Does The US Really Trail The Rest Of The World In Payments Innovation?

PI_Feature
CEO, Market Platform Dynamics
7:00 AM EDT July 14th, 2014

Maybe it was the celebration of our independence on the 4th of July that got British columnist, John Gapper, annoyed enough with the US to write a piece in the FT last week that took our banking and payments systems to task. In that piece, Gapper claims that the US “lags behind badly in the basic infrastructure of retail banking.”

It surely wasn’t a critical look at what’s been accomplished in the US with respect to innovation in banking and payments.

His piece begins by describing a check he received from a New York bank for a dollar, a check that traveled by post 3500 miles across the Pond prompting Gapper to comment on the “quaintness” of the US system because we still use checks. He didn’t say what triggered the check so it’s hard to comment about why it was a check and not something else. Gapper used the example to contrast the US use of checks to the UK Faster Payments system that would have had the monies digitally transferred to his account and made available to him the same day. Gapper’s view, ironically, is that the entity that more or less pushed the check system, The Fed, should now be the organization to lead the US into the promised land of bank and payments innovation by designing and then managing the UK equivalent here in the US. (The Fed has released a working paper on their vision for a faster payments network and you can read it here.)

Maybe because the Fed will soon need something else to do.

Check usage in the US is seriously nose-diving. Sure, we still use checks here, but according to the Fed, in 2000 checks were used in about 40 billion transactions, in 2012, that number was reduced by 50 percent to 20 billion, at the same time the economy grew. Checks represent 7 percent of transactions by number of transactions on the retail payments side, as compared to cash (40 percent) credit (17 percent), debit (25 percent) and electronic (7 percent). And Americans say it is their least favorite payments method.

The demise of the check on the consumer side has come at the hands of that US innovation called the debit card that enable easy use of DDA funds to buy stuff in stores without the friction of writing a check (ok, truth be told, the debit card was invented in the US but it took off more quickly over the pond). Bank-driven innovation  such as clearXchange and third party innovators such as PayPal, Square Cash and Google all provide digital alternatives to sending checks (or using cash) using email and mobile phone numbers – sounds pretty innovative to me!  And an awful lot like Paym, the highly popular mobile P2P solution which launched in the UK just this year using a similar funds transfer scheme.

It’s true though that on the corporate side, something like 70 percent of all payments between businesses are still made by check. But that’s for one big reason: the alternatives haven’t, until recently, been all that compelling for buyers or suppliers.

Suppliers have pushed back on many of the paper check alternatives as too expensive to adopt or too hard to enable, and in many B2B transactions suppliers have a lot of power to call the shots. Buyers, well they just want their stuff. But there’s a visible shift now away from checks to digital payments between businesses thanks to the efforts of innovators like PayPal, NvoicePay, Intuit, Ariba and Dwolla who all offer plausible alternatives to paper checks that make it easy and cost effective for SMB buyers and suppliers to transact digitally. As for the big B2B’s; they move money between bank accounts digitally and have for ages.

Gapper also mentions as further proof of the waywardness of the US payments system the near ubiquitous use of Chip and Pin cards in the UK. Using the adoption of a technology that’s nearly thirty years old, that puts a chip in a plastic card and that was invented in the first place because Europe didn’t invest telecomm innovation a couple of decades ago to tout the innovativeness of the UK payments system is pretty nuts if you ask me. (Pardon me while I grab my Walkman and put a cassette tape in my cassette player  – all wonderful innovations from twenty years ago that have, thankfully, died.) Seriously now, in 2014 does anyone think it’s innovative to put a chip with the relative brain size of a gnat in a plastic card and that we should standardize on that because that’s what they use in France?

Sure, it may be the case that the EMV train is barreling its way to the US but not because it’s an innovative way to solve the fraud problem at the in store point of sale. (Not to rain on anyone’s EMV parade here, but it’s probably also worth mentioning that the UK Cards Association released a report that said that card fraud in the UK, overall, is up 7.4 percent for every £100 of spend. Figures released by the UK’s Fraud Financial Institute reflect an increase of 16 percent in counterfeit fraud in the UK between 2011 and 2012 with fraud online up 11 percent and in store retail fraud up 26 percent.)If we were really committed to delivering innovation at the point of sale, that also delivered a secure solution, then we’d be investing in solutions that leveraged the cloud, the mobile device and new POS technologies to leapfrog plastic cards and EMV completely—delivering a truly innovative way of protecting cardholder data.

