Take On Payments

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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.

November 30, 2015


Half Full or Half Empty?

My colleagues and I in the Retail Payments Risk Forum participate as speakers or attendees in what sometimes seems to be a nonstop stream of banking and payments conferences that run from mid-September to mid-November. This effort is part of our mission to support the education of the stakeholders in the payments ecosystem with a focus on payments risk. We also use the opportunity to network with other attendees and vendors to stay on top of the latest developments and market solutions that are being deployed to combat payments fraud. These events also give us a chance to provide our perspective on trends and key issues involving payment risk.

At a recent fraud conference, I was on a panel discussing fraud trends and key threat vectors. The moderator of the panel revealed some results from Information Security Media Group's 2014 Faces of Fraud survey of financial institutions (FIs). There was a specific question about whether FIs had seen a change in the level of losses from account takeover fraud since the Federal Financial Institutions Examination Council issued its supplemental guidance on Internet banking authentication in 2011. That guidance directed financial institutions to evaluate "new and evolving threats to online accounts and adjust their customer authentication, layered security, and other controls as appropriate in response to identified risks." The survey results are shown in the chart below.

graphic-chart

Source: 2014 Faces of Fraud Survey, Information Security Media Group

While the moderator and some of the other panelists seemed to focus on the 20 percent who said they had seen an increase in fraud, I had the perspective of the glass being half full by the 55 percent who indicated that the fraud had stayed about the same or decreased. Given the certainty that the number and magnitude of data breaches have increased and that the number of attempts by criminals to commit some sort of payment fraud through account takeovers was significantly up, I opined that since the fraud levels for the majority of the FIs had stayed at the same level or declined should be considered as a victory.

Certainly, I am not saying the tide has turned and the criminals are on their way to retirement, but I think the payments industry stakeholders should take some pride that its efforts to combat payment fraud are making some progress through the continuing development and deployment of anti-fraud tools. Am I being too Pollyannaish?

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

November 30, 2015 in banks and banking, crime, cybercrime, fraud, payments | Permalink

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November 16, 2015


Is It Bigger Than a Bread Box?

The answer is yes and no. A payment card in physical form clearly is not bigger than a bread box, but it certainly is a symbol of something bigger. The card is an access device to an account. It could be a birthday gift to my favorite Italian restaurant, a debit card issued by my bank, a general purpose reloadable prepaid card purchased at my local pharmacy, or a card accessing a credit line, and the list goes on. You can't just say, “I used a plastic card to pay for my Italian dinner” and have someone know exactly which card type was used.

Let's play the classic 20-questions game, Take On Payments-style. I'll be thinking of a type of financial account, and you guess the type of account based on the 20 features below. Good luck!

  1. Allows you to earn interest on your account balance.
  2. Offers a loyalty program at selected merchants.
  3. Has no annual or monthly fee.
  4. Can be used at any domestic ATM.
  5. Can be used to pay bills.
  6. Allows person-to-person money transfers.
  7. Offers customer service 24/7.
  8. Offers cash-back rewards.
  9. Is usable for purchases in-person (POS) or online.
  10. Protects against unauthorized purchases and fraud.
  11. Allows access to account information via online or mobile application.
  12. Has budgeting features.
  13. Connects you to more than one account and allows you to manage multiple accounts under one main account.
  14. Issues mobile alerts.
  15. Has optional plastic card; can be all-virtual management.
  16. Offers mobile check deposit.
  17. Allows stop payments on previously scheduled transactions.
  18. Offers the ability to cover some purchase transactions over the account balance.
  19. Accepts direct deposit via ACH for payroll or other deposits.
  20. Allows you to order checks on the account and pay bills with a check.

Which account type did you guess? If I were to tell you that what I had thought of was a prepaid account, would you be surprised? I was thinking of prepaid as bigger than a bread box. It's not a card, or payment channel; it is an account type. Payment transactions are sent to and from a prepaid account just like a checking account. The financial institution and program manager determine the account name and features, and where accounts can be opened.

However, the payments industry needs to be careful that marketing differences don't lead to the misperception that these accounts are fundamentally different from checking accounts. If we let perceptions cloud the true purpose these accounts serve—it is essentially a transaction account, just sold differently—then regulations and risk controls may not address the actual risks. It is inconsistent to regulate transaction accounts offering the same services based on how the account was opened and the type of organization servicing the account, unless the regulation is addressing the actual risk injected at those points. In order for consumer protections and compliance to be achieved consistently, risk controls and regulations should address the operational aspects of these transaction accounts, rather than the marketing name assigned to it.

