Take On Payments


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.

August 17, 2015

Pigskin and Payments

For those who know me well, they know that I find August to be the slowest-moving month of the year. It's not because of the oppressive southern heat and humidity, but rather it's my anticipation for football season. To help speed along the "dog days of summer," I generally read my fair share of prognostication publications. Alongside the predictions, improving player safety has become a key discussion topic as the season approaches.

Armed with data showing an increase in injuries as well as long-term negative effects from playing the sport, football's governing bodies on both the collegiate and professional levels are instituting rule changes to make the game safer. Equipment manufacturers are introducing new gear to improve safety and individual teams are adding new experts to their medical staffs all in the name of player safety.

Ironically, while there is a focus on improving player safety, football players continue to get stronger and faster aided by advancements in nutrition and workout regimes. As player strength and speed improves, this contact sport becomes more vicious and dangerous. And as a fan, I'll admit that I find watching a game featuring stronger and faster players more exciting. I do not want to see players injured, but at the same time I enjoy the excitement that comes with hard tackles and big hits.

Does this state of football sound at all like the current state of the U.S. payments industry? To make payments safer, public and private entities are leading literally hundreds of initiatives across various payments rails. Network rule changes are taking place and new technologies are being harnessed all in an effort to better secure payments. At the same time, start-ups, established payment companies, payment associations, and the Federal Reserve are collaborating to improve the speed of payments.

It's hard not to get excited about the possibilities of faster payments, from important just-in-time supplier payments to simple repayments for borrowing money from a friend or family member. However, can securing payments better derail the speed of payments? By way of example and personal experience, my more secure EMV (chip) credit card has clearly reduced the speed at the point-of-sale for my card payment transactions.

But just as player strength and speed has evolved alongside safety through rule-making and technology (think about leather football helmets here), I think we have seen the same progression within the payments industry. I think football remains as exciting as ever, and the payments expert in me is clearly excited about the future of payments.

Speed and safety are not to be viewed as mutually exclusive, and I am confident that the payments industry supports this view. In both football and payments, elements of risk will exist, regardless of safety measures in place. Finding the right balance between speed and safety should be the goal in order to maintain an exciting football game or efficient payments system. I can't wait to see what lies ahead on the gridiron and within the payments industry.

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

August 17, 2015 in emerging payments, EMV, fraud, innovation, risk management | Permalink


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June 1, 2015

Follow the Money

This blog is inspired by Jack Weatherford's The History of Money, and I'll open with a quote from the book's introduction, attributed to Gertrude Stein: "The thing that differentiates man from animals is money." Now I'm guessing most of us can think of a few more distinctions than that, but I will wager her item would make just about any top ten list.

In his book, Mr. Weatherford discusses three generations of money, noting that today's free market systems saw their genesis in Lydia several millennia ago with the advent of coins. He credits the invention not only with leading to our free market systems but also with destroying "the great tributary empires of history." In other words, money can build new, mighty things and fell that which was once mighty.

Mr. Weatherford describes the second generation of money as beginning in Italy with the Renaissance and moving through the Industrial Revolution. What emerged in this turning was paper money and banking and what fell was feudalism, "changing the basis of organization from heredity to money," with ownership of land supplanted by ownership of stocks, bonds, and the like. In other words, modern capitalism took hold and society evolved into something very different from what it had been.

He describes stage three as electronic money and the virtual economy. Instantly, we recognize the current age. In the way he presents the history, he makes a compelling case that noteworthy evolution and reinvention of money changes the world.

"Fascinating," you might say, "but so what?" Before suggesting an answer, I point out that Mr. Weatherford published this work in 1997. Nevertheless, presciently, he said, "A new struggle is beginning for the control of [money]... We are likely to see a prolonged era of competition during which many kinds of money will appear, proliferate, and disappear in rapidly crashing waves. In the quest to control the new money [emphasis mine], many contenders are struggling to become the primary money institution of the new era."

Indeed. So, I get to my answer. At the moment, one of the focal points for many payment wonks is making platforms "faster." A lot has gone into that already, and much more seems yet to come. A key risk if not the chief risk in this endeavor is ending up with an industry focus that is too narrow (platforms only). It could cause key payment participants to end up missing an important change—in money—not the mechanisms for moving it.

