A Payments Leader Sounds an Alarm About Non-Banks

Deploring the extent to which banks have turned over key functions in consumer payments to non-bank companies, a leading figure in the payments industry on Thursday called on banks to “seize back” leadership in the industry. In a keynote address delivered at the Bank Administration Institute's TransPay trade show in Las Vegas, Jeff Neubert, president and chief executive of The Clearing House, said that by relying on non-banks in markets such as merchant acquiring, online payments, and electronic billing, banks add risk to the payments system and will stand to suffer an erosion of trust among their customers when things go wrong. He cited such processors as PayPal and CheckFree by name as examples of non-bank competitors to which banks have ceded too much control of parts of the consumer-payments business. He also pointed to recent cases in which snafus caused by non-bank players had created trust issues for banks, including an incident in April in which First Data Corp. triple-posted about 800,000 debit and credit card transactions it processed for Wal-Mart Stores Inc. First Data quickly detected and corrected the problem, but it received widespread publicity. “Safety and reliability are what your customers expect,” he told his audience, composed mostly of bankers concerned with consumer payments. “In recent years not only have we frittered away businesses like merchant sales, but we have introduced risk. It's your reputation, your problem. You're the one seen as responsible.” The Clearing House manages various payment systems on behalf of banks, including the New York-based Small Value Payments Co. (SVPCo.), an automated clearing house operator and sponsor of a major effort to build an image exchange for checks. Part of the problem, Neubert said, is a lack of “overall and consistent regulation” that would ensure that both banks and non-banks follow the same rules. Banks, he argued, are often at a competitive disadvantage as a result of being bound by regulations from which non-banks are exempt. At the same time, he said, innovative non-banks may gain market share by investing heavily in sales and research and development, but at the expense of “safety and soundness.” While the Federal Reserve Board can't regulate non-banks, he said, those regulatory bodies that oversee non-banks should impose the same rules to which banks are subject. Customer trust aside, there's a strong financial incentive for banks to recover ground in payments and to prevent further erosion of share, Neubert said. Pointing to statistics that show banks earn $170 billion annually from the industry, he warned, “We need to pay attention. This is not mad money.”