World of payments

A U.S. digital dollar could “coexist with and be complementary to stablecoins and commercial bank money” in some future circumstances, Federal Reserve Vice Chair Lael Brainard said at a House Financial Services Committee hearing in May.

Brainard told lawmakers the deployment of a central bank digital currency (CBDC) could help keep the Fed abreast of technological innovation in other countries and the private sector and could strengthen the role of the dollar as the global reserve currency. 

Lawmakers remain divided on the efficacy of a U.S. CBDC, with some critics arguing a digital dollar would siphon deposits away from the banking system, reducing credit availability and curbing private-sector money creation. 

The hearing came in the wake of the collapse in price of algorithmic stablecoin TerraUSD, and shortly after the Fed wrapped up a 120-day comment period on the CBDC report it published in January. 

In testimony released before the hearing, Brainard argued that a Fed-backed digital dollar could exist side by side with commercial bank money and privately developed stablecoins, assuming robust regulatory guardrails were in place. 

With proper regulation, a CBDC “could provide a safe, central bank liability as the neutral settlement layer in the digital financial ecosystem,” Brainard said. “It would actually facilitate and enable private sector innovation.”

Brainard cited the explosive growth in popularity of stablecoins in recent times as a reason regulators should step in to protect investors. She pointed to the crash of TerraUSD and Luna, as well as the temporary de-pegging of Tether, to highlight the need for stricter laws in the space. In doing so, Brainard concurred with Treasury Secretary Janet Yellen, who called for stronger regulation of stablecoins during a Senate Banking Committee hearing earlier in the month. 

Not all lawmakers see eye to eye about the practicality and necessity of a CBDC, however. 

“What specific problems, if any, will a central bank digital currency solve?” Rep. Patrick McHenry, R-NC, asked Brainard at the hearing.  

Brainard, along with House Financial Services Committee Chair Maxine Waters, D-CA, contended the deployment of a CBDC could help the U.S. keep up with other nations developing CBDC projects — particularly China, which is piloting a digital yuan. 

In addition, “a U.S. CBDC may be one potential way to ensure that people around the world who use the dollar can continue to rely on the strength and safety of the U.S. currency to transact and conduct business in the digital financial system,” Brainard said. 

One key source of contention on the question of developing a U.S. CBDC is the impact such technology would have on the commercial banking industry. 

In letters to the Fed, banking trade groups the American Bankers Association (ABA) and the Bank Policy Institute (BPI) argued that a CBDC would pull hundreds of billions of dollars out of bank deposits, slashing banks' steadiest source of funding and vastly reducing credit availability to households and businesses. 

“A widely available CBDC could serve as a substitute for commercial bank money, possibly reducing the aggregate amount of deposits in the banking system,” Brainard said. “Accordingly, if the Federal Reserve were to move forward on CBDC, it would be important to develop design features that could mitigate such risks, such as offering a non-interest bearing CBDC or limiting the amount of CBDC a consumer could hold or transfer."

A hypothetical U.S. central bank digital currency (CBDC) would need to ensure user privacy, be "identity verifiable," be "intermediated" and be widely accepted as a means of payment, Federal Reserve Chair Jerome Powell said in March during a panel discussion hosted by the Bank for International Settlements (BIS), according to Bloomberg.

Despite listing those four qualifications, Powell said the Fed hasn’t decided whether it will issue a digital dollar, adding the central bank is "only at the beginning of this journey," The Wall Street Journal reported.

Powell said the Fed supports innovation in digital financial products but cautioned it is "easy to see the risks" inherent in some technologies, such as cryptocurrencies.

"There are potential financial stability concerns for some products," Powell said, according to The Wall Street Journal. "We don’t know how some digital products will behave in times of market stress."

Powell emphasized the need for regulators to curb the use of crypto assets to facilitate illicit activity. In that vein, a piece of connective tissue Powell backs — namely, that a CBDC be "identity verifiable" similar to the way U.S. bank accounts are identifiable — could help fight money laundering and distinguish CBDCs from other digital assets.

Security emerged as a major concern in a long-awaited draft paper the Fed issued in January, laying out the pros and cons of issuing a CBDC. The report made no policy recommendations but was designed to solicit feedback. The report was followed quickly by a paper detailing the first phase of CBDC research embarked by the Boston Fed and the Massachusetts Institute of Technology.

Powell wasn’t the only U.S. official to comment in March on the Fed’s strides toward technological advancement. Nellie Liang, the Treasury Department’s undersecretary for domestic finance, said the Fed’s plans for a real-time payments system may provide some of the benefits observers had been seeking in a CBDC.

