Increasing competition from tech-based innovators demonstrates the importance of the payments system to the banking industry. Connect payments with information and you’ve got a powerful basis for business success. Paul Waltz, president of Shazam, likes to say the historical value of the banking franchise was in loans; today it is in deposits and in the future it will be in information.
Valuable information is already being harvested from the payments system. Whether a customer pays by phone, plastic or even check, that information provides someone with insight into potential credit business. Match the payments data with location tracking/time stamping and you really have something. This is why the biggest banks are so interested in services such as Zelle; of course the financial institutions behind Zelle are happy to make person-to-person e-payments possible, but what they really want is all the information that can be harvested from a widely-used e-payments service.
Smaller banks can participate in Zelle, but at what cost? They end up sharing all kinds of information about their customers, which the largest banks might be able to leverage more quickly than smaller banks. This is why the Fed’s involvement in the faster payments initiative is so important. Historically, the Federal Reserve has been involved in the paper-based payments system, giving the smallest banks a level playing field on which to compete with the largest banks. I would like to see the Fed continue to enable this kind of parity in an electronic payments system.
As this issue goes to press, we await word from the Fed on the faster payments notice it published last fall. The Fed conducted meetings all over the country toward the end of 2018, encouraging interested parties to read the notice and provide thoughts. Comments were due Dec. 14. My guess is the Fed will take a significant role in the faster payments infrastructure; the challenge will be to move quickly so solutions proposed by the Fed aren’t outdated by the time they get implemented.