Oh wait, that’s right.  We are.

Tokenization and end-to-end encryption are all available now, thanks to the efforts of innovators here in the US who have been clued in to the need to protect data when transacting online for nearly two decades – the exact place that fraud travels when EMV is implemented. Increasingly, thanks to mobile devices, online environments now include the use of mobile phones to transact at the physical point of sale. Third party innovators like Braintree and Bluefin are but two of the innovators who are enabling secure online and mobile transacting by rendering data useless to the cybercrooks.

Tokenization is making it possible for many mobile payments schemes to actually ignite, e.g. PayPal and LevelUp. And the oldest banking consortia in the US that handles about half of the transactions that run across the ACH network today, The Clearing House, has developed and is piloting a “dynamic credentialing solution” that will leverage its Secure Cloud technology to tokenize data and pass randomly-generated numbers, or tokens, during transactions.

Imagine that.

Gapper also mentioned the adoption of contactless cards is further proof of how far ahead the UK is in payments innovation. This is, no doubt, in response to the ongoing drumbeat of positive PR about the adoption of contactless cards by the Brits and the massive amounts of Kool-Aid being served to the press on that topic. In fact, a recent press release issued by the UK Card Association says that “monthly contactless card spend tops £100 million as transactions triple in a year.”

Sounds pretty compelling. Until you do the math.

As a percent of overall spend, the spend that is being put on contactless cards isn’t even 1 percent, it’s more like 0.23—so less even than one quarter of one percent (See chart to the left which summarizes data from The UK Card Association that says that UK consumers spent $47.1 billion in May on goods and services overall on credit and debit cards and $109 million via contactless cards).

And the tripling of transactions?  The percent increase year over year is actually something like from almost nothing—less than a tenth of one percent—to a bit more than nothing—one quarter of one percent. The average transaction amount is £6 – which is probably concentrated heavily on transit. This, of course, is after years of investment on the part of the payments networks to deploy contactless terminals and issue contactless cards.  Reports in 2011 cited the “tipping point” for contactless was to be in 2012. It appears that UK consumers haven’t quite gotten the memo.  By the way, did I mention that sticking chips with a brain the size of a gnat into a piece of plastic just doesn’t get my innovation juices going?

Just to give this a little perspective, Starbucks mobile volume on a monthly basis is something in the neighborhood of $139M, assuming that reports that their mobile app volume of 11 percent are accurate and using its latest reported sales figures.

Now none of this is designed to beat up on the UK or innovation or the innovators in the UK. Monitise and its mobile banking platform has done an incredible job of enabling mobile banking not only in the UK but worldwide. Skrill has innovated remittances, Ukash and Zapp mobile payments. Paym looks like it will be a homerun, and a new mobile commerce player, YoYo looks like it has the potential be pretty disruptive with, OMG, the QR code. All are but a few of the great things that the UK has spawned and which will or have the potential to change payments and commerce.

It’s unfortunate though that the banks here in the US routinely get hammered up one side and down the other for being big innovator sticks-in-the-mud, especially since the financial crisis of 2008.  The banks have actually held their own in some pretty important areas where innovation really makes a difference and solves some real problems for consumers. Take online banking, mobile banking, digital P2P – all innovations that banks developed here in the US, delivered and kept secure; innovations that consumers actually use.

Ironically, Gapper’s piece was published two days before a report was issued by the British Banking Association describing the slowness of the UK banking system to embrace digital technologies in the areas of mobile banking in order to enable better customer service – something that the banks seem to really need judging by the low level of satisfaction that UK consumers have with their banks.

With respect to mobile payments, well, it seems like we’re doing a pretty good job of getting that flywheel cranked with innovation that works for all consumers with smartphones, not just those with handsets that have NFC chips in them. The innovators here in the US have seen from the efforts across the pond that having NFC available and getting consumers interested in using it are two entirely different things. And, let’s not forget how Square launched the mPOS market and hundreds of competitors all over the world – including those mentioned in Gapper’s piece, and how Starbucks showed the world that mobile payments and bar codes could be a winning combination.

