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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

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.

Photo of Jessica Washington  By Jessica Washington, AAP, payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed

 

 

December 11, 2017 in banks and banking, financial services, innovation, mobile banking | Permalink

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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.

Photo of Douglas King By Douglas A. King, payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed

 

 

December 4, 2017 in banks and banking, financial services, innovation, mobile banking, regulations, regulators, third-party service provider | Permalink

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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.

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

November 20, 2017 in banks and banking, biometrics, emerging payments, EMV, innovation | Permalink

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November 13, 2017


The Future of Wearables

My wife and I took our children to a Florida theme park for their recent fall break. While I would love to spend the next few paragraphs opining on why I think our school calendar is crazy or giving a review of the most phenomenal ride that I have ever experienced, it doesn't really fit the mission or purpose of Take On Payments. Fortunately, the trip did provide some fodder and thought for a blog post, thanks to a much-discussed and written-about wearable NFC—or near-field-communication—device that the theme park offers.

These bands were introduced in 2013 to create an awesome customer experience. This experience is much bigger than a payment platform and has absolutely nothing to do with a rewards program around which so many mobile wallet and payment applications are being developed. The band's functionality certainly includes payments, but the device also replaces room keys, park entry cards, and ride-specific tickets known as fast passes. As an additional feature, it is waterproof, which proves handy for a trip to the water park. I was able to spend the week without ever having anything in my pockets (yes, I even left my phone in the room). My wife commented how fantastic it would be to take the NFC band experience outside of the park because it was just so easy and convenient.

Ease and convenience–isn't that what a lot of us are after? If you have to give me something to get me to open an application and tap my phone in place of a payment card, is that really providing ease and convenience? I am now 100 percent convinced that rewards programs aren't going to drive mobile commerce to any significant degree. Experiences that provide ease and convenience will drive mobile commerce. Hello, mobile order-ahead. Hello, grocery delivery. And hello, wearable of the future.

It isn't hard to imagine a wearable device, like an open-loop band, transforming our lives. After my theme park experience, I long for the day when a wearable will be the key to my vehicle—which I won't have to drive, either—and to my house, my communication device, and my payment device (or wallet). Of course, we'll have to consider the security issues. Even the bands incorporate PINs and fingerprint biometrics in some cases to ensure that the legitimate customer is the one wearing the band.

Is this day really so far-fetched? I can already order a pizza through a connected speaker, initiate a call from the driver's seat of my car without touching my phone, or tap my phone to pay for a hamburger. The more I think about these possibilities, I have to ask myself, is it crazy to question whether or not using mobile phones for payments just might become obsolete before long? Or maybe mobile phones will provide that band functionality?

Photo of Douglas King By Douglas A. King, payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed

 

 

November 13, 2017 in banks and banking, innovation | Permalink

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November 6, 2017


My Fingertips, My Data

I am not a user of old-style financial services. While I remember learning how to balance a checkbook, I never had to do it, since I never had checks. Recently, my financial adviser suggested several mobile applications that could help me manage my finances in a way that made sense to me. I researched them, evaluated a few, and decided which one I thought would be the best. I'm always excited to try new apps, hopeful that this one will be the one that will simplify my life.

As I clicked through the process of opening an account with my new financial management app, I entered the name of my financial institution (FI), where I have several accounts: checking, savings, money market, and line of credit. The app identified my credit union (which has over $5 billion in assets and ranks among the top 25) and entered my online banking credentials—and then I was brought up short. The app was asking for my routing and account number. As I said, I don't own any checks and I don't know how to find this information on my credit union's mobile app. (I do know where to find it using an internet browser.) I stopped creating my account at this point and have yet to finish it up.

I later discovered that if I banked with one of the larger banks, for which custom APIs have been negotiated, I would not have been asked for a routing and account number. I would have simply entered my online login details, and I'd be managing my finances with my fingertips already. I started digging into why my credit union doesn't have full interoperability.

In the United States, banking is a closed system. APIs are built as custom integrations, with each financial institution having to consent for third parties to access customer data. However, many FIs haven't been approached, or integration is bottlenecked at the core processor level. It is bottlenecked because if they deny access to customer data (which some do), the FI has no choice in the matter.

New Consumer Financial Protection Bureau (CFPB) guidance on data sharing and aggregation addresses the accessibility and ownership issue. The upshot of the CFPB's guidance is that consumers own their financial data and FIs should allow sharing of the data with third-party companies. But should doesn't equal will or can.

The CFPB guidance, though not a rule, is in the same vein as the European Union's PSD2 (or Directive on Payments Services II) regulation, whereby FIs must provide access to account information with the consumer's permission. This platform, which represents an open banking approach, standardizes APIs that banks can proactively make available to third parties for plug-and-play development.

