Anyone watching the huge natural disaster unfolding over the past three weeks can see the obvious, that Hurricane Katrina has already reshaped the physical landscape of New Orleans, one of the nation's great cities, as well as cities and towns all along the gulf in Louisiana, Mississippi and Alabama.
But people in the financial services industry are seeing it from a different angle, that is, the reshaping of the payments system, at least in that region, and maybe all across the nation.
One of the things this once-in-a-lifetime storm has already taught us is, cash is no longer king.
This was clearly evident as the storm touched down and flooding destroyed payments and communications systems.
What is being displayed in the flooding, death and general havoc caused by Hurricane Katrina are three main trends, as far as the payments systems are concerned.
First, the physical destruction of dozens of small credit unions and banks will only hasten the demise of these kinds of institutions. Many small credit unions have been shut by the massive storm and its aftermath, and when they will re-open remains to be seen.
Lots of them will probably be merged into more viable credit unions, while others could be liquidated.
Look for NCUA to pay a big bill for assisted mergers and for "resolving" credit unions-a term created in the 1980s and early 1990s when hundreds of CUs were also shuttered.
The failures of all these credit unions, and many banks as well, will accelerate the concentration of the financial services market. Their customers/members will be picked over by the largest and most able competitors who see new market possibilities.
Second, the ongoing crisis over cash deliveries, retention of paper records, and efforts at identifying consumers will speed the move away from paper-based transaction to electronic transactions. Watch for faster implementation of Check 21-enabled technology, web-based authentication and biometric identification that don't depend on paper. That means that credit unions and banks will move faster towards going electronic with their check-clearing process, as allowed under the new law. Institutions all over the country, fearful of a Katrina-like disaster, will also hasten their move towards electronic processes, as well as those in the stricken areas.
The effects of the storm will also expand interest in products such as stored value cards, which are portable and can readily be reloaded, as people learn to trust the cards system for all of their financial needs, and other emerging technologies. Pay-by-cellphone, contactless cards and pay-by-fingerprint technology-all will get a boost from Hurricane Katrina.
The rapid switch from cash to electronic means of payment, such as credit and debit cards, during the aftermath of Katrina helped speed the recovery.
Another Trend
The third trend, as usually happens after major national crisis, will be seen in that the federal government and state government will get deeper into your credit union with a variety of new laws and regulations aimed at preventing another Katrina. Comprehensive disaster recovery systems such as off-site records retention centers will become mandatory, instead of recommended. Back-up systems will be required. In time, this will put even more pressure on those small credit unions that survived Hurricane Katrina, as well as those in regions not physically affected.
For credit unions, it will also mean the reworking of markets, heretofore delineated by NCUA and state regulators as field of membership. Because now, many credit unions are serving new members and even non-members and many of those temporary customers/members will become permanent ones. As many as one-million refugees from Hurricane Katrina have relocated to new locations and will never go home again. The Houston area, alone, has seen an influx of more than 250,000 refugees over the past few weeks, most of them from the New Orleans area. Tens of thousands of refugees were also fleeing to San Antonio. Many of these people will probably end up staying in Texas. Many of the 150,000 or so temporary refugees to Baton Rouge are also expected to become permanent. Cities as far away as Washington, D.C., Denver, or Los Angeles are also getting refugees from the storm.
The Simple, But Critical Need
In all the chaos following Hurricane Katrina, questions abounded about the ability of victims to get food and shelter and water. But really, the most critical need for almost every one of the victims was the ability to pay for these critical needs. In many cases the payments systems failed them, leaving them at the mercy of charity or other relief efforts. This will be one of the main issues hashed over in the days and months after this horrible tragedy is resolved.
Because the clean-up of this huge tragedy is only beginning, questions like these will take a long time to answer. But regulators and lawmakers began the process last week, even before the water had been pumped out of the city of New Orleans. A group of lawmakers, regulators and industry leaders were meeting last week on Capitol Hill to discuss what happened to the payments systems and how to prevent future disruptions during times of major crisis.
Ed Roberts can be reached at eroberts
