The Fed Should Champion and Lead Faster Payments Push
Encouraging the financial industry to explore faster payments is all well and good. Effectively directing it to do so, however, is beyond the Fed's authority.
Few would dispute that the U.S. ought to move to a faster payment system. But the hurdles to modernizing the infrastructure are daunting, said participants in a panel at this week's Retail Banking 2015 conference.
In a new detailed report, the Federal Reserve laid out four options for upgrading the creaky U.S. payment system. The study raised questions about how far the Fed can, and should, go to bring about change.
There should be little debate as to whether the U.S. payment system is falling behind the rest of the world. Great Britain and others lead the world in real time payment options at affordable prices to consumers, merchants and other payment stakeholders.
The Federal Reserve undoubtedly feels the sting of public criticism aimed at the banking system's lack of innovation and singular focus on maintaining payments' revenue streams equal to or in excess of revenue streams associated with today's credit card payments. The Fed should be complimented and supported in its quest for "near real-time clearing," instead of reminded that banking interests want to impose limitations on its efforts.
Banks' fixation on revenue, rather than on innovation, is the reason the U.S. has fallen behind and will continue to languish without active involvement of those outside the private banking sector.
Fed activism is not without precedent. In fact, today's Federal Reserve System was constructed around the Fed's goal of insuring that individual secular interests would not interfere with checks being exchanged at par. Prior to the Fed's activism, individual banks victimized the public by discounting deposits consisting of checks drawn on third-party financial institutions. I wonder how many would discount the role of the Fed in providing the mechanism for central planning that led to the conclusion that commerce was best served by requiring checks to clear at par?
While private sector enterprise has no doubt led to some important innovations in financial services, in most cases banks were followers, rather than innovators. The last important bank innovation was the automatic teller machine. Since the time of its invention in the 60s, innovation has occurred at a snail's pace. Even today's ubiquitous ATM and POS payment systems, which were once the envy of the world, would not have been possible without the unique on-line telecommunications created by the telecommunications industry, not the banking industry.
There is a leadership void in payments innovation which the Fed appears interested in filling. We are prone to encourage their efforts. Most of my colleagues would also point out that while there is a void in leadership, there is no void in central planning.
Today, central planning for U.S. payments comes in the form of the leading card networks. The networks maintain a stranglehold over payments owing from the market power they exert over merchants and the discipline they demand from their bank constituents. U.S. banks are fearful of venturing beyond the pale in fear of upsetting the flow of supra-competitive interchange on their card products.
A good example of the banks' preoccupation with card-like revenue is the recent effort by NACHA to modernize the ACH. They have proposed adding a few more "batch" processes to a system that has remained basically unchanged for over 40 years, along with a new form of interchange designed to pay the banks to modernize their systems.
That new form interchange includes revenues from the "opportunity cost" of shifting away from the existing high-cost, supra-competitive interchange fees. Imagine if all U.S. industry looked to public and private interests to help maintain relevance without the risk of competition, rather than relying on individual competition between industry participants to weed out the bad and encourage the good.
The U.S. banking system has become a system based upon propping up the laggards, with a lowest common denominator mentality. Is the next step one in which the banks ask the federal government to buy up all their overbuilt branch networks?
Mark Horwedel is CEO of the Merchant Advisory Group.