US falling behind Europe on electronic payments
The US’s continued penchant for paper payments contrasts with the dynamism of the European market, but change could be afoot in both markets as new payment systems disrupt cheques and chip-and-pin technology.
A large gulf is emerging between the US and Europe as Americans remain wedded to cheque payments and signature credit cards, while an efficient standardized payment systems takes root in the single market.
The US has suffered a number of setbacks as a result of its slow adoption of more modern forms of payments. For example, during the busy Thanksgiving period last year, Target was hit by a cyber-attack, which saw the details of 100 million credit and debit cards compromised.
While a switch to chip-and-pin technology might not have stopped the attack, it might have reduced the number affected. While cheque use in the US is declining it is still high in absolute terms and relative to Europe. Figures from the Federal Reserve estimate 18.3 billion cheques were paid in 2012, with a combined value of $26 trillion. The average value of each cheque was $1,420.
Jim Gifas, senior vice-president and head of the treasury management, product management and innovation group at Capital One, notes the role of regulation in accounting for the divergence in payments behaviour in the US and Europe.
“Banking in the UK and Europe is very different than in the US,” he says. “Banks are engaging in more technology and automating payments, and the European regulatory system is driving change around payments and a move to real time settlement.
“In the EU, there are more laws in place meant to protect the sender, the receiver and the value of the payment’s ecosystem. The US has to catch up on moving to a faster payment-settlement process or we will remain behind.”
He points to the Check 21 Act which came into effect in the US in 2004, which allows for cheques to be cleared through an image, rather than the physical document being passed on. This was implemented after 9/11 and the shutdown of the US aviation sector, which resulted in a huge backlog in cheques to be processed.
The imaging technology has been introduced in the UK, but the use of cheques has been in slow decline for decades. And not long ago, the plan to abolish cheques by 2016 was announced, with the move only overturned after calls from small businesses and charities.
The regulatory issues surrounding the likes of the Single Euro Payments Area might have created a headache for the banks and corporates in Europe, but it has set in motion a process of facilitating easier payments system across the single-currency region.
In the US, by contrast, each state has its own laws governing payments and no standardized system is in place – not to mention the difference in time zones from coast to coast, which can slow how quickly a payment can be transferred.
With systems such as Paym and near-field communication payments being introduced in Europe, there is the potential for some payment providers to leapfrog chip and pin, and go straight to the latest version of the technology.
However, change could be afoot in the US.
Bank of America has been one of the leaders in providing mobile banking, and recently announced it has 15.5 million users, a 17% increase on 2013. Wells Fargo has also been actively looking to increase mobile engagement, and now has more than 13 million users, a 22% rise on the previous year.
“Mobile technology is going to drive forward technology even further. It will be the end-consumer who is pushing forward this change, and this will carry over into the business world,” says Gifas.
He pushes for the theme of innovation to go beyond just creating new systems, but also to produce better and more efficient methods of reporting, transparency and functionality. And systems need to include stringent fraud controls, and integrated ways to make payments and collections.
There is an appetite for digital, but 58% of the users Bank of America surveyed had tried using the system to pay cheques, suggesting even those who are willing to adopt new technology are still regularly encountering paper payments.
Gifas says: “In Europe it’s not unheard of to give your account number to someone to make a payment, such as rent. This is not done in the US due to a lack of understanding that everything you provide to move a payment for an electronic method is the same information that rides along the cheque.
“The evolution of new technology and the convergence of efficiencies is propelling us forward, and we should be able to catch up to what is happening electronically in Europe.”
A corporate- rather than consumer-led push for the latest payments technology is likely, say some analysts. While the big companies might be reluctant to initiate a change that would require the wholesale overhaul of their legacy systems, the smaller companies, or those untied to legacy systems, could lead the way.
Gifas says the change will potentially come from within the mid-market companies, adding: “Businesses in the mid-market space are already pushing for the most innovation. These corporates are more nimble and have the ability to focus on new ways of doing businesses through new technology.
“Large corporates have more people working on these processes, but are slower to adapt as they have the old infrastructure to support. The mid-markets don’t have this infrastructure so they look to leverage as much innovation as possible.”