Five (Nonrevolutionary) Industry Predictions

Article excerpt

For nearly a decade the payments industry has been besieged with predictions of imminent technological revolutions. Though some progress has been made, the revolution has been mostly silent and marked primarily by the entrance of nonbanking companies.

Various pilot tests of electronic payment systems have shown that most American consumers have an emotional relationship with their money and change their economic behavior slowly.

Nevertheless, there is ample evidence that benefits of technology are moving payments away from paper and overnight netting systems and toward real-time execution and settlement.

So with the caveat that predicting trends in payments systems is always a gamble, here are five factors likely to influence the changes that occur in the near future.

Automation of checking. The transformation to electronic check processing is accelerating and will affect the cost, risk allocation, and security of payments systems. In addition to utilizing the automated clearing house system for direct deposits and direct payments, under the Check 21 Act the processing of paper checks will be truncated into electronic transactions.

Though the paper check system is costly and inefficient, it does provide a system of rules that allow certainty of execution that consumers, businesses, and financial institutions understand. And though its eventual disappearance is inevitable, the need to create an effective replacement system that fulfills all the functions of the old - and meets the emotional needs of future consumers - is a theme that reappears in each of the other trends discussed in this article.

Person-to-person payments. The increasing acceptance of person-to-person payment systems, which allow individuals to transfer funds without using cash or checks - illustrates the potential for alternative electronic payment products. Systems that survived the technology boom of the late 1990s and became viable parallels to the bank and credit card systems have found success in niche markets, such as facilitating purchases between consumers for online auction sites.

Because these systems can clear payments faster than check processing systems, do not impose high fees like credit cards, and avoid the merchant-qualification requirements imposed by the credit card associations, they make it cheaper and easier for merchants and individuals to conduct business online.

But, as the need for and familiarity with these products grows, so do the issues that they raise for businesses, consumers, and regulators. The operational challenge to these systems in the future will be to develop and continue to maintain the private system of rules that supplement the laws and regulations that make payments systems work as effectively as they do. Universal acceptance of payment products requires universal standards, technologies, and rules. All of those things require time and cooperation.

Merchant-specific payment systems. In an effort to make it easier for consumers to spend money - and to capture that money even before the purchase - merchants are increasingly promoting electronic gift and payment cards, especially around the holiday season. Similarly, riders on the larger mass-transit systems can pay with electronic passes, and universities and other "campus"-based organizations offer stored value cards. These closed-system electronic payment cards have room to succeed because of the failed efforts, up to this point, of the open or universal electronic payment products of the past.

As these and other person-to-person payment vehicles proliferate, federal regulators, state legislatures, and attorneys general will increasingly impose limitations on the permissible terms and conditions of these products. That will be particularly true when these products seek to provide alternative payment options to the unbanked.

The Federal Deposit Insurance Corp. …