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.
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December 11, 2017
Fintechs and the Psychology of Trust
In the 14th century, Chaucer used the word trust to mean "virtual certainty and well-grounded hope." Since then, psychologists have described trust as an essential ingredient for social functioning, which, in turn, affects many economic variables. So how do we define trust in the 21st century, in the age of the internet? In particular, how do fintechs, relative newcomers in the financial services industry and not yet coalesced into an industry, gain the trust of the public? Would they more effectively gain that trust by relying on banks to hold them to certain standards, or by coming together to create their own?
In 2004, social psychologists Hans-Werver Bierhoff and Bernd Vornefeld, in "The Social Psychology of Trust with Applications in the Internet," wrote about trust in relation to technology and systems. They observed that "trust and risk are complementary terms. Risk is generally based on mistrust, whereas trust is associated with less doubts about security." They further explained that trust in technology and systems is based on whether an individual believes the system's security is guaranteed. Psychologically speaking, when companies show customers they care about the security of their information, customers have increased confidence in the company and the overall system. Understanding this provides insight into the development of certification authorities, third-party verification processes, and standardized levels of security.
To understand how fintechs might gain the trust of consumers and the financial industry, it's worth taking a step back, to look at how traditional financial services, before the internet and fintechs, used principles similar to those outlined by Bierhoff and Vornefeld. Take, for example, the following list of efforts the industry has taken to garner trust (this list is by no means comprehensive):
- FDIC-insured depository institutions must advertise FDIC membership.
- All financial institutions (FI) must undergo regulator supervision and examination.
- FIs must get U.S. Patriot Act Certifications from any foreign banks that they maintain a correspondent account with.
- Organizations with payment card data must comply with the PCI Standards Council's security standards and audit requirements.
- Organizations processing ACH can have NACHA membership but must follow NACHA Operating Rules and undergo annual audits and risk assessments.
- The Accredited Standards Committee X9 Financial Industry Standards Inc. has developed international as well as domestic standards for FIs.
- The International Organization for Standardization has also developed international standards for financial services.
- The American National Standards Institute provides membership options and develops standards and accreditation for financial services.
FIs have often been an integral part of the standards creation process. To the extent that these standards and requirements also affect fintechs, shouldn't fintechs also have a seat at the table? In addition, regulatory agencies have given us an additional overarching "virtual certainty' that FIs are adhering to the agreed-upon standards. Who will provide that oversight—and virtual certainty—for the fintechs?
The issue of privacy further adds to the confusion surrounding fintechs. The Gramm-Leach-Bliley Act (GLBA) of 1999 requires companies defined under the law as "financial institutions" to ensure the security and confidentiality of customer information. Further, the Federal Trade Commission's (FTC) Safeguards Rule requires FIs to have measures in place to keep customer information secure, and to comply with certain limitations on disclosure of nonpublic personal information. It's not clear that the GLBA's and FTC's definition of "financial institution" includes fintechs.
So, how will new entrants to financial services build trust? Will fintechs adopt the same standards, certifications, and verifications so they can influence assessments of risk versus security? What oversight will provide overarching virtual certainty that new systems are secure? And in the case of privacy, will fintechs identify themselves as FIs under the law? Or will it be up to a fintech's partnering financial institution to supervise compliance? As fintechs continue to blaze new trails, we will need clear directives as to which existing trust guarantees (certifications, verifications, and standards) apply to them and who will enforce those expectations.
As Bierhoff and Vornefeld conclude, "it is an empirical question how the balance between trust and distrust relates to successful use of the Internet." Although Chaucer was born a little too soon for internet access, he might agree.
By Jessica Washington, AAP, payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed
December 4, 2017
What Will the Fintech Regulatory Environment Look Like in 2018?
As we prepare to put a bow on 2017 and begin to look forward to 2018, I can’t help but observe that fintech was one of the bigger topics in the banking and payments communities this year. (Be sure to sign up for our December 14 Talk About Payments webinar to see if fintech made our top 10 newsworthy list for 2017.) Many industry observers would likely agree that it will continue to garner a lot of attention in the upcoming year, as financial institutions (FI) will continue to partner with fintech companies to deliver client-friendly solutions.
No doubt, fintech solutions are making our daily lives easier, whether they are helping us deposit a check with our mobile phones or activating fund transfers with a voice command in a mobile banking application. But at what cost to consumers? To date, the direct costs, such as fees, have been minimal. However, are there hidden costs such as the loss of data privacy that could potentially have negative consequences for not only consumers but also FIs? And what, from a regulatory perspective, is being done to mitigate these potential negative consequences?
Early in the year, there was a splash in the regulatory environment for fintechs. The Office of the Comptroller of the Currency (OCC) began offering limited-purpose bank charters to fintech companies. This charter became the subject of heated debates and discussions—and even lawsuits, by the Conference of State Bank Supervisors and the New York Department of Financial Services. To date, the OCC has not formally begun accepting applications for this charter.
So where will the fintech regulatory environment take us in 2018?
