To the Editor:
Once again, articles are appearing that ask the same old questions [Oct. 23, "
Over the last two decades banks have ceded major payments system functions to nonbank processors and networks, including merchant acquisition, card transaction processing, and check verification. In recent years, electronic bill presentment, person-to-person payments, and low-income financial services have drifted out of bank control.
Such transitions typically occur in response to market efficiencies and economies of scale. Essentially, banks backed away from the business of payments, arguing that payment processing was not their business. They assert the rights of their "traditional" role only when pinched margins turn their attention to fixed-income streams. But the role of the payments system in the economy demands more steadfast commitment.
The role of the payments system, which embraces a wide array of services and subsystems, is to facilitate commerce between various constituencies including consumers, businesses, and government. To be effective, the system must serve all parties and all environments equitably and efficiently. It must be responsive to change as the needs of commerce change. The question then becomes which parties are best equipped to identify and satisfy those needs.
In its current form, the payments system is loaded with redundancies and contradictions that, it could be argued, are a byproduct of banks' traditional control. For decades, banks marketed debit and credit cards to consumers as a cash or check substitute. At the same time, 326,000 ATMs provide convenient access to cash for any consumer with a checking account. While banks evaluated each ATM placement against volume-based cost models, independent marketers saw opportunity and, capitalizing on the ATM dependency fostered by banks, saturated retail markets with fee-based, limited-function cash dispensers. As a result, nonbank-owned ATMs now account for nearly half of all ATMs installed in the United States.
In the card system, media competition at the point of sale pitted cards (credit and debit) against all other media (checks, cash, etc.). Despite substantial growth in card usage, consumers continue to use checks at the POS (the banking industry did a good job training consumers to use checks), and merchants must still handle tens of billions of check and cash transactions. Merchants favor emerging e-check technology that promises to make check acceptance more efficient and less subject to fraud. But the banking industry is ambiguous about e-check - it reduces fraud, but it could also reduce fee income from card transaction processing.
Banks fight similar battles internally as traditional paper check processing systems convert to image processing and electronic lockbox. While these electronic services increase productivity and reduce processing costs, they also reduce traditional lockbox fees. As cost center battles profit center within the bank, the user - consumers, businesses, and merchants - is driven away.
In the electronic billing and payment field, banks spent years of effort to establish and expand bank-owned fee-based services. But in a natural evolution to electronic alternatives, banks are being bypassed as businesses and consumers establish direct billing and payment connections online. Billers are beginning to experience growth, especially for ACH payments, with direct services that are self-marketed. It's not that consumers weren't interested in electronic bill presentment and payment services; it's just that they weren't interested in paying their bank to get them.
Consumers still seek better integration of bill payment functionality with banking services, but they expect banks to provide this integration either as a component of their retail delivery channels or as an enhancement of the services the bank provides to the biller. In either case, consumers don't expect to pay fees to their bank for better integration any more than they will pay the bank for electronic bill payment. What the bank loses in fee opportunities, however, is won (potentially) in an opportunity to cement consumer relationships.
Online access is pandemic and cell-phones are ubiquitous worldwide. With such technologies in place, mobile commerce could become the payment system of choice in a relatively short time, at least for low-dollar purchases. In some scenarios, m-commerce development bypasses the banking system, further shrinking the role of the industry in the payment system. Maybe bankers shouldn't spend time and energy asking themselves what role their industry plays in the payment system, maybe they should just play.
