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Contents

Introduction 4 Determining the Need for a Digital Wallet 5 The Digital Wallet Field: Commonalities and Differences 6 A Digital Wallet Payment Strategy 8 Digital Wallet In-House Vs. Third Party Platforms 8 Digital Wallet Learning Curve—Payment Ecosystems to Fraud 9 Concluding Thoughts: Digital Wallets—A Slow Unfolding Future 11 Acknowledgements 12 About the Author 12

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A Note from the Technology Council Communications Committee Chair Thank you for downloading “Physical-Digital Wallets: The New Payment Strategy.” In our annual member surveys, members tell us time and again what a fantastic member resource the Council white papers are; they are designed to offer thought-provoking, executive-level content and take a deep dive into various technology topics. The white papers are specific to credit unions and include commentary and/or case studies from credit unions and industry vendors and providers relevant to the topic. The Technology Council’s Communications Committee, which is comprised of fellow Council members, is responsible for producing these white papers. The committee chose to team up with the Operations Sales & Service Council’s Member Resources Committee for this white paper about digital wallets because there is a great deal of cross-over interest with this topic. After reading the paper, start or join in a discussion on the Council list serve. We’d like to hear your thoughts, questions, and advice, as well as continue the dialogue on this important topic beyond the white paper itself. How is your credit union planning its payments strategy? Thanks for reading and being a member of the CUNA Technology Council! Alex Barker Chair, Technology Council Communications Committee SVP/CIO Mountain America Credit Union West Jordan, UT abarker@macu.com

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Introduction While the concept of a digital wallet is not new, the way credit unions approach this aspect of the industry is critical. The landscape is changing. In its conceptual, adopter phase of the early 2000s, a digital wallet was defined by disparate cardless and paperless transactions via third party payment conduits such as PayPal and eBay. Google Play and iTunes was the next generation followed by firms like Braintree and Stripe, which captured in-app and mobile transactions outside iTunes and Google Play. These payments alternatives were welcome by certain consumers and merchants, but broad market adoption rates weren’t realized due, in part, to available technologies (i.e., consumer devices) and merchant acceptance (e.g., near field communication (NFC), quick response (QR code), et al.). The hurdle to market adoption to a digital or mobile wallet has been secure, interoperable ease of use. The goal is one smart phone/device and one debit/credit card branded to one financial institution. According to a ComScore survey (February 2015), approximately 182 million people in the U.S. own a smartphone. Apple ranked as the top smartphone manufacturer with 41.6 percent OEM (original equipment manufacturer) market share, while Google’s Android was the number one smartphone platform with 53.1 percent market share. With retail juggernaut Walmart announcing that it is switching from signature debit transactions to PIN-based transactions for debit cards, interchange revenue is on the decline. And more retailers are expected to follow suit. As such, it is critical for credit unions, more than ever, to define a strategy that places a branded card at the point-of-sale transaction. The objective is no longer a digital wallet per se, but rather a physical-digital wallet: a

personalized member-facing operating system that facilitates all retail and banking transactions. For many credit unions, a digital or mobile wallet is new territory, and cyber crookery, such as the Target breach, is an understandable concern for

members and credit unions alike. However, there is good news with regard to estimated digital wallet adoption rates. According to a ING International Survey (April 2015) of

10,169 mobile users, 84 percent of consumers who own a mobile phone trust their own bank the most to provide a mobile payment application. While Google Wallet launched in 2011, and was later integrated with Gmail in 2013, the digital wallet industry didn’t proportionally change until October 2014 when Apple Pay was announced. Until this point, many credit unions cautiously watched from the sidelines. This was for good reason as there wasn’t a digital wallet silver bullet solution, noted John Schweikert, Senior Director of Payments for the digital banking solutions firm, Digital Insight. “After years of hype and disappointment, mobile wallets are beginning to gain some traction and the mobile wallet ecosystem is beginning to take shape.”