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

November 16, 2015 in banks and banking, prepaid | Permalink

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November 9, 2015


Is the Payment Franchise Up for Grabs?

I have lost count on the number of discussions at payment conferences over the last few years on this topic of financial institutions (FI) losing the payment franchise to various new payment start-ups and business models. This very topic was the focus of a session at the Code/Mobile conference in October that featured executives from Chase and PayPal debating "Will Banks Eat Payments, or Will Payments Eat The Banks?" This idea was stuck on my mind while I was recently reading Fidelity National Information Service's 2015 Consumer Banking Index Report. This report reveals the findings from a survey of a thousand household decision makers who ranked 18 attributes according to their importance and according to the respondents' perception of how well banks perform. I readily admit that one shouldn't read too much into the results of a single survey, but the results in the payments and product-related category really grabbed my attention.

blog-visual

Consumer expectations for their financial institution to provide digital payment options through more innovative products than other financial institutions scored extremely low in the importance category. Digital payments ranked as the 14th out of 18 attributes in importance, and delivering leading-edge products was the least important attribute surveyed. Though the importance of these two attributes was significantly lower than security and reliability attributes, consumers rated the performance of their financial institution on these two attributes favorably.

My interpretation of the survey is that consumers aren't expecting much from their FI when it comes to delivering digital payments and innovative products yet the FIs are exceeding these light expectations. The survey does not cover whether consumers place importance on others—say, non-bank payment providers—offering innovative products and payment options and how they are delivering on consumers' expectations.

If consumers expect non-FIs to provide digital payment options, then perhaps FIs are in danger of losing the payments franchise. Maybe consumers don't place a lot of importance on digital payment options because they are satisfied with the options their FIs provide and so the risk to FIs losing the payment franchise to non-FIs is low.

It's possible that the consumer falls somewhere in the middle of the two scenarios above. They may be pleased with the offerings of their FIs, which offer ubiquity and are not highly differentiated, so their expectations for options are low. The non-FI payments space is fragmented with new payment options being developed and deployed at a rapid pace that will take time for consumers to digest. Should consumers realize that any of these offerings present a significant improvement in the payments experience, they may raise their expectations for their FIs. This would suggest that the non-FI providers haven't fully delivered on a compelling, ubiquitous, and widely adopted offering yet.

I believe FIs remain firmly entrenched in the payment space today. However, the level of investment and innovation taking place in the industry should capture the FIs' attention. Consumers, me included, are a finicky bunch when it comes to expectations, and these expectations can change almost instantly with the amount of innovation occurring today. I see no reason why the digital payments arena would be any different, and FIs that fail to realize this as they consider future payment options risk a declining share of the payment franchise.

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

November 9, 2015 in banks and banking, innovation, payments | Permalink

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August 4, 2014


Fishing for Your Private Data

fishing Recently, I received a text from my daughter about an e-mail that appeared to be from her financial institution. The e-mail stated that online access to her bank account would be terminated because she had tried to access her account from several computers. However, she could retain access by clicking on a link. While my daughter's natural reaction was concern that she would lose online access to her bank account, I told her that this was probably a phishing incident.

Unlike the hobby of fishing, phishing is the work of fraudsters. With phishing, fraudsters attempt to dupe a consumer or employee into believing that they must immediately provide personal or private data in response to an e-mail that appears to be (but is not actually) from a legitimate entity. Much like fishing, phishing relies on numerous casts, with the phisher hoping that many of those who receive the e-mail will be fooled and swallow the bait. If they get hooked, malware may be loaded on their computer to monitor their keystrokes and pull out financial service website log-on credentials. Or, in my daughter's case, if she had clicked on the link, it would have most likely taken her to a legitimate-looking web page of the bank and requested her online banking credentials. The volume and velocity by which anyone can send e-mails has created a wide window of opportunity for fraudsters.

In their e-mail, the fraudsters create a sense of urgency by indicating some sort of drastic action will be taken unless the customer acts immediately. Although organizations have repeatedly posted statements that they would never send an e-mail asking for private data, this threatened action often causes the recipient to act without considering the consequences or taking the time to call the company or organization to verify the e-mail's authenticity. If it is not authentic, the individual should immediately delete the e-mail without replying, without clicking on any links embedded in the email, and without opening any attachments.