It’s also true that there are a bunch of differences in the US and UK banking systems that to the uninformed might make it seem like we’re a bunch of duffuses when it comes to the digital transfer of money between bank accounts. I’ll mention that it’s a whole lot easier to get things done when you’re  basically on one small island, with a fifth of the population of the US, where almost all of the economic activity is in one city, and where there’s a handful of banks.

But, here’s my big problem. I don’t get anyone claiming the government anywhere is who we should be looking to for innovations in payments, including our every own Fed.  The government didn’t invent a single one of the innovative payment systems that have revolutionized payments around the world. Not the payment card which has help make payments electronic and provide an essentially global method of payment; not the ATM machine; not the incredible mobile money schemes that are providing financial inclusion across Africa; not PayPal or another of the payment methods that enable digital commerce. Nope, the government is what has foisted cash on us and in the US at least, paper checks.

I love reading John Gapper’s stuff and agree with most of the things that he writes about. He’s an amazing and well respected journalist and always has an interesting point of view to share. On this one though, I have to say that he just got it wrong.

But, hey, at least he didn’t advocate that we dump the existing system and all start using bitcoins.

Comments
  • Raymond Lee

    The UK card spending ratio figure is slightly disingenuous. What should be considered is how many payments are under £20 (the contactless limit) and how many of those are contactless. I’m pretty sure it’s higher than the 0.2314%.. probably closer to 4 or 5%. And this figure will climb significantly with TfL going live this year with contactless payments on the underground.

    Whilst the Fed may be looking at the cheque issue (we tried and got beaten down by the pensioner lobby) NACH have already said they don’t want faster payments when thy voted down a proposal to provide this via the ACH network, – http://www.americanbanker.com/issues/178_219/how-big-banks-killed-a-plan-to-speed-up-money-transfers-1063631-1.html – for reasons that are beyond most of us.

    I do agree that some of the banks are innovative, but when you look at the likes if ISIS and how that has been something of a failure (and with WEVE we have our own MNO failure) and how it took a UK MNO to show how mobile payments can really work (MPesa) then I think both countries have a pretty equal footing. For a country one fifth the size, with a handful of banks.. we do pretty well when it comes to innovation .. at least I think we do!

  • Mani Tulasi

    Ill-informed article as usual and a gung ho response. Contactless spending is primarily a replacement for cash which is used to buy small ticket items. Hence, comparing it to total card spend is like comparing grapefruits with apples. A more appropriate comparison would be total cash against contactless.

    Also, not all innovation you claim to have been invented in US was invented pure by US innovators. Not sure you can claim some of them are innovative in the first place. They came out of the pure need to protect old and obsolete acceptance infrastructure. Tokenization and end to end encryption were “invented” to protect magstripe data which was being captured and sent in the clear for criminals to intercept. The US is plagued by payment card data compromises because of magstripe and this is the only way the data can be secured. Hence, it is innovation to patch old technology and not something mind bending innovative either. BTW in a fully CHIP and PIN environment tokenization and end to end encryption does not really deliver any value as the data is already cryptographically protected and offers no value to anyone who intercepts it.
    The underlying cause of counterfeit is not EMV but the magtsripe UK and other European markets still have to support to enable their customers to transact in not EMV markets including the US and vice-versa. Added to that is the reliant of the US on older technology like card verification code to prevent online fraud. CHIP and PIN was never invented to prevent online fraud over the internet. Hence, any claims that say it does not help online fraud are flawed as well. Online fraud in UK and Europe is going up not because of lack of innovative idea but poor adoption and implementation of solutions like Verified by Visa and MasterCard passcode by merchant community.
    Finally, J.Gapper’s view on state lead innovation in payment is not entirely flawed either as in Europe at least the state plays a bigger part in ensuring the payment infrastructure operating within a country is robust and secure, either by legal means or where it is feasible developing solutions in collaboration with other stakeholders in the ecosystem.

    • Chris Farlee

      “BTW in a fully CHIP and PIN environment tokenization and end to end encryption does not really deliver any value as the data is already cryptographically protected and offers no value to anyone who intercepts it.”

