Payment systems usage
The large majority of all payments are, as they always have been, domestic. Even in Europe with its large number of small countries, only 3-5% of payments are estimated to be made cross-border. In terms of transactions, cash still dominates the global payments market, used for more than 60% of all transactions, even in developed countries; for the larger banks transactions within the same bank group amount to as many as 50% of their transactions. In terms of value non-cash payment systems, particularly in developed countries, take more than 50%.
The Bank for International Settlements review of non-cash payment system usage in the 20 leading economies, which is published a year late, showed the massive impact of the liquidity crisis in 2009 with the number of transactions declining to 127 trillion, from 216 trillion in 2008. The survey also showed the continuing long-term trends in the decline in the use of cheques, minus 6%, and other paper-based clearing systems world-wide. The use of direct debiting was shown to have grown rapidly, by 19%, and was predicted to overtake the use of credit transfers in 2010.
Payment cards remain the most used non-cash payment method. Although there was a 50% decline in payment card usage from 2008 to 2009, reports from MasterCard and VISA indicate that in 2010 usage levels went straight back up to 2008 levels, with debit cards dominating. Debit cards are by far the most widely used payment card in the world, exceeding cheque payments even in the US in 2010 for the first time. The usage of same-day payment systems continues to expand, with most of the growth in the low-value clearing systems such as the UK‘s Faster Payments service. In the UK the number of transactions made through the high-value system CHAPS sterling grew by 1% in 2010, though the value per transaction fell by 5%. The number of transactions through the Faster Payments system grew by 47% and the value per transaction by 57%, with an average value of £385 per transaction.
The UK Payments Council, which set a target date of 2018 for ending payments by cheque, is finding the payment habits of consumers and companies difficult to shift, with a backlash from both consumer groups and SMEs. The council says it has been focusing on gaining an understanding of what payment methods customers will accept as alternatives to cheques and will this year publish a list of gaps where such alternatives do not exist. It seems doubtful it will win over the hearts and minds of dedicated cheque users and fill in the gaps left by the withdrawal of the cheque payment system in the next seven years.
Payment hubs
All payment systems are basically the same, only the detailed formats and clearing cycles vary. Both banks and companies around the world are now installing payment hubs, which offer significant cost savings, improved throughput and greater centralized control, to process all their payments through a single system.
The Bank of America Merrill Lynch payment services hub is a typical example of these advanced systems, as shown in Figure 1. Banks must now accept payments from a growing number of different devices, including SWIFT, host-2-host, e-mail, voice, mobile devices and the web and send payments to many different clearing systems around the world. When new payment hubs have eventually replaced all remaining legacy payment systems, they will not only cut the costs of processing payments dramatically but offer the perfect opportunity for really cost-effective value added payment services.
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Figure 1 – BofA Merrill Lynch payment services hub |
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Source: BofA Merrill Lynch |
Similarly, large corporations are finding that by installing payment hubs they can not only cut their costs considerably but, more importantly, that centralized processing gives them greater control of their cash flows. Payment hubs are likely, eventually, to be used by all corporate payment factories.
Same-day ACHs
Many ACHs now provide same-day payment services for low-value payments. The demand for shorter clearing cycles is growing. Many merchants now demand receipt of value before they despatch goods, particularly for downloads of information on the internet, as consumers use them for paying all sorts of bill and person-to-person payments, and as businesses incorporate same-day payments into their bill payment processes. All the ACHs around the world providing same-day clearing services are reporting rapid growth in usage of at least 20% and some considerably more.
The FedACH Same-Day service, on which payments are settled on the processing date, was launched in the US in 2010. The service accepts a range of payments, including converted cheque payments as well as telephone and web consumer debit payments but is limited to non-governmental payments at present. Files submitted to the ACH can contain a mix of same-day and next-day payments but same-day payment details must be delivered by 4 pm. It is still early days in the roll-out of the service, with many outstanding issues to be resolved, including a consistent commitment to funds being moved in a stated time-frame, faster returns processing and more bank participation. But it is clear that there is a huge pent-up demand for such services. Steven Cordray, project manager for the FedACH Service at the Federal Reserve Bank of Atlanta, claims, "The service has generated considerable interest given we have not had a material settlement change in 35 years. Participation will accelerate once the economy improves and credit payments are supported."
SEPA
The future of SEPA is either bleak or rosy, depending on your outlook. Bleak if you believe it unlikely that the euro will still exist in its current state in 10 years’ time. Rosy if you believe it will and that the announcement by the European Commission of deadlines for the implementation of the new SEPA Credit Transfers (SCTs) and SEPA Direct Debits (SDDs), which could well be as early as the end of 2012 for mandatory migration to SCTs and the end of 2013 for SDDs, will materialize. The euro crisis has, if anything, increased the determination of the European Commission and the European Central Bank to press ahead, but protests have already begun - from the Association of German Banks, to name but one. The banks, unconvinced that deadlines will be set, are leaving it as long as possible before making the investment necessary in the required changes to their internal systems. But, if SEPA SCTs and SDDs are really to take off, mandatory migration is probably the only way. Greater transparency of payment dates and standardized pricing may well appeal to corporate clients, but they are not great incentives for the banks.