In addition to the need for consumers and employees to be wary of e-mails that are not legitimate, financial institutions must continually stay abreast of the latest technologies to help combat these schemes and educate customers. In a past post, we discussed steps financial institutions should take to help customers protect themselves from fraudsters. These schemes remain in the news even though banks, businesses, and government entities continue to post educational information and best practices for consumers and employees. As my daughter's example demonstrates, consumers opening bank accounts for the first time are not likely to know these schemes. This example suggests that—in addition to educating both business and consumer customers generally—it would be beneficial for financial institutions to place more emphasis on education concerning these schemes at the time customers open their accounts.

Photo of Deborah Shaw

August 4, 2014 in banks and banking, consumer fraud, consumer protection, data security, fraud, identity theft | Permalink

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June 16, 2014


Banking on the Financial Institutions as Gatekeepers

With all the changes and new participants in the payment industry, financial institutions remain the participants in the best position to know their customers. They still play a central role in transactions, so laws, regulations, and rules view them as gatekeepers, best able to protect consumers from unauthorized payments and fraudulent business practices. This gatekeeper role has never been simple, but the increase in the number and type of businesses conducting transactions over the internet and mobile devices has added to its complexity and difficulty. Complicating the gatekeeper role further is the increasing number of intermediaries involved in the payments stream.

Over the years, regulators have issued guidance to institutions highlighting issues related to high-risk businesses and service providers. In the fourth quarter of 2013, both the Office of the Comptroller of the Currency and the Federal Reserve Board issued guidance on third-party risk management for financial institutions. The new guidance highlights the growing importance of managing relationships with payment participants and makes it clear that institutions have to focus on managing customer relationships, which starts at onboarding.

Regulatory pressure is one approach to keeping the payments system safe, and so is the pressure that law enforcement agencies put on financial institutions. A recent example includes the crackdown of the New York Department of Financial Services on unlawful payday lending practices.

Payments system rules are also effective in keeping financial institutions focused on indicators of the fraudulent use of a payment type. For instance, NACHA Operating Rules include a provision that says an institution is out of compliance if its businesses have a return rate for unauthorized transactions over 1 percent. (A previous post addressed proposed enhancements to the NACHA Operating Rules to address additional indicators of fraud.)

An even stronger type of pressure exerted on financial institutions is when an agency bans a payment type entirely or restricts its usage. For instance, the Federal Trade Commission issued a proposal last year to ban the use of remotely created checks by telemarketers. If a payment type is banned, the financial institution's role is to enforce the ban with its business clients.

The emphasis on the financial institution's gatekeeper role underscores the continued importance of protecting consumers from fraudulent payment practices. It also highlights the fact that this role is not an easy one and brings with it certain risks and costs.

Photo of Deborah Shaw

June 16, 2014 in banks and banking, regulations, risk management | Permalink

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May 19, 2014


Choking on the Cost of Risk Management

In March 2013, the Department of Justice (DOJ), joined by the Federal Deposit Insurance Corporation (FDIC) and the Consumer Financial Protection Bureau (CFPB), quietly launched the program “Operation Choke Point.” The program’s objective is to cut off fraudsters’ access to consumer bank accounts by restricting—or choking off—their access to the banking system. Normally the fraudsters would be the only ones complaining about officials trying to shut down their business, but this program is also creating new risk management challenges for the banking industry.

While critics of the program readily admit that criminal activities should be fully investigated and prosecuted, they contend that the program has imposed a wider, “chilling,” effect on financial institutions and their third-party payment processors. A number of financial institutions have said that the operational, compliance, and risk costs associated with the increased scrutiny outweigh the benefits of such high-risk but legal business account relationships and can result in their termination.

The agencies defend their actions, stating that the “know-your-customer” and “know-your customer’s customers” requirements have been in place for some time. They say they are targeting only processors and financial institutions that are blatantly exchanging these requirements for due diligence and compliance with the Bank Secrecy Act (BSA) for a sizable fee revenue opportunity.

By September 2013, the DOJ had issued 50 subpoenas to financial institutions and their processors citing the BSA’s requirements for a financial institution to monitor the activities of its customers and its customer’s customers for suspicious activity. In its first enforcement action of the program, in early 2014, the DOJ entered into an agreement with a holding company of a North Carolina community bank for $1.2 million in civil penalties and with certain restrictions with regards to its future processor relationships. The DOJ alleged that the holding company’s management knowingly ignored numerous warning signs that some of its processing customers had clients engaged in illegal business practices, including internet-based payday lending, gambling, and even Ponzi schemes, all to generate large amounts of account service charges and fees. A U.S. District Court judge approved the agreement on April 25 this year. However, the bank didn’t admit to anything in the DOJ complaint nor to any liability.