While open banking is a regulatory requirement in Europe, market competition is driving North American banks to be very interested in implementing open banking here. An Accenture survey recently found that 60 percent of North American banks already have an open banking strategy, compared to 74 percent of European banks.

It is no surprise that bankers are becoming more comfortable with the shift-in-ownership concept. FIs have been increasingly sharing their customers' data with third parties. Consumer data are what fuel organizations like credit agencies, payment fraud databases, identity and authentication solutions, and anomaly detection services, to name a few. As these ownership theories change, we will also need to see new approaches to security. What are your thoughts about open banking?

Photo of Jessica Washington  By Jessica Washington, AAP, payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed

 

 

November 6, 2017 in banks and banking, data security, emerging payments, innovation, mobile banking | Permalink

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October 23, 2017


ACH and Consumer-Only Payments: Will the Twain Ever Meet?

For many years, person-to-person (P2P) payment providers have touted the emergence of compelling P2P mobile-based products that exploit some combination of financial institutions (FIs) and fintech providers. Several players have made notable inroads into P2P with certain demographics and use cases, but the overall results in terms of absolute numbers are far from ubiquitous. This post uses hard numbers to explore what progress ACH has made with P2P payments.

During a payments conference earlier this year that showcased findings from the Fed's triennial payments study (here and here), the table below was presented showing the number and value shares of domestic network ACH payments in 2015. The table is complicated because it shows both debit pull and credit push payments by consumer and business counterparties. Despite the complexity, the table distills ACH to its essence by removing details associated with the 14 transaction payment types (known as Standard Entry Class codes) that carry value for domestic payments. Many of these individual codes reflect similar types of payments (for example, three codes are used for converting first presentment checks to ACH). As expected, virtually all payments involve at least one business party to each payment. Consumer-only payments are negligible.

Chart-one

In a typical use case for consumer-only ACH, a consumer transfers funds from one account to another account across financial institutions. As shown in the solid red oval, 0.04 percent of all domestic payments were consumer-to-consumer payments, where the payee initiated a debit to the payer's bank account. For consumer credit push payments, the figure is 0.3 percent. The combined figure rounds to 0.3 percent. On the value side for consumer-only payments (in the dashed red oval), debit pulls, credit pushes, and the combined figure were 0.02 percent, 0.2 percent, and 0.2 percent, respectively. These types of payments typically reflect P2P payments1, when one consumer pushes funds to another consumer.

The next table shows the figures that prevailed in 2012. Given the modest share by both number and value across both years, it is apparent—and interesting—that ACH has made little progress in garnering consumer-only payments. Although ACH is ubiquitous on the receipt side across all financial institutions, it is not so for consumers, given the lack of widely promoted and compelling service offerings from FIs and no standardized form factor like there is for card payments. Additionally, many small FIs do not offer ACH origination services.

Chart-two


This lack of adoption is not unique to ACH. Although some of the electronic P2P entrants are experiencing significant growth, it will be some time before they supplant the billions of P2P cash and check payments. P2P players on the FI-centric side include Zelle, which a large consortium of banks owns. Non-FI providers include PayPal and its associated Venmo service. Given the lack of ubiquity with the new offerings, the fallback option for consumer-only payments is cash and checks. As the payments study reports, check use is still declining, though the most recent trend shows that this decline has slowed. ACH or other electronic options still seem a good bet to continue to erode paper options, but perhaps the market is signaling that paper options have ongoing utility and are still preferred if not optimal for some users in some instances.

So what would it take for ACH to gain some traction in the consumer payments space? Perhaps the presence of same-day ACH, in which credits were mandated in September of 2016 and debits followed in September 2017, offers some opportunity for compelling service offerings coupled with a user-friendly way to send an emergency payment to your ne'er-do-well son.

What are your views on the viability of ACH garnering more P2P payments?

Photo of Steven Cordray  By Steven Cordray, payments risk expert in the Retail Payments Risk  Forum at the Atlanta Fed

 

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1 Sometimes account-to-account (A2A) transfers are lumped in with P2P payments.

 

October 23, 2017 in banks and banking, financial services, mobile banking, mobile payments, P2P, payments study | Permalink

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August 7, 2017


Are Business Payments Directories Coming to the Fore?

Financial institutions (FIs), service providers, and particularly businesses have been dreaming of a ubiquitous payments directory for business-to-business (B2B) payments over the last five years or so. Payments directories give payers the ability to quickly look up accurate account and routing information to originate payments of all types to payees. Directories reduce friction and time needed to efficiently and accurately make payments and accelerate the transition away from checks.

That the dream is getting closer to reality became obvious to me in April, when I attended a NACHA Payments Conference that included the panel discussion "Can a B2B Directory Service Advance e-Payments?" Significantly, one of the panelists was the chair of the Business Payments Directory Association (BPDA), a nonprofit initiative to advance an open, nonproprietary B2B directory for small and large businesses. The independent BPDA has the support of the Business Payments Coalition comprising banks, industry associations, service providers, and businesses.

