CHICAGO – Paul Whitmore bluntly assessed what he views as a “mess” -- the state of payments in the United States. His comments came last week at the Chicago Payments Symposium at the Federal Reserve Bank of Chicago.
“I’ve been sitting here for two days, wondering how did you get yourself into this mess?” said Whitmore, president of Hong Kong-based financial services provider Consultancy Associates Ltd.
The “mess” includes a crowded mobile payments scene and the slow conversion to EMV smartcard technology to replace magnetic-stripe cards.
It’s complicated by a mounting number of cyber attacks on financial institutions, merchants’ insistence on taking more control over payment data, and consumers’ uncertainty about whether they would rather trust a bank or a tech company with their personal information.
If those trends don’t cause enough industry hand-wringing, another major worry looms — uncertainty about federal regulations and what, if anything, could follow in the footsteps of the Dodd-Frank Act and its Durbin amendment altering interchange rates on debit transactions and changing the rules on network exclusivity.
In addition, consumers and merchants alike may demand speedier transaction settlement, the key element to displacing cash and checks.
But, advantage can arise from turmoil, as speakers emphasized at the Federa Reserve Bank’s meeting .
Sandra Pianalto, president and CEO of the Federal Reserve Bank of Cleveland, said the way the United Kingdom collaborated to speed up automated clearinghouse transactions could serve as an example to the American payments industry.
Here, the Check 21 law, enacted in 2003, facilitated check imaging, but it failed to answer questions about the speed of ACH transactions, which generally take a full business day to clear, pianalto said.
She noted that the UK developed the Faster Payments Service four years ago, which speeds Britain’s ACH clearing times to within an hour or two, instead of the following business day. The UK’s example could justify the hope that a collaborative U.S. payments industry could do the same, Pianalto says.
But in Whitmore’s view, the U.S. has simply “kept things alive way beyond their expiration date.” Outdated technologies include magnetic-stripe cards, paper checks, various network operations and security measures.
As hosts of the event, leaders of the Federal Reserve Banks made it clear they want to act as partners of all players in the development of payments.
The U.S. payments industry doesn’t need to draft a “policy” on what shoud take place to meet current and future challenges, Whitmore says.
“I think you need a strategy that shows where you are now and where you want to be,” he said.
Such a strategy doesn’t need a timeline, he maintained, but industry players collaborating on issues have to understand that progress “is never a straight line, rather it is always zig-zagging.”
But if that zig-zagging doesn’t foster industrywide agreements, the U.S. payments industry may replicate the problems of Europe, said Liz Oakes, principal advisor for KPMG in London.
“You don’t want to go down the same path as Europe in its decade-long attempt to establish a Single Euro Payment Area throughout most of the continent,” Oakes says. The payments industry in Europe failed to reach agreement and ultimately could not meet the deadlines it set, Oakes says.
“It brought on far more government regulations,” she adds. “You want to take control of your situation and collaborate because it will give you a much better chance.”
John Carlson, executive vice president of the Financial Services Roundtable, said the industry “can’t ignore the significant trends” taking place in payments, but the many differences in payment types with “so many policy objectives attached” complicates matters.
Roy Deciccio, managing director of JP Morgan Chase & Co., says the industry should monitor the progress of ISO 20022, the financial services messaging standard used by payments systems globally for corporations to integrate payables and receivables with banks’ systems.
ISO 20022 could be a basis for helping the industry establish “a thoughtful, holistic view” of the marketplace, Deciccio said.
Julie Conroy McNelley, senior analyst and fraud expert with Boston-based Aite Group, tried to persuade the gathering not to dwell on “what we are doing wrong.” To move forward, the industry should identify the top five “points of pain” and develop plans to address them, McNelley suggested.
“Most consumers say their financial institutions are doing a good or great job [in handling and securing payments],” McNelley said. “We do a lot right and we need to keep moving those best practices forward.”