Why clearXchange is great for payments

By Felix Salmon
May 25, 2011
clearXchange system; nobody noticed, until they put out a press release today.

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If you want to keep your revolutionary payments system top secret, here’s a piece of advice: launch it in Arizona. That’s what Bank of America and Wells Fargo did in April, with their new clearXchange system; nobody noticed, until they put out a press release today.

ClearXchange really could be a game-changer, though. I spoke to Mike Kennedy, the Wells Fargo executive who’s leading the project, which right now is a joint venture between Wells, BofA, and Chase; he reckons that by this time next year, the program will not only be rolled out nationwide but will also be available to pretty much anybody with a bank account. (For the time being, both the sender and the receiver of the money need to be a customer of one of those three banks, and right now the sender needs to be in Arizona.)

ClearXchange is a clear competitor to the likes of PayPal and Popmoney, but it’s not an existential threat to those companies. Instead, the reason I like it is just that it brings peer-to-peer payments where they belong, to the level of the bank account. And it’s likely to set a new benchmark of $0.00 for the cost that consumers pay for such payments.

Up until now, most payments mechanisms, including PayPal, necessitated opening a new account. PayPal is now moving away from that system, and is trying to do deals with banks where its technology can get integrated directly into the banks’ own software and mobile apps, allowing people to send money to each other even if they don’t have a PayPal account. ClearXchange works much the same way: if I want to use it to send money to you, I just pull up my own bank’s mobile-banking app and use that. I don’t need to go to some separate clearXchange app. The first time you receive money from it, you’ll get a text message or an email telling you that you need to link your email or phone number to your account; after that, the money should just automatically appear in your checking account.

None of these technologies are cost-free, as far as the end-user banks are concerned. But processing checks isn’t cost-free either, and banks do that for free. In general, as a matter of public policy, there’s a strong interest in having the $865 billion which changes hands between Americans every year clear at par: the amount the sender is down should be exactly equal to the amount the receiver is up. That’s one of the reasons why so much of that $865 billion is transacted in cash, and it’s a big annoyance with PayPal and Square and other services which have a tendency to charge money for the service of facilitating payments.

What I’m hoping is that clearXchange will help make that service a basic part of what banks do whenever you open a checking account — that electronic peer-to-peer payments will just get added to the list of free services along with electronic bill payments and fee-free check clearing.

But that doesn’t mean that all banks will encourage their customers to use clearXchange technology instead of PayPal, Square, Popmoney. If those vendors can come up with a way of sending money which is cheaper and easier and safer and more efficient for the banks, then the banks will use those services rather than clearXchange. In any case, it’s all going to be pretty much invisible to the end user, who just sees their own bank’s website or app.

So I hope that the other big payments providers stick around, to provide competition for clearXchange and act as a force preventing the banks from charging for the service once it reaches ubiquity. We want this to be like bill pay, which is generally free at both ends of the transaction, and not like debit-card usage, with its fast-rising interchange fees (until Richard Durbin came along). And now that clearXchange has launched, I’m more optimistic than ever that we might actually achieve that goal.


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This sounds or less like the payment system in Germany. Which is more or less unqualifiedly great. I haven’t written a cheque in at least 15 years, and most payments I can transact without a CC, account to account, without costs, using a one-time pad.

Posted by seanmatthews | Report as abusive

As a Bank of America customer, it is easy for me to transfer money to any bank account in the country without involving clearXchange. All I have to do is go to my local branch, fill out a form with the recipient’s ABA and account numbers, and pay small fee of only $25.

Posted by guanix | Report as abusive

I presume that two of the other reasons are the size of the transactions (many are probably small), cash transactions can be difficult to track (anonymity is good), and at least some transactions are in person, so no intermediation is needed. Okay, that’s three.

While I am normally of the opinion that banks don’t offer these kinds of services unless it is more for their benefit than ours, if it forces operators like Paypal to lower their fees, that’s okay.

Posted by Moopheus | Report as abusive

Also worth mentioning: SEPA will replace all other national payment systems in EU this year.

That means the process will be the same (& simple) for paying 1€ to your friend or buying something from a company in another EU country.

http://en.wikipedia.org/wiki/Single_Euro _Payments_Area

Posted by Developer | Report as abusive

I’m sure that the “fee” for these transactions is paid in customer data. Obviously the banks aren’t providing this service out of noble intention or public goodwill. You do have to provide the bank with an email address or phone number for the receiving party which essentially creates a de facto social network. And Lord knows that social network data is more valuable than gold these days.

I’m not saying that this is necessarily a bad thing. I just think that no one should be under the illusion that this is a genuinely free innovation. You’re paying the bank every time you provide them with the contact information for a potential new customer (not to mention that person’s financial relationship to you).

Posted by spectre855 | Report as abusive

This sounds a lot like Interac email transfer here in Canada – you just enter the person’s email, the amount, and a security question, and the money is transferred effectively instantaneously. Most bank plans include a number of them for free each month, with the cost being fairly low otherwise.

Posted by autocorrelation | Report as abusive

spectre855: It’s certainly plausible that the fee is paid in the opportunity cost associated with processing a check.

Back in Denmark, domestic wire transfers become very cheap and eventually free for almost everyone (if ordered online) around 5 to 10 years ago. Checking accounts have almost always paid interest, so the fee was two days of forgone interest on the money: the transferred amount stopped paying interest on day 0, appears in recipient’s account on day 1, and only starts accruing interest again on day 2.

Posted by guanix | Report as abusive

@guanix: I’m not disagreeing with you. I’m sure there are other cost elimination factors as well considering the rest of the world seems to have been providing free transfers for a long time.

My point is that this particular system has the added “cost” of forcing its users to pony up social networking type information instead of, for example, an anonymous routing number for the receiving party. I think that this aspect of the system should not be understated. I have a feeling that more than a few privacy hawks are going to voice concern over this type of setup.

Posted by spectre855 | Report as abusive

A word of warning for Reuters readers.

These bank payment services which are outside of the normal CC system are dangerous.

I was recently royally screwed over by Chase while trying to use their “QuickPay” service.

The banks can and will freeze your account at a whim and require ridiculous actions to regain access to your own money.

Search for “Chase Quickpay Consumerist” to read my story.

Posted by dbasch | Report as abusive

The banks are playing the float game by taking out of the sending account but not putting it into the receiving account for 3 business days.
It is an electronic transfer. There is no need to prove funds availability.

Posted by Anonymous | Report as abusive