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Is The US Closed Loop Payment System Increasing Credit Risk?

In other words, is the US "Closed Loop" payments system making Americans less creditworthy?

For several years, American travelers have been having a tough time trying to use their magstripe credit cards in the EMV Europe.

In India, many ecommerce and bill payment websites have recently started refusing American credit cards (click here for more details). This is because these cards lack support for Mobile OTP, a two factor authentication mechanism that is now mandatory for Card Not Present payments in India.

From December, in store transactions in India will require a six digit PIN apart from signature. I expect US-issued credit cards to start failing even in Card Present situations since they don't support PIN.

The above declines may be on account of technical reasons. But, effectively, they're diminishing the credit worthiness of American individuals traveling abroad. 

According to my recent experience, this problem is spreading to American businesses as well.

Around the time I was reading Brett King's blog post USA - world's largest closed loop payments system? on Finextra, I received an order from an American business for one of my company's products. My customer inquired how to make the required payment. I replied back saying that we preferred wire transfers and provided my company's bank account details, which included, among other fields, SWIFT BIC code.

As I'd highlighted in Why B2B Suppliers Should Accept Credit Cards (hyperlink removed but you can find this post on my personal blog via Google Search), the buyer asked us if we could take a credit card instead. I wrote back as follows:

"We can take a credit card. However, shipment will take much longer in this case due to technical reasons. Let's explain: India uses Two Factor Authentication for all online card payments. We regularly experience incompatibilities with most US credit cards, which don't seem to support 2FA. The only way we can be sure that the payment has gone through successfully is when we actually receive credit in our bank account, which happens 4-5 days after you initiate the payment. We ship the product on the next business day. For faster delivery, you can use a wire transfer, in which case we can treat the screenshot of your transfer advice as proof of payment and ship the product immediately thereafter."

Like mine, several businesses are unwilling to take the risk of failed payments from US-issued credit cards and are insisting on sighting good funds in their bank accounts before making shipments. In other words, they're declining credit to buyers who might otherwise be creditworthy.

In the past, due to the sheer size of the US market, many countries went out of the way to accommodate American citizens and businesses. However, I don't expect this to continue forever because of the following factors:

  1. Economically, the gap between the US and the rest of the world is narrowing. Faster growth in many emerging markets is moving the center of gravity away from America.
  2. Payment system wise, the gulf is widening. In the eight years since the FFIEC issued guidelines for implementing two factor authentication for online shopping, online banking and other high risk transactions, I've been hard pressed to come across even a rudimentary implementation of 2FA - e.g. Verified by Visa  - by any leading ecommerce website or Internet Banking portal in the USA. During the same period, other countries - including India - have moved on from static VbV passwords to more sophisticated security mechanisms (e.g. card readers, mobile OTP). While these new steps might increase online friction and cause more number of abandoned shopping carts, respective regulators in these nations insist that they're making online payments safer.
  3. More than one of my American customers has regretted inability to pay by our preferred method of wire transfer saying that their credit union doesn't know how to make a wire transfer. Apparently, some banks don't even know what SWIFT BIC means! I find this very odd because our customers in other countries, including some tiny ones like Mauritius, have absolutely no problem with wire transfers.

As a result, regulators in most other nations - including India for sure - are unlikely to compromise their payments systems just for the sake of accepting the payment products prevalent in the USA. The "closed loop" like payments system in America will lead to the inexorable decline of credit worthiness of Americans while doing business abroad. What do you think? Please share your thoughts in the comments section below.


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