U.S. Isolating Itself from Global Payments System

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    September 17

Last year the U.S. contributed close to 20% of the world's gross domestic product despite coming off the back of the biggest economic downturn since the 1930s Great Depression. The U.S., U.K., Germany, Russian and former Soviet states, and China dominate the world's payment landscape, but in volume of nonbank payments the U.S. dominates with more than half of the world's total. In terms of global electronic payments and transactions, the picture is similar with Canada and the U.S. still accounting for half the global payments volume in the last few years. It would be reasonable to think that this is due, at least in part, to a healthy payments and banking infrastructure.

But this is not a globally progressive payments system.

Last year Celent reported that two-thirds of checks written globally are still written in the U.S. At a time when the world is accelerating towards faster payments, the U.S. has been reinforcing Check 21 and propping up a system that was popularized in the 1950s. The U.S. banking community last year voted down NACHA's Expedited Processing and Settlement initiative, which would have given real-time payments via the automated clearing house a chance in the U.S. At the end of 2012, North Korea adopted the EMV standard, leaving the U.S. the remaining holdout, with the debate on EMV rollout for a 2015 timeframe still raging.

The most common justification for the lack of support for the EMV standard – apart from the fact that merchants, banks, issuers and networks can't agree on adoption terms – is that the U.S. intends simply to leapfrog EMV and go straight to mobile. The most logical move on that front would still be adopting the revised EMV standard for secure element deployment, at least as a partial measure towards retooling the Visa and MasterCard networks for mobile phones. But NFC has struggled in the U.S. more than in most markets.

Many payments experts have dubbed NFC a collective failure, with the technology receiving the nickname "Not For Consumers". Despite Google's endorsement of this tech in its Wallet, and the widespread adoption by handset manufacturers, U.S. NFC adoption at the point of sale has been painfully slow. Larger retailers are holding off on replacing POS terminals while they debate the Durbin amendment's impact on interchange fees.

Despite the U.S.'s lackluster support of NFC, contactless transactions in Europe, Australia, China, and Southeast Asian countries are accelerating at a measured pace. Compared to countries like France, the U.K., Australia, Poland, etc. which record volumes of contactless transactions in the 20% to 40% range, the U.S.'s 1% of contactless transactions looks shabby. NFC is currently being trialed in 70 countries, so despite the criticisms leveled by the broader payments community, it still appears the best bet for incumbent POS networks to survive the shift to mobile payments in-store. If you're argument is you're not adopting EMV standards because mobile is going to leap-frog chip-and-PIN, then you'd expect the industry would be actively pursuing a mobile payments standard.

From the outside looking in, the U.S. is quickly becoming a massive closed-loop payments system. There is plenty of activity within the local system, but interoperability with the rest of the world is suffering. The U.S. is fast becoming a payments island with, in the case of checks and card standards, a system that is 10 years behind the rest of the world.

The U.S. has more than 7,000 banks and a like number of credit unions, making it the most complex and diverse banking market in the world. Bradley Leimer, digital strategy lead at Mechanics Bank in Richmond, Calif., pointed out to me recently that there were more than 280 mobile payments startups in the U.S. alone. This is free-market economics at its best, something that in the past has produced incredible innovation.

PayPal is obviously one of the most successful global payments businesses in the world today, with $43 billion in total payments volume in Q2 2013 alone, up 25% year on year, but it has yet to crack the in-store market from a traction perspective. (Incidentally, PayPal expects to do $20 billion in mobile payments alone this year, so while faster payments have failed on the ACH front, PayPal is still showing the way with an infrastructure buoyed by customer demand for real-time responsiveness and mobile payments.)

Google Wallet and ISIS have invested close to $1 billion in their respective wallet technologies in the last couple of years, but the lack of suitable POS infrastructure has hampered their progress immeasurably.

Clinkle, the latest, new kid on the payments block, has raised $25 million in recent months, but comes competing against Square, Dwolla, Venmo and others. Square has performed phenomenally on the measure of merchant acquisition, but is still based on old card swipe technology.

Then you have the Merchant Customer Exchange in the U.S. as an in-store mobile payments technology which appears designed primarily to circumvent the traditional card networks of Visa and MasterCard so that merchants get to keep interchange in-house.

This doesn't even start to tackle efforts like P2P payments, QR code payments technology like LevelUp, Lemon and others that enable you to pay with your phone in novel ways.

With the exception of Square and PayPal, all of these innovations are very U.S.-specific. While that's great for U.S. citizens, the lack of interoperability means the vast majority of these apps don't work outside U.S. shores, and, hence, limit the ability to send money across borders or purchase from overseas merchants.

Each year close to 70 million tourists travel to the U.S., and last year almost 62 million Americans travelled abroad, according to the Commerce Department. None of the payments innovations in the U.S. address these consumers, nor are they likely to.

While the market is producing potentially remarkable innovations, adoption of standards that result in lower cost of delivery, interoperability on a global stage, less payments friction and higher adoption rates should not be viewed as an antithesis to progress.

There's a simple way to illustrate what is going on in the U.S. right now. There appears to be in a philosophical battle over who will dominate the future of mobile payments, but it is like a fight between VHS and Betamax, while the rest of the world has moved on to streaming movies. The chances of a payment technology like Clinkle or MCX's wallet quickly becoming ubiquitous and moving offshore to create a new de-facto interoperability standard that competes with EMV and faster payments is a statistical long shot. PayPal did accomplish that for the Web, but it wasn't competing against 280 other payments startups, and an established global ecosystem that was already working efficiently.

The only solution to payments reform in the U.S. is a parallel approach. Aggressive adoption of the EMV standard along with lowering the friction behind secure element support for NFC would be a promising start. While NFC clearly has some competition from emerging technologies focused on cardless payments, it is still the most workable approach to retooling the existing networks to accept mobile payments in the short term. The adoption of expedited processing and settlement on the ACH network would also be a basic step on the road to real-time payments enablement.

I think the simplest way to rally the troops around this would be for U.S. regulators to mandate EMV interoperability for issuers and merchants tied to Durbin reforms (merchants, you don't get interchange reduction without it beyond 2015; issuers you can't issue new cards beyond 2015 unless compliant) and for the Fed to propose a basic across the board check-processing fee of $2.50 per check. This should solve the intractability of the various players, and provide enough incentive for larger payments reform.

Like that is going to happen!

Brett King is founder of Moven, Bank Technology News' 2012 Innovator of the Year and author of "Bank 3.0."

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