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The Balkanization of Payments

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Balkanization is a pejorative, geopolitical term typically used to describe the process of fragmentation or division of a region or state into smaller regions or states that are often hostile or non-cooperative with one another. Conceptually, Balkanization has an application to the payments industry as well and Bruce J. Summers, who consults with the financial markets group of the Federal Reserve Bank of Chicago, has used it to describe the impact of vested interests on the future of payments and money movement in the United States, most notably in a 2014 Bank Technology News article titled “Imagining a Real Time Payments System.

This BTN article was one of many published on real time payments that year after the Federal Reserve kicked off a nationwide debate by releasing a paper that challenged the status quo of the U.S. payments system.  Many within our industry weighed in on why modernization of this type must or must not go forward.  Anyone following the dialogue or, in some cases the diatribe, probably found it easy to be cynical of the arguments on both sides, but perhaps nowhere was the voice for self-interest more visible than among those whose desire is to keep the payments ecosystem in the U.S. just as it is.

The reality is the system in the U.S. needs to be changed and since the initial tiffs around the topic in 2014, there has been a broader consensus in support of this position.  As for the inherent cynicism the debate has produced, we should not be too quick to condemn, as everyone is entitled to the opportunity to make a living and advocating for that interest is not a crime -- even in policy debates.

That said, too often most of the energy is spent trying to defend the incumbent methodology against new ideas rather than focusing on how new ways of doing things might – when well designed - produce meaningful benefits for all involved.  Unfortunately, we in the payments industry have not always been very good at making this leap.  To some degree, this mindset is a byproduct of regulation, as new processes are often viewed as risky, which brings additional scrutiny and concern from regulators.

To some degree, this mindset comes from the role of payments as a central component in the evolution of human society. How we pay for goods and services always had a direct correlation to the need to support economic growth.  Initially, humans bartered.  That worked well as long as trade was local. Then humans began to explore other geographies, where there were new opportunities to buy and sell.  At some point, bartering became too cumbersome for this environment and abstractions of value began to be used involving precious metals and other forms of “money.”  Finally, as the human species continued to grow and spread, and as economies grew more sophisticated, there developed a need for letters of credit with institutions that stood behind their value.  All of this ultimately lead to the need for payment devices to support our need to buy and sell.  Voila! The credit and debit card are born, followed by a number of variants leading to now when the Three Pays (Apple, Samsung, Android) seemingly command all the attention.

Thus today we find a Balkanization of the payments industry, with invested interests causing many, if not most, of the players to not work and play well with others.  This shows no sign of changing as the “old ways” of paying seem to live on (see recent blogs here on the popularity of cash) while new ways of paying continuously come into existence.  The fountain of innovation that the industry has seen recently is driven by new players leveraging a weakness within the established payments landscape.  The bulk of the established system trusted by consumers is anchored by financial services organizations with big balance sheets and thus, significant levels of government oversight.

Is there a chance that we might all agree to get along for the benefit of the consumer?  I doubt it.  It seems more likely that as technology makes more and more innovation possible, an increasing number of companies will emerge and try to disrupt the status quo.  This will require financial service providers to evaluate how best to address those disrupters that have viable business models whether by assimilation, partnership or perhaps both.  In the end, the innovators make a valuable contribution as a catalyst for change that benefits the consumer, but the established players continue to control who lives and who dies within the Balkanized territory of “Paymentsland.”

So, what’s this mean for those of us who build the software that powers the plumbing and infrastructure that supports Paymentsland?  Complexity will continue to grow, performance that delivers anytime, anywhere access remains table stakes and the opportunity to fail big due to systems that cannot keep pace will grow.  2017 looks to be a pivotal one in our industries history.

Happy New Year from Paymentsland!

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