscape. A majority of consumers continue to identify financial institutions as logical providers of next-generation services such as digital wallets. A “wait for the winners to emerge” approach will likely result in credit unions lagging behind the curve.

Apple Pay Verdict So Far

Apple is a global influencer; it's no surprise when the tech giant unveiled Apple Pay to the world in late 2014 it unleashed a marketing campaign aimed at distinguishing itself from the competition. Apple has succeeded in harnessing the marketing resources of nearly all major U.S. banks as well as American Express, concentrating efforts toward a single high-profile rollout and in the process breaking the logjam caused by indecision over wallet alternatives.

So what are the early returns on Apple Pay as we near two years since its launch? Despite widespread promotion, fully 85% of U.S. iPhone 6 owners have yet to try Apple Pay, according to a recent Filene report, “Turmoil In Payments: Keys to Credit Union Success.” While this is likely to decline over time, a more ominous indicator comes from sporadic Apple Pay users, a majority of whom perceive it as no better than the swipe in terms of speed and ease of use.

More than three-quarters of credit unions reported a desire to be in the market with Apple Pay by the start of 2016. How that plays out throughout the rest of the year remains to be seen.

One of the biggest shortcomings of Apple Pay is its lack of a rewards component. Incentivizing mobile payment adoption may be the key for Apple and other providers to gain more users. Seventy-nine percent of American consumers reported they would increase the amount they use their phone to make payments if they were offered discount pricing or coupons based on past usage, according to the Filene report.

The Others

Google was early to the digital wallet revolution in 2011. Google Wallet had some early stumbles regarding data ownership issues and generating user interest. While Apple holds an awareness benefit and wallet share advantage, Android comprises more than 50% of the handset market – making it prime for a viable wallet solution. Android Pay is Google's second attempt at payments as the company quietly transformed Google Wallet into a peer-to-peer payment app.

Google appears to be at a payments crossroads; having alienated financial institutions over data ownership issues, it could use its acquisition of Softcard's assets as a way to soften its stance, or it could decide to cede the financial institution-friendly position to Apple and take an adversarial approach. Android Pay offers consumers rewards for purchases, which bodes well for merchants supporting loyalty programs.

Credit unions can pursue local rewards/offers through payment platforms as a logical extension of their community focus. CU Wallet, a credit union member-driven digital wallet, has embarked on such an initiative. CU Wallet works with 120 credit unions serving more than 10 million members, according to a Feb. 22 MasterCard news release.

It's still too early to assess whether there is enough desired differentiation in customer experience for a credit union specific digital wallet to attract significant market share. However, in February, CU Wallet announced a partnership with MasterCard to offer the MasterPass digital service for in-store, in-app and online purchases.

Can Credit Unions Survive The Payments Blitz?

In a time when consumers expect quality and convenience, credit unions are feeling the pressure to compete against larger financial institutions on feature functionality. However, according to Filene, CEOs believe most members do not expect leading edge offerings from their credit union.

More than 80% of credit union CEOs believe their members expect no difference in the credit union's payment capabilities in comparison to large banks, according to the Filene report. What members really desire is knowledge or understanding of what technologies are down the radar. There are a number of collaborative and individual solutions credit unions can leverage to help them survive the ongoing payments blitz:

Prepaid/reloadable debit cards: Only 40% of credit unions currently offer prepaid cards, highlighting opportunity for improvement. Prepaid cards can offset some of the losses from losing members or potential members to non-traditional financial providers. Not only will they serve as a promising source of fee income but they can help reinforce financial responsibility messaging.
Preparedness for loss of interchange revenue: In the next five years, interchange revenue will continue to decline, especially as more retailers take control of payment rails. To counter this, it'll be imperative to diversify product offerings to stimulate revenue growth.
Apple Pay/Android acceptance: Each credit union should evaluate its financial capability for adopting a digital wallet such as Apple Pay or Android Pay. If members are willing to adopt, then the participating fees may be worth the investment.
Credit union-specific wallet: A service such as CU Wallet helps credit unions leverage community ties to reinforce “shop local” messaging efforts. Naturally, this type of solution is ideal for local reward/loyalty programs. However, such programs may limit scale to attract major merchants.

It's never a bad time to pause and reflect on progress. The market for digital wallets is approaching a tipping point, and the window of opportunity to stake a claim may soon close.

Manpreet Nat is a research associate for Filene Research Institute. He can be reached at 608-661-3752 or manpreetn@filene.org.

Instant Insights /

Mobile Payments: Where We&rsquo;ve Been, Where We&rsquo;re Going

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Mobile Payments: Where We’ve Been, Where We’re Going