"Because FedNow relies on the banking system, there already are safeguards for consumers and businesses," Liang told a National Association for Business Economics conference, according to Bloomberg. "Bank-based money usually has deposit insurance and banks are generally eligible to obtain access to the lender of last resort. These two backstops help to ensure that bank money is not runnable."

FedNow, at last glance, was still slated for a 2023 debut.

Powell’s comments, meanwhile, came at the same annual event where, last year, the central bank chief doubled down on his stance that he is in no hurry to issue a CBDC.

He said at the BIS event in March 2021 that the U.S. has "an obligation to be on the cutting edge of understanding the technological challenges, as well as the potential costs and benefits, of issuing a CBDC," but "because we’re the world’s principal reserve currency, we don't need to rush this project, and we don't need to be first to market."

Several of his comments at this year's event concerned regulation of emerging technologies. He said the Fed would be guided by a principle of "same activity, same regulation" — namely, that activities regulated in the banking system should be subject to the same rules if those activities move outside banking regulators’ purview.

"It’s highly likely that digital financial activities that are currently outside the regulatory perimeter will … be brought within it, which is necessary to level the playing field, keep trust of users, protect consumers, and all of that," Powell said, according to The Wall Street Journal.

The BIS, meanwhile, has developed two prototypes for a platform on which financial institutions can use CBDCs to transact directly with one another on a shared platform. Project Dunbar, as it’s called, may ultimately save time on cross-border payments and cut costs by reducing the need for intermediaries, the BIS said, according to Bloomberg.

"While there is clearly more work to be done in thinking about the feasibility and design of multi-CBDC platforms, the findings from Project Dunbar provide a good platform for future work," said Michele Bullock, assistant governor at the Reserve Bank of Australia, one of four central banks participating. The others are the South African Reserve Bank, the Monetary Authority of Singapore and Bank Negara Malaysia.

As for the U.S., President Joe Biden signed an executive order in March placing the "highest urgency" on the research, development and design of a potential U.S. CBDC and directed the Treasury Department to deliver a report on the matter by September.

The absence of traditional payments players in the legal cannabis industry has opened a unique opportunity for new entrants to facilitate payments for that merchandise.

“It’s created this wide-open field where you can come in, and if you have an idea, you can launch it and see if the market actually takes it on,” said Dustin Eide, CEO and co-founder of CanPay, a debit payment app for the legal cannabis industry. The cannabis payments industry is “driving innovation because we have to be super creative.”

Cannabis has been legalized for recreational use in 18 states and Washington, D.C. — and approved for medical use in several more — but its status as a Schedule 1 drug at the federal level has kept many banks and payments companies on the sidelines. Enter companies like CanPay and Aeropay, which have turned to the Automated Clearing House (ACH) network to facilitate cannabis payments in states where the business is legal.

The Financial Crimes Enforcement Network (FinCEN) issued guidance in 2014 for financial institutions that cater to cannabis-related businesses. Regional banks and credit unions tend to be “more comfortable” serving that market than big banks, said Dan Muller, founder and CEO of Chicago-based digital payments company Aeropay.

“Compliance is a major differentiator to being able to do this correctly,” Muller said.

Littleton, Colorado-based CanPay counts about 110 financial institutions in its network that are openly banking the cannabis industry. CanPay's partner merchants must bank in a compliance program that also meets federal guidance requirements, Eide said.

Federal restrictions also mean cannabis is an industry that depends heavily on cash, which allows these young payments companies to pitch their services as an alternative to dispensaries keeping large quantities of cash that can put their business at more risk. 

Following a recent rise in dispensary robberies in Washington state, CanPay and Aeropay are both mentioned on Washington’s Department of Financial Institutions website listing financial services options for cannabis retailers. In California, Oakland and Los Angeles have also seen recent dispensary robberies — contributing to a renewed push to enact cannabis banking legislation at the federal level, which would help de-cash the state-licensed industry even while cannabis remains illegal federally.

Given the nature of the merchandise, there’s still a preference for cash among some customers who want the anonymity that the payment method offers. Eide said that’s a hurdle CanPay has had to overcome. 

“The bigger we’ve gotten, the more stores that accept, the more times they see other customers using CanPay to pay, the more likely those customers are to then engage with CanPay,” Eide said.

Turning to ACH 

The ACH network, facilitating electronic bank transfers, offered the transparency Eide wanted to bring to cannabis payments, allowing merchants to do business in their own names — a standard in payments generally, but something the cannabis industry has lacked.

