Where?s the Vision for Banks in Payments?
BY KENNETH CLINE
The Clearing House?s Rick Leander calls for senior bank management to set aside vested interests and show leadership in driving how payments should evolve.
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SYNOPSIS | Rick Leander, chief strategy officer at The Clearing House, credits the industry for its operational work in laying the foundation for a digitized payment system. But he faults the industry for not developing a common vision of the future of payments. Leander urges top executives to become involved in laying out a vision, which should include a swifter transition from paper to electronic processing. He also pushes for an effort to reduce infrastructure in the payments business ? in both telecommunications networks and industry groups ? to help alleviate the expense burden on institutions.
Checks may be on their way out, but their departure is likely to be prolonged. And in the meantime, bankers will be deciding what technologies and systems will be needed to span the paper and electronic eras. Where should individual banks and the industry as a whole place their investment bets?
One person tasked with answering that question is Rick Leander, chief strategy officer at The Clearing House Payments Co. LLC, New York City, the nation’s largest private sector payments clearing facility. Leander, who’s had a long career in payments (see box, pg. 35), was brought into the Clearing House in 2004 to lead its Strategic Payments Forum. The forum’s aim is to craft payments strategy for member banks and the industry as a whole.
In a recent interview, Leander repeatedly stressed the need for the industry to put aside its competitive differences and decide on a common endgame. “We’ve got to find a forum to drive a shared vision for how payments should evolve,” he said.
One obstacle to such a shared vision is differing opinions on the role of check imaging. Should it be seen as a technology that can prolong the life of the paper check — and thus preserve bank revenues? Or is it just a transition phase, to be passed through quickly, on the way to an all-electronic future?
Leander leans to the latter. “We need a strategic orientation that looks across the payments silos and provides the framework to move from paper to electronic as quickly and cost-effectively as possible,” he said, adding that senior executives need to take a leadership role in this process.
Leander also believes that providers need to reduce overlapping infrastructure in the payments space, both in terms of telecommunications networks and industry groups.
Q How should the banking industry think about check imaging?
LEANDER: The banking industry has two choices. We can view image as a way to protect the check, because we’ve all got a vested stake in it, or we can recognize that all-electronic is a better environment and that image is part of the transition.
If you view image as our last chance to defend paper, you end up driving down a particular path. But if you take the view that check image is a critical transition into an electronic environment, then your attitudes and behaviors change dramatically. You quit thinking of all the other services as competing forces. Instead, you start looking at opportunities to rationalize the processing infrastructure, rules and governance, and legal and regulatory issues.
It’s important that banks think of check image as a transition to an all-electronic world, with the full understanding that the transition is likely to be long rather than short. And when I say transition, I mean transition on many fronts. It’s not just how the banks need to transition their infrastructure, but it’s also how consumers, corporate customers and government customers need to transition as well.
Q What’s your best guess on how long?
LEANDER: My guess is that certainly for the life span of most business people, there will be a certain number of checks. By the time our children are getting ready to retire, we will have seen the last of the paper checks.
One of the reasons this will take so long is that we don’t have good alternatives to checks in the payments space. For example, I’m not going to give a prepaid gift card to the gardener who shows up twice a year to do some work at my house. So I write him a check.
Q How should individual banks work toward this future payments environment?
LEANDER: There are three things banks need to do. First, they need to think holistically across their payments business and make decisions based on their impact on the entire enterprise. Second, they need to show leadership and look for opportunities to drive consolidation in the various payment infrastructures. Third, they need to look aggressively for ways to cooperate in areas that are, or should be, non-competitive.
Then, at an industry level, we have to clearly stake out a vision and an endgame. This hasn’t happened already because it’s really difficult and made even more problematic because many people have a vested interest in defending one payment type over another. We’ve got to find a forum to drive a shared vision for how payments should evolve.
Q Like some sort of organization or industry group?
LEANDER: Yes. For example, ECCHO has been doing good work in creating a vision of what the standards or rules should look like and working with organizations to build consensus. That’s an important step. But you run the risk of people saying, “Now that we have the standards and rules, let’s let the market work it out.”
In fact, there are times when you need to drive the market in certain directions. It’s incumbent on the financial institutions to figure out how you put these pieces together strategically. That probably means you can’t do it at the operating level. It’s going to have to be done at a very senior, strategic level — where people look holistically, extract the emotion from the equation and say, “This is the best endgame, and we’re going to work aggressively to make that happen.”
Aggressively might be a 10- to 30-year time frame — but the time frame is not the problem today. Lack of a clear vision of the endgame is the problem.
Q Would that strategic level be the payment councils at individual institutions?
LEANDER: Many of the bank payment councils are beginning to jell. We need to let these councils mature to the point where they’re actually driving policy. They need to be in a position not just to persuade, but also to move strategy and action within their banks on important payment issues.
We are making progress within the institutions as well, but thinking about complex payment issues holistically is new. It’s going to take a while.
Q Do you see a clear split in opinion at the operational level, at least, of those fiercely attached to check processing and those who want to rush on to digital?
LEANDER: Clearly, there is still competition within organizations among the various payment channels.
