Academic journal article ABA Banking Journal

Who Will Control Electron Payments?

Academic journal article ABA Banking Journal

Who Will Control Electron Payments?

Article excerpt

The Internet as a payments and commerce channel is an idea whose time has come, yet only just begun. To banking strategists, it is a soul-searching mission which overturns traditional models on which today's wholesale and retail banking businesses are based

Decades from now, the late 1990s will be seen as the period when the Information Age was truly born.

The quick emergence of the Internet as a payments and product distribution channel is compelling strategists at all banks to make some tough decisions. Do we go it alone, or in partnership, or do we dare ignore the Internet?

Nothing less than the future identity, viability, and profitability of many commercial and consumer banking institutions is at stake.

Chase Manhattan Bank's widely respected vice-chairman Joseph G. Sponholz identified a mindset of many bank executives today when he sparred with Bill Gates recently at a forum. Gates said, "Don't worry, Joe, Microsoft doesn't want to be a bank," to which Sponholz quipped, "Neither does Chase."

Best thing since the phone

Internet commerce is accelerating rapidly. The speed with which consumers, businesses, and governments are adopting the Internet, compared historically to other technologies, has been dramatic:

The idea of the Internet as a commerce mechanism-including, of course, Internet-delivered financial services-is bound to include the notion of the Internet as a payments mechanism. Payments and product distribution channels are connected symbiotically: one enables the other. Thus, technological compatibility and financial transaction security is essential for both to operate efficiently.

* the pager took 21 years to become widely accepted;

* the facsimile machine, 22 years;

* cellular telephone, 9 years;

* videocassette recorder, 9 years;

* compact disk, 7 years;

* personal computer, 6 years;

* Netscape's Internet browser, ten months-according to a report by Montgomery Securities.

Why? "The Internet is the best positioned delivery mechanism since the invention of the telephone because of its power, properties, and what you can do with it as a communications system beyond the actual payment," says Donna Embry, a payments expert formerly with PNC Bank in Louisville, now with Vital Processing Services, a card processor.

So the frenzy taking place today to go online with e-commerce, e-cash, banking, e-procurement, e-point-of-sale, is igniting a host of entities-banks among them-to bolster the robustness, security, and efficiency of the Internet as a retail and wholesale payments system.

A banking competency

Still, the idea is relatively new. As a payments system, the Internet is in its early stage, considering how arduous it's been to make today's most widely used electronic payments systems secure and efficient.

Visa, for example, the largest card issuing association of banks, began building Visanet, its global authorization, clearing, and settlement system, in 1973.

NYCE, one of the largest ATM networks today, is the result of 1980s banking competition in New York City.

In wholesale banking, the Federal Reserve Fedwire system, a real-time gross settlement of funds transfer system, dates to 1913 when the United States Federal Reserve System was formed to eliminate transit and interest costs in physically transferring interstate payments.

The Automated Clearing House (ACH), an interbank payments network governed by the National Automated Clearing House Association (NACHA), dates to the late 1960s when several California banks, swamped with paper checks, sought to automate bank-to-bank payments.

These were (and remain) bank-owned-and controlled-networks.

The notion of bank control of U.S. payments systems has been central to the development and management of the U.S. economy. The Fed needed a secure and robust payments system, achieved, in part, by defining and regulating the nation's monetary intermediaries, (i. …

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