Living in the Chicago area, I’ve spent my fair share of time in traffic congestion trying to get to the airport. (Anyone familiar with Chicago ORD will also know that finding a plane that leaves on time is another challenge – but that’s a different story). Chicago is known for having only two seasons – winter, and construction season. This past summer has seen reconstruction of the roads in full gear as projects from the stimulus funds (correctly known as the American Recovery and Reinvestment Act, 2009)) kicked in. My frequent rides to the airport now take much longer than usual, and a recent trip had me thinking about national payments infrastructures and what it takes to modernize them.
At the risk of being drawn into a political discussion (I won’t), it seems to me as a layman that there are many roads in the US being rebuilt that still had some life left in them. They weren’t perfect and had been patched and repaired, but in large part I wouldn’t have put them on the priority list for rebuilding. Pre-stimulus, I doubt that many of these roads would have been rebuilt because there simply wasn’t a business case to justify the investment required. When you look at the current state of payments infrastructure in mature payments markets, you can make the same argument.
The US for example has ACH and Fedwire networks that were established in the 1970s. They work well for the original design, but of course there are limitations that are difficult to overcome and restrict the ability to address the future needs of consumers and corporations. While many countries are implementing near real time low value systems, speeding up the cycles of ACH (a batch based system), forces additional challenges on banks with long running batch processes on predominantly mainframe applications. Adoption of new data structures such as XML and ISO20022 for additional remittance information has been challenging to implement to say the least. As I say, these examples are challenges to modernization, but is it enough to create a compelling reason (and funding) to invest in true modernization?
So let’s think about some recent drivers of change and modernization. In 2001, when cheques in the US were still cleared as paper items, they were transported around the country in planes. Those planes were grounded after 9/11, and so cheque clearing was effectively halted for days. This played a major part in driving the Check21 Act which enabled the exchange of cheque images and data in place of physical paper. In the UK, consumer advocacy groups played a large part in forcing the regulation that resulted in the Faster Payments initiative. Of course, there is also the SEPA initiative, again driven by regulation and without a clear business case for banks, and it seems that only mandating an end date for compliance will complete the long-running course. All of these initiatives have resulted in innovation being used to dramatically change the payments landscape, but it is doubtful that any of these initiatives would have happened without regulation.
I’m not a fan of more regulation – banks have enough on their plates – but I’ll close by asking a provocative question. Payment systems are a complex but vital component of a country’s financial infrastructure. We have the technology, but is regulation what it takes to modernize for the next generation of payments processing?