Those of us who have been in the payments industry a long while can remember when "Cash was King" of all payment methods, and when you would hear in every storefront in every city in the U.S., "Will that be cash, check, or credit?" However, these days we have many more established forms of payment and a variety of evolving methods piloting somewhere in the land.
As each day goes by, new payment concepts are discussed and it seems inevitable to most of us that the payment system, in the not too distant future, will be far different from the one we use today. As a matter of fact, the role of banks as we know them is in question due to potential non-bank competition, the potential loss of a strong consumer franchise or consumer disenfranchisement, and even a major shift in revenue and profitability.
Banks make a lot of their revenue and profit in the check segment (see chart, right).
Currently just about everyone you meet in the financial services industry is talking about moving away from checking accounts and converting to debit, ACH, or paperless electronic settlement in one form or another. Yet, little is said about how banks will replace the lost revenue. In fact, there seems to be no consideration as to whether companies or individuals will pay more to get less with check safekeeping or truncation programs, or if businesses, which may have lower fees for the return of ACHed ECP items than their paper counterpart, may end up paying more due to more returns and more presentments.
While massive bank consolidation is occurring, Congress may change the banking rules of 1999 and remove the lines between banking and investment, as well as other barriers. As the outcome, we may see a totally new breed of financial service companies that will challenge the long held banking franchise of safekeeping, loans, and checking (the most lucrative elements of bankings‚ consumer franchise).
As we consider a turning point for payment systems, one of the payment initiatives that may change the face of U.S. banking, is the stored-value card. While numerous "tests" have been conducted (and we are reminded that in some parts of the world the concept is enjoying widespread acceptance), tests in the U.S. continue to be lackluster and many questions, both legal and practical, remain unanswered.
The first and perhaps most crucial question is, "Do entities other than banks have the legal right to issue transferable liabilities in the form of stored-value cards or electronic cash?" Current U.S. law limits the ability of nonbanks to offer deposits, and limits the ability of nonbank depository institutions to make commercial loans. If new forms of transaction liabilities were to be seen as deposits, these laws would also apply to nonbank firms offering these new types of liabilities. Whether or not various new forms of payment legally constitute deposits is not entirely resolved, although the Federal Deposit Insurance Corporation recently ruled that, for insurance purposes, most types of stored-value cards are not deposits.
Another important question has to do with application of the rules governing the validity of electronic funds transfer. For retail payments, these rules are provided by the Electronic Funds Transfer Act of 1978 and the Federal Reserve System's corresponding Regulation E. Regulation E requires extensive disclosure of information to consumers regarding their rights and obligations when using various forms of electronic funds transfer. Currently, the applicability of Regulation E to various new forms of payment is uncertain. In the case of stored-value cards, for example, the Fed has proposed exempting from Regulation E all cards containing no more than $100, as well as all stored-value cards that are off-line and that do not track individual transactions.
The final area of regulatory ambiguity results from potential conflicts between the putative anonymity of some of the new forms of payment and the reporting requirements of federal anti money-laundering laws. In effect, it will be very difficult to comply and (the big question), "What will the federal government's reaction be to failing to comply?"
As consumers, as well as participants in bringing the ever-changing payment system to the retail world, we should be aware that the changes underway in our monetary system may in fact fundamentally alter how consumers interact with businesses and how businesses interact with one another.
Aside from the occasional interjection of the word "electronic" or "virtual" in today's questions of the transfer of value, these questions were widely debated in the nineteenth and early twentieth centuries. But by the mid-twentieth century they had been resolved, at least in a policy sense, in the forms of the regulated banking environment that Congress is now re-considering. If these new forms of payment become popular enough to make our nation consider these questions again, it should be interesting in the twenty-first century to see if we see things the same way we did more than one hundred years ago. Maybe it is time to shake up banking! What do you think?