Regardless of asset class or member count, many credit unions are in the process of determining how they will approach this new digital wallet arena. Considerations from a technological as well as a sales and operations stance are required. Variables include:

“After years of hype and disappointment, mobile wallets are beginning to gain some traction and the mobile wallet ecosystem is beginning to take shape.” – John Schweikert

84 percent of consumers who own a mobile phone trust their own bank the most to provide a mobile payment application. – ING International Survey

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1) determining if a digital wallet is right for every credit union,

2) understanding commonalities and differences with digital wallet platforms,

3) determining how digital wallets can fit into a credit union’s overall payments strategy,

4) determining if in-house talent can oversee the initiative, and

5) determining metric-based milestones to gauge if a digital wallet campaign will be successful.

This white paper investigates and discusses strategies related to adopting a digital wallet solution. Credit union leaders from the CUNA Technology and Operations Sales & Service Councils provide commentary on related issues, which is supported by insights from digital payments industry experts.

Determining the Need for a Digital Wallet Conventional wisdom dictates that in order for credit unions to remain competitive with community and big bank counterparts, a digital wallet is required. However, the solution is not always black and white. There are considerations such as region/market, member demographics, and member expectations. So for many organizations it’s not a matter of if a digital wallet will be adopted, but rather when.

“It really comes down to your members - current and future. You either believe that digital payments are going to continue to grow or that they are simply a fad,” said Financial Partners Credit Union Senior Vice President Operations and eServices, Lori Reeves. “We believe digital payments are going to continue to become more of the accepted and desired payment option. Therefore, it is our position that we will offer our own digital wallet while continuing to support all other payment methods,” said Reeves, adding that the $960-million credit union serves 66,000 members, 8,500 of which are active smart phone bankers. The digital wallet industry remains a wild west of sorts, which is comforting news for those credit unions that have yet to make a definitive decision on member offerings. Reeves said the biggest issue with digital/mobile wallet adoption is what technology merchants plan to embrace coupled with consumer choice/preference. “Merchant Customer Exchange (MCX) continues to gain merchant interest and most of the participating merchants are blocking NFC to other wallets at point-of-sale (POS).”

Since there is a diversity of devices, acceptance methods and tokenization standards, credit unions in the near term may need to support multiple options. And while this approach may change in the future, the fact remains that there isn’t one digital wallet technology standard in the industry, nor is one forecasted. “Credit unions should evaluate each of the mobile wallet options, fully understand the associated costs and upside and then decide which wallet/s are the best fit for their institution and members,” said CU Wallet’s Founder and CEO Paul Fiore. “Just as credit unions adopted online banking, then mobile banking, mobile wallets are a part of the technology evolution. Mobile devices are already used more frequently than desktop computers or visits to their branch.” The Board of Governors of The Federal Reserve’s Consumers and Mobile Financial Service’s Survey (March 2015) supported Fiore’s stance: banking transaction are occurring in greater numbers via mobile devices. Statistics from a December 2014 survey found that 39 percent of all mobile phone owners with a bank account used mobile banking in the 12 months prior to the survey, which was up from 33 percent in 2013 and 29 percent in 2012. Additionally, 52 percent of smartphone owners with a bank account used mobile banking. Mobile payments with smartphones were the most common type of mobile payment at 68 percent.

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During the same time period, the survey found that 47 percent of smartphone users’ comparison shopped with their phone while at a retail store, with 33 percent using their phone to scan a

product’s barcode to find the best price for the item. Additionally, 29 percent of all mobile phone users and 38 percent of smartphone users used their phone to track purchases and expenses. “Mobile wallets should be a core portion of a credit union’s payments

strategy,” said Schweikert. “In-store and online payments are a significant driver of spend, and the core of any mobile wallet strategy is ensuring that your cards are top-of-wallet.”

