Payments can sometimes be a confusing and complex topic. Yet, it is an important concept for community banks. As members of the payments ecosystem, community bank account holders rely on cost-effective solutions for their banking needs. Increasingly, though, payments technology is owned and controlled by a few entities. The impact for community banks is reduced influence, choice and flexibility caused by the tools – known as standards – used in payments.
SHAZAM is an advocate for a payments system based on open standards instead of one that is driven by the proprietary technology of its largest players.
Similar to the rules and regulations that govern the automated clearinghouse system, standards in payments govern data security and consumer authentication for card transactions. The payments system includes many players including merchants, card processors, card networks, financial institutions, and software and hardware technology companies. Payment players rely on a system that allows transactions to move from one to another for processing. Certain standards will allow for optimal interoperability between all players in the system.
Consider this. What if, in our homes, the pipes and plumbing came in all shapes and sizes? What if there were no system for size — the appropriate pipe for a specific job? What if faucets were manufactured with one set of standards, and then pipes and fittings were manufactured to conform to another set of standards? How would we connect to a water service or install plumping fixtures in our homes and businesses?
In the end, using a uniform infrastructure of pipe sizes and a system of hot on the left and cold on the right allows for consistent operation. Even with these standards in place, we still see vast innovation and competition in faucet selection because they all connect and function on a uniform system.
Standards in payments are similar. In addition to ensuring interoperability, establishing a consistent framework will result in payments that are more secure and fraud resistant. As proprietary technology gains influence in payments, these rules limit the ability of community banks to choose the best solutions and partners that fit their business needs.
The simple answer is choice, flexibility, innovation and healthy competition.
If open standards are in place, and interoperability is ensured, card issuers can choose a partner from a highly competitive payments ecosystem. If proprietary technologies continue to take hold, the payments ecosystem will become increasingly fractured, more confusing to customers and community bank costs will go up.
Maintaining the competitive edge in the U.S. payments system benefits small community banks. It keeps costs in check for the technology and services, which allow community financial institutions to stay relevant.
Step by step, the largest entities in the payments industry are using their size and market strength to nudge out competition. How? The introduction of proprietary technology is the best example. These large entities own the new technology, such as EMV and tokenization. They also control the rule-making bodies that govern payments systems. If the same players set and enforce the rules, that means they have a massive amount of control over who handles the transaction and how the transaction gets routed. This all adds up to increased costs for your financial institution.
Community institutions can advocate for a system that protects against putting control in the hands of a few, if for no other reason than in a standards-based system, the risk of hacking-for-profit (or nuisance) is mitigated.
The U.S. payments system is excellent, yet it could be better. Reach out to industry leaders, respond to information requests from banking organizations, and introduce yourself to your elected officials. Community banks need standards that allow choice, flexibility, innovation and most of all, competition.
Contact Pat Dix with questions by email or at 800-537-5427 ext. 2901.