You would think that by now that there would be a banking system that allows customers to send instant payments from their accounts to anybody else’s bank account in real time. You would think that from a technology standpoint, it might not be such a big deal.
But as it turns out it is a big deal, and there is such an instant payment system is live as of today—it’s just not out of Silicon Valley, let alone available in the United States. As of Nov. 21, banks in eight European countries—including Italy, Spain and Germany—began to offer an instant payment system. Nearly 600 payment service providers are represented, according to the European Payments Council, and anyone working and living in the participating countries can now send up to €15,000 (about $17,700) within 10 seconds to any bank account they so desire.
Not that U.S. consumers have something similar to celebrate today, let alone in the years to come. There’s talk that instant payments might become a reality by 2020. So if America is home to Silicon Valley hotshots and high-flying high-tech, then why hasn’t the American banking system been able to keep up? Here are a few theories.
There hasn’t been enough demand. Any business owner who’s been told that their check is in the mail would probably disagree—strongly. Still, no organized groundswell or group has pushed for banks to offer a real-time payments system, according to David Grindal, senior solutions consultant for ACI Worldwide, a Naples, Fla.-based software vendor that assists banks with their payments technology.
“In the U.K., Europe and Australia, governments or industry regulators have issued mandates regarding immediate payments,” Grindal says. “This has the advantages of allowing a bank to focus attention on internal operations, and more importantly, helping everyone move in lockstep.”
Meanwhile in the United States, and in Canada, “There have been general statements and intentions, but no mandate,” Grindal says. Even the Federal Reserve Faster Payments Task Force, which concluded its work in July, “could only request that the industry move forward together. The absence of a formal directive ultimately leads to uncertainty—and banks hate uncertainty.”
American culture is slower. There have been a slew of speed-conscious innovators throughout American history, from the Wright Brothers to Steve Jobs. But as a group, consumers and business owners are more like the tortoise than the hare. And it’s very difficult to introduce change into any sort of payment system, Grindal says.
“Merchants won’t accept new payment types until consumers actually want to use them,” he notes. “Consumers won’t use new payment mechanisms until merchants accept them. It’s a bit like convincing someone to buy the very first fax machine.”
You would think we’d be beyond fax machine mentality by now. Not so fast (or not too fast, if you prefer).
“The same reservation goes for introducing an instant payments network, too,” Grindal observes. “How do you convince a bank to spend a fair amount of money on a payment type that isn’t widely used or accepted yet?”
There have been other delays due to banking culture. In the 1990s, a lot of bank mergers and acquisitions created an environment in which financial institutions struggled to prioritize payments over everything else and instant payments was put on the back burner, according to Rajesh Venkatraman, based out of New York City and the director of worldwide payments at IBM.
But the mindset has changed. “More than 40 percent of a bank’s revenue comes from payments, so this is big business for the banks that has been somewhat neglected until now,” Venkatraman says. “It has been bubbling up to the top two to three priorities in any given year among the C-suite at financial institutions.”
Fears of fraud abound. In this day and age of hacking and identity theft, often aimed at financial institutions and retailers, that’s a fair concern – for all banks, no matter where they’re located, according to Suresh Ramamurthi, chairman and CTO of CBW Bank, which used to be called the Citizens Bank of Weir, which is located in Weir, Kansas.
“The challenges are the same from a risk management standpoint,” Ramamurthi says. “Both European and U.S. banks need to have a real-time risk scoring solution in place to support instant payments. Banks have to adhere to a slew of regulations including know your customer requirements, monitoring for suspicious financial activity and other risks.”
Still as the rest of the world receives faster payments, it will happen in America, too, just about everyone says—including Tyrone Canaday, a managing director leading the financial services technology strategy and operations practice at Protiviti, a global consultancy headquartered in Menlo Park, California.
Canaday points out that the Federal Reserve—the closest thing the banking industry has to a master surgeon—has set recommendations to make payments in the U.S. faster and more accessible by 2020.
“I certainly think by that time instant payments offered by banks will be more ubiquitous in the U.S., due to the fact that many initiatives are already well underway,” Canaday says.
Banks, Canaday adds, really have no choice, given how popular non-banking payment alternatives have become. “They want to avoid losing control of the relationship and point of transaction with customers and having payment transaction revenues commoditized,” he says.
Venkatraman agrees that American banks will ultimately do their own version of consumers transferring, say, $17,700 dollars in 10 seconds, no matter how much banks have to pay their IT departments to get the technology right.
It isn’t the cost of doing business, Venkatraman says. No, he says, “It’s the cost of staying in business.”
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