As work progresses to reach consensus on what and how to improve the extant payment mechanism, it seems good to pause and make sure the focus. Pursuit of a purely faster mechanism that envisions world monetary systems continuing to be based on the things they've been based on for centuries now could cause us to overlook or miss the next evolution of money. It would have been of little use to invest in improving the systems for speeding the exchange of cowrie shells as the turn was made toward paper money and banking. I think that to get this right, it is important to worry less about improving the system(s) for facilitating exchange, and more about what's going to be exchanged.

Photo of Julius Weyman By Julius Weyman, vice president, Retail Payments Risk Forum at the Atlanta Fed

June 1, 2015 in emerging payments, innovation | Permalink


Excellent observation and well stated.

Posted by: Kimberly Rector | June 5, 2015 at 10:11 AM

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May 4, 2015

Keeping Up with the Criminals: Improving Customer Authentication

The interesting thing about authenticating customers for checks and PIN-based debit transactions is that the customer's authentication credentials are within the transaction media themselves—a signature, a PIN. But for the rest of the transaction types, authentication is more difficult. The payments industry has responded to this challenge in a few different ways, and may be turning increasingly to the use of biometrics—that is, the use of physical and behavioral characteristics to validate a person's identity.

Improving customer authentication in the payments industry has been a focal point for the Retail Payments Risk Forum since its formation. After all, authenticating the parties in a payment transaction efficiently and with a high level of confidence is critical to the ongoing safety and soundness of the U.S. payments system. We have intensified our focus over the last two years, including holding a forum on the topic in mid-2013. The Forum has also just released a working paper that explores the challenges and potential solutions of customer authentication.

The working paper examines the evolution of customer authentication methods from the early days of identifying someone visually to the present environment of using biometrics. The paper reviews each method regarding its process, advantages and disadvantages, and applicability to the payments environment.

Much of the paper looks at biometrics, an authentication method that has received increased attention over the last year—partly because smartphones keep getting smarter as folks keep adding new applications, and as manufacturers keep improving microphones, cameras, accelerometers, touch sensors, and more.

The table lays out six key characteristics that we can use to evaluate a biometric system for a particular application.


The use of biometrics will be the subject of an upcoming forum hosted by the Retail Payments Research Forum later this fall, so stay tuned as we finalize the date and agenda. In the meantime, if you have any comments or questions about the working paper, please let us know.

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

May 4, 2015 in authentication, biometrics, emerging payments, innovation, mobile banking, mobile payments, risk management | Permalink


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January 12, 2015

Forming a More Perfect Union (for Faster Payments)

Thus far, conversations about the basic idea of moving ahead with near-real-time payments in the United States have been positive. However, the thorny business of "walking the talk" hasn't begun. When the time comes to do so, I expect less comity.

The degree of fragmentation in the United States—within both the public and the private sector—is significant. Consider the public side first. To avoid listing each entity that has a stake in payments services, let me sum it up by saying that if we had a box of Alpha-Bits, we'd run out of letters long before we put together the acronyms of all the agencies and organizations. On the private side, fragmentation starts with merchants and banks but includes mobile and third-party providers as well. These groups are vital to the success of any effort to improve payments, but they don't move in lockstep. In the end, for a faster scheme to work, the public and private sides have to work through their respective issues—and then come together.

Whether we're considering the public or the private side of things, some of the trickiest questions look like this:

  • What will faster payments cost and who will pay?
  • Will certain interests lose from the success of faster payments in the United States while others win?
  • Can we build a faster system quickly and flexibly enough before the next wave of technological advancement makes the current vision obsolete?
  • What are the rules, and who will administer and manage them?

While you ponder those questions, consider this excerpt from the United Kingdom's Payment Systems Regulator consultation paper (November 2014):

    The Payment Systems Regulator (PSR)…will become fully operational in April 2015. The PSR is a subsidiary of the Financial Conduct Authority (FCA), but it is an independent economic regulator, with its own objectives and governance.