The Digital Wallet Field: Commonalities and Differences The digital wallet industry is evolving and remains in flux, but there are four leading segments to watch: Mobile Device Makers (e.g., Apple, Google), Merchant Centric (e.g., CurrentC), Payment Centric (e.g., PayPal, Visa Checkout) and Financial Institution Centric (e.g., CU Wallet). While Apple Pay took an early lead by leveraging its vast iPhone consumer base (what Schweikert referred to as “a dead-simple and easy user experience”), InfoScout, a real-time provider of shopper insights, conducted a survey (March 2015) that found just six percent of surveyed U.S. iPhone 6 owners used Apple Pay at a store, with 85 percent never trying the application. According to The Wall Street Journal, in order for financial institutions to participate in Apple Pay, Apple charges 15 basis points per credit card transaction and half-a-cent per debit transaction. Conversely, Google Wallet does not require financial institutions to enter into an

interchange surcharge agreement—a possible upper hand for credit unions. When Apple Pay launched in October 2014, the company noted that 220,000 retailers supported the payment channel. By mid-March 2015 that number purportedly jumped to over 700,000 retailers. But for many credit unions, getting Apple Pay green lit has proven difficult with growing numbers waiting in the queue. “Our credit processor was not ready, but our debit side was,” said UNCLE Credit Union Senior Vice

President and Chief Technology Officer, James Fisher. “Apple would not allow us to move forward with just one side available so we have to wait to do a conversion of our credit

processor to CO-OP Financial Services.” Fisher added that the $306-million credit union, serving roughly 22,000 members, 6,555 of which are smart phone bank users, hopes to offer Apple Pay by Q4 2015.

47 percent of smartphone users’ comparison shopped with their phone while at a retail store, with 33 percent using their phone to scan a product’s barcode to find the best price for the item – Consumers and Mobile Financial Service’s Survey

Just six percent of surveyed U.S. iPhone 6 owners used Apple Pay at a store, with 85 percent never trying the application - InfoScout

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Digital Wallet Commonalities and Differences

(Source: Financial Partners Credit Union) Despite basis point interchange concerns and roll out delays, Apple Pay has moved the industry’s digital/mobile wallet conversation forward in a more significant manner than its competitors, which in the credit union space, include leaders CU Wallet and Google Wallet. The latter comes preloaded on Android phones, while Apple Pay requires the user to have an Apple iPhone 6, 6+, or Apple Watch device. CU Wallet, a majority owned credit union CUSO, offers an agnostic white labeled mobile wallet functionality from within a mobile banking application or as a standalone application centered on payments and payment related features. (To view Apple Pay, Google Wallet and CU Wallet commonalties and differences, refer to chart “Digital Wallet Commonalities and Differences”). Google Wallet, Apple Pay and CU Wallet share the same goal—ease and speed of use at retail POS. However, the companies have different approaches to operations. Google Wallet allows a member to pay with an Android phone wherever NFC payments are accepted. With Apple Pay, users link to their iTunes account/card or upload additional credit cards. The card is verified by the credit union and an encrypted token is stored in a secure element on the phone. A leading difference with CU Wallet and Google Wallet is that the member’s credit card is securely stored on the cloud, not the phone. Despite the possibility of greater interchange revenues, the problem for CU Wallet and Google Wallet in the near term is merchant participation. To date, Apple Pay has them both beat.

“We feel like we have more potential upside partnering with CU Wallet given that fees from Apple Pay and Google Wallet could have a significant impact on interchange revenue and we’re still not really sure how they plan to use the data or market to our members,” said Reeves who added that in April, Financial Partners Credit Union was in the final stage of Apple Pay roll out. “CU Wallet is built by a consortium of credit unions and tailor made for our needs.” Supporting over 240,000 members, 73,000 of which are split between Android and Apple users, ENT Federal Credit Union is among the approximately 200 financial institutions that adopted and launched Apple Pay. With 750 active Apple Pay users since February 2015, Chris Chippindale, vice president, Enterprise Initiatives & Electronic Banking, said the $4 billion credit union is keeping an open mind to digital wallets. “We continue to watch closely as new solutions enter the marketplace, particularly Samsung (Loop), MCX and Windows. Momentum is picking up and an inflection point seems imminent,” said Chippindale. “Apple Pay was a must do from a relevancy standpoint, but we believe that keeping the solution within our mobile banking app is important. This will allow us to maintain the primary point of contact for a member’s financial relationship—top of wallet.”