      It is my understanding the cryptogram used in EMV isn’t encrypted…one could still pull the PAN from the cryptogram and use it in a CNP transaction if the transaction data aren’t encrypted. What it stops is using the card data to create a counterfeit card, it doesn’t protect the PAN itself during data transmission as P2PE or Tokenization would.

      “Online fraud in UK and Europe is going up not because of lack of innovative idea but poor adoption and implementation of solutions like Verified by Visa and MasterCard passcode (SecureCode is, I assume, what you meant) by merchant community.”

      3DS solutions are full of friction and cause major abandonment so there’s a reason merchants aren’t adopting…it’s a poor solution.

  • Dave Birch

    “he government didn’t invent a single one of the innovative payment systems that have revolutionized payments around the world”

    The government did mandate the introduction of the Faster Payments Service in the UK. I’m not sure the banks would have done it otherwise.

    • WarumNicht

      Touché Dave.

      Since the 1980′s predominant thinking in the US has swung to the default assumption that anything government touches will end badly. Which is both incorrectly and intellectually lazy.

  • Gareth Lodge

    Regardless of our opinion of the original article, or your response, I do think your response misses a vital but pivotal point. John isn’t writing as a payments expert, or even someone in the industry. He writes as a *customer*. As such, its less about facts, more about experience and perception. If that’s his experience, then, as an industry, we should be listening, not pointing fingers saying yeah, but we’re better than them.

    Whilst I like LevelUp, it was slightly amusing to see you use them as a success story, yet dismiss contactless in the UK, even though contactless it has been around approximately the same amount of time and has c.80 times more monthly volume! I guess it all depends on how you define success and innovation, and thats really the key here. Unless we have a common, shared view of where we are and where we want to go (ie what the Fed study aimed to create a discussion around) then no-one is going to agree on the two articles.

    “It’s true though that on the corporate side, something like 70 percent of all payments between businesses are still made by check. But that’s for one big reason: the alternatives haven’t, until recently, been all that compelling for buyers or suppliers.”

    2/3rds of checks globally are written in the US. Next come India and Iran. In the majority of countries globally, the majority of B2B transactions take place by ACH. Or, indeed, so do C2B or B2C. Its hard *not* to pay some bills by ACH. That would suggest that the issue is with the US ACH system, not ACH as a system.

    The issue is not (just) the cost of doing some of these things, or upgrading the systems, but the revenue. ACH is a fraction of the cost of a check – but banks make far more money from checks. Innovation is great – but money talks louder.

    Finally, the UK card fraud – a misleading quote, and out of context. Yes, its up 7.4% …but to 0.074%. ie up 0.0055% . It also includes things which are likely to happen whatever the card type (ie Identity theft).

  • Philip Andreae

    Mobile as the solution takes me back twenty six years to the moment when the European telecommunications industry began the formation of the GSM specification which is the backbone of the Mobile evolution we have all been dreaming of since the Nokia 9000 appeared. Then five years later, mobile phone in hand, three payment associations (Europay, MasterCard and Visa) met in a Chicago hotel to start the work to define a global security standard capable of eventually enable mobile payments.

    The real question is why here in the United States we continue to struggle to embrace EMV, migrate to NFC, embrace realtime ACH and eliminate the paper check? This should be the discussion. We should ask the question why?

    Many know the answer. Magnetic stripe fraud is still amazing low. Merchants and issuers have not seen the revenue lift necessary to embrace NFC. Financial institutions fear the canabilization of revenue by introducing real-time account to account transfers.

    Like in every other developed economy and most developing economy the USA has finally accepted the fact that criminals can cheaply counterfeit American Payment cards and that Global Interoperability is essential. Like GSM, 3G and now LTE; EMV is a global standard that can and is evolving as technology and innovation march forward.

    Instead of arguing again EMV we collectively need to embrace EMV as the security standard capable of assuring the security of card payments and the secure and effective evolution to mobile payments.

    Instead of arguing that we should migrate everything into the cloud we should remember George Orwell’s evil BiG Brother and worry about a cloud full of Big Data. We should worry about the hungary entrepreneurs and hackers seeking to harvest personal and private information about you and me.