    In setting up the Payment Systems Regulator, the Government highlighted four aims for UK payment systems:

  • UK payment networks that operate for the benefit of all users including consumers
  • a UK payments industry that promotes and develops new and existing payment networks
  • UK payment networks that facilitate competition by permitting open access to participants or potential participants on reasonable commercial terms and
  • UK payment systems that are stable, reliable and efficient.

The Government's assessment was that there were problems in each of the first three of these areas, and that the best way to tackle these was to create a payment system regulator. The Government noted particular areas of concern, including ownership, innovation and access to payment systems…. [W]e believe that our regulatory package will address the underlying issues and concerns that led the Government to setting us up. However, should our proposals fail to do this, we will…consider further use of our competition and regulatory powers to take action as appropriate.

That's one way governance issues could be resolved here. Another way is revealed through a study of the evolution of the ATM networks. Consider that landscape circa 1980s and then contrast it to today. I can't do justice to that history in a single post but suffice it to say that the issues faster payments currently face look similar to those the ATM industry faced. Back then, the market figured things out. Such a course may be slower than a mandate, and there will be failures and angst. Will the United States need a PSR to direct us to faster payments, or will the market figure it out?

By Julius Weyman, vice president, Retail Payments Risk Forum at the Atlanta Fed

January 12, 2015 in emerging payments, regulators | Permalink


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January 5, 2015

Can Insecurity Keep Us from Faster Payments?

Helen Keller once said, “Security is mostly a superstition. It does not exist in nature.… Avoiding danger is no safer in the long run than outright exposure.” It is unlikely that Ms. Keller was considering real-time payments when she offered this perspective, but this post will.

As part of its broad effort to chart a future for payments, the Federal Reserve conducted a Payment Security Landscape Study. It was no surprise that the study highlights “persistent and ever-changing threats” as a given within payment systems. The study suggested several improvement or focus areas:

  • Improve industry coordination to increase the timely adoption and implementation of technology, standards and protocols.
  • Improve the protection of sensitive data that can be used to perpetrate fraud, including devaluing or eliminating such data from the payments process.
  • Strengthen authorization and authentication of parties and devices across all payment methods and channels and adapt approaches as the payment system evolves.
  • Improve the collection and reporting of aggregate data on fraud losses and avoidance.
  • Broaden access to actionable security and fraud threat information to payments system participants, including less technologically sophisticated participants and end users.

Applying Ms. Keller’s risk perspective to payments systems would suggest that work to prevent security breaches, fraud, or theft is futile. Fortunately, using the foregoing list as evidence, it’s clear that those considering the future of payments haven’t adopted this perspective. The most critical elements for optimizing the security of payments are all there, though some could surmise that detection or prevention measures have a disproportionate emphasis, with response measures perhaps rating as secondary. It is important to make sure that risk management is optimized across all three broad areas—prevention and detection, yes, but also response. In particular, in the context of response, the enforcement landscape will need to be ordered such that consequences for perpetrators are both timely and proportionate to the harm a given incident may cause. User protections will need to evolve as well.

If one agrees that advancing faster payments offers rewards and that holding back doesn’t promise freedom from harm, it’s encouraging to observe industry direction. Indeed, it seems reasonable to conclude that faster payments scheme architects will heed the notion that real-time payments will require real-time security. Particularly encouraging is that the discussion on payment security is at the center of industry dialogue and likely to remain so as the work to advance faster payments continues.

By Julius Weyman, vice president, Retail Payments Risk Forum at the Atlanta Fed

January 5, 2015 in consumer protection, data security, emerging payments | Permalink


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June 2, 2014

Mobile Payments Fatigue

When I was an elementary school-aged kid, I looked forward to coming home from school and grabbing an ice cold Coca-Cola and a snack before venturing out into the neighborhood to play. And while I can't remember the exact discussions I had with friends around the lunch table when I was that age, I do remember our anticipation of the launch of New Coke in 1985. And oh my, how much my friends and I were disappointed when our lips first met New Coke. My reaction, with most others, was that we wanted our "old" Coke back.

