Digital Transactions Authoritative, insightful and timely information for payments professionals
What are the ingredients of payments modernization in the United States? I suggest there are three:
1. Faster Payments The race to create a U.S. faster-payments system has begun. What’s not clear is what it will look like at the finish line. The variety of systems being either launched or proposed includes: using the ACH with accelerated clearing and/or settlement; using blockchain technologies for moving fiat currency; API-based and mobile-phone-based approaches; payments-hub models; token-based approaches; U.S. versions of other countries’ faster-payments systems; and schemes using artificial electronic money.
Two things will have the most effect on what the country ends up with and on how long it will take. One is providing uniform security across what might in the early days be a highly diverse system of a dozen or more competing faster-payment schemes. The second is achieving ubiquity, the sine qua non of payments systems. Historically, most new payment methods’ road to ubiquity was measured in decades. I don’t think that pattern will repeat. One reason is simply the advances in technology. A second is how the dispersed, independent ownership of today’s payments system puts many more horses into the race.
2. Fintech Today, the bulk of fintech payments innovations target retail payments. I expect we will see more expansion into corporate payments soon. One obvious reason is that the market for P2P, purchase, and consumer bill-pay innovations is becoming saturated. A more cogent reason is that the higher margins in corporate banking provide a richer pool for recovering innovation’s costs.
I would not be at all surprised to see more bank acquisitions of fintech firms. Initially, it will be just acquiring the rights to technologies (and poaching the people who invented them). Then will come joint ventures, and then outright acquisitions, as much for control as for increasing profit. We shouldn’t forget that the tectonic shifts in payments in our time were led by banks: MICR, lockbox, the multi-issuer/multi-acquirer credit card, the ACH, and check imaging.
While the United States is just beginning to see mergers of banks and fintechs, Asia is pushing ahead with acquisitions going both ways. Japan’s regulator has dropped the rule limiting bank ownership of technology companies, and Korea’s LG technology conglomerate recently bought a bank.
The fully integrated bank-plus-technology company model might well prove to be the most effective way to develop and market new types of payments systems. After all, startups are often formed with the goal of a buyout, not an ongoing company, as the endgame. (For more on fintech’s future, I recommend PwC’s new study: Global FinTech Report 2017.)
3. Regulation Regulation is the third thing to watch, and for reasons growing directly out of the first two items on the list. Getting a trusted and universal regulatory regime in place early in the game has been one of the important factors in the success of faster-payments systems in other countries.
In the U.S., the existing combination of government agencies and industry associations that jointly provide regulation of the current payments systems is for the most part well-suited to serve as the model for governance of a U.S. faster-payments system. The associations formed by the major payments banks have been very involved in the deliberations about a faster-payments system, which has given them the insight to succeed in a rule-making capacity for faster payments.
Independent fintechs will be a challenge to regulate. Economists who study the history and process of innovation have observed that it is often the interplay between disruptive invention and prudent regulation that guides innovation of any kind most effectively. While this is usually evident in hindsight, the culture that drives innovation often feels fundamentally at loggerheads with the culture that supports sound regulation.
The Office of the Comptroller of the Currency seems to have recognized this. It’s hiring new staff specifically to be involved with innovation with the national banks that it oversees. As with faster payments, the mixed industry-and-government model would seem to be well-suited to govern fintech payments, both bank-operated and non-bank schemes.
So far, it has been quite a busy year in payments. I don’t expect that the pace is going to slow down at all given the interplay of the three things needed to modernize the payments system: faster payments, fintech, and regulation.
