As we near the end of 2011, it’s time to look back at what happened in payments this year and consider the implications for 2012.
1. Regulation II. Ah, interchange. The controversy surrounding the debit interchange cap certainly garnered plenty of media attention, but I do think interchange regulation turned out to be the single most important change to payments in 2011—just for different reasons than I had expected. I was correct in thinking banks would grudgingly accept the cap, but they did manage to pressure the Fed into increasing the cap amount from 12 cents to 22 cents. I pretty much muffed up the rest of it.
The fraud adjustment fee almost became an afterthought once the cap was increased, and while both merchant-funded rewards and credit card offers are increasing, they don’t appear to be blockbuster moves—yet. What surprises me most is the extreme reluctance of banks to let go of the old pricing paradigm—charging fees for transaction-based exception items as the path of least resistance with consumers. The Bank of America move to charge a monthly fee for a product that still generates revenue and appears to remain profitable to them was just boneheaded. Still, BofA showed some wisdom by reversing course and the whole experience highlighted the importance of pricing transparency.
Going forward, I expect the small-ticket interchange debacle to catch up with MasterCard and Visa. Visa’s move to raise its small-ticket interchange price to match MasterCard illuminates the market power the larger banks impose on the card networks—not a good move when all the credit card lawsuits are reaching a critical stage. The card networks also seemed to have successfully extended their interchange-based business model to the mobile payments arena. That success is not ideal, but if credit card interchange does take a major hit in the future it will all work out for merchants and ultimately consumers.
2. Isis in Motion. It wasn’t too hard to predict Isis would get going sometime after 2011. The business model for Isis has evolved but during the year it has won me over as my top pick as the potential winner in the mobile wallet sweepstakes, despite all the media attention showered on competitors like Google. All the card networks are on board. Issuers are being lined up. Merchants in test markets are being signed as we speak. Now Isis needs to execute.
Isis is the name of the ancient Egyptian goddess of motherhood, fertility and magic. Assuming the Isis technology can move beyond magic to produce a viable network for mobile commerce, this wallet/service has a lot of potential. Today if you lose your wallet, you call everyone that issued you a card to ask for a replacement (or pay a service to do it for you). All of that effort takes time and is a hassle. With Isis, you’ll only need to drop by one of the phone carrier’s stores to get a new phone if it’s lost or damaged—all your card accounts will be immediately restored. That’s a major paradigm shift.
3. ERI Day. It took several years, but the Extended Remittance Information service for wire transfer payments is here; the Fed stayed on track and officially launched its service on November 21, 2011. Banks are now required to receive and pass on up to 9,000 characters of information sent with wire transfers. Some of the top banks have resisted the launch of this service every step of the way, but many recognize this new capability as a new opportunity to grow one of their most profitable payment services. Corporates won’t convert all their payments to wires with ERI, but this payment capability will shortly become an important part of the portfolio of services companies will expect when selecting treasury services providers.
4. Same-Day ACH. The Fed’s Same-Day ACH service has been criticized by some for a decided lack of uptake. Fair enough, but their action will ultimately accelerate the adoption of this capability once the NACHA rule-making process requires ODFI participation. Since us payments folks like our acronyms, NACHA gave us a new one—EPS, which is the moniker NACHA assigned to its Expedited Processing and Settlement proposal.
Corporates do have a few issues with EPS; namely, they are concerned about managing late-day exception items. If the treasury group is notified in the morning of an unexpected item received from, say, a taxing authority, they have time to adjust their cash position to cover it. Under EPS, that same item becomes a problem. Granted, this type of situation is not expected to occur frequently but AFP will provide commentary to NACHA next month to suggest modifications to their proposed rules to limit the damage these types of items may inflict.
5.Cross-border ACH. OK, so I jumped the gun a bit on this one—cross-border ACH item volumes are still relatively small. The IAT volumes (about 7MM items) reported by NACHA continue to be dwarfed even by CTX volumes, but IAT is growing at over 200 percent (figures as of 2Q2011). I expect these cross-border ACH items will continue to grow at a robust rate for the foreseeable future, assuming the eurozone doesn’t fall apart.
Best wishes and good luck in 2012.