Transcript June 2015 Payment Improvements in the U.S. Questions • Should Free Market Determination Select the Best Option(s) for Electronic Business Payments? – Fed estimates that only 27%

June 2015
Payment Improvements
in the U.S.
Questions
•
Should Free Market Determination Select the
Best Option(s) for Electronic Business
Payments?
– Fed estimates that only 27% of checks will move
to the new online real-time credit push system by
2025
– Should the market support improvements for the
other 73% of check payments?
– How far is the UK ahead of the US?
– How can free market determination be supported?
2
Business Payments
•
No Universally Acceptable Alternative to
Checks for Business Payments
– Phoenix-Hecht (2014) reported 65% of business
payments made by check (small businesses not
included)
• Credit push alternatives have been available for decades
• Fed, private sector and NACHA have heavily supported moving
business payments to ACH credits
– Alternatives to paper checks are:
• Today - Fedwire or ACH credit
• Future – Online, realtime credit push payments
– Years and billions of dollars away
– Fed estimate is that only 27% of all checks will make transition in 10 years
– Is there sufficient difference in this credit push option to overcome business
inertia?
– What about the other 73% of checks – why not improve them?
3
Business Payments
•
According to Phoenix-Hecht (2014)
– Businesses prefer check payments by a ratio of
more than 3 to 1 over all other payment types
•
In Both the U.S. and Canada
– Businesses report that check systems work and
are not problems
•
According to the Federal Reserve Payments
Studies
– The percentage of total check payments that are
business payments continues to rise
4
B2B Payments
•
Phoenix-Hecht – 2014*
Middle Market Corps ($20 - $500 MM in Sales)
60.0%
66.1% 67.3%
2013
2014
% of Total Payments
70.0%
“our 2014 survey shows a slight uptick
among middle market corporations”
50.0%
40.0%
Note: In 2014, checks = 3.7
times the next largest
payment type
30.0%
19.0%18.3%
20.0%
8.0% 7.8%
10.0%
6.7% 6.2%
0.2% 0.6%
0.0%
Check
5
ACH
Wire
Transfer
Cards
*Phoenix-Hecht 2014 Treasury Management Monitor
Other
B2B Payments
Phoenix-Hecht – 2014*
% of Total Payments
60.0%
Large Corporate (>$500 MM in Sales)
50.6%
50.0%
40.0%
2013
2013
2014
2014
•
48.9%
“the large corporate market continues
to show a steady decline”
33.7% 32.7%
Note: In 2014, checks = 1.5
times the next largest
payment type
30.0%
20.0%
11.3%
9.5%
10.0%
5.8% 6.5%
0.4% 0.5%
0.0%
Check
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ACH
Wire
Cards
Other
Transfer
*Phoenix-Hecht 2014 Treasury Management Monitor
B2B Payments
•
Phoenix-Hecht – 2014*
% Distribution of Business Payments
Card
Wire
Other
0.6%
6.2%
Clearly checks
8.1%
continue to be the
ACH
ACH
19.6%
preferred
Checks
Checks
business payment
65.5%
method by ratio of
at least 3 to 1!
7
*Phoenix-Hecht 2014 Treasury Management Monitor
B2B Payments
•
Fed Payment Studies*
B2B as Percentage of Checks Written
32%
35%
27%
30%
25%
25%
Clearly shows
20%
the persistence
15%
of business
15%
checks
10%
5%
0%
2001
8
2006
2009
2012
*The 2013 Federal Reserve Payments Study
Investments in Payments
•
Business Investment Options Are:
– Spend money on administration/overhead or
– Spend money where its make money
• On its goods and services
•
To Spend on Administration/Overhead,
Businesses Need:
– To fix an existing or imminent problem that
prevents normal, ongoing business, or
– An ROI that is greater than generated from their
normal business activities
• Especially true for publically held corporations
•
9
Payments are an Overhead Costs for
Businesses
UK Experience
•
Applying the UK Experience to U.S.