    Stable standards like EMV assure evolution and innovation.

  • http://www.anzaintl.com/ Randy Gutierrez

    Payments Innovation – With a New Payments Infrastructure

    Much focus today by the payments industry globally seems to be to compete for significant profit, which is understandable, but providing ease of payment for businesses and consumers at a reasonable cost and price through collaboration, and to make a payment with ease and for the common good, should not be looked down upon, and is a payment industry challenge with
    thoughts for resolution compiled in the Federal Reserve Bank’s “working paper” as referenced by Karen; formally titled the “Payment System Improvement – Public Consultation Paper” It should be reviewed, in-depth and with serious thought. I’ve read Karen’s critique of John’s critique of US payments systems, and found Karen’s critique a defensive one, rightly so in
    some respects given the pride and scope of growth of the payments innovators
    and large banks who’ve gained traction in the US market with the funding and
    growth of “enhanced” payments products with innovative payments products
    features within their payments products space. However, the gains of growth by payments
    innovators and large banks in the US has occurred in some cases by not
    deploying an efficient, ubiquitous US clearing and settlement infrastructure, proving
    John Gapper’s statement correct,

    the US “lags behind badly in the basic infrastructure of retail banking.”

    Checks

    John’s example of a check and its inefficient flow through the US payments system
    shows the extremes of inefficiencies, acknowledging the decline of check usage,
    as does Karen although conceding check usage for business payments still exists
    at undesirable levels due to expensive alternatives. However, payments
    innovators have succeeded in integrating the payables and receivables segments
    of products for SMB’s by some of the vendors she’s listed such as PayPal, NvoicePay, Intuit, Ariba and Dwolla, omitting others such as MineralTree and a plethora of emerging B2B
    players offering ASP and software solutions with the goal of driving price points to levels
    where checks become a less desirable alternative. More promising are ASP solutions interfacing with a more streamlined US clearing and settlement system providing payments innovators and banks in this space a greater opportunity succeeding with more efficient real-time low-cost payments, or scheduled low-cost payments from directory based buyer
    accounts to supplier accounts. Coupled with remittance information, transaction
    detail matching purchase orders with invoices would streamline workflow for both the supplier and buyer. Regarding the larger buyers and suppliers with existing B2B solutions, no market exists for them for payments innovators since they’ve already developed payments solutions
    among bank participants conducting trade among them.

    One can claim the reason for the success of some payment innovators named by Karen in her article is the lack of a streamlined US clearing and settlement infrastructure. Payment innovators are able to leverage the inefficiencies of the existing payments networks with
    enhanced technologies for the origination and delivery of payment instructions
    with a modern high tech face, while using the existing legacy back-end retail (DDA) systems for clearing and settlement, and some middleware payments networks such as ACH and Debit packaged in a new all encompassing payments architecture design. Good for payments
    innovators, bad for banks that aren’t partners in some form with the payments innovators. One can claim most banks are to blame due to their inability to innovate and inability to stay abreast
    of the demands of the consumer, and let their system capabilities; technology and business models ferment to rancidity, or unknowingly “wilt” to some degree, and these claims could be true for the most part. As both a payment professional and consumer, let me convey my
    experiences.

    Having worked for “Large West Coast Bank” in my youth in a variety of technical and lead positions in their Wire, ACH, Swift, Bill Payment and other areas of the bank with a team of
    exemplary and innovative peers, both technical and operational, we succeeded to
    streamline payment transaction flows from customer origination through delivery and settlement to DDA systems, from customer origination devices to customer receiving devices where applicable, reducing unit costs significantly throughout the years. After significant reductions in unit costs due to automation, reduction in personnel, and other cost savings,
    “Large West Coast Bank” proved unwilling to reduce some price points to consumers and businesses to maximize profit, enjoying increased profits per transaction, remaining reliant upon revenue streams throughout the years when new “payments innovators” outside of
    the banking industry exploited new and improved technologies, with new and improved businesses models, and “innovative” payment delivery methods. The devices and streamlining within “Large West Coast Bank” advanced from paper documents with wire and ACH instructions entered in multiple systems through dumb terminals in multiple steps across multiple communications links by multiple people throughout the day with DDA
    posting and settlement at the end of day. Advancements in technologies occurred
    over time with intelligent PC’s, the internet, SQL databases, advanced programming languages, etc., with skilled personnel providing innovation, allowing for the removal of manual steps with streamlined processes, DDA posting and settlement remaining at the end of day,
    resulting in significant unit cost reduction, but minimal price reduction to consumers and businesses based on business model choice of price retention, a long term flaw for business and consumer customer attraction and retention.

