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USA - world's largest closed loop payments system?

Last year the US contributed close to 20% of the world's GDP despite coming off the back of the biggest economic downturn since the 1930's Great Depression. The US, UK, Germany, Russian and CIS States, and China dominate the world's payment landscape currently, but in volume of non-bank payments the US dominates with over 50% of the world's total. In terms of global electronic payments and transactions, the picture is similar with North America (Canada and the United States) still accounting for half of the global payments volume in the last few years (See IPFA Report November, 2011). It would be reasonable to think that this is due, at least in part, to a healthy payments and banking infrastructure.

Last year Celent reported that fully two thirds of cheques written globally are still written in the United States. At a time when the world is accelerating towards faster payments, the US has been reinforcing Check21 and propping up a system that was popularized in the 1950s. When put to a vote recently the US banking community voted down the Expedited Processing and Settlement (EPS) initiative at NACHA which would have given real-time ACH payments a chance in the US. As of Q1 2012, the only countries not to have adopted the EMV standard for cards payments were the United States and North Korea. In Q4 of 2012, North Korea adopted the EMV standard leaving the US as the sole remaining holdout, with the debate on EMV rollout for a 2015 timeframe still raging. This is not a globally progressive payments infrastructure.

The most common justification for the lack of support for the EMV standard, apart from the fact that merchants, banks, issuers and networks can’t agree on terms for adoption, is that the US intends simply to leap-frog EMV and go straight to mobile. The most logical move on that front would still be adopting the revised EMV standard for secure element deployment, at least as a partial measure towards retooling the Visa and Mastercard networks for mobile phones. But NFC has struggled in the US more than in most markets.

Many payments experts have in recent times dubbed NFC a collective failure, with the technology receiving the nickname "Not For Consumers". Despite Google's endorsement of this tech in the Google Wallet, and the widespread adoption by handset manufacturers, NFC adoption at the POS has been painfully slow in the US, with larger retailers holding off on replacing existing POS terminals while they debate Durbin impact and interchange fees. Despite the lackluster support of NFC in the US, contactless transactions in Europe, Australia, China, and ASEAN are accelerating at a measured pace. With countries like France, UK, Australia, Poland, etc. recording volumes of contactless transactions in the 20-40% range, the US with it's 1% of contactless transactions looks shabby by comparison. NFC is currently being trialed in 70 countries globally, so despite the criticisms leveled by the broader payments community, it still appears the best bet to allow the incumbent POS networks to survive the shift to mobile payments in-store. If you’re argument is you’re not adopting EMV standards because mobile is going to leap-frog CHIP and PIN, then you’d expect the industry would be actively pursuing a mobile payments standard.

From the outside looking in, the US is quickly becoming a massive closed-loop payments system where there is plenty of activity within the local system, but interoperability with the rest of the world is suffering, and that means the US is fast becoming a payments island. In the case of checks and card standards, a system that is 10 years behind the rest of the world.

When innovation and free market process is not enough

In the US there are over 7,000 banks and community banks, and over 7,000 credit unions, making it the most complex and diverse banking market in the world, by the numbers. Brad Leimer, lead for Digital Channel Strategy at Mechanics Bank pointed out to me recently that there was over 280 mobile payments start-ups in the US alone (Source: Angelist). This is free market economics at its best, something that in the past has produced incredible innovation.

PayPal is obviously one of the most successful global payments businesses in the world today, with $43 Billion in Total Payments Volume in 2013, up 25% year on year, but PayPal is yet to crack the in-store market from a traction perspective. Incidentally, PayPal expects to do $20 Billion in mobile payments alone this year, so while faster payments have failed on the ACH front, PayPal is still showing the way with a infrastructure buoyed by customer demand for real-time responsiveness and mobile payments.

Google Wallet and ISIS have invested close to $1Bn in their respective wallet technologies in the last couple of years, but the lack of suitable POS infrastructure has hampered their progress immeasurably.

Clinkle, the latest, new kid on the payments block, has raised $25m in recent months, but comes into a space competing against Square, Dwolla, Venmo, and others. Square has performed phenomenally on the measure of merchant acquisition, but is still based on old card swipe technology.

Then you have the Merchant Customer Exchange in the US, as an in-store mobile payments technology which appears designed primarily to circumvent the traditional card networks of Visa and MasterCard so that Merchants get to keep interchange in-house.

This doesn’t even start to tackle efforts like P2P payments, QR code payments technology like LevelUp, Lemon and others that enable you to pay with your phone in novel ways.

With the exception of Square and PayPal, all of these innovations are very US-specific, and while that’s great for US citizens, the lack of interoperability means that the vast majority of these apps don’t work outside US shores, and hence limit you from sending money cross-border or purchasing from overseas merchants.