That transparency stands in contrast to payment methods like cashless ATMs, a terminal on the counter that’s serving as an ATM where no cash is dispensed but money flows to the dispensary, Eide said. Visa has warned against this type of transaction, noting fraudulent use could be subject to penalties or compliance enforcement. 

Modern technology is a differentiator in the cannabis industry, too, Muller said. As the cannabis industry matures, the ability to integrate ACH into e-commerce providers or point-of-sale providers allows for a “normalized omnichannel buying experience.”

For both CanPay and Aeropay, merchants take payment by scanning a QR code on a customer’s phone in person, or through a website payment. 

CanPay charges merchants less than 2% of the transaction in what’s essentially a processing fee. Aeropay charges merchants 2.5% plus 25 cents per transaction. Merchants also pay a monthly fee for marketing, support and maintenance of $25 or more. Neither charges the consumer, whereas cashless ATMs charge consumers upward of $5 for each purchase, Eide said. 

Aeropay, which recently announced an integration with cannabis point-of-sale platform Flowhub, raised about $5 million in venture capital in March 2021, but the company would not share the amount of total funding it has received since its 2017 founding. Aeropay has hundreds of thousands of consumers on its platform, and moves millions of dollars per month in payments for companies in cannabis, gaming and cryptocurrency, with most of that coming from cannabis, Muller said. He wouldn’t provide more details.

At the end of 2021, CanPay, which works with about 800 merchants, handled about $500 million in state-legal cannabis purchases made through its web app. Founded in 2016, CanPay is “all self-funded, bootstrapped,” Eide said. “We pay for everything out of our revenues,” he said, declining to provide that figure. 

Visa, Mastercard sidelined for now

Traditional payments players may be absent for now, but cannabis payments executives expect it’s only a matter of time before they get involved, with federal legalization perhaps eventually providing the push. 

A Visa spokesperson said via email that transactions involving the purchase of cannabis “are not permitted on the Visa network, until such time as federal law allows.” 

Mastercard doesn’t allow such purchases on its network, either. Given the complexity of the cannabis situation between federal and state levels, “we continue to monitor the situation, seek guidance from regulators and inform merchant acquirers of any new developments,” a Mastercard spokesperson said via email. 

Executives focused on cannabis payments hope that by the time standard payments players move in, alternative payment methods will have firmly established roots. 

With major change at the federal level “probably some time off still,” Eide said, CanPay is focused on adding merchants and customers, so the debit app is accepted in most, if not all, dispensaries by the time federal legalization occurs. If major card networks get involved in cannabis, CanPay “could quickly add funding of purchases via debit/credit cards as an option for our customers,” Eide said.

Muller aims to prove that moving money fast and safely with ACH transfers is an alternative that “sits alongside any of those other methods, and then maybe even wins in the long run,” he said. 

“Things that we’re doing in cannabis might extend outward into mainstream payments, versus just mainstream payments coming in and sort of taking everything over,” he said.

The availability of ATMs may have peaked at 470,000 units scattered across the U.S. in 2019, with a fall-off since then to 462,000 in 2020 and an estimated 456,000 last year, a spokesperson for research firm Euromonitor International said in updating its report on financial cards and payments in the U.S. 

Kendrick Sands, Euromonitor’s head of consumer finance research, expects that downward trend to continue.

The automated tellers are disappearing in tandem with banks closing local branches. The banking strategy pivot comes as digital banking and payment alternatives become more widespread.

Reduced demand for cash globally is raising costs for servicing the machines, “prompting banks to review ATM footprints,” according to consulting firm McKinsey’s annual global payments report from October.

Between 2015 and 2019, ATMs kept popping up across the U.S., rising 8% from 434,000 machines to 470,000 during that period, according to Euromonitor. But now a confluence of consumer behavior changes are curtailing the appeal of the automatic cash dispensers seen as revolutionary in the 20th century.

“It’s going to be a gradual drop for the next decade as cash” is used less, Sands said in an interview. He attributed the demise of ATMs to their lack of appeal for a younger generation that is gravitating to digital platforms and that is less loyal to particular banking institutions.

“They realize that convenience and security” of the digital tools, he said. “Once consumers realize that, it’s hard for them to go back.”

The consumer shift away from brick-and-mortar banking facilities has dovetailed with a waning desire for cash in recent years. The deadly COVID-19 contagion accelerated the trends, prompting consumers to opt for contactless alternatives, Sands said.

While some U.S. policymakers are advocating for the preservation of cash as a form of payment, particularly to safeguard parts of the population that don’t have access to alternatives, its use is likely to keep dropping.

