By Brandes Elitch
CrossCheck Inc.
NACHA - The Electronic Payments Association was formed in 1974 to coordinate disparate efforts to replace checks with electronic debits. NACHA is the traffic cop; it writes the operating rules and regulations for using the automated clearing house (ACH) system, which was originally designed to process very large batch files of recurring small-dollar items. NACHA's annual payments conference is now the largest such meeting of payment professionals in the United States
While there has been a lot of talk about expanding the ACH system to "make checks obsolete," it is important to note that the ACH is still a batch, store-and-forward, next-business-day settlement system. Transactions received by banks during the day are stored and processed later in a batch mode, where they are sorted by destination for transmission during a predetermined period.
Over the last decade, NACHA has come up with new payment types, and many people believe that in the near future most payments will clear as ACH entries. This is why you should attend NACHA's annual event. This year's show, Payments 2010, held April 25 to 28 in Seattle, offered seven tracks, plus workshops, plus a large vendor exhibit hall.
For many years, most growth in the ACH world came incrementally from government transfer payments. Things started to change about 10 years ago, when NACHA came up with a new code to allow checks to be converted to ACH at points of purchase. This was not a resounding success, and some industry professionals believe NACHA has been on the fringe of payment innovation.
Predictions of ACH usurping check proved shortsighted; this year there will be 25 billion checks written in the United States, and Electronic Data Interchange has, for my 25 years in cash management, been the "next big thing."
Nine of 10 payments worldwide are still made in cash. A recent study by Packaged Facts called Consumer Payment Trends in the US found that "54 percent of U.S. adults cite cash as their preferred form of payment."
Based on data from the Experian Simmons Spring 2009 Adult Consumer Survey, the report notes that "68 percent of American adults have a debit card in their wallet, and 67 percent have a credit card; though only 53 percent of adults may be considered active credit card users with transactions in the last 30 days." So how are they making their payments? (The answer is debit card, cash and check.)
Americans have recently shifted their preference from credit to debit, and merchants are studying decoupled debit, to convert what started out as a debit card transaction to an ACH debit. So, while there are changes in the wings, they use the existing payment channels and, until now, there have been no big changes to the existing platforms and networks.
In a recent article called "Why Banking Technology Sucks," the Banksimple blog identifies the root of the problem. It says, "back-end technology is constrained by legacy systems - core processing is done on a nightly batch basis in a mainframe, using code that was written 30 years ago.
"Given the large number of existing users, and the network effects inherent in payment systems, it's going to be a long time before the majority of banks switch to better technology."
And it's not just technology: Brett King, the author of Bank 2.0, said that "legacy organizational structures and metrics are why technology is held back - not just because of investment in legacy systems." But now I am not so sure.
This year's conference proved that things are changing, and fast. I came away convinced we will see big changes in the next five years, and they will involve new devices, new channels and less reliance on interchange.
These new channels will feature "immediacy, transparency and approachability," the new payments mantra. Since interchange is the lifeblood of the card industry, and the source of the ISO revenue stream, it is important to pay attention to these developments if you work in the card industry, because your world is going to change. The first hint was "The Future of Money: It's Flexible, Frictionless, and (Almost) Free," by Daniel Roth in the March 2010 Wired magazine.
You can read it, at www.wired.com/magazine/2010/02/ff_futureofmoney/. Revolutions begin with a series of small, unrelated events.
Roth wrote that "hundreds of software developers and entrepreneurs are attacking the payment ecosystem, seeking out ways to tear down the stronghold the banks and credit card companies have built." This is a comprehensive, well funded, wide ranging movement initiated by newcomers to the payment system. One event was the decision by PayPal Inc. last summer to allow developer access to its code, allowing them to work with its transaction framework.
Two months later, 15,000 developers had used it to create new payment services. And developers can write apps to solve business problems and leave the regulatory and risk management issues to PayPal.
In November 2009, PayPal released a new platform that charges about one third of traditional credit card rates. And PayPal executives said they won't have to convince American consumers not to use their credit cards online; people will make that choice on their own.
One developer linked users' Twitter accounts to their PayPal accounts and created a new company, Twitpay. The featured speaker at Payments 2010 was the creator and co-founder of Twitter, who launched a new channel he calls "Square."
Square is a smart phone terminal that allows anyone to accept payments. You can take physical card payments by plugging in a free, sugar-cube-sized device - without a card reader.
Obopay (funded by Nokia) lets people transfer money on their phones with just a PIN. Amazon and Google are distributing their shopping cart technologies across the Internet. Rumors are that Facebook is building its own network. A year ago, Apple Inc. gave iTunes developers the ability to charge sub-fees through their applications.
Driving this is a change in the way merchants perceive the value of accepting credit cards. The fees for card acceptance have increased significantly, and yet, as Roth noted, "the service provided [has] hardly grown any better, faster or easier to access." Entrepreneurs see this as a "massive inefficiency."
Roth added that "an army of engineers and entrepreneurs is rushing in, hoping to do what has been done in the music, movie and publishing businesses - unseat a legacy industry built on access and distribution, drive the costs to zero, undercut the traditional middlemen, and unleash a wave of innovation."
Many exciting ideas were presented at Payments 2010. Some presentations were excellent. For example, Steve Mott's presentation "Reinventing the Bankcard Payments Business" and Lee Wetherington's "Getting Payments Wrong: Top 10 Ways to Drive Customers Away."
On the other hand, the presentation on "same day ACH" was so confusing it was obvious the few hundred bankers in the room couldn't even make sense of it. In the past, that might have been a hurdle, but going forward, it won't be, because the driving innovation will not come from banks and card companies. The payments revolution has begun.
Brandes Elitch, Director of Partner Acquisition for CrossCheck Inc., has been a cash management practitioner for several Fortune 500 companies, sold cash management services for major banks and served as a consultant to bankcard acquirers. A Certified Cash Manager and Accredited ACH Professional, Brandes has a Master's in Business Administration from New York University and a Juris Doctor from Santa Clara University. He can be reached at brandese@cross-check.com.
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