By Brandes Elitch
We had an excellent grape harvest in Sonoma County in 2013, the second in two years β a very unusual situation. However, after harvest, work remains β 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 β we had to sort our Cab and Merlot in the field and crush straight away. β¦ There will be some awful Cabs β green, oxidized, and botrytized. The quality of 2011 will depend on who sorted well."
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.
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 β 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 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.
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.
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 β but not involving debits, at least not in this decade.
Reality check: the Consumer Financial Protection Bureau, for example, wants to vet payment products and solutions before they are brought to market, taking on the role of the "FDA of Payments." The Electronic Transactions Association will have no effect on this, notwithstanding any lobbying effort it may mount.
Consumers are quite happy to continue to swipe their mag stripe cards in card readers. It is faster than taking out a mobile phone, unlocking it and entering payment information. Consumers want to do what is easiest and fastest for them, period. They have little interest in merchants' payment processing costs or issues. Remember "Green's Rule" (I can hear Paul Green saying this now): "If you are a merchant, you have to take any payment type that the consumer wants to tender." And the corollary: "No payment type ever goes away."
I recently attended a presentation by a company called DoubleBeam, which enables precisely this, so I am prepared to say that this will happen β probably next year.
I wonder how things such as Federal Deposit Insurance Corp. insurance, Suspicious Activity Reports, and annual intensive audits by highly trained bank regulators β who are increasingly focused on suspicious activities, money laundering and fraud β will be affected by these new payment types. Don't hold your breath.
I have been hearing this since I worked at First Chicago Bank & Trust in the mid-1990's, and we were focused on a project to electronify purchase order and invoice information. This obviously did not happen. However, it will happen, but not the way you think it will.
Business-to-business payments will still be made by check. They just will be all electronic, with no paper checks created in the first place. These are called electronic payment orders, and we can use them now. I look forward to spending a great deal of time on this in 2014. Remember, all payments begin and end in the demand deposit account. Anything else is an intermediary.
Mandate from whom β consumers, merchants or payment processors? We have this now. It's called Fedwire. I have been trying to find out where this rumor originated. It appears to have come from a payment blog that also sponsors a Payments 101 kind of seminar for aspiring cash managers. It costs $1,000 a day to attend the class. (This makes me question whether I'm in the right business.) Meanwhile, I've never heard a consumer or merchant ask for a real-time, good funds payments push, but I will keep my ears open.
This talk about payment experts' predictions makes me wonder if some of them live in a parallel universe. I see this in my home town of Healdsburg, which is inundated during the annual grape crush by tourists driving luxury cars, eating $50 entrees at local restaurants, drinking wine that costs at least $40 a bottle, and staying in hotels that cost $400 a night.
As one of our local pundits, Richard Thomas, said, "The mentality of these consumers wouldn't even let them think of putting a $10 wine near their lips for fear their teeth will fall out. And of course, there's no shortage of local wineries that will take advantage of this mentality."
Perhaps we are seeing this type of behavior in purveyors of new payment offerings. I will close with another of Thomas' comments: "If restaurants charge corkage to remove corks from your wine bottle, is it called 'screwage' when you have a screw top?"
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 firstname.lastname@example.org.
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