By Clive, a bank IT professional and Japonophile
When I read articles like this one Under Pressure, Big Banks Vie for Instant Payment Market in The New York Times, it is all I can do not to weep.
If you accept my premise that the only point of serious journalism, blogging or broadcasting is to both educate and inform their audiences, this piece fails on each count. There’s nothing wrong with offering entertainment, of course. But if you market yourself as a serious source of information, you shouldn’t publish half-baked stories that make you look like one of those grocery store magazines running a constant diet of showbiz stories.
Giving The New York Times’ piece the benefit of the doubt, it is highlighting both the rapid growth in non-traditional payment systems which it refers to, incorrectly, as Instant Payment Systems. It rightly criticises the incumbent industry players – these are mostly the Too Big to Fail banks (TBTFs) – for their lack of innovation.
But it cuts far too much slack to the non-traditional payment systems, ignoring their weaknesses and not highlighting the risks to their users.
I’ll start by saying something that should be obvious but which ends up being completely obscured to such a degree and with such regularity that I cannot help but think it is at times deliberate obfuscation. If you want to, for example, send me some money, when you use a traditional payment system, such as cash, checks or bank wire transfers you pay me.
These payment systems are highly regulated and have the benefit of well-settled law behind them.
Conversely, in non-bank payment systems or, as the New York Times refers to them, Instant Payment Services, you pay the Payment Service who pays me.
In most respects, these “instant payment” services are a little more than marketing and a sleight-of-hand. They are nothing but tack-ons to the conventional clearing or payment systems (such as the well-known card schemes like Visa, MasterCard, Amex etc.) which actually do the grunt work of money transmission. While we have often criticised these here at Naked Capitalism, they do however meet the criteria of being socially useful. They provide anti-money laundering and consumer protection facilities such as fraud and loss control. Some of their fees (all of them in EU member states) are regulated.
This is why when you register for a non-traditional payment system, none of them work as true end-to-end money transmission services without either a credit or debit card account or a national account number (or an IBAN (International Bank Account Number)) being registered as a precondition to signing up for their service. It is these which are all interfaces to the real clearing system. If you stop to think about it, it’s a bit more obvious – try getting “cash” out of PayPal for example. You can’t write a check on your PayPal account. It has no branches to do over-the-counter withdrawals from. All you can do is send the money to another PayPal account or a “real” bank via a bank or credit/debit card account.
Similarly, if these services offer a conventional card product as an additional feature, such as the PayPal debit card, that is nothing to do with PayPal, but is instead just a branded service from one of the existing card schemes (MasterCard in the case of PayPal).
And they are all skating around the regulations for being licenced deposit takers where you end up with a “credit” balance sitting on your account. This vexed question was explored in more detail in this excellent FT Alphaville article but it did not reach any firm conclusion because there isn’t one to be reached. Money left in a PayPal account is in legal limbo.
Even in their core business, which is money transmission, the new entrants have found it difficult to comply with the law as evidenced by PayPal’s settlement for sanctioned goods and entities dealing violations. In fact, one of the key drivers behind PayPal’s Venmo service offering was to ensure a better demarcation between the PayPal payment service and the PayPal money transmissions service which, of course, then had to apply for state money transfer licences because these are not granted at a federal level. In the EU, PayPal applied for and obtained a banking licence for similar reasons and you could argue that the EU was a lot tougher on PayPal than the U.S. regulators (the OCC and FDIC) were because they stopped short of forcing PayPal to become a licenced deposit taker.
The fact that these payment services are even able to get their feet in the door of the money transmission business is worth observing. While the increasing popularity of non-bank payment services is due in part to poor bank and industry systems which don’t easily allow for more convenient or sophisticated interfaces and lazy oligopoly TBTFs thinking they don’t need to invest in better propositions to their customer, it is also due to regulation offering some consumer protection for the regulated payment systems which the intermediaries like PayPals Venmo don’t provide.
It is this complete lack of objectivity which is most objectionable in The New York Times article. Users complained, for example, about the intrusive security in the Chase QuickPay service (which is a true bank-to-bank payment system via the clearXchange interoperability layer with a mobile-friendly front end) but there was nary a mention about which party in a non-traditional payment service money transfer is responsible if things go wrong.
The boosterish mainstream media reporting that new economy challengers can offer consumers all of the convenience of one-click services with none of the costs or risks incurred by doing away with safeguards is getting increasingly tiresome. By continuing this pretence when it comes to money transmission, the coverage has the equally unpleasant side-effect of letting the TBTFs and their regulators off the hook for failing to mandate the adoption of interoperability services like clearXchange that don’t involve an intermediary.
If we were being suspicious, we could suggest that this is a feature not a bug – allowing a fee-charging intermediary to enter the picture creates the opportunity for a rent-seeker to establish themselves, especially if the moves to wean us off “costly” and “inconvenient” cash and checks gain momentum. Me thinks too that the bank-operated payment systems doth protest too much about the new non-bank operators because, certainly for the foreseeable future, the banks legacy payment systems will continue to be pivotal to the end-to-end flow of funds, so the banks will still be able to extract their cut too.
And as for Nice Things like the provision of a universal money transmission service, complete with clearXchange-type convenient interfaces, which is operated as a public utility (which it is) on a not-for-profit basis, they seem as unlikely as ever.