The rate of decline will be about 6% annually through at least 2025, according to McKinsey's third-quarter U.S. Payments Map report last year. Meanwhile, the rise in digital wallets with embedded credit cards, prepaid debit cards and automated clearing house transfers will continue, the consulting firm said.

Such changes are making ATMs less cost-efficient for banks. “The reduction in cash demand is leading to increasing [ATM] unit servicing costs for its distribution and collection,” according to the October report from McKinsey.

As a result, banks worldwide are sharing ATMs and others are outsourcing the servicing of the machines to “specialized cash-in-transit players,” the report said. 

Sands said ATMs may one day be a rare sight, just like payphones are today in the U.S. He added he suspects they’ll be gone within 25 years. 

Pressure is building on the Consumer Financial Protection Bureau (CFPB) to better police companies that offer consumers the ability to spread payments over time through buy-now-pay-later (BNPL) financing. 

CFPB Director Rohit Chopra began an inquiry last year into the business practices of five of the leading BNPL providers — Affirm, Afterpay, Klarna, PayPal, and Zip — asking them to provide detailed information about their business practices.

In a last-minute flurry of some 40 submissions, a group of state attorneys general and a coalition of nonprofits argued in two separate comments that consumers needed to be protected from BNPL providers' services. Banking industry groups called on the CFPB to create a level playing field, and some trade groups defended BNPL practices. A week earlier, there were only a few comments in response to the December request.

In one submission, the coalition of 77 nonprofit organizations recognized the benefit of BNPL providing some consumers "an affordable way to finance purchases," but launched into a litany of concerns and called on the CFPB to take a tough stance with respect to BNPL providers. 

"BNPL credit presents cause for concern, including: a lack of meaningful underwriting for a consumer’s ability to repay; hidden fees and absence of clear disclosures; lack of dispute or refund rights should a consumer be unsatisfied with their purchase; an incentive created that could lead consumers into taking on unmanageable amounts of debt; a negative impact on credit reporting; and debt collection issues," read the comment from a coalition that included the Center for Responsible Lending, the National Consumer Law Center, Better Markets, Public Citizen, Consumer Reports and the National Association for Latino Community Asset Builders.

“BNPL products offer a promise of interest-free payments, but many providers charge fees, including late fees, missed payment fees, account reactivation fees, returned payment fees, and rescheduling fees that are not clearly disclosed,” the nonprofits added.

In a separate submission, a group of 22 attorneys general raised similar concerns, calling on the CFPB to “prioritize robust consumer protections” during its review of the BNPL sector. 

“We have concerns about new and supposedly innovative financial products that promise to disrupt and democratize the industry but push consumers into cycles of debt and carry some of the same terms and features as other expensive and predatory financial products,” the attorneys general said.

Initiating the federal BNPL inquiry

Chopra initiated the inquiry and request for comments in December after complaints by some Democratic senators and consumer activists alleging consumers were taking on more debt than they could afford.

"Buy-now-pay-later is the new version of the old layaway plan, but with modern, faster twists where the consumer gets the product immediately but gets the debt immediately, too," he said.

The BNPL craze started in Australia with pioneer providers such as Afterpay, and over the past decade spread to Europe, before gaining traction in the U.S. over the past few years. Consumers made an estimated $100 billion in purchases using BNPL financing last year — four times the level of such purchases in 2020, Forbes reported, citing consulting firm Cornerstone Advisors. The service is particularly popular with young consumers who often access it via apps on their phones.

The Bank Policy Institute called on the CFPB in a comment to “clarify that nonbank BNPL providers are held to the same standards as banks with regard to consumer protections, responsible lending, and consumer data privacy requirements."

The Consumer Bankers Association, meanwhile, asked the bureau to institute a level playing field for banks and the fintechs offering BNPL credit in its letter to the CFPB. 

"The CFPB should reaffirm that non-bank BNPL lenders, like banks, must engage in responsible lending practices, including providing clear and conspicuous upfront disclosures on all the key economic/pricing terms associated with a BNPL product," the trade group wrote.

A comment from the National Association of Convenience Stores voices concern about credit card fees associated with rising buy-now-pay-later sales, particularly given Mastercard’s plans to enter the BNPL market. 

“CFPB therefore should consider holding BNPL services to the standards applicable to analogous forms of credit,” the organization wrote.

Consumer Reports noted that consumers may become confused about the terms of their loans because of varying web and digital app designs. It has also logged problems for consumers in returning purchases. 

“Consumers who use BNPL with smaller companies or less reputable websites may face a higher frequency of difficulties,” the outlet wrote.