– After 6 ½ years, single item, immediate Faster
Payments total 4% of total non-cash payments
• Linearly extrapolated over 10 years yields 6.1%
– Between May 2008 and December 2014:
• Non-cash payments in UK grew by 416 million payments
per month
• Single item, immediate (SI) Faster Payments grew by 58
million per month
– Market demand for non-cash payments grew 7.2 times
faster than demand for SI Faster Payments
– At same adoption rate, U.S. should continue to
enhance all of its non-cash payment systems
• Assumes 90% will not transition in first 10 years, and
• 73% of checks will not transition in first 10 years
10
UK Non-Cash Payments
BACS is UK’s ACH
10.0B
BACS Credits and Cheques –
Only Payments with Declining
Volumes
2014
3
.9B
.5
2
1
.29B
1.2B
4
3.1B
3.7B
5
2.0B
3.0B
6
5.9B
7
.3 B Decline in BACS Credit
Volume was Mandated
Movement from BACS to FP –
Standing Orders
2009
In Billions
8
.035B
.036B
9
2.5B
2.2B
10
0
DR Card
11
Cr Card
BACS Dr BACS Cr Cheques
CHAPS
Source: UK Payments Council – www.paymentscouncil.org.uk
FP
UK Faster Payments
*Total Non-Cash Payments (w/o credit cards)
1,600,000
1,473,012*
200,000
Total Payments - 416.4 million
Faster Payments - 101.6 million
SI Payments 58.2 million
Dec 2014 - SI Payments only 4.0% of
Total Non-Cash Payments
58,504
400,000
Single Item Immediate FP
600,000
All Faster Payments
800,000
1,056,576*
1,200,000
101,885
1,400,000
1,000,000
Growth in Volumes 6.5 Years
After FP Implementation:
Market demand for non-cash
payments grew 7.2 times
faster than demand for SI
payments
0
May 2008
12
Dec 2014
*Source: UK Payments Council – www.paymentscouncil.org.uk
Implementation Success
1,400,000
In Thousands / Month
1,200,000
1,000,000
UK’s Faster Payments
800,000
600,000
400,000
.1B
200,000
0
1 4 7 10 13 16 1 22 25 28 31 34 37 40 43 46 49 52 55 58 61 64 67 70 73 76 80
1,600,000
1,400,000
1,200,000
Months
U.S. Image Exchange
1.3B
1,000,000
800,000
600,000
400,000
200,000
0
1 4 7 10 13 16 1 22 25 28 31 34 37 40 43 46 49 52 55 58 61 64 67 70 73 76 80
13
Months
Sources: UK Payments Council & CheckImageCentral
1,600,000
Volume Trends - 1st 80 Months
UK Payments Trend
*Total Debits vs Total Credits (w debit cards)
600,000
Debit Pulls
400,000
Growth in Volumes 6.5 Years
After FP Implementation:
Total Debits Total Credits -
Credit Push
800,000
Credit Push
1,000,000
Debit Pulls
# of Payments / Month
1,200,000
Demand for debit pull
payments grew 7.8X faster
than demand for credit push
payments since introduction
of Faster Payments
200,000
0
May 2008
14
361,096
45,922
Dec 2014
*Sources: UK Payments Council & UK Cards Association
UK Payments Trend
*Total Debits vs Total Credits (w debit cards)
# of Payments / Month
1,400,000
1,200,000
Debit Pull
1,000,000
% Change/Yr:
800,000
600,000
Debits
Credits
% Total Payments
May '08 Dec '14
76.6%
97.5%
33.4%
2.5%
400,000
200,000
Credit Push
May '08
Aug '08
Nov '08
Feb '09
May '09
Aug '09
Nov '09
Feb '10
May '10
Aug '10
Nov '10
Feb '11
May '11
Aug '11
Nov '11
Feb '12
May '12
Aug '12
Nov '12
Feb '13
May '13
Aug '13
Nov '13
Feb '14
May '14
Aug '14
Nov '14
0
15
*Sources: UK Payments Council & UK Cards Association
Debits – 6.8%
Credits – 2.8%
Credit Push in the US
•
Credit Push Options Have Been Available for
>30 Years in the US
– But all have failed the market adoption test
• Payment examples: ACH credits and Fedwire
• Remittance standard: Electronic Data Interchange (EDI)
– Is there sufficient financial incentive in 2015 for
businesses to invest in modified versions of credit
push payments?
16
Is There a US Alternative?
•
According to the Federal Reserve’s Summary
of Its Electronic Payment Order (EPOs)
Forum
– “EPOs are a viable payment method for both small
and large businesses because of the speed in
clearing and settling them, the finality of payment,
their low cost, their ubiquity and their familiarity.”
•
17
EPOs address many desired outcomes of the
Payments Improvement initiative!
