Capitalism’s grim reaper — aka “creative destruction”– has come calling on credit unions in the last two weeks and I’m more than a little surprised that the industry as a whole doesn’t seem to have noticed or cared. In my ever so humble opinion, the entry of Apple and WalMart into the financial industry will change the industry more than either the financial crisis or the Great Recession.
Others, the majority of the industry if I am correct, tell people like me to calm down and look at the big picture. They point out that two weeks ago credit unions already faced competition from large corporations and technology firms seeking to get a piece of the banking action. Credit unions offer great products and great service. Nothing has changed other than the fact that there are two new nonbank companies entering the financial industry.
It’s a comforting thought, but it is also wrong.
- Walmart and Apple are different. They have the skill and the economy of scale to change the way both businesses and consumers do things. WalMart serves more than 245 million customers a week worldwide and has more than 11,000 stores including4,281 in the U.S. alone. Apple has an estimated 800 million iTunes users. In contrast, Navy FCU has 250 branches and more than 5 million members.
- The models they are rolling out work for them, but not for credit unions. Apple came to the world’s biggest banks and gave them an offer they couldn’t refuse: Give us a piece of every Apple Pay credit and debit transaction and we will let you be the first providers of debit and credit for these transactions. I would feel a lot better about Apple’s approach if they didn’t choose the members of the club. Hopefully, access to Apple Pay will be open to all issuers. But if and when that happens it still means the loss of even more fee income for credit unions, which successfully fought to be excluded from the interchange fee cap just a few years ago.
As for Wal-Mart’s business strategy they know a lot of working and middle class people are feeling squeezed. Every little bit helps and they are fed up with bank fees. They also know that that young people, in particular, want mobile services. The GOBank accounts are not charging overdraft fees and a monthly $8.95 account fee is waived for anyone with $500 or more in their account. Just how are they going to make money? For one thing, if Walmart can convert a small fraction of their existing customers into GoBank users they will have huge volume. It’s the same approach they have taken to retailing with the result that many a mom and pop hardware store is out of business.
- Apple and WalMart will get people into their “branches.” The biggest step in getting someone to open an account is getting them into the branch. Many people are intimidated by this prospect but 245 million people aren’t intimidated by WalMart. In addition, GOBank is a mobile platform which is crucial if your goal is to attract new members or those with modest means. As for Apple, if a gadget freak has to choose between not using the Apple Pay system and sticking with their debit card issuer or getting a credit card from an issuer linked to ApplePay, well they are going to get a new issuer. As things stand right now, this is bad news for everyone but Navy. By the way, when CitiBank wanted to redesign its branches it hired the same firm that oversaw the design of Apple’s stores.
- Credit unions take comfort in the fact that they too offer great service and reasonably priced productss. But credit unions will now have to effectively compete to get that message out against a retailing behemoth in WalMart — advantage WalMart. Furthermore, Apple makes everything that goes before it look stodgy and obsolete. In a famous 1984 commercial, Apple branded IBM as Big Brother while introducing the Macintosh computer. Macintosh sales were 50% higher in their first 100 days than Apple anticipated. What will Apple make people think of when they think of old, stodgy, brick and mortar financial institutions?
- Beware of the salami tactics. Cold war diplomats were as concerned with Russian Salami tactics as they were about preventing another world war. Their fear was that Russia would take one slice of Europe at a time but never so big a slice as to engender any real resistance. In 2005, the world went berserk when WalMart sought to get a bank charter in Utah. Today, it is partnering with GoBank to get its bank charter and no one is saying a word. It used classic salami tactics: opening its branches to banks, providing space on it shelves for prepaid cards, and offering to transfer funds. By the time it made its GoBank announcement, it already quacked like a bank and walked like a bank. The salami tactics will continue. Credit unions might find it reassuring that WalMart is “just” offering low cost bank accounts. In the not too distant future, they will start offering more and more products such as consumer loans. As for Apple, today they are “just” offering a virtual wallet but there is no limit on their expansion once their platform takes hold.
None of these challenges are insurmountable, but they are real challenges. Credit unions that aren’t thinking about how to best position themselves in a financial landscape that has fundamentally changed are at best putting their heads in the sand and at worst whistling past the financial graveyard.