Will it continue to be up to the FIs to perform due diligence on fintech companies, much as they do for third-party service providers? Will regulatory agencies offer FIs additional guidance or due diligence frameworks for fintechs, over and above what they do for traditional third-party service providers? Will one of the regulatory agencies decide that the role of fintech companies in financial services is becoming so important that the companies should be subject to examinations like financial institutions get? Finally, will U.S. regulatory agencies create sandboxes to allow fintechs and FIs to launch products on a limited scale, such as has taken place in the United Kingdom and Australia?
The Risk Forum will continue to closely monitor the fintech industry in 2018. We would enjoy hearing from our readers about how they see the regulatory environment for fintechs evolving.
By Douglas A. King, payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed
November 27, 2017
How Intelligent Is Artificial Intelligence?
At the recent Money20/20 conference, sessions on artificial intelligence (AI) joined those on friction in regulatory and technological innovation in dominating the agenda. A number of panels highlighted the competitive advantages AI tools offer companies. It didn't matter if the topic was consumer marketing, fraud prevention, or product development—AI was the buzzword. One speaker noted the social good that could come from such technology, pointing to the work of a Stanford research team trying to identify individuals with a strong likelihood of developing diabetes by running an automated review of photographic images of their eyes. Another panel discussed the privacy and ethical issues around the use of artificial intelligence.
But do any of these applications marketed as AI pass Alan Turing's 1950s now-famous Turing test defining true artificial intelligence? Turing was regarded as the father of computer science. It was his efforts during World War II that led a cryptographic team to break the Enigma code used by the Germans, as featured in the 2014 movie The Imitation Game. Turing once said, "A computer would deserve to be called intelligent if it could deceive a human into believing that it was human." An annual competition held since 1991, aims to award a solid 18-karat gold medal and a monetary prize of $100,000 for the first computer whose responses are indistinguishable from a real human's. To date, no one has received the gold medal, but every year, a bronze medal and smaller cash prize are given to the "most humanlike."
Incidentally, many vendors seem to use artificial intelligence as a synonym for the terms deep learning and machine learning. Is this usage of AI mostly marketing hype for the neural network technology developed in the mid-1960s, now greatly improved thanks to the substantial increase in computing power? A 2016 Forbes article by Bernard Marr provides a good overview of the different terms and their applications.
My opinion is that none of the tools in the market today meet the threshold of true artificial intelligence based on Turing's criteria. That isn't to say the lack of this achievement should diminish the benefits that have already emerged and will continue to be generated in the future. Computing technology certainly has advanced to be able to handle complex mathematical and programmed instructions at a much faster rate than a human.
What are your thoughts?
By David Lott, a payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed
November 20, 2017
Webinar: Key Payment Events in 2017
This year has been an exciting one for the payments industry. Topics such as block chain and distributed ledger, card-not-present fraud, and chip-card migration continued to be in the news, and new subjects such as behavioral biometrics and machine learning/artificial intelligence made their way into the spotlight.
In the past, the Retail Payments Risk Forum team has coauthored a year-end post identifying what they believed to have been the major payment events of the year. This year, we are doing something a little bit different and hope you will like the change. Taking advantage of our new webinar series, Talk About Payments, the RPRF team will be sharing our perspectives through a round table discussion in a live webinar. We encourage financial institutions, retailers, payments processors, law enforcement, academia, and other payments system stakeholders to participate in this webinar. Participants will be able to submit questions during the webinar.
The webinar will be held on Thursday, December 14, from 1 to 2 p.m. (ET). Participation in the webinar is complimentary, but you must register in advance. To register, click on the TAP webinar link. After you complete your registration, you will receive a confirmation email with all the log-in and toll-free call-in information. A recording of the webinar will be available to all registered participants in various formats within a couple of weeks.
We look forward to you joining us on December 14 and sharing your perspectives on the major payment events that took place in 2017.
By David Lott, a payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed
- Fintechs and the Psychology of Trust
- What Will the Fintech Regulatory Environment Look Like in 2018?
- How Intelligent Is Artificial Intelligence?
- Webinar: Key Payment Events in 2017
- The Future of Wearables
- My Fingertips, My Data
- Why the Explosion in Household Payments?
- ACH and Consumer-Only Payments: Will the Twain Ever Meet?
- No Magic Bullet for Preventing Data Breaches
- A Record-Breaking Season of Hurricanes and Data Breaches
- December 2017
- November 2017
- October 2017
- September 2017
- August 2017
- July 2017
- June 2017
- May 2017
- April 2017
- March 2017
- account takeovers
- ATM fraud
- bank supervision
- banks and banking
- card networks
- check fraud
- consumer fraud
- consumer protection
- cross-border wires
- data security
- debit cards
- emerging payments
- financial services
- identity theft
- law enforcement
- mobile banking
- mobile money transfer
- mobile network operator (MNO)
- mobile payments
- money laundering
- money services business (MSB)
- online banking fraud
- payments risk
- payments study
- payments systems
- phone fraud
- remotely created checks
- risk management
- Section 1073
- social networks
- third-party service provider
- trusted service manager
- Unfair and Deceptive Acts and Practices (UDAP)
- wire transfer fraud
- workplace fraud