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ChapterTitleViews
Do popular payment
mantras ring true?
By Brandes Elitch
CrossCheck Inc.
e had an excellent grape harvest in Sonoma
County in 2013, the second in two years –
a very unusual situation. However, after
W harvest, work remains – pressing grapes
and getting the barrels ready. Then, you can't predict the
precise moment when the wine needs to be transferred
from one tank to another.
This means 12-hour days pumping wine and shoveling out
tons of spent grape skins to make room for new wine. That
phase should be done before this issue goes to press; by
mid-December, the entire 2012 vintage should be bottled.
Contrast this to the 2011 season. Ravenswood winemaker
Joel Peterson said 2011 was "the most fungus-filled,
botrytis-filled vintage I've ever seen. The vintage was
marked by two rains: the first loaded the gun, and the
second pulled the trigger. Napa Cab never got ripe – we
had to sort our Cab and Merlot in the field and crush
straight away. … There will be some awful Cabs – green,
oxidized, and botrytized. The quality of 2011 will depend
on who sorted well."
The need to sort
Sorting things out is important in winemaking, as well
as in developing new products in the payments system.
Just as the vineyard manager and winemaker need to
focus intently on results, so do managers developing new
products in the payments space.
Every day brings new announcements about the Next Big
Thing in payments. Everyone has an agenda; sometimes it's
hard to tell what really has potential. Some new products
will end up green and oxidized, just like Sonoma's 2011
harvest. In this article, I'm going to address nine commonly
heard mantras in the payments milieu now.
1. The use of cash is declining
In September 2013, MasterCard Worldwide released a
study of cash use in the United States. Frankly, a study
by MasterCard on cash has about as much credibility
as a study by NACHA – The Electronic Payments
Association on check usage. I would put it in the
same category as a book titled How Penny Stocks Create
Millionaires Every Day.
It is no surprise that this study predicts declining cash
usage, when in fact the use of cash is increasing. This
is caused by workers' migration to the underground
economy. The percentage of unbanked and
underbanked Americans rose from 25.8 to 28.3 percent
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in 2011. Many of these people are choosing to keep
their money out of the mainstream financial system.
Also, certain businesses always operate on a cash
basis. The motivation is varied: to underpay taxes,
skirt regulations or even hide illegal activity. But
that's not all: the new underground economy includes
freelancers and consultants and entrepreneurs who
used to be full-time professional employees.
Economists estimate the underground economy to
be somewhere between 8 to 14 percent of total gross
domestic product. This could amount to as much as
$2 trillion. California estimates that this costs the state
as much as $6 billion in lost tax revenue annually,
which would make up for the state's budget deficit.
Nationwide, this could be $50 billion in lost tax
revenue. This is a cash economy, and that is unlikely
to change; thus, the use of cash will not be declining
anytime soon.
2. Banks are obsolete
Yes, the number of commercial banks is down to
about 6,000, and dropping by around 200 per year.
Circumstantial evidence for the notion of banks'
obsolescence is in a compound question I found
online: "How did Amazon get ahead of banks in
providing trusted credentials and streamlining
payments, or Facebook take the lead in streamlining
online payments?"
This is a fair question, but whoever posed it should sign
up for an academic course on money and banking, pay
attention and not skip a class. To conclude that banks
are obsolete is absurd. Yes, bankers need to overcome
their organizational silos. Yes, the nonbank players
(Google Inc., Isis, PayPal Inc., Amazon Inc., Square
Inc., Merchant Customer Exchange) are innovative.
But to state that "distributed models" such as those of
the Bitcoin Foundation and Ripple Labs are "the future
of commerce, not just payments," as one industry
expert suggested, is sheer fantasy.
3. The ACH system will achieve instant settlement
The automated clearing house (ACH) is a batch, store
and forward, next business day settlement system. It is
designed for a high volume of small dollar payments
to be processed on a preplanned settlement day and
authorized by a signed consumer agreement. Instant
settlement could happen, well maybe by credit push
– but not involving debits, at least not in this decade.
4. The ETA will formulate rules for its members to
forestall regulatory action
Reality check: the Consumer Financial Protection
Bureau, for example, wants to vet payment products
and solutions before they are brought to market, taking