An EFT Association conference drew a big crowd in Washington last week, showing that bankers are finally
Who says payment systems don't Sell?
A conference on this seemingly dry subject in a Washington suburb two weeks ago attracted 150 people, including prominent retail banking and technology executives, heads of regional funds transfer networks, a smattering of government officials, and a speaking appearance by Federal Reserve Governor Lawrence Lindsey.
The sponsors -- the Electronic Funds Transfer Association and National Automated Clearing House Association -- declared it a success and may do it again next year.
The response was a sign that banking industry leaders, after years of indifference, are waking up to the need for strategy and policy in an area that may be crucial to survival and profitability.
And even as competition intensifies among banks and with nonbank competitors, there is a growing realization of the need for co-operation to defend and develop the payments infrastructure.
The EFT Association's emphasis on retail payment areas, and the automated clearing house group's more wholesale focus, attracted an unusual mix of people to the conference in Tysons Comer, Va., noted Paul Schmelzer, chairman of the EFTA executive committee.
Such cross-functional cooperation "will be the key to achieving practical, effective public policy on the payment system," said Mr. Schmelzer, who is also a vice president of Deluxe Data Systems Inc., Glendale, Wis.
Mr. Schmelzer said it will take a united front to educate regulators and legislators on the difference between mature payment methods like the check and newer developments like debit cards.
"We are also looking at electronic benefits transfer and prepaid cards -- emerging alternatives whose value needs to be protected in their infancy from premature regulation," Mr. Schmelzer said.
"Cooperation between the wholesale and retail sectors will be critical for emerging services to succeed, like stored-value cards and home banking," added Elliott McEntee, president and chief executive officer of the National Automated Clearing House Association.
Galvanizing the new wave of interest in payments issues, and serving as a kind of centerpiece of the conference, was "Banking's Role in Tomorrow's Payments System," a two-volume study published this past summer by the Bankers Roundtable.
Furash & Co. of Washington prepared the report, which urged bankers to recast their payment systems and services -- from wholesale networks such as Fed Wire to retail networks of automated teller machines -- as profit centers. Banks must add value and collect the commensurate profits, the report said. Perpetuating the "utility" mentality invites competition from, and possibly payment-system control by, nonbanks.
Edward E. Furash, chairman of the consulting firm, said in an interview that bankers' response to the report has been "significant and gratifying," In fact, another symposium taking off from the report has been scheduled for Dec. 12 and 13 in New York, sponsored by Executive Enterprises Inc.
"Banks have built a superb, efficient system," Mr. Furash said at the recent meeting. "But it's nonbanks that are getting paid for the services that ride on top of it."
Metall Lynch & Co. has thus piggybacked on the check collection and credit card systems for its Cash Management Account, while AT&T Corp., Household International, and other nonbanks have profited handsomely from relatively easy access to the bank card infrastructure.
The Furash report lists several opportunities for banking companies to take leadership and boost income, including health care and government benefits processing, corporate demands for electronic data interchange, and electronic commerce over the emerging "information superhighway."
The payment system report also covered challenges that could impede the banks, including various categories of payment and settlement risk, new mechanisms like stored-value cards that could leave banks out of the payment loop, and the Federal Reserve's role as both regulator and competitor of banks.
In his speech, Mr. Furash elaborated on one of the challenges that got only a brief mention in the printed report: patenting.
The report described patents of payment system innovations as "a thorny [issue that] closely resembles the debate on patenting important medical advancements." The hazard is that the awarding of a patent to a payment system or procedure could be costly to users and stifle its growth and acceptance.
A patent won by Online Resources and Communications Corp., a McLean, Va., developer of a screen-based telephone used for home banking, caused a major stir last year. Online stands to collect licensing fees for some types of electronic debits, using a system that critics said should not qualify for patent protection.
Another payments-related patent is owned by U.S. Wireless Data Inc. of Boulder, Colo., for a point of sale terminal that can operate in any location because it communicates via cellular telephone channels.
Edward L. Neumann, a Furash & Co. consultant, said the blurting of distinctions between hardware and software has sparked intense debate over what is patentable. Court decisions have opened the door to the patenting of software, which could increase the confusion.
"We take no position but say this issue has to be addressed," Mr. Furash said. "Patents are being issued more to nonbanks than banks."
He suggested that the industry take collective action to balance the need to compensate inventors with that for sound and efficient payment systems.
Among the other speakers was Peter M. Martin, president and chief operating officer of Provident Bank in Baltimore. His detailed explanation of Provident's use of payment systems belied any stereotypical assumptions about such a senior banker being out of touch.
