For what it’s worth

We all know that Wal-Mart’s withdrawal of its bank application was not the end of the ILC issue. Nor is it the end of Wal-Mart’s ambitions to offer banking services.

In fact, Wal-Mart could be just as effective and competitive without a bank charter as with one.

Consider this. The superstore chain has plans to launch a prepaid Visa debit card. The Wal-Mart MoneyCard will join Wal-Mart's other financial services that include low-cost check-cashing and money-transfer services.

If a customer can cash checks, purchase a prepaid card that will be accepted virtually anywhere, and transfer money at Wal-Mart, how will our industry persuade customers to work with banks? With Wal-Mart’s reputation as a low-cost provider, customers may assume they are getting a better deal there. But the fact is, most banks already offer free transaction accounts.

Wal-Mart is not the only one picking off the most profitable pieces of the payments business and threatening banks’ central role in the system.

Prosper.com is an online marketplace for loans, started by one of the same guys who founded e-Loan. It’s people lending to people – sometimes because, frankly, the would-be borrowers would have trouble qualifying for a loan. But I suspect companies like Prosper also attract customers who want to steer clear of the government-mandated red tape that comes with banking transactions. Regardless of the reason, Prosper is prospering, with more than $65 million in loans since its launch in February 2006.

Such growth in person-to-person payments and retailers’ use of prepaid cards is taking a bigger piece of the payments pie away from banks. Our agility in the payments marketplace is also being compromised by scores of rules that turn banks into law enforcers. Add to these trends banks’ never-ending need to address evolving data security threats, and the now public ownership of Visa and Mastercard, which were once governed exclusively by banks.

These trends leave banks in the unenviable position of trying to keep up with less-regulated, non-bank competitors while also maintaining the much more expensive and burdensome infrastructure of banking.

These influences also are slowly shifting the traditional hub-and-spoke design of the US payments system into an image more closely resembling a complex chemical diagram. And banks, which have been so central to ensuring the system’s security, efficiency and reliability, are at risk for being squeezed out of the middle.

ABA’s board of directors raised some of these issues with Federal Reserve Chairman Ben Bernanke and the Fed governors in a meeting earlier this year. We also are exploring these issues further with the help of a working group I’ve appointed.

Under the leadership of Dave Hickman, chairman of United Bank & Trust in Tecumseh, Mich, the group will analyze trends and probe payments system policy. They will explore policies that might hinder bank innovation and consider whether new rules are needed to uphold the integrity of the payments system.

I believe in the free market. Companies and individuals have the right to pursue new ways to do business, including payments processing. But when these businesses are not bound by same regulatory concerns as banks, we have reason to pause.

Either the rules are essential to the system’s security and should be applied to all players, or they are ineffective and costly burdens that should be lifted from banks. Through the working group, ABA hopes to identify which is which and to secure banks’ role in the payments system of the future.