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A Digital Wallet Payment Strategy Aside from Apple Pay, Google Wallet, and CU Wallet, PayPal, Samsung and Windows [phone] are also vying for market share, although the latter three have been more the David than the Goliath. A Changewave survey (April 2015) found that Apple Pay, with more than 200 participating credit union and banks, remains the channel to beat. To this end, the Changewave Mobile App Satisfaction rating found that 66 percent of Apple Pay users were “very satisfied,” alongside 45 percent of PayPal customers and 33 percent of Google Wallet customers who felt satisfied with the payment channel. As the October 2015 deadline for the Payment Networks’ Liability Shift associated with EuroPay, MasterCard, and Visa (EMV) nears, credit union executives are considering what impact EMV will have on respective payment strategies, including digital/mobile wallets. “The liability shift with EMV is coming. As a result, many of the merchants are upgrading their terminals, which will have NFC technology,” said Mountain America Credit Union Senior Vice President of Payment/Business Services, Tony Rasmussen. “It may be many years before a mobile wallet can be taken everywhere, but starting next year mobile wallets will be accepted at a broader number of merchants.” With approximately 500,000 members, MACU rolled out Apple Pay in January 2015. To date, 5,500 cards have been uploaded. During Q1 2015, over $500,000 was completed in Apple Pay transactions.

“Members look to us as their financial partner so we need to help them interpret this [digital wallet] space,” said Rasmussen. “Many members see these conveniences and want to do something with their phones, so we are looking at solutions like Google Wallet, Apple Pay and all the different players so we can provide our members with convenient solutions that work with our payment channel.”

Alliant Credit Union Senior Vice President, Operations and Technology George Rudolph indicated his credit union is taking a similar approach. “We’ve been somewhat discerning in our participation in wallets; in all cases, we want to make sure we only participate in or promote wallet solutions that we believe will provide a more convenient, safe alternative to the legacy card swipe and/or keystroke processes.” With 285,000 members, 81,000 of which are Apple and Android active users, Alliant Credit Union began offering Visa Checkout and Apple Pay. Currently there are 1,450 Apple Pay users. “We are hopeful that our participation in digital wallet services will make Alliant’s card offerings even that much more attractive in the marketplace,” said Rudolf.

Digital Wallet In-House Vs. Third Party Platforms In order to ascertain whether or not a digital wallet strategy is right for a respective organization, credit unions have to first look in-house to determine if appropriate talent, resources, and technologies can be tapped.

“I think every credit union has the expertise in-house. Re-organizing small sections of the organization to align a majority of the functions under a payments role is a start,” said Chief Technology and Operations Officer at Washington State Employees Credit Union (WSECU) Ben

“Many members see these conveniences and want to do something with their phones, so we are looking at solutions like Google Wallet, Apple Pay and all the different players so we can provide our members with convenient solutions that work with our payment channel.” – Tony Rasmussen

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Morales who also serves as and Chief Executive Officer at WSECU’s subsidiary Q-Cash Financial, LLC. With 200,000 members, 70,000 of which are active Android and Apple users, Morales said WSECU did work in-house and plans to have Apple Pay rolled out to membership by the end of April. “You have to know what your payment ecosystem is and begin to contractually manage them holistically.” While understanding internal operations is the first step to determining the potential of a digital wallet platform, in most cases, credit unions will have to augment an internal digital wallet team with vendors and consultants to ensure a successful roll out. This multifaceted approach includes sales, service and technology executives. While the former experts will handle frontline and marketing initiatives such member-facing advertising, education and loyalty programs, the latter need to be effective UX (User Experience) and UI (User Interface) and payment rails experts to ensure the digital wallet application is intuitive. If these all-important tasks can’t be handled internally, credit unions need to look for outside partners. “Collaboration at all levels is the key to success for a credit union branded mobile wallet launch. Executives within the credit union will work closely with the solution provider’s

