March 31, 2017
By Mark Horwedel
Lately, the Federal Reserve Board has been shepherding a cross-industry effort to build a faster, more efficient, and more secure payments system in the United States. As that commendable effort heads into its home stretch, one big question stands out glaringly, but has largely gone unaddressed: How much influence should the nation’s big banks have in putting this faster-payments scheme together?
Here’s why I think payments executives need to think carefully about this question.
The U.S. was once the envy of the payments industry, having been among the first to embrace online payments and ATMs. But it has now fallen significantly behind much of the rest of the world. Most innovation now occurs outside the U.S. and is increasingly a result of efforts by public policymakers who insist on better security or by tech companies challenging bankers for market share.
--The equivalent of real-time ACH in Great Britain
--Chatbots in China
--T-Money in South Korea
--Voice recognition in the United Kingdom and Netherlands
--M-Pesa in Kenya and Tanzania
--RuPay in India
--Chip & PIN in most of the industrialized world (while we in the U.S. settle for a less secure, watered-down version of EMV that still relies upon worthless signatures)
Meanwhile, the U.S. has become the Dead Sea of payments, with dominant banks focused on circling the wagons around payment schemes that support supra-competitive fees, ensure survival of the weakest, and thwart competition between scheme-members. Banks have no motive to innovate, nor are they inclined to disrupt or compete with other banks, since the risks outweigh the benefits of keeping the old payment systems intact.
Instead, banks in the U.S. have created payment schemes in which they have aligned on prices and services and marketed their services under common brands. These schemes shield members or their primary customers (the banks) from competition by setting default prices to merchants and create rules and pseudo-standards that inflict on merchants the costs of protecting member banks from their card products’ defects.
Unfortunately for U.S. merchants and their customers, U.S. banks charge the highest fees for card payments in the world. Bank fees, including interchange, translate into higher costs to merchants, which temporarily absorb part of the costs. However, due to merchants’ razor-thin operating margins, most costs inevitably get passed along to all their customers, even those who receive public assistance. Bank management and bank shareholders are delighted and content with the status quo.
Fortunately, many people outside the banking industry have begun to recognize and address the sad state of domestic payments. One public official characterized the U.S. as having a “disco-era payments system,” and, as mentioned above, the Federal Reserve has started to address the problem by conducting efforts focused on bringing U.S. payments up to date with the rest of the world.
Market developments also threaten disruption of the existing payments paradigm. Mega-banks, like Chase, with a global presence and a desire to focus primarily on promoting their own brands over scheme brands have recognized the need to work with individual merchants. These banks want to develop products for mobile commerce since they want their payment products to gain top-of-wallet presence. No doubt, some of them chafe at the tendencies of the bank schemes to homogenize payments by forcing participation under a common logo or ID, tendencies that may prop up the weakest banks in the scheme.
Card-payment schemes born in the U.S. have also run into opposition by public policymakers and regulators outside this country who are not interested in replicating the U.S. card-payment environment.
Change will likely come slowly, since disruption of the status quo threatens banks’ short-term profitability as well as the very existence of weaker members of the bank establishment. But this change can be accelerated by not allowing those schemes exclusively owned and operated by big banks to effectively own or control a greater share of our domestic payments. Merchants can help by getting more involved in payments by participating in the open forums sponsored by the Federal Reserve and others seeking to address the inadequacies in U.S. payments.
Mark Horwedel is chief executive of the Merchant Advisory Group.
SPECIAL FEATURERead Digital Transactions Online