HALT PAYMENT PROLIFERATION
BS+T: You delivered the keynote address at the Bank Administration Institute's Transaction Processing conference in March. What were the
main points?
Beran: There are 650 billion payments, representing $22 trillion in value exchanges, in the United States annually. Cash accounts for 80% of
these payments, 17% are checks and electronics are 3%. Revenues associated with the processing of those transactions are $115 billion, of
which about 46% goes to banks and the rest to third-party service providers, technology companies, the Fed and so forth. A large percentage of
that is interest and the fees directly associated with the payments themselves.
We continue to add different methods of payment for consumers and business, including cash, checks, wire transfers, ACH, credit cards, debit
cards, stored-value cards and [electronic] bill payment. We try to displace older payments with newer ones but have been unsuccessful, because
consumers and businesses [are slow to change their payment habits].
Take check processing. To settle and clear checks, you have the Federal Reserve - which is the primary agent - local clearinghouses, direct
sends and electronic check presentment (ECP). That's one whole clearing and settlement infrastructure around the payment mechanism known
as the check. In the credit card world, we invented a new clearing and settlement system built around MasterCard's BankNet and Visa's
VisaNet. The regional ATM networks have built infrastructures for the clearing and settlement of debit card transactions, originating from either
the point of sale or ATMs.
BS+T: What problems does this overlapping clearing and settlement infrastructure cause for the banking industry?
BERAN: The large amount of investment required to maintain it eats into the profits banks derive from payment processing and keeps us from
maintaining customer relationships. When a business opens up a Web site, they will usually offer several payment options, including check, credit
card, debit card and, eventually, stored-value card. This helps attract new customers for the business, but the banking industry must bear the
costs of clearing and settling those different payment methods.
BS+T: Is the fact that banks have outsourced parts of their payments business, such as bill payments, a sign that banks don't really want to be in
the payments business?
BERAN: No. In bill payments, what's being outsourced is the maintenance of the biller file and customer service. However, the vast majority of
banks still retain profitable relationships with their [merchant] customers.
BS+T: What opportunities does electronic bill presentment provide to banks?
BERAN: Although the economics of electronic bill presentment are very strong for both consumers and billers, it will only be effective if the
billers are able to accept electronic payments. If you look at the major bill-payment services today, a large percentage of their remittances is
electronic, particularly to large retail chains or utilities. However, it will be some time before all billers are capable of receiving payments
electronically. I, as a consumer, may have 30 merchants that I pay "electronically," of which only 10 - like Visa, MasterCard, my utilities and a
couple of retailers - actually get their remittance electronically. The rest would require either a check or check and list.
BS+T: Aren't you assuming that all bill payment providers are capable of originating electronic remittances?
BERAN: I agree that collecting billing information from consumer front-ends, such as PCs and telephones, and converting it into an electronic
transaction is not a trivial task. However, that task will be minimized by newer technologies, such as those for Web-based banking.
BS+T: How will the two principal bill concentrators - CheckFree and Microsoft-First Data Corp. (MSFDC) - affect the relationships
between banks and their corporate customers?
BERAN: Because of Comerica's Integrion relationship, I'm more familiar with CheckFree than I am with MSFDC. For the banking industry, it's
really a question of whether Microsoft will try to disintermediate them relative to [banks'] relationships with merchants. Because of their
relationships with consumers and billers, banks are in the best position to facilitate bill presentment.
BS+T: Is financial EDI (FEDI) a solution to the problem of getting electronic remittance information back to the billers?
BERAN: Financial EDI has not been as successful as originally hoped. Such products as Gateway [Comerica's Web-based suite of cash
management services, see February 1998 BS+T case study] will obviate the need for a separate EDI system.
BS+T: Do you define an EDI capability as the ability to receive ACH-formatted information or something more than that?
BERAN: Something more than that.
BS+T: The Federal Reserve, through a recent report issued by the Rivlin committee, has reiterated its intent to remain in the check processing
and ACH businesses, coupled with a commitment to promote new technologies such as image, EDI and ECP. What are your thoughts on that?
