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Take On Payments, a blog sponsored by the Retail Payments Risk Forum of the Federal Reserve Bank of Atlanta, is intended to foster dialogue on emerging risks in retail payment systems and enhance collaborative efforts to improve risk detection and mitigation. We encourage your active participation in Take on Payments and look forward to collaborating with you.

Take On Payments

April 16, 2018


Merchant Surcharging: Winners and Losers

It isn't too often that we at the Retail Payments Risk Forum get to interact with card-acquiring stakeholders on such an interactive basis, so it was especially interesting—and valuable—for me to attend a lively session on surcharging at the Southeast Acquirers Association conference in March. I found the session to be quite informative about credit card surcharging and cash discounting programs that processors and independent sales organizations offer.

Incidentally, Jim Daly, senior editor of Digital Transactions, recently wrote an article for the publication—"Surcharging Is the Wave of the Future, ISO Executives Say"—on this very session.

Card brands have allowed merchants to levy surcharges on credit cards since 2013, after a legal settlement with merchants. Under the rules, merchants can charge what it costs them to accept a credit card. This rate, normally defined as the contracted discount rate, is capped at 4 percent of the transaction amount. Ten states have statutes prohibiting surcharging, but recent court decisions in some of those states have found the prohibitions to be unconstitutional. More legal challenges are under way.

While the panel at the conference was highly optimistic about the proliferation of these programs, their viewpoint is understandable since their companies offer these programs as revenue generators. Other industry stakeholders I have talked to since the conference have been less optimistic and view the potential as a niche market currently representing less than 1 percent of the U.S. merchant base.

In any case, I can understand why a merchant might want to pass that incremental cost on to me if my payment method costs the merchant more than other payment methods. It's my choice to use that particular method. Of course, the merchant who chooses to implement such a program takes the financial and reputational risk of driving its customers to other businesses that do not impose such a surcharge or that have a lower surcharge.

So how does the implementation of a credit card surcharge affect the various stakeholders of a transaction? Let's assume a merchant pays a 3 percent discount rate under its current processing agreement for accepting credit cards. In the non-surcharge environment, for a $45 transaction, the cardholder customer is billed $45; the merchant receives a net $43.65; and the merchant's processor collects $1.35, which is the 3 percent discount rate. In a surcharge environment, the cardholder would be charged $46.35; the merchant would receive $45; and the processor would collect the same $1.35. So the cardholder pays more, the merchant retains that extra money, and the processor maintains the same revenue amount.

Under the terms of the 2012 legal settlement, the merchant can assess the surcharge only on credit card transactions, not debit or prepaid cards, and must place clear disclosures for the customer at entryways and the point of sale. Additionally, the customer's receipt must have an itemized entry identifying the surcharge.

It will be interesting to see whether surcharge programs proliferate in the future, as the panelists forecast. What do you think?

Photo of David Lott By David Lott, a payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed

April 16, 2018 in cards | Permalink | Comments ( 0)

April 9, 2018


Fintech for Financial Wellness

When you hear the term fintech, you might free-associate "blockchain" or "APIs" or "machine learning." Chances are "financial opportunities and capabilities for all" might not be the first topic to spring to mind. Recently, I've been learning about the vast ecosystem of fintech entrepreneurs seeking to improve what the Center for Financial Services Innovation calls "financial health"—that is, our financial resiliency in the face of adversity, ability to take advantage of opportunities, and ability to manage day-to-day finances.

Consumer-focused fintech projects ask the question: Can we use data to improve financial wellness for individuals?

Some of these projects are directed toward specific groups. There are apps to help SNAP (Supplemental Nutrition Assistance Program) recipients manage benefits, enable immigrants to import their credit history from their home countries into U.S. credit reporting tools, and teach recent college grads about financial decisions such as paying off student loans or signing up for employer-sponsored retirement accounts.

Some can help you to:

  • Analyze your cash flows over the course of the month and tell you how much you could save.
  • Save or invest when you make purchases by automatically rounding up and putting your change into an account.
  • Analyze your accounts to identify peaks and valleys in your income and help you smooth it out.
  • Know when you have enough money to pay a particular bill and let you pay it by swiping your finger.
  • Link saving to opportunities to win prizes by incorporating lotteries.
  • Know, via text message, if you're likely to overdraw your account in the next few days.

Recent research finds that these sorts of interventions can be effective. For example, in "Preventing Over-Spending: Increasing Salience of Credit Card Payments through Smartphone Interventions," the authors find that people who use an app that suggests weekly savings goals significantly reduce their expenditures. This trial took place with a small sample of Swiss credit card users. As part of the experiment, participants reviewed and classified every credit card transaction, thus making every payment more visible to them. On average, participants reduced their weekly spending by about 14 percent.

Of course, not only entrepreneurs but also economists, policymakers, and traditional institutions appreciate the importance of financial education. Increasing financial literacy makes for a stronger economy, and financial education is an important part of what the Fed does. Just last week, Atlanta Fed president and CEO Raphael Bostic spoke about the importance of financial literacy. You can read his remarks here.