    A wire transfer in 1983 incurred a high unit cost within the bank, was charged a mid-level price by the Federal Reserve Bank, with “Large West Coast Bank” levying a charge to the business or consumer at a price somewhere in the $30 – $50 range; a decent profit. After streamlining processing over time with front-end and middle-ware changes, the wire transfer incurred
    a unit cost between $1.50 and $3.00, was charged a price by the Federal Reserve Bank between $.17 and .67, volume dependent, with “Large West Coast Bank” levying a charge to the business or consumer at a price somewhere in the $5 to $30 range, volume and business or consumer customer dependent; a more than decent profit. Fear of revenue loss from a
    change in business models was, and is, a primary incentive for payments innovation providing payments services to businesses and consumers outside of the banking payments industry. Although the model chosen is a wire transfer payment, not necessarily one used heavily by
    consumers in the banking industry, the payment type is noted to indicate business
    model choices made in the banking payments industry and indicative of price point definition for charges with variations on specific components of the unit cost and variations for added
    profit margins.

    This example highlighted shows transaction flows reliant upon the banks internal systems architectures and existing business models long term. Other examples of the streamlining of
    transaction flows with success at “Large West Coast Bank” also exist with their home banking account transfer products, bill payment products, international consumer remittance products and those using ACH for account movement. Most of which are great products with varying internal systems architecture designs and money transfer pricing structures. I expanded
    upon these products due to my familiarity with their relation to the comparisons made by John and Karen with regard to money movement cost and timing between accounts with products in the US, and with products in the UK. The comparison began with John’s frustration with the behavior of check timing of clearing and settlement in comparison with timing of clearing and settlement with Faster Payments, and mention of mobile and card, with further expansion with Karen passionately promoting payments innovation in the US with like products; interesting comparisons with payments innovators and product adoption to be determined
    long term by consumer and merchant acceptance.

    Debit and Credit Cards

    John proudly touts the claimed superiority of the security of the EMV chip and pin, and the value of contactless cards which Karen denounces vociferously as an unworthy claim and proudly promotes the efforts of The Clearing House with its admittedly interesting attempts at
    solving one of the most difficult problems in the payments world, authentication.

    With EMV chip and pin cards, the solution appears to be economic with merchant
    acceptance being the driving force, and determination by security industry experts of security a factor, Frankly EMV appears to be a solution tepidly embraced by the payments industry in the US per the article referenced1 although early in the evaluation stage, with The Clearing
    House very early in determining whether their approach2 will even succeed, let alone convincing the merchants to accept the changes, whatever those changes may be.

    Regarding contactless cards, I’m not sure whyJohn references this other than to tout this as a major accomplishment in the UK, and suggesting the possibility of contactless cards as a potential product for market in the US. Karen appears to question the success of the card in the UK in numbers, rather than accept the value John believes the card adds to the
    economic and social construct of the market in the UK.

    1EMV CHIP and Pin

    http://www.digitaltransactions.net/news/story/EMV-Commercial-Card-Issuers-May-Herald-PIN-Dominance-With-Consumers

    2The Clearing House Tokenization Pilot Info

    http://www.mobilepaymentstoday.com/news/the-clearing-house-to-pilot-new-digital-payment-standard/