technology, product and marketing teams on many levels,” said Fiore. “Technology executives at the credit union in particular, will be integral to the digital wallet rollout by providing host access and helping to streamline the provisioning process; for instance, so that members don’t have to type in their social security numbers to gain access.” While Apple Pay, Google Play and CU Wallet are the known entities in the credit union digital wallet space, it doesn’t mean these companies hold all the answers. In March 2015, PayPal reentered the space as more of a “Goliath” after purchasing Paydiant, a Boston-based digital wallet mobile startup. The technology powers payment applications for Capital One bank and MCX, a merchant-owned network developing the payment application CurrentC. “Because the long-term winners and losers are not yet clear, credit unions will need to own and/or participate in multiple digital wallets,” said Schweikert. “The ecosystem is not yet complete, and there are few places your members will be able to pay. However, this is a great opportunity to test and learn. Speed to market is important, but doing it right is crucial.”

Digital Wallet Learning Curve—Payment Ecosystems to Fraud As is the case with the adoption of new technologies and services, there is a learning curve. Rudolf explained that for his credit union, strong support from debit and credit card processing partners was necessary to ensure digital wallet solutions are successfully rolled out. “A credit union needs to have at least a basic understanding of how the payments ecosystem operates and the various options in the wallet marketplace—different wallet solutions take advantage of different services in that ecosystem,”

said Rudolf. “Alliant has been very involved with our providers, credit union peer groups and industry associations to stay abreast of the constantly-changing payments landscape.” For credit unions early in the digital wallet adoption phase, determining the success of the platform can feel like hitting a moving target. Fiore explained that executives should take a metric-based approach to ensure milestones are reached.

“Because the long-term winners and losers are not yet clear, credit unions will need to own and/or participate in multiple digital wallets. The ecosystem is not yet complete, and there are few places your members will be able to pay. However, this is a great opportunity to test and learn. Speed to market is important, but doing it right is crucial.” - John Schweikert

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“Example metrics include fraud, acceptance, declined transactions as a percentage, digital vs. plastic as a percentage and member response to messaging, offers, loyalty and other features of a mobile wallet,” said Fiore. Reeves added that when looking at digital wallets, the same metrics that are used for tracking card performance should be administered. “These include transactions, dollars spent, reported fraud, acceptance, declines and real time monitoring blocks, among other variables,” said Reeves. “These statistics would be benchmarked against physical cards.” In light of Apple Pay fraud reports, Morales echoed Fiore’s and Reeves concerns about digital wallet scams. “Fraud related to all card transactions will become a bigger deal for all financial institutions,” said Morales. “We believe that making an investment in more data analytics and an integrated enterprise fraud management platform is needed to

stay ahead of the losses and member inconvenience.” Industry leaders implore that credit union executives and members keep in mind that digital wallets, regardless of the channel, are not safe from crooks. As such, transactions need to flow through existing risk systems in order to identify unsafe transactions. And since member’s physical cards will continue to be used in addition to the wallet, risk will always remain. “Members still need to be authenticated before their card can be added to the wallet. Abdicating verification/authentication of the member in any wallet seems to be the primary security issue,” said Reeves. “Understanding how a card is automatically approved to be used in the wallet and having a solid plan for those who need additional validation.” The key to reducing digital wallet fraud and risk, added Reeves, is ensuring that credit union employees understand the risks and what their responsibilities are for authenticating members.

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Concluding Thoughts: Digital Wallets—A Slow Unfolding Future Moving forward, the objective for most credit unions will be providing a branded mobile wallet solution, which will meet the demands of an increasingly mobile membership, attract younger members, and generate sustainable streams of revenue.