A 30-year banking veteran, he was active in the formation of the New England Automated Clearing House Association while at First National Bank of Boston in the 1970s.
A nonbank perspective came from Nolan L. North, vice president and assistant treasurer at T. Rowe Price Associates.
Mr. North is also something of an ACH expert. Describing payment systems usage at the Baltimore-based mutual fund company, which has $58 billion of assets under management, he said 48% of fund purchases are effected via ACH debit, outnumbering the 45% of transactions done by check. The rest are ACH credits, wire transfers, and preauthorized checks.
The distribution of those purchases in dollars is almost a mirror image. Large-value wire transfers account for 55% of the total, checks 39%, and ACH debits only 4%. The remaining 2% are ACH credits and preauthorized checks.
One-third of T. Rowe's new accounts sign up for "ACH authority," which allows them to initiate paperless transactions over the phone. And the asset management firm's support of ACH doesn't stop there: 97% of its 1,800 employees are paid via direct deposit.
Fed Governor Lawrence Lindsey's luncheon address on Nov. 2 was eagerly anticipated by the conference's sizable Washington contingent and others interested in the regulation of electronic benefits transfer. Mr. Lindsey is influential in the Fed's deliberations on Regulation E, which defines consumer protections for ATM and point of sale payments, and on the applicability of the regulation to EBT, the delivery of welfare, food stamps, and other benefits through electronic terminals.
Mr. Lindsey argued against exempting EBT from Reg E, saying it would create two classes of unequally treated consumers. In a compromise with the White House and state governments, which said Reg E's costs would discourage EBT, the Fed allowed an exemption through March 1997. In the meantime, states will be compiling cost data to support their contention that EBT systems can't withstand the burdens of Reg E.
While EBT advocates have blamed Mr. Lindsey's stance for slowing development of such systems, he professed to be a strong supporter of the concept as a way to improve government services and raise the dignity of the poor while reducing administrative costs and fraud.
"The same rules should apply to all consumers," he said, adding that Congress, and not the Fed, has the power to amend the law.
He would not say whether he supports a bill recently introduced by Sen. Joseph Lieberman, D-Conn., that would permanently exempt EBT from Regulation E. But he praised the bill for focusing attention on the need to revisit laws that predated, and therefore did not anticipate, certain technological and product innovations.
Robert M. Tetenbaum, executive vice president of First Manhattan Consulting Group, gave some payment-system predictions for the mm of the century:
* Electronic payments by individuals will have grown by 20% a year to three times current levels.
* The number of corporate electronic payments to individuals will exceed paper-based payments.
* Electronic data interchange will be in widespread use among the 1,000 largest corporations and will be growing rapidly among smaller businesses.
* Private-sector clearing houses will evolve into multi-currency, real-time settlement systems with global linkages.
Taking off from First Manhattan's study on retail delivery systems last year for the Bank Administration Institute, Mr. Tetenbaum said consumer usage of bank branches will decline 40% by 2000, and the industry will have "fewer branches doing very different things."
He said home banking with bill-payment options will be one of the "winner technologies," meeting the convenience demands of consumers who are buying and using personal computers at an increasing pace.
Neil Marcous of Electronic Data Systems Corp. made that company's pitch for preserving a role for banks in an increasingly multimedia world.
Mr. Marcous, general manager of EDS Payment Systems, said banks are in a position to perform the role of "consumer on-line service provider." In that sense, they do not have to play a subordinate role to Microsoft or AT&T or anyone else who may be seeking control of the customer relationship, Mr. Marcous said.
"We don't have to give the franchise away and take the secondary role of electronic depository," Mr. Marcous said.
Interactive Transaction Partners, a joint venture of EDS, U S West, and France Telecom, offers to help banks be their customers' "entry point to the information highway."
Amid the excitement about future payments opportunities and potential cooperative solutions came a sobering note from security consultant Winn Schwartau of Seminole, Fla.
He fears that the global financial system is growing faster than financial institutions' and governments' ability to compensate for its vulnerabilities.
Data security threats fall in three categories, he said: confidentiality, integrity, and availability.
The Internet, the widely accessible global web of computer networks, has only begun to ensure safe and secure availability to authorized users, said Mr. Schwartau, whose firm, InterPact Inc., publishes the monthly newsletter Security Insider Report.
"But it is years behind in confidentiality and integrity," the consultant said. "That can take years to implement, and what enemies can do is terrifying."