The Green Sheet Online Edition
January 25, 2016 • Issue 16:01:02
Much ado about faster payments
I found your article ("Including checks in payments modernization," published Dec. 14, 2015) to be very informative. There is a lot of noise about "faster payments" right now. The loudest commentators in the brave new fintech world about the "urgency for faster payments" are entitled to their own opinions, of course, but not their own facts, and here you provide the facts that allow some clarity rarely found on this subject.
Virtually all paper checks clear electronically, and the vast majority (80 percent, you say) are clearing same day. How much faster is meaningful? There is absolutely no demand for real-time payments posted intra-day, except of course for wire transfers, which require intensive risk management that is lacking in other methods of payment. The pricing that wire transfers command is justified because of the risk management practices that must happen to avoid fraudulent attempts to penetrate the bank's wire room. Just recently, the PayPal subsidiary Xoom took a $31 million hit from a fraudulent wire scheme.
Another interesting comment was that inter-bank check clearings are falling just 2 percent a year – we routinely hear from industry "experts" that checks and cash are "going away quickly," which is nonsense of course.
We should also say out loud that the ACH was originally designed as a batch, store and forward, next-business-day settlement system for small dollar payments. It was not designed for high-dollar payments and lacks the risk management infrastructure that a bank would have for wire transfers. "Same Day ACH" will never be a substitute for wire transfer for a variety of reasons, not the least of which is that when the Fed gives a reference number and time, the payment is final and not subject to reversal, unlike an ACH payment.
I also appreciated the statistic that in the U.K., only 4 percent of payments had migrated to "faster" systems in seven years. The inference that Kenya and Singapore and Mexico have more advanced payment systems than the United States is preposterous: most of their population is unbanked or underbanked; that is why telephone carriers are so successful in "banking" in those environments.
Finally, if you have ever worked for a bank, you will be familiar with the very thorough annual exams by the FDIC and other regulators, particularly around the safety and security of payments and the controls banks need to have in place before a payment is approved. When I worked at a large bank in the pre-cellphone days, I had to carry a beeper at all times to approve outgoing wires. The government is not going to abdicate this responsibility to the private sector, just like they are not going to allow bitcoin to create and manage monetary policy for the Fed.
Thanks for helping to clear the air here and give your readers a reality check.
Brandes Elitch, CrossCheck Inc.
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