BNPL backers offered input, too

BNPL operators deny critics' claims that they are taking advantage of consumers or are exploiting loopholes in laws and regulations.

“Today, BNPL providers are compliant with consumer protection laws and regulations such as anti-money laundering, privacy, and electronic fund transfers enforced by the CFPB, Federal Trade Commission, and numerous state regulators,” the Electronic Transactions Association (ETA) wrote. "New public policies for BNPL products should complement, and not conflict with, existing laws and regulations as well as private sector rules and practices.”

The ETA’s views were echoed by The Financial Technology Association (FTA) — which, like the ETA has BNPL providers as members. It underscored the oft-cited statistic that the average American can’t afford a $400 emergency expense.

“Buy Now-Pay Later is a valuable tool for consumers to manage their cash flow and avoid unnecessary interest and fees,” FTA CEO Penny Lee said in a press release that noted the organization's submission to the CFPB. “BNPL services are subject to federal and state consumer protection laws and regulations and provide low-risk, low-cost payment options to consumers.”

Some consumer activists weighed in earlier this month. A 26-page report released March 10 by the U.S. Public Interest Research Group documents a rise in consumer complaints about BNPL, concerning hidden fees and debt collection issues. U.S. PIRG questioned whether policing has kept up.

Critics outside the U.S. submitted comments to the CFPB, too. 

“BNPL products are currently contributing to the extent and severity of financial hardship in Australia,” wrote two nonprofits, Financial Counselling Australia and Consumer Action Law Centre. “This poses a substantial risk to both individuals and the community."

JPMorgan Chase’s acquisition prowess is picking up in 2022 where it left off last year. The U.S.’s largest bank agreed in January to acquire a 49% stake in the Greek fintech Viva Wallets.

The Athens-based company serves small and medium-sized businesses in 23 European countries through bill pay, merchant cash advance and card acceptance through a point-of-sale app. Viva Wallets is also a virtual debit card issuer.

“The European payments landscape is fragmented yet large in terms of opportunity, with more than 17 million merchants ready to implement scalable payments solutions, and this is a big focus area for added growth” for JPMorgan,” Takis Georgakopoulos, the bank’s head of global payments, said in a statement.

Financial terms of the transaction, which is subject to regulatory approvals, were not disclosed. But a source told Reuters the Greek firm was valued at more than $2 billion. Bloomberg reported in November the bank was considering investing in Viva Wallet, and that the fintech sought a valuation of at least $1.7 billion. 

JPMorgan's investment will exceed $1.15 billion, including a capital increase that won’t dilute its founders' majority stake, Reuters reported.

Viva Wallet obtained a banking license when it bought Greece's first digital challenger, Praxia Bank, in 2020 — which could be handy if JPMorgan decides to increase its stake.

Haris Karonis, Viva Wallet’s CEO, said JPMorgan’s investment “will enable us to complete the build-out of our vision to deliver fully localized payments and transactions services to SMBs across Europe.”

Regulations prohibit JPMorgan Chase from acquiring additional U.S.-based deposit-taking institutions because it already holds more than 10% of U.S. deposits. So it has taken to investing in businesses that are banking-adjacent — or outside banking entirely.

JPMorgan made more than 30 acquisitions in 2021, Reuters reported, citing data from Refinitiv and Dealogic. That includes a trio of deals in September — for the college financial planning platform Frank; the restaurant platform The Infatuation, which owns the Zagat guidebook; and nearly 75% of German car-maker Volkswagen’s payments platform.

The bank has also made significant investments overseas, agreeing to buy British digital wealth management platform Nutmeg for a reported £700 million ($972.8 million), and taking a 40% ownership stake in the Brazilian digital bank C6. JPMorgan Chase also launched a digital-only retail bank in the U.K. in September.

The Viva Wallets deal also follows a 2020 pledge from CEO Jamie Dimon that JPMorgan would be “much more aggressive with acquisitions across the board.”

U.S. Bank is piloting a new real-time payments application, teaming with car sales company Lithia Motors to offer a speedier way for consumers to sell their used cars from the driveway of their homes, the companies said in a March press release.

It’s the bank’s bid to advance its business of embedding payments processes in transactions in a way that’s simple to use and more efficient.

In the latest application, Medford, Oregon-based Lithia, an online car dealer for new and used vehicles, is working with the bank to allow for real-time payments from customers who sell their used cars to the dealership in an at-home transaction. It's part of Lithia's e-commerce Driveway strategy. 

