Archives for July 2011
Earlier this month Aptys Solutions announced the availability of same-day ACH support on its PayLogics platform primarily used by midsize banks. On about the same timing, Fiserv made known the availability later this year of a separately licensed module to its PEP+ product used by most large US banks. The enhancement is currently being pilot tested at Citigroup. So, it looks like in short order, the technical hurdles of same-day ACH adoption may be lowered for many US banks. Does that mean swift adoption of the service will follow? Color me unconvinced.
The Achilles heel of the new service is fundamental. A significant number of financial institutions must opt-in to the service before originating depository financial institutions (ODFIs) will have anything meaningful to offer to their customers. The service stands in sharp contrast to what has been one of the hallmarks of the ACH, namely “universal” accessibility among financial institutions. In Celent’s view, the opt-in nature of the new service combined with higher ODFI pricing has resulted in protracted adoption. Available payments platform upgrades won’t change this.
One might cite the rapid industry adoption of image exchange infrastructure over the past several years to argue that the opt-in approach is sound and should work again in the case of ACH. There are at least two reasons why this won’t be the case.
Image exchange presented a compelling business case based on cost reduction from the start. Not so for the FedACH SameDay service, which carries a premium for ODFIs versus the next-day legacy service. Moreover, post Check 21, the Federal Reserve immediately began deconstruction of its physical check processing footprint. This created a significant and growing cost increase for financial institutions that persisted in paper check clearing, strengthening the business case for image exchange. There is no similar dynamic at work in the ACH.
Image exchange–adopting banks didn’t have to sell the service to clients to benefit from adoption. Instead, image exchange began as a payment system innovation that later, once a critical mass of participation occurred, was offered to clients as image cash letter (ICL) deposits and accelerated funds availability. In the case of FedACH SameDay Service, without something to sell, there is little benefit to ODFIs beyond its use to settle on-us transactions (at a higher cost).
So, what can we expect? A number of large, early-adopter banks invested heavily in image exchange infrastructures, but significant industry adoption took several years. As more banks connected to the various image exchange networks, the business case for subsequent adoption improved. The same dynamic will be at work for same-day ACH. Early-adopting banks won’t have much to sell clients, because so few RDFIs will be available. Client adoption will fuel RDFI adoption, and vice versa.
What would be compelling, perhaps, is a broadly available same-day alternative accompanied by a NACHA rules change—particularly if both debits and credits were included. That would give banks something to sell, both for existing ACH customers, for expedited consumer payments (in return for a meaningful fee) and as part of the growing interest in mobile P2P payments.
Reader, I had to bite my tongue yesterday. A lot. Indeed, I had to wait until today so my blog was a blog rather than a rant.
Yesterday, the UK Payments Council said it had cancelled any plans to retire cheques in the UK , after severe pressure from MPs and from consumer groups.
The industry, more than 2 years ago, announced plans to sunset cheques by 2018, but promised to ensure that adequate alternatives in place. Cheques peaked in the late 90’s and have fallen continually ever since. They are still used by certain groups today, but equally, the average number of cheques written every day has fallen by 70%, and many large retailers will no longer accept them as payments.
Consumer choice is obviously important. I don’t blame the consumer groups here at all. A promise of an alternative is difficult to sell. That said, I note the same arguments were used for the move to chip & pin, yet a compromise was reached and Henny Pennys’ vision failed to materialize. 6 years on and it feels very strange to sign a card receipt.
What I do object to though is the politicians stance. The Cruickshank into UK Payment Systems, and the subsequent work by the Office of Fair Trading highlighted a series of issues that it felt the industry needed to respond to. Amongst them was the performance compared to other comparable nations, and a lack of innovation. This is why Faster Payments was born and almost forced through by the government, and on unachievable timescales. Yet, they’re keeping cheques, a method of payments with its roots in the 17th century. Only France in Europe has any volume of cheques. Most other countries got rid of cheques years ago. Did we even notice? In the global top 10 cheque users, the UK, at no. 5, is sandwiched between India and Iran, places (no offense to those countries) that the average UK citizen would feel are less sophisticated than the UK.
Equally at a time where the banks are under pressure to manage costs, especially those owned by the UK government, the banks are being asked to maintain the most expensive of all the UK payment systems, where the average transaction cost will only increase as volumes continue to decline.
The danger is that there is no longer clarity. Whether you approved of the plans or not, at least there were agreed objectives, timetables etc. Now, there is nothing. Consumer Focus, the UK government body, expects the payments industry to continue to develop alternates. Why? For who’s benefit? There is little incentive to create a replacement whilst maintaining cheques. This is the argument with SEPA and why the regulators are having to mandate a move away from the legacy schemes to the new schemes. Why does Consumer Focus believe that this will be any different? Furthermore, banks are wary about collaboration. Discussions around pricing cheques to consumers (they’re currently free) have always been avoided because of a belief that if they did it as an industry, it would be seen as a cartel action; and equally no one bank wanted to be the first in case others didn’t follow, leaving a catch-22.