Businesses wanting to pay other businesses have a variety of payment instruments to choose from—check, ACH credit, wire, and card—with consequential differences among them such as costs, payment reconciliation, and funds availability. Though ACH has made significant inroads into B2B payments, particularly for large businesses, checks are still the fallback payment method when payers are not sure if the payee is willing to accept anything else. Checks are still widely accepted, and attaching associated remittance information with the check is straightforward. The ease of paying by check contrasts with the potential difficulty of determining whether the payee is willing to accept electronic payments and of getting accurate account and routing information.

Essentially, any B2B directory should contain all the information a payer needs to specify the payee’s payment account and route the payment electronically. Typically, directories by themselves do not clear and settle payments. The idea behind the BPDA initiative is that each payee in the directory is provided an electronic payment identity (EPI). That EPI uniquely identifies a payee and supports multiple payment accounts. It also specifies the payee’s preferred way to be paid, the type of remittance information needed, and preferred remittance delivery methods. A payee owns its EPI, which is portable across multiple subdirectory providers. As envisioned, a central node would link multiple subdirectories containing EPIs, each managed by a subdirectory provider that validates payee information so that it can be trusted. Subdirectory providers can include FIs, service providers, and payment networks. All of this is managed by the BPDA that sets rules, credentials subdirectory providers, payees and payers, and oversees the central node.

The image illustrates the process. Payers query the system to retrieve account and routing information from payees. They can then use this information to originate a payment through existing payment rails.

Chart-one

The BPDA lists several advantages of this approach, including these:

  • Payees can centrally communicate preferred payment methods and the information needed to effect payments by payers.
  • Payers can centrally retrieve accurate payee payment and remittance content and delivery preferences.
  • Friction for noncheck payments between payees and payers is reduced.
  • Minimizes misdirected payments.

One lingering concern about having a centralized directory is the risk that fraudsters could gain access to account numbers of large businesses for producing counterfeit checks or unauthorized transactions. In addition to the need for robust credentialing, one mitigant the system offers is that account information can be made private and restricted to specific payers.

It will be interesting to see how this nascent service shakes out given hurdles in governance framework, garnering industry support, developing a funding model, and, of course, getting businesses to enroll and participate. What are your views on the future of B2B directories?

Photo of Steven Cordray  By Steven Cordray, payments risk expert in the Retail Payments Risk  Forum at the Atlanta Fed

August 7, 2017 in ACH, banks and banking | Permalink

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July 24, 2017


FIDO Tightens Authentication's Leash

Our blog often covers user authentication challenges confronting financial institutions and merchants. We feel this topic is essential given that consumers are increasingly going online to make payments and their passwords tend to be weak. Financial institutions and merchants face a difficult balancing act. They must be confident that their authentication tools effectively confirm the legitimacy of the individual attempting a transaction, but they also have to make sure these tools don't create a bad experience for the customer.

A meeting in 2009 between a fingerprint-sensor manufacturer and a global, third-party payment provider to fingerprint-enable online payments quickly turned into a conversation on how to develop an industry standard for the general use of biometrics to identify online users. Ultimately, this meeting led to the formation of the FIDO (Fast IDentity Online) Alliance in 2012. FIDO currently has a global membership of more than 250 companies and agencies spanning the payments, mobile, PC, and transaction security industries.

FIDO's principal effort has been to develop a set of specifications and certifications covering consumer devices, mobile and web applications, and biometric authentication methods for e-commerce applications. Products certified to these authentication specs reduce password dependence, transaction friction, and stolen password attacks such as phishing, man-in-the middle attacks, and transaction replays.

FIDO initially focused on mobile devices—which allow authentication with the fingerprint sensor, microphone, and camera—and developed the Universal Authentication Framework. This framework provides enhanced security using public-key cryptography, with the keys and biometric templates remaining on the mobile device. The user goes through a device registration process that creates the biometric template and a cryptographic key pair on the device and registers only the public key with the online service. To perform a transaction, the customer uses one of the phone's biometric sensors to unlock the private key on the device.

To expand these strong cryptographic authentication capabilities to second-factor use cases on the web, FIDO established a second set of specifications known as FIDO U2F, or Universal Second Factor protocol. With this protocol, the user inserts a certified U2F device, also known as a security key, into a device's USB port or uses the device's Bluetooth or near-field communication features. The application running in a FIDO-compliant web browser first challenges the user for a password and then authenticates the user with the cryptographic private key on the U2F device.

Authentication of customers, especially on a remote basis, will always be a challenge as criminals find more and more ways to spoof identities. The industry's efforts to increase the security of remote payments remain ongoing and the cooperative work demonstrated by groups such as the FIDO Alliance plays an important part in that effort.