The payment innovation is being piloted now in Portland, Oregon, and is expected to be rolled out nationwide this year, said Mike Jorgensen, who leads U.S. Bank’s emerging solutions and strategy in its Global Treasury Management business.

Using real-time payments for used car sales was a way to give Lithia a "competitive edge in the market with new payment solutions," Jorgensen said in an interview. He declined to discuss the pricing arrangement for the payments tool.

"Customers selling a car on Driveway.com can now have the payment deposited instantly into their bank account after a sale is complete and before the vehicle even leaves their driveway," the companies said in the release.

To make use of the service, a seller enters details about the car to be sold online to get an instant quote. If the seller wants to follow through on a sale of the car, that person would respond to an email invitation and provide financial details via the Driveway-U.S. Bank digital payment portal. After an in-person inspection, the payment is deposited into the car seller’s bank account. Normally, the transaction could take days to settle.

The real-time payments flow over the RTP Network operated by The Clearing House, which is owned by a group of banks, including Minneapolis-based U.S. Bank. The banks have been seeking to increase the use of RTP for instant payments on any day at any time.

The bank aims to showcase how RTP can be used and offer more customers more ways to use such real-time payment tools, Jorgensen said. U.S. Bank is also working on new applications in the broker-dealer and residential real estate title markets, he said.  

The Federal Reserve aims to will introduce a real-time payments service next year that competes with the RTP Network, putting pressure on TCH to keep building demand for its service now before the new rival arrives.

As card companies, banks and fintechs compete for customers, and the lines between their financial services become blurrier, American Express is pushing further into banks' territory and targeting younger consumers.

The card network became a bank holding company in 2008 amid the Great Recession, and introduced such options as high-yield savings accounts. Now, it's making more use of that designation, launching debit cards for small business and consumers alike in recent months, as well as all-digital checking account services. 

Digital checking has gone mainstream amid the COVID-19 pandemic and card members have said they want more from AmEx, so "it really just seemed like the right time for us to make a move here," said the company's vice president of consumer banking, Liz Bergman, who oversees digital checking and debit product management.

To further entrench relationships with current credit cardholders and meet demand from younger spenders, AmEx in February launched all-digital consumer checking account services tied to a debit card loyalty program. The company's executives aim to attract debit card users with the account's perks. 

AmEx CFO Jeff Campbell said he doesn’t see card rivals Visa and Mastercard as the company’s competitors. Rather, banks like JPMorgan Chase and Barclays, and small fintechs are the company's new challengers, he said last month at the Keefe, Bruyette & Woods Fintech and Payments Conference.

The checking account offer is a natural brand extension for American Express, said James Angel, a finance professor at Georgetown University.

"The more relationships you have with a customer, the stickier the relationship becomes," he said in an interview.

There’s no shortage of competitors in the digital banking space, as neobanks and other digital-first outlets have gained steam in recent years.

AmEx has examined a number of players, from fintechs to traditional brick-and-mortar banks, and is trying to incorporate the best of the bunch, Bergman said in an interview. 

Powered by record amounts of capital, fintechs have set the standard when it comes to digital experiences on mobile and web. Because Gen Z and millennial consumers have high expectations, AmEx aims to match those digital experiences while adding the kinds of features its cardholders have come to expect, Bergman said.

Brand matters, too, Bergman said. And in that regard, AmEx is positioning itself as an established player with a far lengthier track record than newer entrants. Considering those factors and the rewards offering for debit, "we don’t see one competitor playing in all those spaces," Bergman said.

Fellow card network Discover also announced it had revamped its checking offering, which isn’t limited to credit cardholders, and added early access to paychecks as an account benefit. Unlike Discover and AmEx, Visa and Mastercard don't hold bank licenses and aren't in the business of offering such services directly to consumers.

As both the network and issuer, AmEx is exempt from a regulation that caps debit fees and earns full or market-rate interchange on debit transactions, which is partly why the company can offer an account that’s "chock full" of benefits, said Sarah Grotta, director of Mercator Advisory Group's debit and alternative products group. The checking service features an annual percentage yield of 0.5%, rewards on debit purchases, purchase protection and no monthly maintenance fees or account minimums.

"They have an opportunity to be a formidable presence in the marketplace" — especially if the user experience is on par with or better than other digital account offerings, Grotta said.

Capturing a broader clientele

AmEx’s checking product is an example of the company’s shift from providing credit services to fairly wealthy individuals to serving a broader audience, Grotta said. 

Amex launched a debit card for small businesses in October. At the company’s March investor day, CEO Steve Squeri touted those debit products as examples of AmEx tapping its network to extend services. "You don’t need brick-and-mortar to have deposits," Squeri said.