My suggestion? Nationalize the cheque system. Let the government carry the cost. I suspect there will be quite a few people in the cheque world who’d be glad to pass the responsibility on to someone else.
I’ve written many times about the fact that new regulation often has unintended consequences. To be fair, whilst you can model and theorize, it’s often hard to judge what Joe Public or market will actually do. Sometimes though, you feel like saying ….duhh – what did you expect?! I think one that may fall into this category is the Australian intervention into credit card interchange. What follows is a very simplistic view obviously but it does highlight the challenges.
One element of the reforms was to allow merchants to surcharge in order to cover the interchange fee, in the belief that it made the fee more “transparent”. Latest research show that those merchants who did surcharge found consumers switched to a payment type that wasn’t surcharged. Long term, that will raise the cost of a merchants credit card transactions. It’s made the business less economic and reduced consumer choice – surely not what the regulator had in mind?
There would seem to be a parallel effect in Durbin. As merchants pushed for lower and lower rates, there were always likely to be less obvious impacts that are negative. It would seem decoupled debit is one of them. Tempo Payments, one of the first and most successful players, has announced that it is closing up shop as a direct result of Durbin. Tempo estimate that 50% of its revenues will be cut, making it unsustainable going forward. The draft regulation makes it very clear, that whilst Tempo may fall below the $10bn asset size, the ruling applies to the account which is being debited. The irony of course is that the decoupled proposition was positioned as a way of merchants sharing the interchange.
There are wider implications. If revenues are capped and are likely only to come down, how do you encourage new entrants to make the space competitive, or how do you drive innovation? The regulator is in a tough position – almost whatever it does will be considered to be wrong, for some party. If what has happened in Europe is an indicator of what will happen in the US – and I believe it is – then there will be a wave of further regulation and intervention. The US payments market ought to be anticipating this, and trying to take control of their destiny by considering reforms that may head off some of these interventions. Better to be driving the bus than being driven somewhere no-one wants to go – or being thrown under it, as Tempo seem to have been.
As you may gather from some of my recent posts, it’s the speaking season. This post is the third in a row about insights and observations from recent speaking engagements. Whilst the core of being an analyst is about writing, getting out and talking to people is equally important, and equally as satisfying.
This time the occasion was to celebrate the opening of the new Dutch office for Clear2Pay. They had invited me to speak on the topic of SEPA, and whether banks and corporates were divided or united on its future. Generally my speaking engagements are either mainly bankers or mainly corporates, but this time there was an almost 50:50 split. I won’t replay the presentation here, but it is worth just highlighting a few key points.
I jokingly made reference to the headline of this blog, and got a few wry smiles. To make the point though more clearly, I used the opportunity to do some more informal polls of the audience and the results were startling. But perhaps the most surprising was when asked who would benefit from SEPA. Whilst I expected the corporates to say bankers, the 2 groups were actually united – they both almost universally believed that no-one would benefit from SEPA.
My presentation was making the case for SEPA. It drew parallels to the role that canals and railways played as the infrastructure required to accelerate the Industrial Revolution. SEPA is the equivalent infrastructure required to accelerate a digital and data based future for banking and payments, and ultimately, business in Europe. Once upon a time payments were really defined by the networks they ran over. Then the industry moved to a point the commonality between payment types were more prominent (the move to “a payment is a payment is a payment”). We’re now at a stage where a payment is increasingly defined by the data it carries, and focusing on enhancing how that data can utilized.
Payments is now as much about what it enables and supports, and that’s what SEPA has built with in mind. The example I used was e-invoicing, and the potential savings that could be gained. Almost everyone in the audience underestimated these savings by a factor of at least 10. The best estimates put the figure at around €240bn, of which the banks and corporates were the key beneficiaries. Yet for many in the room, this was news and eyeopening.
Its probably not surprising then that I won the day, with the final vote of the evening showing almost everyone now believed that banks and corporates would be the key beneficiaries from SEPA.
This event serves to highlight some alarming deficiencies in understanding what SEPA enables, even at this late stage. It’s easy to point the finger at the banks at not educating their clients better. In part, this is probably because banks want to have the whole answer first, and that’s still not possible. But equally, I suspect that it also means that corporates are less engaged with their banks than they ought to be. It is telling in that the latest SEPA corporate survey, only 1/3rd of the respondents were getting information on SEPA from their bank. Banks may not be the largest supplier to a corporate, but they are probably one of the most critical. Engaging their bank in dialogue is the minimum that a corporate should be doing. However the best way to ensure that the banks are delivering the services that they require is to tell them.
Corporates may not have been involved in the inception of SEPA, but they can be part of it’s future, especially as in reality they are paying for it. SEPA is a once in a lifetime opportunity to create the right foundations for the future. How successful they are is entirely down to ALL the participants.