30 August 2012
It’s always easy to sit on the side lines and to snipe. As a non-US citizen, it’s easy to take pot shots at the US payments system. For example, at a time when most European countries were phasing out checks, the US was introducing Check 21 which, it can be argued, extends the life of a 17th century payment mechanism for potentially decades to come. As a result, the US now writes over 2/3rd of all the checks globally, and I’m not sure in this digital era, that’s necessarily anything to be proud of. But equally my own colleagues will tell me that I don’t understand, and they’re right. Often, reality bites, and what seems best from a distance isn’t actually possible, for many reasons. I can only think that is the case for the failure of Nachas’ proposal for an expedited processing and settlement service (EPS). Many organisations came out strongly in favour of such a development, even if the proposed solution was, compared to other countries, something of a fudge and therefore far from cutting edge. In reality, the proposal did not suggest the radical overhaul of the system that some feel is required. Instead of following the lead of a long list of countries who’ve had a truly faster payment system - Netherlands (and indeed most European countries), India, Mexico, etc – the Nacha approach took a much more pragmatic approach, by playing with the settlement window, and thereby reducing the cost of implementation substantially. Yet this still failed to reach the necessary 75% of votes required to pass, despite anecdotal evidence that that the majority of the 50 voting members voted in favour. So why did it fail? I guess this in some ways is the more interesting piece. I suspect there are some “fear factor” reasons, that often get more weight than perhaps they may deserve. The first is a loss of wire income. This may or may not be true. I presented at Nacha Payments a case study of the UK Faster Payment System (FPS) that suggested that wire volumes actually increased after FPS was introduced. Not by much, but equally, not the calamitous drop being predicted here. I’m not suggesting that may happen here. I think it is an unknown. But as customers get used to near instant service in other payment networks, I wonder how business cases took a more holistic, longer term view. Perhaps the issue here should not be cannibalisation by EPS, but threat of leakage to PayPal et al, including ClearXChange. One option could be to apply value limits, as wire transfers are typically for higher values. The second is concerns around risk management. I would argue that some of this is a result of banks own systems. Should the least capable really hinder the progress of the majority? It's’ also partly due to the design of the scheme. The UK FPS system for example has all sorts of measures in place (settlement windows on demand, daily value limits, etc). Thirdly, does this raise questions about the future of ACH? There are a number of aspects to this. ACH in many countries is the default mechanism for payment, and is utilised far more than in the US. The US volumes are impressive, but there is considerable scope for growth. So why hasn’t this happened? Unlike many countries, the US doesn’t have a central body that is thinking about national payments strategy. As a result, we have check image exchange clearing faster than ACH – but this doesn’t seem to have been a conscious decision, but a siloed one. Even within ACH, does this raise questions about the autonomy of Nacha to ensure its own future? A phrase we often used to use when working for the UK ACH, which has only 13 members, was “herding cats”. Indeed, often getting a consistent view within the member itself was not always simple. With 50 members, many of whom in turn represent many other banks, Nacha must face an almost exponentially more difficult challenge to please. There is of course no easy answer, and by no means a criticism of any party involved. It is what it is, and it’s a product of the situation. Nor am I saying “Europe knows best”, as I think that we’ve learnt in Europe the hard way that the set-up doesn’t make everybody happy. In fact, perhaps that’s the reason why I think we should, as an industry, take pause. Moves in Europe and the UK have come from the regulator, unhappy with the pace and direction of innovation and access, to take a greater role in payments. In both cases, the regulator is, or is proposing, to have a more active role in the direction of the industry. Could the EPS decision, at some point in the future, be seen as what triggered the beginning of similar moves in the US? After all, fully 10 years (at least) of the first proposal of a faster payment system in the UK, it took a regulators intervention to make it happen. A leap I know, but it does feel that the industry does need to take a step back, and plot the future more coherently, before someone else does. There have been several significant payment reviews and strategies around the world, from Canada to Australia to India. Perhaps that should be the real outcome from this decision.