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Letter from the CEO: Payments Innovators Deserve Merchant Support (MAG Quarterly- Volume Six, Issue Two)

Mark Horwedel headshot
By Mark Horwedel, CEO, Merchant Advisory Group

June 7, 2018

Almost suddenly, the world seems ablaze with payments innovation; however, the U.S. continues to fall further behind.  ACH and cryptocurrency may provide rays of hope for the lagging U.S. market.

Almost suddenly, the world seems ablaze with payments innovation. Europe has opened its doors to new payments players. The EU now requires banks, the traditional keepers of the financial services gates, to open up the locks to checking accounts and other services long reserved to banks protected from competition. Third world countries are experiencing a revolution in banking as peer to peer payments schemes created by fintech companies have opened the way for the masses to access everyday financial services. The trend is clearly in the direction of better, more cost-effective solutions to everyday payment problems driven by competition and spurred by public policy. 

Unfortunately, the U.S. continues to fall further behind. Banks here are largely protected from competition and often defy regulation aimed at opening their industry to competition. Their protected status and propensity to circle the wagons when confronted by change agents doom us to financial services mediocrity.

In spite of our predicament, there are rays of hope. The ACH has long provided a means by which payments innovators might disrupt over-priced card payments and cryptocurrency schemes are beginning to emerge from their tumultuous beginnings to provide hope of delivering more efficient, cost-effective payment solutions for tomorrow. 

ACH payment pioneers like Cumberland Farms and Target have shown the ACH to be a viable means to transact business with customers. Cumberland is said to now transact over 40% of its payments from customers on an ACH-based private-label card. More petroleum retailers have taken notice and will soon be following Cumberland’s lead. 

While these are positive developments, merchants can take nothing for granted. We need to be mindful that access to the ACH is (by statute) exclusively available to banks. Only they can initiate payments and only they can receive them. Also, long ago, the banks created an association, NACHA, to make the rules for the ACH reserving voting rights exclusively to the banks themselves. The Federal Reserve has long operated one of the two ACH switches, the other is big-bank owned, The Clearing House.  Rest assured, the big banks resent competition from the Fed and should be presumed to be continually pressuring the Fed to vacate their role as the sole competitive ACH switch so only they will be left to operate the ACH. Recent decisions by the Fed to not pursue an operational role in Faster Payments should sound an alarm to merchants and consumer groups who benefit most from competition.

Cryptocurrency seem poised for emergence as viable means of challenging traditional payments. While the public attention has historically focused on the boom/ bust cycle of cryptocurrency as an investment, many of the initial operational hurdles associated with cryptocurrency applications are now being solved, such as scalability.  First and second generation blockchains such as Bitcoin and Ethereum were proof of concepts for retail payment transactions.  These blockchains demonstrated that secure transactions could be settled through a transparent and decentralized ledger. Emergent third generation blockchains, such as EOS are exponentially more scalable, and have innovated new methods so that there is an ability to perform thousands of transactions per second, enabling a Visa grade of throughput, and at a massively reduced cost to legacy card payments. Unique applications like tethered payments, first introduced to a MAG audience by keynote speaker Gideon Samid several years ago, as well as Ripple’s cross-border payments have emerged as viable alternatives to traditional payments. Perhaps most encouraging of all is the public condemnation of cryptocurrency efforts by leading proponents of the status quo. One might assume this to be the predictable result of payments incumbents feeling threatened. A closer look reveals many of the biggest voices against cryptocurrency are spending a lot of resources and financial assets investing in cryptocurrency or are asserting intellectual property rights associated with emerging crypto schemes.

With third generation blockchains, the innovators have an opportunity to enjoy the benefits of first movers as they challenge the over-priced and unfair payments paradigm we face today. Merchants should monitor closely the banks’ and Fed’s activities that impact the ACH and be on guard against ACH, currently the most cost-effective form of settlement, going down the same destructive path as card payments. Merchants should encourage cryptocurrency innovators, as well as all payments pioneers who seek to compete with card payments. There are concrete efforts today to bring large merchants together with community banks and credit unions to incorporate an innovative blockchain into mobile banking to solve issues related to credibility of cryptocurrency, exposure to volatility, compliance with regulations, etc. These third generation blockchain solutions that we see today offer merchants the latest and best opportunity to disrupt payments for the ultimate benefit of the merchant community, as well as our customers. It seems we have little to lose and much to gain when operating in the most expensive, closed payment market in the industrialized world.