Reviewing The Payments System: Will Banks Keep their Central Role?
 Ed Yingling, President & CEO
American Bankers Association
What do PayPal, Mastercard’s IPO and the new online gambling prohibition have in common? Answer: they all are shaping our payments system today.
Next question: how do changes in our nation’s payments system affect banks? That’s the fundamental question a new ABA payments system working group hopes to answer.
Members of the working group, which will be headed by Dave Hickman, chairman, United Bank & Trust in Tecumseh, Mich., have their work cut out for them.
The variety and volume of issues touching the world of payments and banks’ intermediary role is staggering.
PayPal and other peer-to-peer payments services are essentially less regulated businesses that cut out the middle man (banks). Mastercard’s public ownership and Visa’s plan to go public mean banks will no longer be the owner-operators of the world’s largest payment card companies. And the recently enacted ban on online gambling is an example of how banks increasingly are being asked to police their customers. Of course, this is on top of all our anti-money laundering requirements.
U.S. banks have a well-deserved reputation for safety, efficiency and reliability in running the payments system. But even that reputation can be tarnished by the mistakes of other non-bank payments system participants. Whether it’s a faulty ATM owned by non-bank or a data security breach of TJX proportions, banks are often at the receiving end of customers’ ire. That’s because banks are as close as consumers can come to putting a face on their invisible electronic transactions – and, of course, it is banks that unfairly end up picking up the tab for reissuing cards.
Efforts are underway to address some of these issues. For instance, Congress is in the midst of considering several different data security bills – some good for banks, some much less so. ABA has been adamantly asserting that any new legislation should establish a national standard to preempt competing state laws. We also are backing a provision that would force the party that causes a breach to reimburse banks for the cost of reissuing cards.
Technological advances and marketplace changes are also altering banks’ role. In addition to PayPal, companies like Zopa and Prosper are taking banks almost completely out of the equation.
Based in the United Kingdom, zopa.com is an eBay for money. Started by former bankers, the Web site offers a marketplace for “social lending,” meaning people borrow from and lend to each other, with no bank in sight. The company uses credit scores to rate borrowers, then lenders make them offers.
And while Zopa plans a U.S. launch later this year, you don’t have to wait for the concept to talk hold on our shores. A similar service known as Prosper – started by a co-founder of eLoan – has been in operation since February 2006 and now boasts 100,000 members and $20 million in funded loans.
Then there’s Japan. Forget cash and even plastic. There, mobile phones -- with embedded chips that enable electronic purchases even at vending machines -- are truly the one thing you don’t leave home without.
All these trends raise important business and policy issues. Will the new participants in our payments system uphold the system’s historical safety, efficiency and reliability? Are banks becoming marginalized players, left to facilitate the least profitable piece of transactions while non-banks take greater ownership of the customer relationship?
Banks are increasingly caught in the middle – but not in the intermediary sense of the term. Rather, we are forced to maintain legacy systems and deal with ever-increasing regulatory requirements while also trying to innovate to secure a place in the future.
Our industry has done a wonderful job in running the payments system – so much so that it is taken for granted. It is in our country’s interest to make sure that the payments system of the future remains well-run, and we believe that means the central role of our industry must be maintained.
The ABA working group will identify the key issues that need to be addressed to assure we continue to have a safe, efficient and reliable system, even as we incorporate important innovations and marketplace changes.
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