Banks across Europe are set to lose an historic revenue stream.
It doesn't seem so long ago that the promise "the cheque's in the mail" filled you with dread.
First, maybe it wasn't. Second, even if it was it might still take two or three days to arrive in the letter box. Third, you then had to bank it. Fourth, the bank had to clear it.
If you were lucky, you might get your sticky fingers on the boodle within ten days from the get-go.
The brave new world of electronic banking, which has been in general use for about a decade, was supposed to end all that. Your payee goes online, makes the transaction and, bingo, it's in your account. Except it doesn't always work like that.
Some British banks can do the job in two hours -- for instance, HSBC (LSE: HSBA) to Royal Bank of Scotland (LSE: RBS) -- while others still take three working days. The Bacs system, backbone of the payments system here for over 40 years, works reasonably smoothly.
But in several European countries, the delays are inordinate. In Italy, six days isn't unusual for the transaction to be cleared. Heaven knows how long it used to take for a cheque to clear there.
Of course, the money's debited from the payer's account the money it's withdrawn, but doesn't turn up in the payee's until it suits the bank's payments system.
A payments revolution
However that's all going to change, in fact already is changing. This will be to the considerable benefit of the customer and to the hefty loss of the banks.
It's all due to the influence of the Payment Services Directive (PSD) that's rolling across Europe and UK as we speak. One of those little-known European Commission directives, at least outside banking services, the various elements of the PSD's influence on bank profits will be profound. In fact, it's a revolution.
The delay in clearing transactions is popularly called "the float" but it's more technically known as value dating. And value dating is for the high jump.
Although it's happening behind the scenes, payments being an arcane but fundamental area of banking, the demise of value dating is creating turmoil within the industry.
A wonderful euphemism, value dating describes the period of time taken by a transaction as it passes between two parties through the hub of the bank.
Float and gloat
It's been a great lurk. The longer the bank holds the money, the more interest it collects in the overnight markets.
Exactly how much value dating contributes to the bottom line we'll never know, but it's a considerable element of any institution's fee-based income. Indeed some banks could hardly stay solvent without it, although they'll have to figure out a way pretty darn quick.
The PSD is the European Commission's grand plan for levelling the payments playing field right across the European Economic Area's 27 nations. It means banks can't debit a payer's account until the day the transaction is credited into the payee's account.
Further, the bank has to credit the latter's account as soon as the money lands from the payer's bank. Thus at one blow, PSD means banks can't charge for shifting euros across national boundaries.
To be fair to the banks, they can't always flick through payments even if they wanted to. Money-laundering protocols and other official directives inevitably force delays in cross-border transactions, although banks in Britain and elsewhere have routinely manipulated these to hold on to cash.
Also, payments in foreign currencies often involve counter-party risks that have to be checked out before the money is released. Yet most transactions are pretty straightforward, especially those within borders, and hardly justify any delays at all.
Rent a payments system
Meantime PSD has put the cat among the pigeons. Right now, there's a price war going on as banks try and undercut each other to achieve economies of scale on their massively expensive payments infrastructure. Thus price per transaction -- an important element in fee income -- is plummeting.
Smaller banks will be hit the hardest because they've had to invest heavily in payments systems but henceforth won't be able to charge enough to justify the expense.
Some may have to pull out of transaction banking altogether and form an alliance with bigger, cross-border banks. In effect, it's a rent a payments system. Indeed some of the pillar institutions such as Deutsche Bank are reporting a jump in market share in euro clearing as smaller banks outsource the work.
If they can't look after their long-standing customers, whether individuals or companies, in an increasingly cross-border world, smaller institutions don't have much of a future.
A wave of amalgamations may be inevitable.
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