BERAN: In my address at BAI, I was trying to provide a call to arms for our industry to make more efficient use of the existing payment
systems. The Fed is in one of the best positions to make that happen, primarily as a regulator and secondarily as a payment [services] provider.
If we work collaboratively, we might be able to make progress in collapsing some of the back-end systems.
The Rivlin report described five scenarios, ranging from exiting the payment systems business to taking an aggressive role in promoting
electronic payments. I think if those five scenarios had been combined, the report would have reached a different conclusion.
BS+T: Which would be what?
BERAN: There might have been stronger support for the Fed taking a less active role in payments and a stronger role in regulatory actions. The
Fed has the power to move the banking industry in a lot of different directions by the way they price services, for example. I'd like to see the
Fed, BITS [the Banking Industry Technology Secretariat], Visa, MasterCard and Integrion come together to address this issue.
BS+T: In your speech, you said the Fed has a budget of $800 million representing the costs of checks and ACH processing. Does that represent
the Fed's true costs?
BERAN: It's a budgeted number. Since the Fed is not operated for profit, you'd assume that cost would equal revenue. [However] I believe that
the Fed at times subsidizes [its services].
BS+T: Would the Fed's withdrawal from payment processing be a prerequisite to achieving efficiencies in the national payments system?
BERAN: I honestly don't know. I believe the Fed will remain in the payments processing business. The biggest issue related to the Fed's exiting
the payments business is access to the payments system by banks. How would they process their work? I maintain that the Fed should regulate
and price [payment services] but not necessarily provide them.
BS+T: Given that consumers are slow to change their payment habits, how can they be persuaded to use electronic payment methods?
Beran: It does take a while for the consumer to change. As an industry, we come out with new payment methods and then spend all of our time
and money trying to change the consumer, which is something we don't have much control over. Rather than spending all our time and energy
there, [the industry should use] technology to combine - on the back end - the different ways consumers make payments.
For example, rather than worrying about whether the consumer writes a check or uses a debit or credit card, just let the consumer write the
check. In my organization, I'll capture it and kill it [i.e. make the check electronic]. I'll then push that through the same clearing and settlement
system I use for debit and credit card transactions.
Today, [Comerica] captures images of everything. Then, using ECP, we transmit the electronic information, but we still have to send the paper
checks. If we can get to the point where the checks don't have to flow, then once I capture the check image on my high-speed equipment I'm
done. That would be a major step.
BS+T: Is the industry working toward that?
Beran: ECCHO [the Electronic Check Clearing House Organization] advocates ECP. But you still need to follow with the paper check.
BS+T: Unless you have a way of transmitting a check image.
Beran: Right. Here's where the Fed can help. What if the Fed, through regulation and pricing, provided enough incentives to electronify this
stuff, even to the smaller banks?
BS+T: What is Comerica doing to achieve some of the objectives you've discussed?
Beran: At the conclusion of my remarks at BAI, I challenged the audience to examine their own organizations' readiness to facilitate common
payment strategies. We're not totally there [at Comerica], but we're working toward it. We're looking at how the Internet can help us collapse
the silos we've built around the payments system. We have a credit card department, check processing, lockbox, debit cards and electronic
banking. The different payments groups [within banks] should be collaborating to create a payments processing utility within their own
organization.
Take electronic bill presentment. Who's really managing that in organizations? Is it the folks that have traditionally managed ATMs and
electronic banking, or is it your cash management folks? At Comerica, it was the people who are doing electronic banking, not those managing
the merchant relationships.
You have to distinguish between a product and a channel. A debit card is not a product. The product is the checking account, lending account or
savings account attached to it. Other delivery channels could be check, telephone bill payment, ATM. A credit card is a product, but it also has a
vertically integrated delivery channel built around it.
BS+T: You were discussing converting checks into electronic payments. What do you think of the possibility of using the ATM networks to
provide on-line authorizations of checks written at the point of sale?
Beran: It has real possibilities. One of the problems with that approach is the need for the customer to supply a PIN.
BS+T: The ATM networks are discussing a new class of "PIN-less" transactions.
Beran: They would need to change their rules in order to do that. |