“Companies like Google, Apple or Samsung have huge marketing dollars and are defining customer experience, so why wouldn’t we want to partner with them,” said Rasmussen. “We as financial institutions have let these non-financial institution players really define what the customer/member experience should be around a digital wallet. Now the decision is: how are we going to participate rather than are we going to participate?”

Since digital wallets will soon become a credit union norm, Fiore encourages executives to be proactive, as opposed to reactive, in shaping the future of this payment channel.

“We leverage the advantages credit unions have over their technology giant rivals in the mobile payments market—consumer trust, member accounts, strong merchant relationships, risk management—and provide a focused, entrepreneurial team of experts that use agility, business technology enablement and economy of scale to keep credit unions competitive in the new payments ecosystem,” said Fiore. “With major forces in the technology, merchant and financial institution market prioritizing this space it is time to place bets. If credit unions wait for a winner, the race will be over.”

With industry leaders cautioning digital wallet late adopters, technology, sales and operations executives are charged with redefining respective

roles so that a collaborative approach can be taken that addresses an overarching strategy. A digital wallet platform, after all, is too expansive for one department.

“If this is going to be a big splash, the credit union will want to get it right the first time. If they plan to iterate and experiment, and are comfortable communicating this to members, then the opportunity for self-learning is much greater,” said Chippindale. “For Apple Pay we relied heavily on CO-OP and Visa. Even though we were early adopters their insight was very valuable.”

While there are benefits to early adoption, credit unions have long benefited from a measured

approach to implementing new technologies. And for many credit unions, this remains a sound approach.

“Apple Pay adoption has been much slower than we anticipated. However, as iPhone 6 and 6+ devices become more mainstream and more merchants start accepting Apple Pay, we think we’ll see steady increases in adoption,” said Rudolf. “We’ve also learned

that with something as fluid as the wallet space, being first to implement may not always be best. You want to make sure you are offering a stable service for your members. Sometimes it is best to let others work out the kinks, acting as a fast follower.”

When summing up the digital wallet space, Fisher stated that the industry is changing fast—maybe too fast. Whether an early adopter or late follower, all credit unions understand that the future payment channel is smart phones/devices. Industry leaders agree that in order for credit unions to remain relevant to membership moving forward, a digital wallet platform will be absolutely necessary. The question that remains unanswered is: What

“We as financial institutions have let these non-financial institution players really define what the customer/member experience should be around a digital wallet. Now the decision is: how are we going to participate rather than are we going to participate?” - Tony Rasmussen

“With major forces in the technology, merchant and financial institution market prioritizing this space it is time to place bets. If credit unions wait for a winner, the race will be over.” – Paul Fiore

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operating systems will be preferred by merchants and consumers? “Companies like PayPal are buying solutions; Google is coming out with a solution that works

with older card swipe technology. The field has a lot of players,” said Fisher. “Until there is a shorter list of key solution providers and a good understanding on how they would work in our market place, it’s a wait and watch phase.”

Acknowledgements

Chris Chippindale Vice President, Enterprise Initiatives & Electronic Banking Ent FCU Colorado Springs, CO Paul Fiore Founder and CEO CU Wallet Woodland Hills, CA James Fisher Senior Vice President and Chief Technology Officer UNCLE Credit Union Livermore, CA Ben Morales Chief Technology and Operations Officer Washington State Employees Credit Union Olympia, WA

Tony Rasmussen Senior Vice President of Payment/Business Services Mountain America Credit Union West Jordan, UT Lori Reeves Financial Partners CU SVP-Marketing/Alternative Delivery Downey, CA George Rudolph Senior Vice President, Operations and Technology Alliant Credit Union Chicago, IL John Schweikert Senior Director of Payments Digital Insight Redwood City, CA

About the Author W.B. King is an award-winning journalist (New York Press Association and Jesse H. Neal Award), author, communications specialist and contract writer who teaches courses on related disciplines at New York University. King writes for numerous publications, including Credit Union Journal, as well as for organizations and corporations. He has been published more than one thousand times across multiple titles.

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