If you, too, care about improving financial wellness for everyone and want to learn more, please reach out to share information and ideas.

Photo of Claire Greene By Claire Greene, a payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed

April 9, 2018 in fintech , innovation | Permalink | Comments ( 0)

April 2, 2018


Advice to Fintechs: Focus on Privacy and Security from Day 1

Fintech continues to have its moment. In one week in early March, I attended three Boston-area meetings devoted to new ideas built around the blockchain, open banking APIs, and apps for every conceivable wrinkle in personal financial management.

"Disruptive" was the vocabulary word of the week.

But no matter how innovative, disruptive technology happens within an existing framework of consumer protection practices and laws. Financial products and tools—whether a robofinancial adviser seeking to consolidate your investment information or a traditional checking account at a financial institution—are subject to laws and regulations that protect consumers. As an attorney speaking at one of the Boston meetings put it, "The words 'unfair,' 'deceptive,' and 'misleading' keep me up at night."

A failure to understand the regulatory framework can play out in various ways. For example, in a recent survey of New York financial institutions (FI)s by the Fintech Innovation Lab, 60 percent of respondents reported that regulatory, compliance, or security issues made it impossible to move fintech proposals into proof-of-concept testing. Great ideas, but inadequate infrastructure.

To cite another example, in 2016, the Consumer Financial Protection Bureau took action against one firm for misrepresenting its data security practices. And just last month, the Federal Trade Commission (FTC) reached a settlement with another firm over allegations that the firm had inadequately disclosed both restrictions on funds availability for transfer to external bank accounts and consumers' ability to control the privacy of their transactions. Announcing the settlement, acting FTC chairman Maureen Ohlhausen pointed out that it sent a strong message of the "need to focus on privacy and security from day one."

As Ohlhausen made clear, whoever the disrupter—traditional financial institution or garage-based startup—consumer protection should be baked in from the start. At the Boston meetings, a number of entrepreneurs advocated a proactive stance for working with regulators and urged that new businesses bring in compliance expertise early in product design. Good advice, not only for disrupters but also for innovation labs housed in FIs, FIs adopting third-party technology, and traditional product design.

Photo of Claire Greene By Claire Greene, a payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed

April 2, 2018 in innovation , regulations , regulators | Permalink | Comments ( 0)

March 26, 2018


Convenience Always Wins, In One Form or Another

My colleagues and I often write about the frustration that security professionals have that consumer convenience will almost always win over the adoption of more secure practices. We've seen this over the decades with poor password and PIN management and the often lackadaisical approach consumers take to keeping their payment devices safe and secure. This post will take a slightly different tack—it will explore the influence convenience has on the payment card issuance strategy of U.S. financial institutions (FI) and how convenience always seems to win, though sometimes in unexpected ways.

When the various mobile pay wallets were being launched, many observers speculated that they might be the beginning of the end for plastic payment cards. Some, presuming that mobile was a more convenient way to pay, opined that the day would come when FIs would have no reason to continue issuing cards since everyone was going to be using their phones. Although adoption has been increasing, the reality is that mobile payments at the point of sale have been slow to gain traction. Recently released results of a survey of FIs in seven of the Federal Reserve Bank districts revealed that 75 percent of respondents thought it would be at least three years before consumer adoption rates of mobile payments would exceed 50 percent; 40 percent said it would take five years or longer. Consumer surveys consistently indicate that consumers aren't adopting mobile payments because they find their plastic payment card more convenient. So for mobile devices, convenience still has a ways to go.

Some financial-institution-owned ATM operators, continuing efforts to provide alternatives to plastic cards, have recently begun supporting cardless ATM transactions. With this service, you use your FI's mobile banking application to set up or stage an ATM withdrawal, identifying the account and amount to be dispensed. The details of the various technologies differ, but they all work like this: you go to the FI's ATM, select the cardless ATM function, and use a smartphone to either scan a QR bar code or enter a one-time transaction code. (Sometimes you may have to use a PIN.) Nice and convenient! And you don't have to worry about damaged or forgotten cards, or getting your card skimmed. We'll have to wait to see how consumers react to this feature's convenience.

Some FIs currently issue, or plan to issue, dual interface cards when it's time for customers to replace their existing chip card. While costlier to the FI, the new cards include a contactless feature that allows an NFC-enabled terminal such as an ATM or point-of-service device to read the data on the chip when you pass the card within a couple of inches of the reader. Contactless transactions, which are quite popular in Canada and Europe and greatly desired by mass transit systems in the United States, are faster. And we all know that faster means more convenience—right? Like cardless ATM transactions, contactless offers some security benefits. But merchant terminal acceptance remains a concern, just as it has been for the various pay wallet applications.

So it seems that convenience comes in different forms, and it appears that many FIs are betting that, like currency and checks, the plastic payment card is going to be around for quite some time. Perhaps that is the best strategy: offer a wide range of options and let the customers decide for themselves which are the most convenient.

Photo of David Lott By David Lott, a payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed

March 26, 2018 in cards , debit cards , mobile banking , mobile payments | Permalink | Comments ( 0)

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