The payments impasse

January 6, 2014

I’ll say this for bitcoin: it’s got a whole new class of people, like Matt Levine and Guan Yang, increasingly interested in one of my longstanding obsessions — payments. (You might be surprised to learn how hard it is to get people interested in payments.) Guan’s post, along with the response to it from Simple’s Shamir Karkal, provide a techie’s viewpoint into a question which many non-Americans have when they start living in this country: how on earth can can moving money from one person to another be so difficult, expensive, and time-consuming?

The simple answer, as Karkal hints at, is that we’re suffering from a particularly toxic combination: an outdated payments system combined with a seemingly powerless central bank, which is happy to let the big banks dictate the pace of change (or lack thereof). And as American Banker’s Kevin Wack explained in a great piece last November, the big banks are very good at vetoing even incremental improvements in the US payments infrastructure.

The best place to start, if you want to understand the massive opportunities here, is the public consultation paper on payments which was put out by the Federal Reserve Banks last September. It’s written in reasonably plain English, and makes it clear that the Fed would love to see two key “desired outcomes”:

Desired outcome 2: A ubiquitous electronic solution(s) for making retail payments exists that does not require the sender to know the bank account number of the recipient. Confirmation of good funds will be made at the initiation of the payment. The sender and receiver will receive timely notification that the payment has been made. Funds will be debited from the payer and made available in near real time to the payee.

Desired outcome 4: Consumers and businesses have better choice in making convenient, cost-effective, and timely cross-border payments from and to the United States.

In other words, the Fed absolutely understands what Guan and I have been saying for a while. The big problem, however, arises before we even get to the two big “desired outcomes”. Indeed, it’s so big that the Fed puts it right at the top of the list:

Desired outcome 1: Key improvements for the future state of the payment system have been collectively identified and embraced by payment participants, and material progress has been made in implementing them.

It’s this that isn’t ever going to happen. As the Fed paper drily notes, the results of its analysis of gaps and opportunities in the payments system “are not surprising as they are comparable to the results of a similar gap analysis conducted in 2002”. And the paper itself was released just a month after the big banks which control the existing payments system voted down an attempt to speed it up just a little bit. Probably because they feared that a faster and more efficient payments system would cut into the fees they get from wire transfers, which they charge as much as $50 for despite a cost of only 14 cents.

The Fed is a bit like a hippy parent: it doesn’t want to force anything on its charges, it wants them to change on their own. And so it asked for responses to its paper, which can be found at a dedicated website. If the Fed had any doubt about the banks dragging their feet, then the responses will certainly have put those doubts to rest.

The responses from The Clearing House, Nacha, and the American Bankers Association all basically say exactly the same thing (which is not surprising, given their highly-overlapping memberships). Do we really need instant funds transfer? Can’t we just have instant messaging saying that the funds transfer will happen, instead? How are we going to make money doing this? Do you have any idea how expensive it’s going to be? Don’t you know that we already have a massive regulatory burden? This is no time to ask us to do even more. (Although, by the same token, it wouldn’t be fair to allow non-bank competitors like Ripple to compete against those of us who have many more regulators.) Besides, just thinking about the cybersecurity aspect of the whole thing makes our heads hurt!

The impasse has never been more obvious. The Fed wants changes; it wants those changes to come from the banks; the banks have no interest in implementing such changes. Which means that either the Fed is going to have to get tough, and force the banks to change, or else we’ll have about as much change in the next ten years as we’ve had in the last ten.

What are the chances of the Fed forcing America’s banks to get with the 21st Century? Very slim, I’d say. The banks have been extremely good at squealing very loudly whenever anybody has attempted to implement any new regulation, even regulations designed to safeguard the entire national economy. Improving payments doesn’t protect us against systemic risks: it just makes everybody a little bit better off in a million different ways. And as all politicians know, any policy which benefits everybody a little, but which a small number of key players are vehemently opposed to, will never get off the ground.

Non-bank solutions to this problem, be they based on cybercurrencies or anything else, are never going to cut the mustard: the key element here is ubiquity, which means people shouldn’t have to sign up for yet another service like PayPal or Bitpay or Square. Instead, the entire national (and international) payments architecture needs a massive upgrade.

Realistically, that upgrade can only be overseen by the Federal Reserve — an entity which doesn’t feel empowered to enforce such a thing. Until then, as Guan says, “US Dollars, while a good store of value and unit of account, are also terrible for making payments.”


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