By now, we were all supposed to be beaming payments back and forth between our cell phones and smart cards. Purchases would be check-less and cash-less and sci-fi smooth, our old coins and dollar bills just study aids for school kids.
But the 1990s ended before the future quite got here. Captain Kirk is out of a job again, and our lives are more complicated than ever. In payment processing, too, reality is turning out to be a little messier than many prognosticators had hoped. Cash hasn’t gone away. Checks haven’t gone away. And despite predictions of its demise, paper hasn’t gone away; on the contrary, it chokes transaction channels more than ever before.
For retailers, the answers regarding which payment forms to support are less clear than they seemed just a few years ago. Some payment processing experts almost wax nostalgic remembering the old days when electronic payments only came in two flavors. “Everybody bitches and moans about Visa and Mastercard, but at the end of the day, they were only two payment methods you had to support,” says Nick Baxter, president of First National Merchant Solutions of Omaha. Now, he says, there’s American Express, Discover, JCB, debit cards, electronic checks, PayPal, and more — each with its own technological characteristics and its own payment cycles.
Supporting all these choices for the consumer adds up to an expensive proposition for merchants, according to Baxter. “The cost of supporting all those payment methods has got to be eating them alive,” he says.
Unfortunately, nothing about payment processing seems to be getting simpler. Even the end of paper checks, which once seemed a sure bet, now seems somewhat more distant. Although checks have declined as a percentage of transactions, the number of checks in circulation has actually risen by 2% a year over the past 20 years, according to a recent Federal Reserve study. The study found that about 49.6 billion checks are still written annually, representing roughly 60% of all non-cash payments, or $47.7 trillion. Approximately half of all those checks are written by consumers.
Consumers may love them, but Alan Greenspan doesn’t. The Federal Reserve still moves checks amounting to roughly $13 billion not in bytes but in bundles. Four nights a week, the Fed shunts about 23 tons’ worth of little paper slips among 45 processing centers around the country, by truck and air courier, according to the General Accounting Office. Those air couriers make 192 flights a day.
For a number of years, Federal Reserve executives have tried to change the system, but it’s been a slow process. In 1998, Alice A. Rivlin, vice chairman of the Fed, told one bank conference, “Every time I visit a Reserve Bank and watch those high-speed sorters working so hard and the trucks coming in and out to the airplanes, I think, ‘This is a really impressive, fast, and cost-effective way of moving paper, but why are we moving paper?’”
This past winter, the Federal Reserve drafted a bill that would give images of checks the same legal weight as the originals, making it possible to reduce some of those overnight flights. Sounds sensible enough, but the proposal has yet to find a sponsor in Congress. Some observers speculate that between the Post Office, check printers (printer Deluxe Corp. alone is a nearly $3 billion concern), paper companies, and private air couriers, there’s a whole checking industrial complex that might have a lot to lose by a radical change in the status quo.
Banks don’t like the proposal either, because its optional nature means that banks would need to maintain both paper routing systems and electronic networks — making the process that much more complicated, according to Stephen McNair, president of FTP Consulting Services Inc., a Southlake, TX-based consulting firm serving the financial transaction processing business.
Last September, the National Automated Clearing House Association, a trade group for the electronic payments industry, released guidelines allowing retailers to create e-checks for the first time. The new rules enable merchants to take a customer’s checking account number over the phone or in person and create an electronic check equivalent that draws on the customer’s bank account within 48 hours. NACHA estimates that more than nine million telephone e-checks were processed in the first quarter of this year.
Renée Frappier, marketing manager of Pacific Network Services Ltd., a Vancouver-based global payment processor, believes the new e-checks create opportunities for some direct marketers. Although credit cards are often considered ubiquitous, a recent Federal Reserve study pegs consumer access to transactional accounts such as checking accounts at 90% of the population, compared to about two-thirds who have credit cards, according to NACHA officials.
“For those people who don’t have credit cards, it’s going to open things up for them in terms of responding to direct response promotions. All of a sudden they’ll be able to call somebody who’s selling something through a call center and make their payment,” Frappier says.
NACHA spokesman Michael Herd, however, says that the most popular use is for paying recurring bills, where there is already an existing relationship with the consumer. According to First National’s Baxter, such customer trust is a key limit to the acceptance of this new technology. “Whilst [consumers are] quite happy for somebody to play fast and loose with their credit card, the concept that somebody could get into my checking account into which my paycheck is deposited is a push,” he says.
Herd says electronic checks present a number of advantages to merchants. “Check conversion provides the merchant with all the benefits of electronic processing — the lower costs, the less labor-intensive payment handling, the faster returns, the better collection of NSF [insufficient funds] items; it gives you all that benefit without trying to tell your customers to do something differently.”
E-check boosters initially predicted savings of as much as two-thirds for merchants, but this isn’t turning out to be the case, says Michael Manna, vice president of sales for Robert Manna Associates, a bank remittance systems supplier in Dallas. At the moment, Manna speculates, retailers will probably just break even with e-checks. He predicts that while remittance costs will go down, clearing costs may actually increase, since the bank usually needs to create a paper equivalent to take the place of an electronic check. “With electronic payments, you would think that would be easy, you just push a button and send the data,” says Manna. “But still, with the system that’s in place, many times paper has to follow.”
