US faster payments: Banking’s technological backwater

By:
Helen Avery
Published on:

Fintech firms and foreign adoption of faster payments are revealing what many have long known – US consumer banks have resisted innovation in favour of profits. Now they face a death by a thousand cuts unless they embrace change.

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The chief executive of one of Europe’s biggest banking groups shakes his head in disbelief. "The US is one of the most technologically advanced countries in the world," he says. "But its banking services are some of the most backward."

Welcome to the backwater that is US consumer banking. This is the country that spawned the technological heroes of modern commerce – the Apples, Googles, Facebooks and PayPals that play such a role in our daily lives. And yet many of the people and businesses that use US banking services find themselves with systems and access that would be rejected by their counterparts in most so-called developing world countries.

How can it be that while other countries’ consumer banking industries embrace digital innovation – building mobile payments technology, supporting mandated faster payments, implementing chip and pin (EMV) technology, and adding greater transparency around fees – the world’s richest economy has failed to follow suit? According to a study by AT Kearney, the US ranks behind the UK, Denmark, Sweden, Singapore, Norway and Australia in terms of having a regulatory environment that can support digital banking.

Even the country’s authorities realise that there’s a problem. 

"There is so much innovation happening in payments systems outside of this country. The US banking system is not on the leading edge," says Sean Rodriguez. He heads the Federal Reserve’s Faster Payments Task Force that was set up this year to examine how the country can join the rest of the world in moving to faster payments.

The US is not among the 18 countries that have now implemented same-day payments. In 2012, NACHA (the National Automated Clearing House Association) on behalf of its 11,000 US financial institutions, voted against a move to same-day payments. In the US payments still take two to five days to move between banks, with many same-day payments requiring a wire transfer that comes with a minimum $30 fee.

Payments are just one part of a larger picture of a US consumer banking industry where banks have delayed innovation in fear of losing out on fees. Rodriguez calls it "inertia". Some might call it protectionism. 

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  These are smart people. They don’t want to be disintermediated and that is their motivation

Sean Rodriguez,
Federal Reserve

The big US banks – all of which Euromoney asked to interview for this article – declined to comment. 

But the likes of Uri Levine, co-founder of FeeX, have plenty to say. "Financial services are more expensive in the US than in Western Europe. We have to ask why is that?" says Levine. "The realization will dawn soon that the industry is just so strong that it allows the banks to make huge profits at the expense of the US consumer." 

FeeX is attempting to reduce the $600 billion in annual fees the global financial industry charges. One of FeeX’s backers is none other than Vikram Pandit, former chief executive of Citigroup (one of the banks that declined to answer our questions). 

Fortunately for the US consumer, innovation means that alternatives to the traditional US banks have appeared. Peer-to-peer lenders offer loans at 7% rather than at credit card APRs of 15%. New online banks have zero ATM fees. Online savings banks offer 100 times the interest of a large retail bank. Payment transfer firms like Venmo allow consumers to bypass banks and make peer-to-peer payments for free. 

At last, such start-ups are hitting the bottom line of the Luddite incumbents. In 2014, for the first time in five years, the US banking industry posted a yearly decline in profits. 

"It’s going to become more and more embarrassing for the US banks and credit card companies as they fall further behind their foreign competitors and the fintech innovators," says one banker. 

Some argue that unless the US banks move fast it will be more than just an embarrassment. It could knock them out of the global financial race entirely. "If the Federal Payments Task Force does not succeed in innovating the US banking payments system, its country’s banks will be left behind and outside of the banking framework that the rest of the world has adopted," says Josh Reich, founder and CEO of online bank Simple Bank, one of the new banks aiming to gain market share from the branch-based incumbents.

Complexities

How did it come to this?

To say the US payments landscape is backwards due solely to the attitudes of the country’s banks would be unfair. The evolution of the banking system in the US, coupled with the country’s vast size means the payments system is far more complex than that of many other countries. "We have 12,000 financial institutions of all sizes and all business models so it is hard to make a comparison to other countries," says Rodriguez. 

Robert Flynn, head of payments in North America at Accenture, says much of the complexity stems from a glut of M&A activity in the 1990s. "US banks were so busy focusing on integration that they simply left alone the payments space and could end up having five ACH systems operating at one time. Europe was already ahead in branch banking and the customer experience, and now has been able to move a long way ahead in payments."