Is it time for the U.S. payments industry to make some bold moves?
Faster Payments will be a reality in the U.S. sooner than what most believe.
The last time the U.S. embarked upon a "major" payments innovation was in the 1970's. ATMs were introduced and the ACH was implemented. The card business embraced electronics at the point of sale. Globally, SWIFT was founded. This is not to say that the existing
payment networks have not experienced continual innovation. But, it has been almost 50 years since there has been a major payment system innovation. Perhaps, now is the time for some bold moves.
Faster Payments programs are gaining traction globally. In the U.K. Faster Payments has been around for over 5 years. Originally, the UK banks had to be coaxed into it. But, today it has enabled innovative services such as Paym, Pingit, and Zap. These services
have changed consumer behavior. Consumer adoption is now very high and transactions are growing in the double digits. Singapore and the Nordic countries came on board last year. Australia is now targeting 2016 – 2017 for start-up.
In the U.S. the Federal Reserve has floated a number of ideas to improve payments for consumers in its "Strategies for Improving the U.S. Payments System" paper published January 26, 2015. On the less disruptive side enabling same day ACH availability is probably
the easiest to implement. There would be significant benefits since settlement times could be reduced an average of 2 days which reduces payments clearing risk. The American Bankers Association expressed support of NACHA's same day settlement ideas on February
On the more disruptive side one bold idea is to consider a new payments system. David Andolfatto of the Federal Reserve best defines a payments system as:
"a protocol (a set of rules) for debiting and crediting accounts, I view money as a widely agreed-upon record-keeping device, and I view monetary policy as a protocol designed to manage the supply of money over time."
There is an industry debate going on whether Faster Payments and new payment systems are really needed. On the one side there is group that believes that everything is just fine. On the other side others are advocating the need to reinvent the payments business
to bring more convenient and lower cost alternatives to the market. The Federal Reserve is starting the process by fostering industry communications. It just announced the formation of two task forces in March to develop a "path forward":
• Faster Payments Task Force
• Secure Payments Task Force.
What's driving the need for a bold change?
There is a need to serve consumers with better alternatives. Consumers are looking for convenience, better funds availability and lower costs. Today's payments systems have served the industry well and created $ trillions of revenue. But, they were built before
the Internet was invented. They are on first generation technology platforms which are not very agile and cannot leverage today's modern technologies.
Technology has taken quantum leaps. Computers are faster, better and cheaper. The sophistication of the Internet, Cloud, Analytics, Security, Social networks and advanced architectures is beyond anything that anyone could have envisioned 50 years ago.
Consumers today are accustomed to being digitally connected 24X7 with information on demand. Amazon can now deliver its products in New York in less than an hour. Why does it take days for payments to clear? It does not have to be this way!
I believe now is the time to do something really bold – 50 years is long enough!There are naysayers that do not want to change the status quo because they want to protect existing revenue streams. History has proved that innovation will trump
the status quo. We have seen this in many industries such as media and telecommunications. The same will be true for the payments business too.
The old payment systems do not go away immediately. Change will be generational in nature where the industry will have ample time to take advantage of new opportunities and manage their challenges.
Now that the payments business is ripe for change, let's not do it half way. Let's think big since whatever the industry does, it will have shorter shelf life, perhaps only 30 years.
What about a new "payment system"?
Remember a payment system is a protocol, a set of rules, for debiting and crediting accounts. Today's systems require many intermediaries which creates inefficiencies and lots of complexity. Technology has evolved such that new payment systems can be developed
by leveraging today's advanced technology, not something from 50 years ago.
A payment system that employs a common shared ledger is an example of a new protocol. There are significant benefits to those that embrace this protocol. Banks could serve corporate clients better by delivering improved funds availability at a lower cost.
Is a shared common ledger ready for prime time? I believe a limited business model could be delivered for the global institutional market, especially international correspondent banking. For global corporate payments markets where there are hundreds of millions
of businesses scalability may be an issue today. But, as technology advances in the next ten years I see this constraint disappearing. I also foresee a day when a new payment system will be able handle billions of consumer transaction accounts throughout the
What about a hybrid model that leverages existing payments systems and creates a new protocol for tomorrow?
The U.S. could be on a path of significant payments innovation if it embraced the following:
1.) Same settlement of the ACH which supports P2P and B2B transactions
2.) A new protocol using a common ledger for high value transactions that leverages today's and tomorrow's technology
Is it time for change, especially since Amazon can now deliver products faster than banks can post debits and credits?