But despite the US Federal Reserve’s interest, the old guard dislike the idea of real-time payments
In the recent September payment System improvement Public Consultation Paper from the US Federal Reserve, it asked what could help improve the US archaic payments system. And, as you may well have expected, feedback was divided. However, the old stalwarts of Visa, MasterCard and other bankers and card schemes were rather happy with how everything currently is. They wanted a free market solution, letting them retain their dominance in the space.
On the flip side, technology firms wanted a fix to this old system, and fast. Just like many in Europe believe, the US system is old, slow, needlessly expensive, and prone to exponential cases of fraud.
Even the Fed thinks the situation can be improved, saying “the opportunity exists to improve speed and efficiency of payment and to maintain payment system safety in the face of escalating threats,” at the beginning of its paper. It’s aware that the landscape is changing and more needs to be done to modernise the US in terms of its payments market.
Interestingly, there was a lot of similar findings to the Fed’s 2002 paper in its latest report. While some see this as a good thing, showing that people like the current systems and the demand for electronic real-time payments is just a myth. Others see it for what it really is, a lack of progress in the industry, with customers not getting the products they really need. This in turn leads to a sparse user base for a wider variety of new systems that have sprung up.
Once again, the Fed knows that this is an issue. In fact, it’s looking at other nations and their payment systems to see how far ahead they are with real-time payments compared to the US.
“In a world where several other countries are moving to ubiquitous near real-time retail payment systems, the US payment system does not have this capability,” reads the paper. “The US payment system has begun to migrate incrementally toward faster payments primarily through private-sector innovation; but these innovations, when considered in total, have not resulted in a ubiquitous near real-time system.”
Naturally, this provoked a fearful reaction from USBank VP John King, who claimed that the US payments system can’t follow the examples of foreign nations, partly due to their lack of cheque usage – an archaic payments system other nations have realised they no longer need. In fact, his statement only serves to highlight just how backwards the US payments industry is once you leave the startups with fresh ideas behind.
King isn’t alone in his thoughts either, with many other banks preferring the status quo rather than actually innovating a system not built for the future.
Merchants, however, seemed to understand that the free market that banks so desire just doesn’t benefit them when MasterCard and Visa are just sat there calling the shots. If the Fed decide that change has to happen, then these two could lose the monopoly-like control they have over the payments space.
“The Federal Reserve Banks believe that ubiquitous, open payment networks and/or broadly interoperable networks best serve the public interest,” it said.
Visa’s reply, however, painted the Fed’s thoughts as nothing but beneficial to the Fed and not in the interest of market improvements, saying “most retail needs are well served by current and emerging payment services … market-based innovation is thriving and will continue to meet most end-user needs as private systems expand and extend their scope … [and] that the Federal Reserve System should focus on enhancing the Federal Reserve Banks’ payment services, rather than changing the way in which private-sector payment systems operate.”
Despite the opinions on show here, the US system has to change. EMV will be coming in next year to the US, and a better solution has to be in place. Moving forward the payments landscape is definitely moving towards real-time payments. People don’t want to sit and wait for money to be transferred when paying by debit card or via a mobile payment. Nor do they want to wait if they’re transferring money to another person. In this day and age, we certainly have the technology, it’s just the age-old problem of regulation failing to keep up with the pace of society.
Wal-Mart’s senior VP and assistant treasurer Michael Cook chimed in too, providing a very convincing argument for why the system needs to change. “For decades, the various payments systems have been owned, operated, and governed by financial institutions with limited input from other stakeholders (including) merchants and consumers,” he said. “It is Walmart’s belief that this consolidation of interest has resulted in inefficient, fraud prone systems that are supported by inflated fees. In our view it is highly unlikely that the private sector, if left to its own devices, will devise a balanced, consumer friendly payments system. The entrenched interests in payments, particularly in card based point of sale payments, have profited from the status quo for decades.”
The World Wide Web Consortium pointed out that it has, in fact, been building a universal payment standard in the core architect of the web for more than three years. The tech can be deployed non-disruptively and allow users to undertake transactions with computers, smartphones, tablets, and other devices.
Manu Sporny, W3C chairman said, “We recommend that Federal Reserve embrace current generation technologies like Ripple and Web Payments that offer major tangible improvements to the United States’ core financial system.”
Personally, and as I’ve said before in the likes of my feature piece on cryptocurencies, the most interesting part about real-time payments is the future of payments through digital currencies. Real-time payments can’t come fast enough to the US, but what’s your stance on it all?
[Image: kelloh - Flickr]