Remittance
Data
RDC
Statement
Image
Image
Image
Deposit
COLLECTING
BANK (BOFD)
•
•
•
•
Image
INTERMEDIARY
BANK
PAYING
BANK
Minimal New Investment (+ROI image)
Minimal Changes in Processes
Reduced Expenses
Quick Implementation
CHECK WRITER
EPO
DEPOSITOR
CHECK WRITER
EPO Scenario
Current Environment
•
The Electronic Check (EPO) Option
– 2014 volume of transit images - 13.2 billion
– 2014 value of transit images - $19.1 trillion
• 116% of GNP – Large, valuable payment system
– Investments in image exchange fully amortized
• EPOs maximize ROI on existing image investments
– Only check clearing functions not electronic are:
• Payer writing check and Payer delivering check to payee
– New investment required? Minimal
• Reformat digital data on AP system and transmit to payee
• Interface EPO with RDC application
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Current State of Check
57.00
2014 Average Daily Image Transit Volume
Volume in Millions
55.00
Dec. 2014 1.05% Higher than Jan. 2014
53.00
51.00
49.00
Total 2014 Transit Image Volume = 13.3 billion
Total 2014 Transit Value = $19.1 trillion or 116% of GNP
47.00
45.00
Jan
20
Feb
Mar
Apr
May
Jun
Jul
Aug Sept
*Source: CheckImageCentral.org
Oct
Nov
Dec
Value / Speed
•
EPO Societal Value?
– Cost savings similar to other electronic payments,
but
• Without significant new investment, and
– Enhanced value from short implementation
•
EPOs Accelerate the Clearing of Checks
– With image, most checks clear same day as
deposited
• Some banks report more than 80% clear same day
– With EPOs, more checks can clear same day as
written (originated)
• Improves end user experience!
21
Risks?
•
According the Federal Reserve
– The transaction and dollar amounts of fraud is
less in check than in ACH or cards
– The rate of return of unpaid checks declined by
40% between 2009 and 2012
•
According to the American Banker
Association
– Check fraud down 37% from 2008 to 2012
– Checks were ranked lowest among eleven
payment options in terms of future threats
• Online Banking and ACH were ranked highest
22
Unpaid Check Returns*
Volumes in Million / Year
200
# Unpaid Cks Returned
.5% Return Rates
186.9
0.50%
180
0.45%
153
160
0.40%
140
126.8
0.35%
120
0.30%
100
0.25%
80
•
.3%
64
0.20%
60
0.15%
40
0.10%
20
0.05%
0
0.00%
2003
2006
2009
2012
2003
2006
2009
Since 2003
– Returns declined 66% (50% since 2009)
23
*Source: Federal Reserve’s 2013 Payments Study
2012
Check Fraud Trend*
$1,024
$1,000
$s in Million / Year
$900
37% Decline
in 5 years
$800
$648
$700
$600
$500
2012 – Lowest
amount since 1997
$400
$300
$200
$100
$0
1997
24
1999
2001
2003
2006
2008
2010
2012
*Source: 2013 ABA Deposit Account Fraud Survey Report
Distribution of Fraud*
Number of Transactions
ACH 5%
Cards
92%
•
25
Value of Transactions
Check 3%
ACH 19%
Cards
65%
Check 16%
Check has Least Volume and Smallest
$ Amount in Fraudulent Payments!
*Source: Federal Reserve’s 2013 Payments Study
Ranking of Future Threats
Source: American Banker’s Association
Description
26
•
All Respondents
Online banking
4.0
ACH
3.9
Mobile banking, in general
3.9
Debit card (PIN based)
3.8
Debit card (Signature based)
3.7
Mobile banking P2P
3.7
Remote Deposit Capture, non-consumer
3.7
Image capture via mobile device
3.5
Remotely created checks (RCC)
3.5
Wire
3.5
Check
2.9
Ranking next 12 months
– “The respondent were asked to rate on scale of 0 to 5 the level of threat
poised by various risks to the industry in the next 12 months, with 0 being
“none” and 5 being “extremely high”.
Maximize Returns
•
Enhance the Payment Type Preferred 3 to 1 by
Businesses
– Maximize achievement of Payments Improvement
initiative by building on most successful payment
transition in history
• Achieve business savings associated with paper medium
• Accelerate clearing to same day as written
– Maximize ROI on existing investments & minimize
required new investments
– Minimize disruption to businesses and their
payments and remittance processing
• Avoids converting debit payments to credits
– Minimize uncertainty of business acceptance
27
Problem Eliminated?
•
The Problem
– What was bad about paper checks was the medium
• Electronic images eliminated the physical medium for
banks and the Fed
•
Opportunity
– Eliminate the physical medium for businesses and
create significant, new societal value
28
What to Do Now?
•
Express Your Support
– If you support continued improvements to the
check system contact ECCHO and let us know and
contact your Federal Reserve Representative and
let him/her know
– If you support letting the market determine the best
option for business payments contact your Federal
Reserve Representative and let him/her know
– If you support creating significant, new societal
value for businesses through improvements in
business payments, ECCHO and the Federal
Reserve need to know
29
Thank You!
David Walker, NCP
[email protected]
214.273.3201
Electronic Check Clearing House Organization
www.eccho.org