First, the good news: American consumers and businesses will write about 1.3 billion checks this week, a sign of a very healthy economy.
Now, the bad: As these checks flow through the payment system, participating banks have to handle each one about nine times; which translates to anestimated per check processing cost range of 60 cents to $3. Even if we accept the low-end estimate, it is obvious that the cost of processing more than 68 billion checks a year represents a prodigious burden to banking and payment systems, as well as to the American economy.
Fortunately, the solution to this dilemma-electronic payment systems-has been in existence for quite some time. The banking industry cost for an electronic payment today is less than 10 cents, significantly lower than the cost of processing a paper check. Obviously, the most logical way to reduce the processing burden is to substitute electronic payments for checks.
To this end, banks have introduced numerous electronic alternatives to the paper check over the past several decades, including credit cards, electronic funds transfers (EFT) and automated clearing house (ACH) items, online bill payment services, debit cards, check imaging, and point-of-sale (POS) electronic check conversions.
But while Americans have warmly embraced alternatives like credit cards, they continue to write ever more checks. Most American credit card users, for example, maintain multiple credit card accounts and pay off these accounts in full every month-by check, of course.
This process has resulted in a payments system that is still dominated by checks and cash, but also includes four independent credit card systems, an ACH network, a variety of ATM and POS networks, the domestic wire transfer service (Fedwire) and the international payments system service (SWIFT). No wonder banks find it difficult and costly to maintain their existing payment operations.
Getting Away from Paper
The fundamental reality for payment systems is that Americans today are more numerous, have more money, buy more things, and maintain more financial relationships than ever before. For these reasons, the total volume of payment transactions will continue to accelerate.
But it is also clear that Americans are not going to stop writing checks, and banks are not going to escape the burden of processing them.
In this type of environment, it becomes imperative for banks to redirect growth in payment traffic away from checks to low-cost electronic products.
The good news is that banks have been handed an unprecedented opportunity to do just that. Electronic commerce offers banks both the gateway and the tools they need to drive payment traffic to electronic alternatives. The infrastructure needed to support this payment migration is already in place. The accelerating use of the Internet for e-commerce has spurred the development of effective security and authentication technologies, as well as the enactment of legislation establishing digital signatures as binding.
Businesses and consumers can now complete their most complex and sensitive transactions within electronic environments, in complete confidence that they enjoy the same legal and financial safeguards that govern physical world transactions.
Fighting for the Internet Space
But when banks enter this new arena, they will be facing some non-traditional competition. Indeed, this e-commerce opportunity is not limited to banks, and several non-bank competitors are already active in the consumer-to-business (C2B) sector. Firms like Ecount, PayPal, and ProPay leverage existing credit card systems to enable direct payments over the Internet. PayPal already claims to have more than four million customers signed up for its service. Major online operations like Yahoo, Amazon, and eBay have also announced similar offerings.
The fact that these competitors are already in the marketplace may be an advantage to banks, however, since they will lay the groundwork that financial institutions can follow. In fact, a few banks-most notably BankOne.com and Wells-Fargo.com-are already promoting competing products.
What keeps more banks from joining Bank One and Wells-Fargo is their inability to move at Internet speed. New e-commerce strategies demand that banks pick up the pace or else be left behind in the race to dominate e-commerce payments. A solution to this problem is to turn to bank-neutral providers-companies that have already developed the secure interfaces required to connect the Internet with legacy systems and existing interbank funds transfer backbones.
Once this is accomplished, the universal systems solutions that will enable banks to bring affordable electronic products to market can be integrated.
An e-commerce-based payment system also gives a bank an edge in the burgeoning business-to-business (B2B) marketplace, especially since the card-based payments offered by banks and non-banks have significant drawbacks in the B2B world. For example, the large transactions generated by the new B2B marketplaces are very expensive-the processing charge on a $100,000 card purchase alone is about $2,500. B2B commerce is already cutting prices to the bone, and few suppliers will be able or willing to bear such high payment charges. Card payments are also subject to repudiation, and thereby increase seller risk.
For B2B systems, payment solutions based on wire transfers offer greater security, faster settlement and access to funds, and greater assurance to sellers. Familiarity with these systems should give banks an edge in B2B markets.
To offer maximum efficiencies, B2B exchanges must excel at procurement, logistics and payment. Today's exchanges are great at purchasing, and are already producing dramatic savings in costs-of-goods and backroom functions like order processing. Logistics functions are not far behind; it is now possible to track the status of an order online from initiation to delivery. Paper-based payment operations, by comparison, are ripe for reaping the efficiency benefits of e-commerce in the same way that procurement and logistics have benefited.
So in addition to bringing banks up to Internet speed, electronic payments products promise enormous savings in backroom activities like accounts receivable, accounts payable, and regulatory compliance, as well as dramatic improvements in accessibility of funds and significant reductions in bad checks and payment disputes. The deployment of online payment products through B2B exchanges and marketplaces will also produce immediate new revenue streams for payment processors bold enough to seize the electronic initiative.
Over the past two decades, banks have ceded major business lines to new competitors, including home mortgage originations, credit card issuance and acquiring, and retirement savings. But the "wholesale" cash management payment system has endured as a citadel of bank dominance.
If banks don't seize the opportunity to bring e-commerce payment products to market quickly, they are effectively delivering up the key to this citadel to a new set of competitors.
About The Author: David Kvederis is president and CEO of BankServ, a leading provider of secure electronic and Internet funds-transfer and payment services. He can be reached at (415) 217-4581 or [email protected]