To help financial institutions better deal with the risk management requirements that Operation Choke Point highlights, a number of associations have developed materials or issued guidelines. An earlier Portals and Rails post discussed the reminders from NACHA on the know-your-customer’s-customer rules and the proposed rules about return item limits that could potentially signal fraudulent or deceptive practices. The Electronic Transactions Association (ETA) has recently published a best-practices guide for processor relationship onboarding and continued oversight. This document, “Guidelines on Merchant and ISO Underwriting and Risk Monitoring,” is available to ETA members only, but the organization has given us permission to make the guide’s executive summary available.

Portals and Rails is interested in your thoughts on Operation Choke Point and the response by some banks, and we pose this question: Are banks properly pricing their services to the business that requires such intense risk management measures?

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


May 19, 2014 in banks and banking, law enforcement, regulations, risk management | Permalink

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March 31, 2014


Ignore Millennials at Your Own Risk

At a recent conference primarily for credit unions and small banks, I participated in an interesting discussion about the future role of banks and legacy payments for person-to-person (P2P) payments. Few of the attendants offered a P2P solution as part of their online or mobile banking platform and those that did claimed the product was seldom used, if at all. There was consensus that a majority of their customers just aren't interested in this product.

I recently wrote on this topic, hailing the check as an efficient form of P2P payment thanks in large part to mobile remote deposit capture. But perhaps my experience of writing a check to a 20-something babysitter was more of an anomaly than the norm. A recent survey that GOBanking Rates conducted reveals that nearly 40 percent of consumer banking customers never write checks and 61 percent of banking customers between the ages of 18 and 24 claim to never write checks. Another survey of 10,000 millennials (those born from 1981 to 2000) reveals that the banking industry is at the highest risk of disruption. Seventy percent of the respondents believe that the way we pay for things in five years will be totally different. One in three of the respondents believe they will not need a bank.

So what can financial institutions take away from my experience and these surveys? Two things stand out to me. First, there are still banking customers (young ones included) that continue to write checks or prefer to receive checks over alternatives from banks and nonbanks. Though I fully expect check usage to continue to decline, the complete demise of the check is a fantasy. Second, and most important, financial institutions that choose not to evolve in the payments space risk disintermediation or even becoming irrelevant. While their customers today may not want specific products or payment capabilities, the reality is that the makeup of a majority of these customers today won't be the same as in the future. A generation of potentially new customers has a very different view on payments and banking. Ignoring these future customers will lead to harsh realities for financial institutions. What is your institution doing in terms of payments to attract and keep millennials and avoid becoming a dinosaur?

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

March 31, 2014 in banks and banking, emerging payments, innovation | Permalink

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March 24, 2014


The Fraudsters Are Omni-Channel--and Omnipresent

"Omni-channel banking" is an in-vogue term for what bankers have known for quite some time: customers can access multiple channels to conduct their banking, have a preference for one over the others, and that preference to a large degree reflects their ages. Despite their primary preference, these consumers are likely to use multiple delivery channels, and when they do, they want a seamless experience when moving from one to another. The banking industry has struggled to successfully implement such an experience. Achieving this seamlessness is difficult because the industry has historically had a vertical organizational structure, in which each distribution channel has its own strategic plan and sometimes even an independent technology, which leads to differences among the channels. For example, if a customer were to check his or her account balance from an ATM or automated call center, the balance can be different from the balance they would get from a teller inside a branch.

Unfortunately, criminals have also adopted omni-channel usage, and at an even faster pace—they are not concerned with having a transparent or seamless experience. In fact, they seem to be more successful when there are disparate systems because that makes the detection of fraudulent activity more difficult. For example, we have seen criminal attacks move from in-branch armed robberies to ATM cash-out cyberheists. Why risk a physical confrontation and mandatory jail sentence when you can work anonymously and actually get a greater haul? We are also aware of cross-channel fraud activity within the electronic channels. In one case, e-mail phishing attacks led to a customer unwittingly disclosing online banking credentials (user ID and password) and then fraudulent payments or wires being initiated through the online channel. In a recent post, we talked about how criminals often target call centers. They use social engineering techniques to gain sufficient account information to fraudulently access accounts through a variety of channels.

A lesson from these incidents is that financial institutions must take a holistic view of fraudulent activity and not just a channel-specific view. For major losses, they have to perform forensics to determine the channel where the fraudulent effort began not just the channel where the actual fraudulent transaction occurred. Only after such investigative work can the financial institution identify the weak points in its system and processes and take the necessary steps to fortify them to provide a higher level of protection against future attacks.

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

March 24, 2014 in banks and banking, crime, cybercrime, financial services | Permalink

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March 10, 2014


Who Is Responsible for Consumer Security Education?