Since the checking account is only available to existing cardholders, AmEx is being deliberate with its strategy. It’s mainly a way to capture existing customers’ spending and give younger consumers what they’re looking for, Mihir Bhatia, a global research analyst at Bank of America, said in an interview. 

"It’s certainly attractive and increases optionality overall for AmEx, but in the near term, it’s a little bit more incremental than truly changing the nature of AmEx’s business," Bhatia said. 

AmEx will evaluate in the coming months whether to open up the checking offering more broadly, Bergman said.

Skirting surcharges with checking

One big hurdle AmEx must overcome to gain market share is apathy.

"Most people, when you ask them if they’re going to change where they have their checking account, they’re going to say 'no,'" Grotta said. 

But as the COVID-19 pandemic solidified debit’s hold on the marketplace — there were more debit card transactions than credit card transactions for the first time in history — a consumer checking offering was a tempting opportunity.

"I’m sure American Express doesn’t want to lose out on all that transactional activity," Grotta said.

Indeed, AmEx Vice Chairman Doug Buckminster indicated the company sees the checking account offering as a way to rope in Gen Zers and millennials who might prefer debit. And if faced with surcharges for credit transactions, "we want our customers to have an American Express alternative when they make the choice to avoid that surcharge," Buckminster said during the company's investor day last month.

Younger consumers have led much of the growth in debit over the past year, and Bergman said she believes the rewards and protections AmEx offers "will naturally attract customers" who are heavy debit users. 

During the company’s January earnings call, Squeri said millennials and Gen Zers represented about 60% of new accounts acquired globally in 2021. Younger cardholders are particularly enticing to AmEx because the company's high retention rate among customers means those youngsters are valuable lifetime prospects, Campbell said on the call. He didn't specify what that retention rate is.

Bergman wouldn’t share the number of cardholders who’ve opened checking accounts, or any future targets. She said the company's penetration goals are "aggressive," and AmEx members tend to have multiple relationships across the company’s products.

"There’s certainly a lot of ripe opportunity with our existing base," Bergman said.

A fintech that facilitates ACH payments is leveraging Discover Financial Services' network to get more consumers on board with paying merchants directly from their checking accounts.

Teaming up with Discover, Atlanta-based digital payments infrastructure platform Buy It Mobility (BIM) Networks is launching BuyPass, which will enable consumers to make direct payments from their checking accounts through merchant apps. Shoppers' payments run through Automated Clearing House rails to merchants within Discover’s network. The companies announced the launch in a February news release.

The collaboration "is a great example of how we’re enabling flexible and innovative payment options that can provide a great customer experience for our merchants," Jason Hanson, Discover’s senior vice president of global business development, said in the release. 

The Wall Street Journal, which first reported the move, noted similar offerings from Alipay and WeChat Pay are popular in China. 

Riverwoods, Illinois-based Discover, smaller than competitors Visa, Mastercard and American Express, has a network connected to about 11.8 million merchant locations in the U.S., per The Wall Street Journal.

Discover is an investor in BIM, and the move — "an extension of their strategic partnership," the release said — is expected to simplify merchants’ ability to accept such payments. Teaming up with Discover makes integration easier for merchants, who will drop a URL into their apps and websites to access BIM’s platform, the release said.

At Shell or Phillips 66 gas stations, which BIM already partners with, consumers who buy gas by sending funds from their checking accounts pay up to 25 cents less per gallon compared to card users, The Wall Street Journal reported. 

BIM projects its market share to expand to about 45% of all gas station and convenience store locations in the U.S. in the first half of the year, per the release, along with several merchant announcements in grocery, quick-service restaurants and other retail segments.

Although banks may be uninterested in encouraging consumers to send funds directly from bank accounts because they collect higher fees on card purchases, consumers might feel differently: Because merchants will fork over less in fees on transactions that go through ACH rails, they can offer lower prices to customers going that route, BIM told The Wall Street Journal.

Those swipe fees, also called interchange fees, are what merchants pay to card-issuing banks each time a consumer pays with a credit or debit card. They've become a hot-button issue, particularly as those fees have climbed higher in recent years. 

Tensions mounted recently between Amazon and Visa over the fees related to cards originating in the U.K.; Amazon has tacked on surcharges for Visa transactions in Australia and Singapore to protest the card company’s high fees. The National Retail Federation has said swipe fees amounted to $110.3 billion in 2020. Merchants paid $53.6 billion in Visa and Mastercard interchange fees in 2019, per the Nilson Report.