Each year close to 70 million tourists travel to the United States, and last year almost 62 million Americans travelled abroad. None of the payments innovations in the US right now address these consumers, nor are they likely to. Some might argue that these 130 million consumers obviously aren’t making enough noise, or retailers, merchants and issuers would have solved the problem already.

While the free market is producing some potentially remarkable innovations, adoption of standards that result in lower cost of delivery, interoperability on a global stage, less payments friction and higher adoption rates should not be viewed as an antithesis to progress.

There’s a simple way to illustrate what is going on in the US right now. The US appears to be in a philosophical battle to see who will dominate the future of mobile payments, but it is like a fight between VHS and Betamax, while the rest of the world has moved on to downloading movies. The chances that a payment technology like Clinkle or MCX’s wallet will quickly become ubiquitous and move offshore so that it creates a new de-facto interoperability standard that competes with EMV and faster payments is a statistical long shot. PayPal did accomplish that for the web, but they weren’t competing against 280 other payments start-ups, and an established global ecosystem that was already working efficiently.

The only solution to payments reform in the US is a parallel approach. Aggressive US adoption of the EMV standard along with lowering the friction behind secure element support for NFC would be a promising start. While NFC clearly has some competition from emerging technologies focused on cardless payment, it is still the most workable approach to retooling the existing networks to accept mobile payments in the short-term. The adoption of Expedited Processing and Settlement on the ACH network would also be a basic step on the road to real-time payments enablement.

I think the simplest way to rally the troops around this would be for US regulators to mandate EMV interoperability for issuers tied to Durbin reforms (you don’t get interchange reduction without it beyond 2015), and for the FED to propose a basic across the board check-processing fee of $2.50 per check. This should solve the intractability of the various players, and provide enough incentive for larger payments reform.

Like that is going to happen! 


Comments: (5)

A Finextra member
A Finextra member 02 October, 2013, 10:54Be the first to give this comment the thumbs up 0 likes

For interest, the FED issued a Public Consultation Paper on Payment System Improvement on 10 Sept 2013. Link accessible here.

A Finextra member
A Finextra member 03 October, 2013, 09:08Be the first to give this comment the thumbs up 0 likes

I see it differently.

Consumers love cards (and cash), for many reasons. Main one - they work. Merchant LOVE cards too. What they don't like is the interchange fee. They want Visa, MC et al to provide their services almost for free - no comment...

Cards in the US mean, mostly, EMV members. They represent the bulk of retail transactions.

If you simply "wrap" existing cards - like 99% of all those start-up do - that's CNP. Why would a merchant be happy with CNP?

If you want to offer CP, that's mag stripe - and, specifically, a plastic CARD as neither the issuers nor the networks are currently prepared to treat emulated mag stripe as CP - or EMV.

The only currently approved interface for "mobile" EMV is NFC. QR would not work as it's a one-way channel. Bluetooth is a good alternative, technically - but NFC train has already left the station in that respect. Things could, indeed, change if EMV allowed those two interfaces, in addition to NFC. How likely is that to happen. Consider how long it took EMV to develop NFC standards, where many issues still needs to be ironed out...

As to merchant adoption, it's hard to buy a card terminal these days in the US that doesn't have contactless EMV interface.


Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 04 October, 2013, 21:25Be the first to give this comment the thumbs up 0 likes


Very interesting post. However, since I'm busy responding to comments on my own blog post elsewhere :), I need to restrict my comment to only one thing in your post, namely, Expedited Payments, a topic I've been following ever since FPS went live in May 2008. During the 2 years that I was involved in bidding, winning and implementing FPS for a Top 5 UK bank, I must've come across at least 1000 documents about FPS. While they related to different aspects of FPS, they all used to begin with the same opening paragraph about how The Office of Fair Trade mandated FPS in UK.

My point is, FPS didn't happen in the UK because banks suddenly felt guilty about enjoying 2-5 day float that came with BACS or cheque payments. The same way, Expedited Payments in the US will be driven by legislation, not banks. From my private conversations with people in the FED, whether it was about Expedited Payments or 2 Factor Authentication or whatever, I somehow got the feeling that regulators play the role of a banking industry association far more strongly than that of an industry watchdog in the US. As long as that posture continues, I won't hold my breath about Expedited Payments or 2FA or EMV becoming a reality anytime soon there.

Brett King
Brett King - Moven - New York 04 October, 2013, 21:44Be the first to give this comment the thumbs up 0 likes


This doesn't happen much, but in this case I completely agree with you.

Please write down the date of this unusual conjunction.


Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 06 October, 2013, 17:36Be the first to give this comment the thumbs up 0 likes

@BrettK: I've gone beyond noting down the date and have published the following post to mark this rare occasion:

Is The US Closed Loop Payment System Increasing Credit Risk?

Brett King

Brett King

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This post is from a series of posts in the group:

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A discussion of trends in innovation management within financial institutions, and the key processes, technology and cultural shifts driving innovation.

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