FTP Consulting’s McNair asks, “If I’m receiving bill payments and some of them are paper and some of them are electronic, have I really reduced my costs or have I increased my costs?” He argues that in the short run, electronic conversion will actually increase costs for companies receiving payments, at least until the majority of payments are electronic. “What I’ve done is that now I’m supporting two processing operations rather than one,” says McNair.
Manna and McNair both believe that initial savings through e-checking will be less than advertised. Electronic payments generally add new choices for the consumer, but don’t necessarily lead to gigantic new efficiencies for anyone else. “They’re still saving some money in the sense that the consumer didn’t have to pay for postage, [the retailer] didn’t have to pay for someone to open an envelope and capture the amount that check was worth, so all those costs are saved,” Manna says. “But a piece of paper is still going back and forth through the system.”
Another element of our fabulous future life that hasn’t arrived in quite the way some expected is in micropayments. When e-commerce first began, many theorists believed that a new system would be needed to make small payments in cyberspace. But for some reason, consumers proved reluctant to trade their cash for online currencies with such unlikely names as Beenz and Flooz, and most of the companies created to meet this perceived need are now defunct.
Still, not every alternative payment scheme has gone the way of all Flooz. PayPal, an online payment company that got its first break helping eBay buyers and sellers do business without disclosing credit card numbers, went public last spring. Last year, 7.5 million users sent or received at least one payment using the service, and in April PayPal announced that its revenue had tripled from the previous year, reaching $48 million.
Nick Baxter, president of First National Merchant Solutions in Omaha, NE, says the success of PayPal should serve as a warning to payment processors. “I think PayPal has been a great eye-opener to the industry,” he says. “I use it. It’s an incredibly easy way to move money from person to person. If we in the payment processing industry had gotten our act together, there should not have been a potential for PayPal to take off.”
But as well as PayPal has done, it’s unclear whether the firm will be around for the long haul. It is wrangling now with banking regulators over what kind of a company it really is, and PayPal executives admit that they face competition from some fairly serious players. In their latest annual report, they list Citibank, MasterCard, Visa, eBay, Yahoo!, Check Free, Western Union, Microsoft, American Express, Western Union, and the U. S. Postal Service as possible competitors.
In Europe, payment processing’s evolution is not in a tidy state either, in spite of the introduction of the euro. Frappier of PacNet says that credit card processing is much simpler with the Continent-wide currency, requiring one merchant account instead of 12, but that checks are still a problem.
“What a lot of people don’t realize is that despite the fact that all of these countries switched to euros as a currency, the banking systems are still separate,” says Frappier. “If you write a euro check in France, you can’t send it to your supplier in Germany and expect that they’ll be able to cash it just like that, because it’s still a French check and they’re still a German company.”
Further east, the banking systems of several countries, including Singapore, Taiwan, Thailand, and Malaysia, have became somewhat easier for outsiders to do business in, but the U.S.’s new-found concern about money laundering has introduced new bureaucratic barriers, according to Frappier.
One service PacNet now offers, which Frappier says is unique, is a system that enables companies to send refund checks in the customer’s own currency, wherever that customer happens to be. While the system may not simplify business for merchants, it probably makes things easier for consumers overseas.
As the last big thing started to sputter two years ago, the buzzmeisters coined a new word: m-commerce, or buying stuff with cell phones. Today, m-commerce has yet to beam down in most markets. Beyond Norway, where it’s possible to buy soda pop with your cell phone, and Japan, where commuters download cartoon characters as wallpaper for their cell phones, computerized wireless operators are still not standing by.
“We’ve talked to a lot of analysts and they’ve all massively revised their projections down by orders of magnitude from the hundreds of billions of dollars that were going to be spent on mobile commerce — suddenly it’s much more modest,” says Simon Pugh, vice president for standards and infrastructure for MasterCard International and co-president of the Mobile Payment Forum, a group that’s attempting to set standards for mobile commerce.
MPF is working to come up with universal payment standards that can work with cell phones all over the world. Pugh says this is challenging; different countries and regions use different technologies and communicate with different data rates, and all of these cellular systems are becoming increasingly less alike. To deal with cardholder authentication, for instance, the group will need to agree on three or four solutions, he says, rather than one. “The optimism that may have existed two years ago has certainly vanished, I would say. We still feel there is long-term value in developing the mobile environment as an acceptance channel for payment cards. By starting at this level, when the technology arrives and, more important, when the content-service propositions within the space warrant the need for secure payments, everything will be in place and ready to go.”
But First National’s Baxter is skeptical such a day will ever come. “I’ve been able to use my cell phone for wireless commerce for eons, I just call 1-800-Lands’ End or L.L. Bean, and because those guys register me as a customer, I’ve been doing mobile commerce for years. What’s the big deal here?”
Baxter’s skepticism is not unusual. Now, Pugh says, people ask a lot of questions about any new payment technology. “Why would I actually do this? Why is this better than what I do today? Unless we can see everything is in the black, and generates benefit for everyone, it’s never going to fly. That’s one thing we’ve learned the last few years from trying things out on the Internet: Unless everyone wins, it’s not going to happen.”
When and if it does, chances are good that it will change a few things and not, as many of us used to say during the Internet boom, everything. Even as new technologies are introduced, payment experts now seem convinced that their evolution is likely to come in fits and starts. “We’ve never seen any one monetary methodology or payment mechanism supplant everything else,” McNair says. “They’ve always been in addition to, and I think it’s true with [electronic payments] as well.”
Bennett Voyles is a business writer based in New York City. He can be reached by e-mail at firstname.lastname@example.org.