The payments industry has seen the uncanny repetition of a pattern. It starts with innovation driven by software companies, followed by ambitious "hockey stick" adoption predictions, fits and starts a la Geoffrey Moore's "chasm" model, an initial trickle followed by a torrent towards outsourced processing and a brutal race to scale and commoditization.
Not all that long ago, there were around thirty U.S. providers of in-house credit card processing software, addressing both the issuing and acquiring ends of the spectrum. Today, there are none that I can think of. A few providers remain, serving niche international markets which are yet to be served by giant multi-national transaction processors. The card processing market is otherwise dominated by transaction processors(or should we call them Software as a Service(SaaS) providers in keeping with contemporary monikers?).
The early years of both credit and debit card payments were characterized by battles for recognition by relatively unknown players, using innovation as a weapon of differentiation. The now distant introductions of electronic draft capture (EDC) and even the automated teller machine (ATM) were ground breaking and transformational. With the move to outsourced processing, however, the overarching imperative shifted from innovation to operational efficiency. Efficiency allowed scale, which in turn drove ever lower costs, resulting in tremendous operating leverage.
A few factors accompanied the shift to outsourced processing. There was massive consolidation in the rush to scale- independent software vendors were elbowed out in the melee. Banks exited the business, and allowed third parties to soon dominate the landscape, despite dire warnings from some that disintermediation could result in banks surrendering access to strategically important customer franchises. The rules of governance and the interchange system created by Mastercard and Visa provided the ideal platform for global acceleration. The availability of inexpensive telecommunications bandwidth and distributed terminal technologies has given us a world in which a card issued in Minneapolis can be swiped in Manila, and then processed by a switch in Melbourne, Australia.
Great, you say, but what does this have to do with imaged check payments? It is true that check images originate at more varied points, including branch back offices, teller stations, image-enabled ATMs, corporate offices, retail points of sale, and even people's homes. In contrast, card transactions are limited to points of sale and ATMs (not counting card-not-present transactions). The need to capture images of a certain quality, recognize amounts, correct errors, and balance transactions involving multiple checks makes this a more complex cat to skin.
Nevertheless, there are early indicators that check image payments are following a path similar to their plastic cousins. There has been significant consolidation in the industry with independent software vendors having been acquired by transaction processors- witness Metavante (AFS, Vectorsgi), Fiserv (Carreker), Fidelity (Bankware), to name a few. There is an acceleration of images being exchanged between banks through networks like Endpoint Exchange, The Federal Reserve, SvpCo, and Viewpointe. Independent Sales Organizations (ISOs) are adding check capture to their kit bag of offerings to the merchant community. While the so-called X9.37 standard for image exchange still exhibits Babel like inconsistency, it is markedly less opaque than it was a few years ago. The check scanner vendors are gingerly feeling their way towards including more check processing workflow capability in their devices, lest they fall afoul of their software provider partners.
So then, is the past necessarily prologue? Are we on a one way track to a First Data type transaction processing behemoth covering the span from capture to settlement?
Based on observation of industry evolution, StratEx, LLC predicts the following:
In the next five years,
- There will be no independent check imaging software vendors in the U.S.
- Core processors will convert acquired software companies into captive suppliers to assist outsourced item processing
- Severe price pressure on transaction fees will be the norm as core processors bundle (and perhaps give way) item processing with core deals
- The outsourced processing market will have several players serving niche markets dictated by institution size, and geography (dictated by sales coverage not technology)
- The commoditization will be most pronounced in consumer and merchant capture
- Branch capture (particularly teller capture) will not see as drastic an erosion in value
- Teller capture will increasingly be combined with teller systems as teller platform providers either make or buy their own capture applications
- ATM capture will continue on its very slow adoption curve
In ten years,
- There will be a significant consolidation of transaction processors for item processing as scale becomes all important
- This will include a few "bank agnostic" processors representing a replay of the disintermediation seen in card acquiring
- Merchant and consumer capture applications will become part of scanner firmware, resulting in a "terminal-to-switch" path typical of card processing today
- Merchant and consumer capture will also be widely available as embedded applications in home banking and accounting software packages (the latter facilitating the "bank agnostic" processing referred to earlier)
- ISOs will dominate the sale of merchant capture to businesses, with capture application enabled scanners being their flagship "plug and play" products
- There will be no interchange fee system for check transactions; rather there will be risk adjusted transaction fees depending on transaction type and source
Whether or not these predictions are borne out exactly, providers and buyers of item processing software and services will be well advised to factor these possibilities into their strategic scenario planning.
After all, it is always better to ask "what if" as opposed to "now what?"
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