I am not a lover of buzzwords and catch-phrases–namely the ones that have to do with my industry. Examples include: New Paradigm, Paradigm Shift, Payment Convergence, Payment Ecosystem (and there are more). These catch-phrases all make me cringe and they all start out well-meaning and intentioned; trying to communicate something of value. They are simply used so frequently that the benefit of the phrase is often lost and ends up becoming a passive, annoying cliché! There is one catch-phrase that is more over used, misunderstood and more annoying to me than any other: “Alternative Payments.”
I cannot count the number of conversations I have had with people who think the words or phrase “alternative payments” actually means a brand new type of payment. Inevitably, the conversation starts with PayPal (or soon gravitates to it) as the example of an alternative payments. Somehow, some folks think that PayPal actually runs its own payment system independent of financial institutions and the payment types PayPal offers are new or unique. Nothing could be further from the truth.
PayPal relies on financial institutions and other providers of financial services to process their payments domestically and internationally. Banks and financial service providers process the payments PayPal offers to run its business. Credit card payments, ACH debits to demand deposit accounts (DDA) or most recently, the remotely created check deposits (RDC) to a PayPal account–which allow PayPal customers to take a picture of a consumer check, presumably using their mobile phone, email it for deposit–all accomplished behind the scenes by banks or non-bank providers. None of the PayPal’s accepted payment types are new. They have been in existence for a long time.
RDC is the only process that is remotely new (no pun intended) when Congress enacted Check 21 law making a digital image of a check a legally permissible and acceptable document in 2004. However, it is still a check–just a digital copy or image. To give you a complete picture, Congress passed Check 21 law because of the events of 9/11/01. If you recall, air transportation came to a screeching halt on 9/11. Airplanes were grounded for days. That affected paper check clearing dramatically because at that time, planes were a major player in the paper check clearing process and flew checks around the country, daily, for deposit and clearing. So when the planes couldn’t fly, our checks could not clear. The passage of Check 21 law made it possible for checks to be converted to digital images and be transported electronically, not physically, for clearing settlement. Today RDC is predominately used to transmit check images to be processed through the same check clearing systems, albeit faster and more efficiently. Hence, there is nothing new, in terms of payment types that PayPal is using to transact its business. PayPal is simply leveraging existing payment options; often steering its customers to the payment type that is most cost-effective to PayPal–which is an ACH debit to a demand deposit account (DDA).
In my opinion, the phrase “alternative access to payments” better describes and reflects marketplace changes and evolution of payments. As technology has rapidly evolved a plethora of options have arisen for consumers, corporations and governmental agencies to make and receive payments, as well as improved how some payments (checks) get processed converting to an electronic image (RDC).
Think about it, technology allows us to conduct almost all our financial service needs without ever entering a bank’s physical branch if we don’t want to. We can receive our billing statements via email, we can pay our bills via on-line banking, we can email our check deposits, deposit our checks at an ATM without having to use paper deposit slips. We can now reload gift cards and pre-paid cards using a PC, phone or automatically using a credit card. We can wave our credit cards at some merchants or for BlingNaton users, the sticker affixed to our mobile phone is all we need to make a purchase. Smart phones also hold the promise of condensing all our financial service needs into a single device that can access financial data (like account balances) like transferring money to and from accounts, paying bills, reloading prepaid and loyalty cards, paying for a latte at Starbucks and sending money to the gardener, a daughter or grandson.
It is how, the access, that is so quickly evolving–not the actual payment instruments (which all more or less remain the same). Do not be misled. You have many choices on how to get to your financial information and payment destination, but once you arrive you’ll see that not much has changed!