    I began comments to Karen’s critique when her original article was published on July 14, 2014, citing personal examples where deficiencies in the US payments infrastructure exists
    with payment types used by me with various products in the market; my “Large West Coast Bank” home banking product, independent utility and mobile phone website billers, PayPal money transfers, EBay, Amazon.com, Western Union, Lendup, Debit Cards, etc, but realized the comments became too detailed, but determined examples of payment types requiring improvement were best identified by organizations solicited by the Federal
    Reserve Bank in the “Payment System Improvement – Public Consultation Paper” by
    some respondents published. One such organization, The Clearing House, submitted a
    comprehensive, well written response with specific examples of payment types as
    “Business Cases,” that would benefit from faster payments and a restructuring of some
    features of the US payments system. Although the recommendations will be
    agreed to by some, not all features will be agreed to, specifically their position with
    regard to negating recommendations to Debit POS structural changes. However, their
    position is commendable among others who’ve submitted responses to the Federal
    Reserve Bank, and is one to be debated in further sessions with others who may
    have conflicting opinions. I suggest those who are interested, review “The Clearing House” response by accessing the Federal Reserve’s website,

    http://fedpaymentsimprovement.org/wp-content/uploads/2013/12/Response-The_Clearing_House-120313.pdf

    and gauge others’ responses. Some of the responses contain content lacking sufficient quality, others are of sound quality with many payment innovators prominent in the market including, PayPal, FIS-Paynet, Fundtech, ClearXchange, MCX, Wal-Mart, JP Morgan, etc;

    Federal Reserve Bank Payment System Improvement – Public Consultation Paper

    http://fedpaymentsimprovement.org/user-submissions/

    My experience with the Federal Reserve Bank over the decades, working directly and
    indirectly, at a large bank and with small and medium sized banks, and payment servicing companies was an educational experience. Having worked in technical and operational positions with their Fedwire, ACH and Check processing network and operations groups, I found them highly competent. Their current approach actively soliciting consultation from payment industry participants, Fed bank members, and Fed bank member customers, with the Fed knowing their clearing and settlement systems lacks a formidable infrastructure necessary for payments innovators to leverage all bank members for payments ubiquitously or a desire for them to do so, and knowing the tendency towards peripheral payment innovators with large bank members moving away from the formation of ubiquitous, streamlined formidable, low-cost payments systems towards fragmented, non-ubiquitous, higher priced, payments systems,
    puts them in a position to assist in collaborating with payment industry participants, Fed bank members, and Fed bank member customers, and given the number of town hall sessions conducted, and the symposiums where many of the payment industry participants and customers responding to the payment industries “desired outcomes” collected by a
    non-government, private enterprise consulting firm in the “Payment System Improvement – Public Consultation Paper”.

    The Federal Reserve Bank’s desires not to be a payments innovator, their desires are to push forth and influence collaboration among the payments innovators in the payments industry, a role they should play to achieve the outcome of the agreed upon efforts, whether project deployment is conducted by payment industry participants, by the Federal Reserve Bank, or by
    both. The decisions are to be made during subsequent sessions conducted by the
    Federal Reserve Bank. Two additional papers were released to the public after the Federal Reserve Bank reviewed all of the responses and summarized into the following summary
    reports. Select the “Industry Feedback Summary” and “End User Summary” url’s to review the PDF report with statistics culled from payment industry participant responses. The results are of interest.

    Payments Industry Feedback Summary

    http://fedpaymentsimprovement.org/wp-content/uploads/industry_feedback_summary.pdf

    End User Demand Summary

    http://fedpaymentsimprovement.org/wp-content/uploads/enduser_demand_summary.pdf

    Recent town hall meetings presenting detailed recommendations from user submissions held
    across the United States in July at various Federal Reserve District offices and conducted by the Federal Reserve Bank with many payment industry participants in attendance. The detailed
    recommendations were based on feedback from all responses gathered from user
    submissions sent in December, which I believe will be made available for public review
    in the fall, 2014.

    So…John Gapper was right. The US “lags behind badly in the basic infrastructure of retail banking.”

    John Gapper’s annoyance of the US banking system is understood and his critique is on point. Karen’s annoyance of some folks non-acceptance of payments innovation occurring in the US is understood and on point as well, but all should evaluate the payments innovators
    objectively. Much innovation is occurring in the US. Both tout the advantages both countries have with their payments innovators’ strengths in the payments industry and rightly so, but should remain objective and region non-specific.

    What’s the point other than the claim of each others’ biased perceived heightened degree of intelligence from the resolution of payments systems challenges presented in different regions with their variables presented, resulting in each regions positive resolution with their payments
    systems innovations? Our goal should be to integrate payments universally, not
    regionally and evaluate each regions clearing and settlement systems for future consideration with a vision of payments innovation consolidation, all variables of each regions success
    considered. Complex, yes; solvable with collaboration and co-operation, also, yes.

