01 July 2006 Comments

 

Cards: The new cash?

Consumers are used to banks encouraging them to use cards rather than cash.An exception is in the US where lockbox products have allowed banks to continue to process cheques efficiently for corporates and consumers alike.

In Europe cards are the tool of choice for most cross-border consumers, yet many cross-border payments continue to be routed via ACH and correspondent accounts with all the attendant costs and inefficiencies of connecting multiple systems. It is this market inefficiency that the European Union has been trying to cure by regulating charges and pushing the industry towards interoperability.

Interoperability does not mean closing down excess capacity, but is simply a way to get the existing infrastructures to talk to one another. The embedded costs of running these infrastructure companies and interfaces continue, despite substantial reductions in price per payment. According to Boston Consulting, payment prices are going to fall dramatically over the next few years. One banker has suggested up to a 70% reduction.

Certainly UK banks face a substantial drop off in price and volume of high value (the amount of the payment) once Faster Payments starts replacing £30-a-pop CHAPS payments in December 2007. Indeed many see CHAPS merging with Faster Payments in the not too distant future.

Faster Payments is essentially a card switch that is providing the “real-time” element, while simply substituting an ISO8583 payment message for an MT103 — although, in a nod to modernity, the scheme also includes provision for XML. For a consumer this means an account-to-account transfer can be achieved near simultaneously, with a confirmation that the funds have arrived on the recipient’s account. This is a substantial qualitative improvement over the existing BACS and CHAPS systems at a fraction of the price of a CHAPS payment.

So why then has the European Union or its banks not used a similar model for its cross border payments? Visa and MasterCard have thousands of member banks across the eurozone, so critical mass is not an issue. It is now possible to route a payment globally account-to-account — not just in Europe — via these networks for a matter of a few pence. There is no need for plastic and the settlement risk and liquidity management systems are already well developed. Moreover, as these networks attract more payment volume, the price should decline.

For banks in Europe that want to offer a cross-border, urgent payment in near real-time SEPA is already a practical reality without IBANs. Many bankers suggest, however, that Visa and MasterCard have become too powerful and are reluctant to give either organisation more, others have invested substantial amounts in cross border ACH products and do not want to put at risk a sunk investment. Nevertheless there is some more radical thought that suggests Swift, Visa and MasterCard should merge to become a single super standards organisation, while the network to provide messaging and value transfer could be outsourced to lower cost providers.

Bob Blower, consultant