By Patti Murphy
ProScribes Inc.
The Federal Reserve's payments modernization initiative doesn't preclude checks. But the central bank does expect to see a significant share of checks (around 27 percent) migrating to a new online, real-time payment system over the next decade.
That's a lot of checks – about 5 billion using the 2013 Federal Reserve Payments Study as a benchmark. It's especially optimistic because, according to data compiled by the Electronic Check Clearing House Organization (ECCHO), total inter-bank check clearings are falling just 2 percent year over year. As David Walker, ECCHO's President and Chief Executive Officer, said, most of the reduction in check usage to date has been in consumer applications, which means additional reductions will need to come from businesses.
Yet businesses continue to favor checks – 65.5 percent of all business payments in 2014 were made by check, according to financial services consultancy Phoenix-Hecht. This year Phoenix-Hecht expects business check payments to drop slightly to 65.3 percent.
To put this into perspective, consider that businesses used the automated clearing house (ACH) network for 19.6 percent of payments in 2014 and 19.5 percent this year. The ACH was created more than 40 years ago as a semi-electronic alternative to checks. (For about the first 20 years, couriers would shuttle mainframe computer tapes to central processing facilities to initiate the clearing and settlement process. Now it's all electronic.)
Today most ACH payments settle on a next-day basis, but that's set to change beginning in 2016 under a transition plan announced by NACHA – The Electronic Payments Association. But here's the rub: a large and growing share of inter-bank check payments are clearing on a same-day basis. At least 80 percent of checks drawn on the nation's largest banks are clearing on a same-day basis, according to ECCHO and the Fed. Ditto for better than 60 percent of checks cleared through third-party processors.
This is noteworthy because the Fed has set forth a 10-year modernization initiative for moving the United States toward faster payments. Dan Gonzalez, Vice President of Industry Relations at the Federal Reserve Bank of Chicago, described the modernization project during a presentation at the RDC Summit 2015, a yearly event hosted by RemoteDepositCapture.com.
"The U.S. is falling behind much of the world," Gonzalez said. Folks in the United Kingdom, Singapore, Mexico and Kenya all have real-time, online payment systems; the United States needs one, too. To that end, the Fed has formed two task forces – one focused on faster payments the other on security – each consisting of hundreds of executives from financial institutions (FIs), networks, solutions providers and retailers.
The Faster Payments Task Force is creating a blueprint for implementing safe, ubiquitous, faster payments using a credit-push model. In a credit-push system, clearing and settlement is initiated by the paying bank; this is how wire transfer networks operate. Checks and credit card payments enter the clearing stream through the payee's bank; that's a debit pull.
The task force expects to have that blueprint by early 2017; the Fed said it hopes private sector initiatives will take over from there. (The Fed is not authorized to create payment systems, and its regulatory purview is limited to FIs.)
Private sector initiatives already exist for faster payments. The Clearing House, a New York-based consortium of the country's largest banks, is working with VocaLink Ltd., the technology firm that built the U.K.'s Faster Payments system and a similar system in Singapore. TCH also is working with Fidelity National Information Services Inc. (FIS), a technology company that provides clearing and settlement services to over 3,000 financial institutions. FIS owns and operates Clear2Pay, a consumer-oriented, real-time payment network. In November 2015, it acquired the technology company SunGard.
Meanwhile, the risk management firm Early Warning Services LLC, owned by many of the same banks that own TCH, inked an agreement with Fiserv Inc., which operates NOW, a network that facilitates real-time online bill payments. The plan is for the two companies to focus on enabling real-time payment of bills issued by FIs (think mortgages and credit cards) as well as real-time deposits. The companies plan to pilot the new deposit and bill-pay services beginning in 2016.
So how much of a draw are real-time payments for FIs, consumers and businesses? McKinsey & Co.'s research suggests 12 percent of existing payments could migrate to real-time networks.
Walker feels that is overly optimistic, noting that the U.K.'s Faster Payments network has managed to attract only 4 percent of payments from other methods, and that network has been operating for seven years. Walker also questions assumptions about large volumes of check transactions (especially business checks) migrating to a new real-time payment system.
"Businesses are most resistant to moving out of the check system even though they have had options available to them for over 40 years," he said. He believes that rather than dedicate money and other resources to building a new, real-time network, it would be better to enhance existing payment systems. "I think it's important that we continue to work on the check system, as well as the ACH, credit and debit card networks," he said.
Gonzalez said the Fed isn't interested in eliminating the check system, but rather introducing a new, faster alternative for consumer and business payments. "There is no one solution that anyone thinks can meet 100 percent of the priorities we have laid out," he said, adding that the Fed's faster payments initiative "is not intended to replace any existing payment channel."
Addressing RDC Summit attendees, Gonzalez said the industry needs to start thinking in terms of leveraging remote capture technologies to support faster payments to ensure it has a role to play in a more modern payment system.
RDC generally, and mobile RDC in particular, have had a huge impact on deposit gathering. But the technology can do so much more. "RDC has branched out beyond check," said John Leekley, President and CEO of RemoteDepositCapture.com.
Solutions exist in the market that leverage mobile capture for account opening and bill payments. It's not a stretch to imagine consumers using their mobile devices to snap pictures of checks and present those mobile images to initiate payments at retail POSs, for example. A similar approach could be taken for bill payments. And that would eliminate the need to move paper – the sole remaining bottleneck in the check system.
Patti Murphy is Senior Editor of The Green Sheet and President of ProScribes Inc. She is also the founder of InsideMicrofinance.com. Email her at patti@greensheet.com.
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