    To end this congenial and fairly lengthy response to Karen’s worthy, interesting, and well written article and per her thoughts:

    “But, here’s my big problem. I don’t get anyone claiming the government anywhere is who
    we should be looking to for innovations in payments, including our every own Fed. The government didn’t invent a single one of the innovative payment systems that have revolutionized payments around the world. Not the payment card which has help make payments electronic and provide an essentially global method of payment; not the ATM machine; not the incredible mobile money schemes that are providing financial inclusion across
    Africa; not PayPal or another of the payment methods that enable digital commerce. Nope, the government is what has foisted cash on us and in the US at least, paper checks.”

    Karen emphasizes the words “anyone” and “government anywhere” clearly showing a strong reluctance with government “owning” innovation. I agree, as most others do, the government should not be looked upon to “own” innovations in payments, but the Federal Reserve Bank is
    technically, not the government but an organization administered primarily on the operations side of its organization by some bank members. The Federal Reserve Bank should not be
    looked upon unfavorably and can play a productive role by influencing the evolution of the payment industry and assisting innovation in payments, thus benefitting financial institutions and their business and consumer customers, and peripheral private enterprise payments
    innovators, domestically and globally.

    Having participated in the Federal Reserve Bank symposiums and observed and interacted with Federal Reserve Bank representatives, financial institutions, large retailers, payments software vendors, payments software processors and innovators, named players mentioned
    in this article and prominent in the market with some included in the Federal Reserve Bank’s web site, http://www.fedpaymentsimprovments.org, makes me believe the Federal Reserve Bank’s recommendations should be reviewed when published, then debated, negotiated, and agreed to, since the recommendations will significantly change the payments networks and clearing and settlement systems for payments in the U.S. The changes will affect all financial
    institutions, payments processors, providers, and payments participants in the market,
    including emerging payments innovators! I don’t believe the recommendations will be a mandate, but a collaborative approach, with the opportunity for payment innovators to continue
    to innovate, and innovate adhering to a new clearing and settlement infrastructure.

    What’s compelling about the possibility of a new US clearing and settlement infrastructure is the potential replacement or major redesign, upgrade and replacement of thousands of DDA
    systems at thousands of financial institutions throughout the United States, with potential significant reconfiguration of networks, potential device upgrades, reconfigurations and replacements, and agreement on messaging, security and other standards long overdue to ensure consistency of domestic and global payments processing, all with the
    encouragement of payments participants to innovate in a collaborative private enterprise market, not as a government run, developed, and implemented product or project. A major cost to our economy, with a major opportunity for profit for those participating in the design,
    development, implementation, and use of the payment infrastructure and business model
    changes beyond implementation.

    The challenge is funding the effort and developing a business case to move forward, whether it is privately funded through collaborative efforts, or a shared government funded effort, given the projected front-end costs anticipated before benefits are received. I’ve faith the Federal Reserve Bank and its private partners will succeed in this role.

    So, to this end,

    “The Reserve Banks remain committed to the continual improvement of the US payment
    system and will work collaboratively with stakeholders this year and beyond to
    implement innovations that meet evolving end-user needs for speed, efficiency
    and security,” Sandra Pianalto, President of the Federal Reserve Bank of Cleveland.

    http://www.finextra.com/news/fullstory.aspx?newsitemid=25692&topic=payments

    And moreover, we all should commend Karen Webster and John Gapper, both who’ve
    sparked a constructive debate from others long standing conversations leading
    to the reconfiguration of one of life’s simple successes, that being a payment,
    a good thing!

  • Ed Starrs

    Banks don’t typically innovate, they adopt other’s innovations. Electronic checks, not ACH, are the fastest, safest and lowest cost payment method in the US, and they already work with 100% of checking accounts, unlike ACH. The Check 21 Act enabled the future of payments in the US, and that is real time fully electronic bank transfers using check data, but big banks control ACH and the card industry and have been hesitant to adopt new technology that would disrupt the ACH and card networks. That is all about to change in a very large way.

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