A theme that consistently appears in our Portals and Rails blogs is the continual need for consumer education when it comes to protecting account access credentials. Financial institutions have generally taken this responsibility seriously, running frequent verbal and print campaigns reminding customers to safeguard their payment cards, monitor account activity frequently, and adopt strong password and PIN access practices.

But as payment channels and access devices expand outside the bank-controlled environment, who then becomes responsible for customer education? The representatives of mobile phone carriers and handset manufacturers, for example, are often in sales mode. The last thing they want to do is scare off a potential sale by identifying the potential for fraud with their product or service.

When I recently went to purchase a new mobile phone that was equipped with a number of strong security safeguard options, the sales representative was more interested in selling me high-margin accessories than telling me how to safeguard the phone and its contents. While I understand the motivation of the sales representative, especially if he works under a sales incentive compensation plan, wouldn’t it easy for the carrier or phone manufacturer to provide a brochure promoting safe practices?

Unfortunately for the financial institutions, the stakes are high. For them, the financial impact of fraudulent activity on a customer's account is often a one-two punch. First, various regulations and rules are in place to protect consumers from liability, so the financial institutions generally write off the fraud loss. Second, and perhaps more painful, victims of fraud often move their accounts even though their financial institution is not at fault. The challenge of consumer education by the bankers is becoming more and more difficult as the opportunity for direct contact with the customer lessens with every new payment transaction product or service.

As we've seen before, in the aftermath of recent card transaction and customer data breaches, the negative reputational and financial impact from fraud is felt not just by financial institutions but also by the retailer or company that was breached. Will such events cause these other stakeholders to take a more proactive role and join financial institutions in educating their customers?

Portals and Rails is interested in hearing from you as to how the payments industry might best address customer awareness and education regarding security.

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

March 10, 2014 in banks and banking, consumer fraud, consumer protection, data security, mobile payments | Permalink

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February 3, 2014


Call Center Phone Fraud: Are You Really Who You Say You Are?

"Have I reached the party to whom I am speaking?" Lily Tomlin would use this line whenever she would play her character Ernestine the telephone operator on the classic TV comedy show "Laugh-In." But to the thousands of financial institutions that operate call centers, the question of whether their customer service representatives are talking to an actual customer is no laughing matter.

In a recent report on call center phone fraud, Pindrop Security cites a number of alarming statistics based on their clients' actual experiences: one in every 2,500 calls to a call center is fraudulent; the average fraud loss per call received is $0.57; and the average potential loss to an account from phone fraud is more than $42,000. It seems that the call center has become an increasingly attractive target for fraudsters.

A call from someone not authorized to access the bank account in question may not directly result in a financial loss on that call. In fact, Pindrop's research indicates that it takes an average of five calls before the fraudster gathers enough information to strike. They use those preliminary calls to gain account or customer information that will help them subsequently to generate a fraudulent transaction, whether it's through the call center or another channel. Some of the calls are from criminals who are simply trying to get account information such as credit and debit card information that they can sell to others. Some of the calls attempts to change account settings such as statement mailing address or call-back phone numbers. With a simple address change, the criminal can gain more information about the accountholder and also keep the victim from being alerted to fraud on their account. Often, a call that results in a direct loss occurs when the fraudster obtains sufficient account credentials to generate a fraudulent wire transfer or ACH transfer from the targeted account.

While these criminals might be looked at as "low-tech hackers" compared to the sophisticated hackers who probe computer systems or worse, the evidence from law enforcement shows that these groups are just as well-organized and sophisticated. They are often based outside the United States, which makes investigations and prosecutions difficult. Sometimes they use technology to change their voice or to show a fake phone number on the bank's caller ID system. The fake phone number helps the fake caller avoid suspicion when the call is coming from outside the customer's area of residence.

To address this growing attack vector, financial institutions are adopting new technology to help them detect potentially fraudulent calls. Voice biometric technology can detect altered voices or even compare the caller's voice to a database to verify the caller's legitimacy. In addition, phone call and device "fingerprinting" gathers enough information from the caller's device to allows the call to be scored, just like a card transaction, on how likely it is to be fraudulent.

It is clear that criminals are attacking all physical and virtual channels of banks, sometimes using information obtained through one channel to carry out fraud in another channel. Portals and Rails believes it is important that you approach your fraud mitigation strategy from a cross-channel perspective. Please let us hear about your challenges and successes with such efforts.

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

February 3, 2014 in authentication, banks and banking, consumer protection | Permalink

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