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

July 24, 2017 in banks and banking, biometrics, consumer fraud, consumer protection, identity theft, innovation, mobile payments | Permalink

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July 17, 2017


Staging the ATM

As the installation of the first automated teller machine (ATM) recently reached its 50th anniversary (48 years since the first U.S. installation), the core functionality of the present-day ATMs has changed very little. They remain primarily designed to provide customers with cash at their convenience, but now most full-function ATMs also accept deposits with image capture and currency counting capability. Sure, the machines of today are much more technologically sophisticated and reliable than the initial ones that were more mechanical in operation. The industry, however, has undergone some major changes.

Accessed by a magnetic stripe or chip card and authenticated using a PIN, the ATM has served consumers and financial institutions well. The 2016 Federal Reserve Payment Study showed that ATM withdrawal volume remained flat from 2012 through 2015 at approximately 5.8 billion transactions valued at $700 billion, or an average transaction value of $122.

Banks in a number of South American and Asian-Pacific countries have installed biometric sensors in their ATMs either to eliminate the need for payment cards and PINs or to serve as an additional authentication factor. However, a couple of major U.S. banks have taken a different path in a quest to eliminate the payment card and PIN; they have developed a staged transaction process using the customer's mobile phone. While there are some variations from bank to bank, the process generally works as follows:

  • The customer opens the mobile banking application using the normal authentication process.
  • The customer selects the ATM withdrawal option then identifies the ATM location and amount of withdrawal.
  • When at the designated ATM, the customer selects the function button on the ATM for a cardless transaction.
  • The next step depends on the particular bank.
    • Some banks display a 2D barcode on the ATM screen, which the mobile phone's camera reads to validate the transaction and dispense the requested amount of cash.
    • Other banks, to complete the transaction, may require the customer to enter both the normal payment card PIN and a numeric token value that the application sent to their phone when they made the transaction selection.

This technology offers banks a number of financial benefits over biometric readers. The barcode or token process requires only software development within the mobile banking application and ATM, so banks don't have to purchase, install, and maintain biometric hardware sensors. A drawback is that only the ATMs of the customer's own financial institution supports the staged transaction. In addition, card readers will have to remain a key component of ATMs to service customers of other banks as well as the bank's own customers who wish to continue to use their cards. Because criminals continue to insert card-skimming devices and cameras to capture card data and customer PINs—an industry-wide and global problem—the new functionality will only minimize, not prevent, such fraudulent activity.

Many financial institutions seem to be making a concerted effort to migrate customers from payment card-based transactions to options such as mobile pay wallets and now staged ATM transactions. Mobile wallet adoption rates by consumers have been low to date, so it will be interesting to see if the adoption rate of cardless ATM transactions will be any different. 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

July 17, 2017 in banks and banking, innovation | Permalink

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July 10, 2017


Can Migrants Teach Us Anything about Millennials?

While attending a recent conference, I became involved in a discussion regarding millennials and their alleged rejection of banks. The other people in this conversation thought that this millennial mindset is negatively affecting banks and other financial institutions (FIs). One person cited a Goldman Sachs report that said 53 percent of millennials surveyed indicated they have no need for a bank in the near future. Another mentioned the Millennial Disruption Index, which found that 71 percent of millennials would prefer to go to the dentist than listen to what banks are saying.

It would come as no surprise to those who know me or have read some of my previous blogs on similar topics that I was the outlier in the conversation. And after reading Inter-American Dialogue's May 2017 report, On the Cusp of Change: Migrants’ Use of the Internet for Remittance Transfers, I feel as strongly as ever that this generation will, in fact, need banking relationships.

While the survey behind the report focused on migrants' use of remittance transfers, Inter-American Dialogue also surveyed migrants on bank account ownership. The survey found that over 70 percent of Mexican migrants in the United States own a bank account, up from only 29 percent in 2005. The report concludes, with support from additional survey data, that bank account ownership is predominantly a function of years being in the United States; those migrants here for 10 years or longer are much likelier to own a bank account.

While millennials may not need traditional FI products today as they wait longer to purchase homes and start families than did previous generations, I believe the day will come when they find they need FIs. Only then will we know whether that wait is shorter or longer than the 10 years it takes for most Mexican migrants to establish banking relationships. Millennials have a host of alternative financial products to choose from—and to ignore—but so do migrant workers. Yet we know that, eventually, most migrant workers recognize they need banks.

I am not suggesting that financial institutions simply wait for millennials to realize their need for a banking relationship. FIs should be actively pursuing new products or developing strategies to attract millennials to traditional products. As millennials establish themselves and grow more prosperous, I believe they will realize banking relationships are extremely important to that process. The notion that millennials never need banks is one that I am not buying (not even with my bitcoins). Are you?

Photo of Douglas King By Douglas A. King, payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed

July 10, 2017 in banks and banking, innovation | Permalink

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