Merchants who work with BIM are seeing "significantly lower payment acceptance costs," BIM President Troy Carrothers said in the release, and active consumers on BIM’s platform "transact four times more frequently than consumers with card on file in the same retailers’ wallets.'

Customer loyalty to merchants offering these ACH payment discounts can result in an average of $1,700 in added revenue annually, BIM told The Wall Street Journal.

La Jolla, California-based Silvergate Bank is buying the Diem Association's assets for $182 million, the bank said in January. That figure breaks down to $50 million in cash and more than 1.2 million shares. 

The bank intends to launch a stablecoin this year using the assets it acquired in the Diem deal, along with Silvergate's existing technology, CEO Alan Lane said in a release.

Silvergate agreed in May 2021 to be the exclusive issuer of the Diem USD stablecoin and to manage the currency reserve. Federal Reserve officials last summer refused to give Silvergate their sign-off on the arrangement, effectively putting the Facebook-backed digital currency effort at a standstill, Bloomberg reported, citing people familiar with the matter.

The deal effectively ends Facebook’s circuitous 2½-year journey in the digital currency space — one fraught with pushback from the start. Libra, as Diem was first known, was pitched in June 2019 as a token backed by a basket of currencies. Lawmakers and regulators in the U.S. and European Union nearly immediately raised concerns over the digital asset’s potential to enable money laundering and terrorism financing. 

Senate and House committees summoned Facebook CEO Mark Zuckerberg and Libra co-creator David Marcus to testify the following month. And two Democratic U.S. senators in October 2019 wrote letters urging the CEOs of Stripe, Mastercard and Visa to reconsider their companies’ backing of the project. They did.

Libra scaled back its ambitions, rebranded itself and applied for a payments system license from the Swiss regulator Finma. Months later, it withdrew that application, switched focus to the U.S. and registered as a money services business with the Financial Crimes Enforcement Network (FinCEN). That's also when Diem and Silvergate began collaborating in earnest.

Silvergate said it expects to incur about $30 million in additional costs this year tied to the integration of Diem's technologies. None of that will be from hiring any of Diem's engineers, Lane told Bloomberg.

“We didn’t hire anybody from Facebook, anybody from Diem,” he said. “We are a regulated financial institution running the payment network.”

The sale may stand as an attempt to return some value to Diem’s investors, who committed $10 million apiece when the association of the then-Libra Association launched. Backers include Coinbase, Andreessen Horowitz, Uber, Lyft, Spotify, Shopify, Ribbit Capital and Singapore’s Temasek Holdings.

Diem’s chief executive, Stuart Levey, said the association sought to address concerns over potential misuse of its system and received “positive substantive feedback,” according to the Financial Times. But ultimately, after talks with federal regulators, executives realized “the project could not move ahead.”

Lane, meanwhile, told CNBC that Silvergate execs “think the potential worth is off the charts when we think about using the blockchain technology for payments and remittance.”

Red flags

Rumors of Diem's sale and potential wind-down had been circulating for days, but red flags appeared earlier. 

Facebook in October launched a pilot of its digital currency wallet, Novi, but did so without Diem, the stablecoin it was built to hold. Novi opted to use the Paxos Dollar instead, with Coinbase providing custody services. 

Diem, at the time, appeared very much in the picture. "Our support for Diem hasn’t changed and we intend to launch Novi with Diem once it receives regulatory approval and goes live," Marcus wrote on Twitter.

A month later, Marcus announced he would leave Facebook — by then rebranded Meta — at the end of 2021.

Another potential stumbling block for Diem may have been a report the President’s Working Group on Financial Markets issued in November asking Congress to pass legislation that would require issuers of the digital assets be insured depository institutions subject to the same regulations as traditional banks. 

When the working group convened in July 2021, Treasury Secretary Janet Yellen pressed attendees to "act quickly to ensure there is an appropriate U.S. regulatory framework in place." Though the group’s initial summary of the meeting was sparse in detail, sources told Bloomberg days later that Diem and Tether were the impetus behind Yellen's directive.

Diem’s absence was noted, too, in December, when executives from six cryptocurrency companies testified on Capitol Hill on the "challenges and benefits of financial innovation."

As regulators lean toward a tougher stance on stablecoins, Silvergate updated its application with the New York Department of Financial Services to form a limited purpose trust company to hold dollar stablecoin reserves, Bloomberg reported.

Lane said Silvergate is "not concerned … at all" at the prospect of a potential Fed-backed digital currency treading on a space now occupied by stablecoins. If the central bank were to issue a digital dollar, its arrival on the market likely would be several years away.