Nacha's push for faster payments is largely positive, but banks still stand to lose position in the business-to-business payments market.
The association on May 19th announced its membership approved a proposal to allow consumers and businesses to send same-day electronic payments among the nation's 12,000 financial institutions.
The proposal calls for two new same-day settlement windows, so funds would move among financial institutions three times per day, rather than once, which is how the system operates today. This change would be phased in beginning in September of 2016.
This will be good thing. This is something Nacha, the Fed, banks and others players have been talking about for more than 20 years. There's no technical reason why payments shouldn't be faster. The main sticking point has been banks' reluctance to give up profits from the current payments. With technology companies moving in on bankers' turf across the board, they appear to have found the inspiration to modernize payments.
Unfortunately, same-day ACH payments won't help banks retain their stronghold on B2B payments, which account for far bigger volume (and bigger profits) than consumer payments. On the consumer side, we're already seeing payment technology companies grabbing market share from banks.
Consumer and B2B payments are about as different as night and day, so the story will unfold differently, but the ending will be the same, which is reduced payments market share and profits for banks.
There are so many sources of friction and delay on both the front and back end of B2B payments that just speeding up one part of the process isn't enough. Massive volume, complex processes and the unrelenting need to manage dynamic supplier data are just a few of the issues customers contend with in the world of B2B payments.
Banks are ill-equipped to handle these issues. In fact, they haven't done much to help customers with any of this complexity for the last 20 years. Getting to instant ACH payments will be great, but for commercial payments, the actual money changing hands is just one step in a long process. Making that one step faster will not keep banks from getting disintermediated in commercial payments, just as they are in retail banking.
While mobile, social and other convenient new payment options threaten banks on the consumer payments front, on the B2B side the threat comes from technology solutions that take the complexity out of the payments workflow, and from cryptocurrencies.
Why cryptocurrencies? Speed, or lack thereof, is a huge problem for international B2B payments, and cryptocurrencies appear to be the best solution. Change happens slowly in B2B, and there has to be a lot of pain to bring it about. It just so happens there is a lot of pain around the cost and the speed, or lack thereof, of international commercial payments.
Banking systems can vary so extremely from country to country that it's hard to send money from bank to bank internationally. Whereas you can move money in two days in the U.S. right now, internationally it can take five days or longer, and there could be five corresponding banks all taking a piece of the payment. It's a spaghetti of decentralized rail systems that talk to each other with great difficulty.
Could everyone get together and create a global ACH system that delivers instant payments locally? I think there are too many players. If anything, the drawn-out debate in the U.S. shows that it's almost impossible to get all the big players together to do this.
Cryptocurrency technology is already being applied to this problem with no committee on collaboration needed. Cryptocurrencies operate on a single rail providing near instant payments, with the promise of lower transaction costs and total visibility. It's a great alternative rail system that could be as simple as handing somebody a dollar: "Here, you're paid."
Do banks have a role to play here? Absolutely. You need to have somebody that translates payments in and out on both sides. Why wouldn't a bank want to do that? It's a new rail system, and, if you're a bank looking to innovate, these rails are a good option.
The reality is, most banks won't make this move. If they really wanted to make things faster and cheaper, they would have by now. Banks have long had a payment method that's more or less instant: Credit cards.
These are hugely more profitable than ACH, and that's one of the reasons major banks have been dragging their feet on faster ACH payments. What they don't want to do is move card business to ACH. They're probably even less likely to want to offer a cryptocurrency option, since the high fees of international payments have long been an important source of bank profitability.
The payments debate illustrates why banks are missing out on opportunities to modernize, and why banking will continue to erode as technology companies come up with better solutions for traditional banking activities.
Mortgage lending and payroll used to be almost exclusively in banks. So did working capital loans. These functions are moving to technology companies that can deliver them with more value added services, at lower prices and with a better user experience.
The same is likely to happen with B2B payments. Tech companies like Ripple and Align Commerce are moving cryptocurrencies toward mass adoption. Align is already making strides on international B2B payments. I would love to see them succeed. Corporate customers have lived with expensive, cumbersome cross-border payments for far too long. At the point where you can move money around the globe instantly and inexpensively via cryptocurrency, why would you pay bank prices for a clunky, labor-intensive service like ACH?
The unbundling of retail banking is well underway and the unbundling of commercial banking is not far behind. Same-day payments are definitely a good thing, but they won't stem the tide. Banks have an important role to play and always will. Those that embrace technology and put their customers' needs before their own margins stand the best chance to hang on to market share, and profit.
Karla Friede is CEO of Nvoicepay.