In a recent article, consumer advocate Ralph Nader warned consumers about the many problems of using credit cards as a form of payment. Among other things, credit cards require sharing of confidential consumer information, create risk of fraudulent charges, and may involve consumer late payment fees and penalties. Also, credit card networks charge big fees to merchants that get passed on to consumers.
Using cash and checks to pay for consumer purchases is not nearly so problematic. Paying by check is much less likely to ensnare consumers in such pitfalls, because when paying by check funds are transferred directly from the consumer’s bank account to the account of a merchant or other payee. Costly and often intrusive payment networks such as those owned by Visa, MasterCard or other large companies are not involved in the transaction.
A point that Nader’s analysis does not address is that modern technology offers consumers ways to get the advantages of the paper check through the use of paperless electronic checks and debit cards and other electronic payment systems that use “ACH” payment system technology to move money directly from the consumer’s bank account to the merchant’s or other payee’s account. The ACH Network provides an electronic funds transfer network for direct account-to-account consumer, business, and government payments. The ACH Network is governed by the not-for-profit Electronic Payments Association (NACHA) Operating Rules.
From a consumer’s perspective, debit cards that use the ACH network seem to function much like Visa or MasterCard debit cards, but in fact, they are actually processed by financial institutions in a manner similar to the way that paper or electronic checks are processed, in the sense that they are not processed by a network such as that of Visa or MasterCard. ((See here for an explanation.))
In addition, a cell phone-based technology like CurrentC, developed with encouragement of Walmart, Target, and other large merchants as an alternative to the Apple Pay cell phone based system, functions in a similar way as a check by making use of the ACH payment system. When a consumer uses an ACH-based debit card or cell phone application, then, as is the case when a consumer pays using a paper check, the money goes directly from the consumer’s bank account into the account of a merchant or other payee. (It is true, however, that stores and vendors who offer ACH payment system debit cards or cell phone-based equivalents may often collect a customer’s personal information in a way that may compromise consumer confidentiality, but such data collection is not inherently a part of employing ACH-based technology.)
For these reasons, Ralph Nader’s support of the consumer use of paper checks logically should extend to the use by consumers of ACH-based electronic checks, as well as ACH-payment-system-based debit cards, and similar ACH-based cell phone applications where money goes directly from the consumer’s bank account into the account of a merchant or other payee. This is particularly true in situations in which the issuers forgo the opportunity to collect the consumer’s personal information for commercial use.
It would seem that ACH payment systems that are the modern electronic equivalent of checks have the potential to undermine the considerable market power that Visa and MasterCard exercise through the use of their networks. At present, there appears to be little evidence of this occurring, but perhaps that will change over time. It would be interesting to hear the thoughts of expert and informed economists about the future effect of these emergent ACH based consumer payment systems in the markets in which VISA and MasterCard compete.
Walter Isaacson makes points in his recent books that may offer insight into the future of ACH based consumer transactions. He has recently written books on the subject of both innovation in technology markets and on the life and work of Steve Jobs. Isaacson’s work suggests that just because an idea seems like it ought to be attractive to consumers and do well in the market does not mean it will. People with considerable product development and promotional skills are needed to make a product succeed. Favorable circumstances and luck may also play a role. The graphic interface for computers and the computer mouse were ideas with great potential that succeeded because Steve Jobs knew how to develop and promote them. The modern programmable computer became commercially important because people like Presper Eckert and John Mauchly and others not only had access to great inventions, but also the necessary product development and promotional skills to get the inventions accepted in the marketplace.