US payments: Forget faster, think better
While the debate about payment-system improvements in the US have tended to focus on making them faster, in line with trends in Europe and Asia, demand in the US is focused on other priorities.
Bank of America Merrill Lynch (BAML), for instance, supports plans to improve the US payment system, but its treasury clients say speed is not their highest priority, according to BAML’s Ather Williams III, head of global payments and global transaction services strategy.
“In the US, we have five major rails for payments: cheque; wire; card; ACH [automated clearing house]; and cash,” he says. “We don’t need another rail – we need to look at how we can improve our existing rails.”
This is backed up by a client survey BAML conducted in February, in which the bank asked what one change to North America payments or processes would most help them improve their payment efficiency.
Of the 177 North America clients that responded, some 40% said a “simple and seamless transition from paper to electronic payments”; 32% said better payment information; 20% said lower cost payments and payment options; and only 7% said faster and easier payment delivery.
The improvements that are in demand seem to revolve around getting better reconciliation processes, and giving more detailed information about transactions, says Williams III.
The chief beneficiary of the need for flexible, and plentiful, data flow alongside payments is also the payment rail most would argue looks in need of a technological makeover: cheques.
A large proportion of payments made in the US outside of electronic payment channels use cheques because the electronic alternatives do not offer the same level of detail for reconciliation, says Williams III.
This is why insurance companies favour payments via cheque, which allow for a detailed explanation of benefits and invoice information, which an electronic payment would not allow, he says.
Elena Whisler, director of product management at Clear2Pay, says: “There are a lot of cheques still in the US payment system because of the data they can incorporate and because they have a routing or account number that is specific to that payment type.”
“There is no unique ID number across payment types that would allow banks or corporates to push payments electronically, so there may be many customers wanting to use electronic payments that are stuck with cheques. This is a big obstacle and I’d like to see the Fed push.”
Sayantan Chakraborty, head of North America payments at Citi treasury and trade solutions, says: “It is hard to migrate away from paper because of the level of information it offers. You can send 100 pages of data with a cheque for reconciliation purposes and many clients like that.
“It’s not easy to deliver that in an electronic format, where the data and the payment flow separately, but the industry is already working towards that.”
Changes made to electronic remittance advice on claim reimbursements, for example, allowed US healthcare providers to match ACH payments with the appropriate remittance advice. This enabled payments to switch from cheque to electronic fund transfer or ACH payments, as part of the US healthcare reform.
However, the popularity of cheques might not have much to do with the level of information they can provide, given the same amount of information can be sent with ACH payments, according to one payment specialist.
Their popularity is broad, encompassing large proportions of retail and corporate clients, and even government agencies. In the first of these categories, part of the issue is a reluctance to push new technologies on to older generations who might be reluctant, and are comfortable with cheques.
However, there is an issue with the way cheques are priced.
“Cheques are expensive and the cost typically is not commensurate with the value they provide,” says Isabel Schmidt, global head of product management for cash clearing, financial institutions, Deutsche Bank.
“This is particularly clear in the cross-border space. While a cross-border payment can be made with a cheque almost for free, it takes a considerable amount of time and does not take into account the regulation-related risk and expense that may arise.”
Before banks can attempt to wean their customers from cheques, they need to find better electronic offerings people will be happy to use instead. This comes back to looking at how to improve data flows with payments on existing channels.
The industry is at the early stages of thinking about this, but has been engaged in global discussions about ISO 20022, the messaging standard that underpins the Single Euro Payments Area (Sepa) regulation and other regional payment systems.
As a global standard, ISO 20022 moves the world a step closer towards the tantalizing possibility of faster and cheaper cross-border payments, something that might soon be in great demand if traditional payment channels are to keep their edge as alternatives, such as Bitcoin, gain more traction. However, in reality this remains a distant prospect.
The cross-border component of the debate presents even bigger challenges than the domestic one, bringing new regulations, such as anti-money laundering, into play, as well as questions about foreign exchange.
“While Sepa is designed as a cross-border solution, it still retains a domestic flavour because it is within a harmonized regulatory jurisdiction,” says Deutsche’s Schmidt.
The more pertinent advantage of ISO 20022 is its dramatically enhanced ability to carry data alongside payments. The gradual replacement of old messaging standards in the US with existing ISO 20022 infrastructure would increase the capacity for data flows alongside payments.
Faster payments might be more likely to be delivered as a result of work to improve other aspects of the system.
“Speed may not be the priority for a new payments system but a faster system may come as a by-product of work on higher priorities,” says Clear2Pay’s Whisler.