Product managers, to a large degree, have historically been product advocates within their institutions. This promotes decisions based on the product manager’s current frame of reference or priority. Then someone else steps in, takes a look at the broader picture and says, “How could we have made that decision?” Well, we allowed it to happen because the person making that decision had a vested interest in perpetuating that product.
Until both the banks and the industry recognize that we need these decisions to be made in a broader context, we’ll continue to run into this problem. I’ve been part of industry-level conversations where “us versus them” is still very apparent — and unproductive. You sit down with some groups and the attitude is, “Those people are infringing on my turf.”
Q So things can’t be left to the operational folks?
LEANDER: The operations and product people have done spectacular work, but they have done it within their product or functional context.
I’m suggesting we need a fundamental shift in thinking. We need a strategic orientation that looks across the payments silos and provides the framework to move from paper to electronic as quickly and cost-effectively as possible. We can’t have the ACH product manager or the check product manager suddenly waking up one day and saying, “You know what, I’m no longer going to worry about what goes on just within my product area; I’m going to think broadly.” They’ll be fine until their next review and then they’ll be gone.
Q Should the CEOs be responsible for changing the context?
LEANDER: The CEOs can’t change everyone’s individual context. What they can do, either directly or by empowering somebody, is highlight the fact that technologies, products and services all have tradeoffs. We no longer make decisions without understanding the tradeoffs; we must make decisions based on the most appropriate combined set of outcomes. CEOs need to ensure that their organizations have a process for making those decisions in that context.
In some other areas, banks already do this. Risk and fraud managers take a holistic view of the issue. The broader payments business needs to do the same.
Q How does Accounts Receivable Conversion (ARC) play into the decisions about image?
LEANDER: With electronic checks, the ACH in general and ARC in particular, there’s good news and bad news.
The good news is that ARC has removed all doubt about whether the market will accept a more efficient way to clear checks. Everybody who can is running for ARC. Whether ARC is an appropriate use of the ACH system is beside the point. People were looking for electronic alternatives, the industry opened one up, and the demand is there.
Now the bad news: The check world is still debating how and when to move to image. But the market is not waiting; it’s moving quickly to check conversion. I’d suggest the best group to push digitization is people in the check world. Who knows checks better than check people? They know the laws, the regulations and the customers. As an industry, we learned that as we converted paper checks to e-checks in the ACH system, we weren’t well prepared. We’ve had customer service issues, market impacts and unintended consequences.
So the message is that you’d better get on with the imaging model because we’ve clearly proven there’s an appetite for digitizing the check processes. The check people are in the best position to understand the landscape and challenges.
Q What kinds of operations or infrastructure needs to be consolidated in the payments industry?
LEANDER: Let’s talk about the paper world, where there are still check clearing houses all around the country. The objective is to consolidate to keep unit costs manageable while check volumes decline. My organization, The Clearing House, has been very successful in consolidating regional check operations. We now operate in six of the 10 largest cities in the U.S. Our check processing operations now cover about 50% of the U.S. population; we’re really second only to the Fed.
We think there are more opportunities to integrate the settlement process on a national level.
Q Despite this consolidation, the regulatory and expense burden in payments continues to increase. What can individual banks do about that?
LEANDER: The payments revenue stream for most banks is critically important, as well as the key relationship driver. Regulatory burdens have increased significantly over the last few years and there is little to suggest it will get better anytime soon. There are a number of areas within the payment infrastructures of banks where costs could be reduced.
First, banks should be vocal about not supporting multiple infrastructures behind the scenes. Big banks and small banks incur significant expense dealing with complex, conflicting and overlapping infrastructures in the payments world. As owners of those infrastructures, the banks are in a great position to improve this.
For example, the number of telecommunications networks that support payments and payment-related information is just astronomical. Banks need to begin to find a way to rationalize this infrastructure and simplify the way we deal with one another.
Second, it’s not just the infrastructure that creates cost complexity. Several large institutions that sit around our table at The Clearing House have actually calculated what it costs them to stay involved in all the industry groups, from NACHA to BITS to ECCHO to ANSII, etc. The numbers are staggering. It’s lots of people and lots of money and lots of time.
Increasingly, even large institutions acknowledge that we just can’t deal with this anymore; we need a simplified process.
Banks really need to show leadership here. Asking the infrastructure providers to figure this out and to consolidate is not realistic — unless their boards get active and lead. Until the banks get together and decide their position on a particular topic, the infrastructure providers won’t do it.
Q But a lot of politics gets involved in the decision of who gets consolidated ...
LEANDER: Sure. Our bias has always been to assume that everything has to be competitive — without realizing that we can cooperate in certain areas between payment infrastructures. We need to be much smarter and pragmatic about where we can cooperate.
A good example is payments fraud. In different channels such as checks, ACH and credit card, we don’t share information across channels. The card association’s rules actually prohibit them from sharing information. The merchant side of a bank that refuses a business because of its bad history in the card network is usually prohibited from sharing that information with their ACH counterpart in the bank. The reason is, we’ve treated fraud reduction as a competitive issue.
But if you’re a bank CEO, do you care whether the losses came out of your card pocket or your ACH pocket? It’s all fraud.
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