Fast forward nearly 30 years and now my lunch discussions often revolve around payments. Each day I am reminded of my New Coke experience via an e-mail or news article touting or predicting an explosion in mobile payments. I'll admit it—I'm getting mobile payments fatigue. The payments industry has been anticipating mobile payments for years now, yet I find the developments to date mostly disappointing. Sure, I've made plenty of payments using a mobile device to purchase digital goods or even to purchase physical goods in an online marketplace. But outside of a few experiences of purchasing coffee with a closed-loop solution, my mobile device stays in my pocket when I'm making a purchase at the point-of-sale (POS) as I take out my reliable cards or cash.

And that is where my New Coke analogy comes into play. To many people, nothing was wrong with Coca-Cola, yet the coolness of a new product created a great level of expectation—which turned to immense disappointment. At the POS, payments are relatively seamless, yet the newness of mobile payments creates great anticipation, only to end up being disappointing and leaving me thinking, "What's wrong with my current payment choices?"

So much attention on mobile is focused on replacing a current payment form at the POS—perhaps the most seamless piece of the commerce experience. Often in mobile payment discussions, I hear that mobile payments are a technology solution looking for a problem rather than trying to solve a problem. However, I think the industry is looking in the wrong place as the problem isn't with the payment. It's with the overall experience in and around the POS. I believe mobile devices have the ability to transform this experience, but it's not by replacing my cards or cash as a payment method. It's by replacing the entire commerce experience. Are you experiencing mobile payment fatigue? And if so, what will it take to energize you?

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

June 2, 2014 in emerging payments, innovation, mobile payments | 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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September 9, 2013

Improving Customer Authentication

The Retail Payments Risk Forum recently hosted payment industry participants at the Improving Customer Authentication forum. On July 31, banks, nonbank payment service providers, industry associations, law enforcement officials, and regulators listened as keynote speakers and panelists explored methods and technologies for improving customer authentication so that financial institutions and other payments stakeholders can better mitigate payments fraud. Forum goals were to help participants understand the challenges of current methods of authentication and the legal implications, as well as to explore emerging solutions, along with pros and cons, that can improve authentication in both the face-to-face and remote channels.

Some of the key learnings from the forum include:

  • Customer authentication is critical to proving identity, authority, and consent throughout the entire payment process.
  • Customer authentication can be achieved by any combination of factors within three categories. For best practice, different categories should be used:
    • Something you know (user ID, password)
    • Something you have (card, phone)
    • Something you are (biometrics, activity pattern)
  • Currently, no single, simple, legally approved method for authorizing a payment or ensuring that a particular payment is authorized exists.
  • New payment types are stretching the boundaries of the current payments infrastructure and have created weak points that are being probed and exploited by cybercriminals.
  • While overall payment card fraud levels, as expressed as a percentage of sales, are at an all-time low, certain categories of card fraud such as card-not-present (CNP) are significantly increasing.
  • Financial institutions are encouraged to build relationships with local and federal law enforcement officials and to report fraud—it is possible that a crime at your institution is part of a larger network of criminal activity.

For a more complete summary of the forum and to see video interviews with two of the forum speakers, go to the conference website.

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

September 9, 2013 in authentication, biometrics, emerging payments | Permalink


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June 3, 2013

Do Digital Currencies Need Bank Secrecy Act Regulations?

Nearly two years ago, a Portals and Rails post looked at digital currencies and posed the question, "Will the use of alternative currencies gain popularity in the criminal world?" It appears that the answer to the question is "yes." According to the recent indictment of a digital currency provider, the currency under question "was designed to give criminals a way to move money earned from credit card fraud, online Ponzi schemes, child pornography and other crimes without being detected by law enforcement," ultimately building up a $6 billion money laundering operation.

At the heart of the issue with this particular digital currency is its anonymous nature. Payment instruments that provide anonymity do attract the criminal element. Anonymity is a major reason cash remains king when it comes to payments for illicit activities. The anonymity that prepaid cards provided in their earlier years attracted the criminal element, which ultimately resulted in regulators attaching Bank Secrecy Act/anti-money laundering (BSA/AML) regulations to these instruments.

There is no doubt that digital currency has benefits over paper and coins. The convenience of not having to lug around paper and coins is appealing to me, as is the fact that I wouldn't feel the need to scrub my hands after handling digital currency since it's no secret that paper money and coins are dirty. I am all for the success of digital currencies and can't wait for them to become more mainstream. But I believe that as long as any digital currency continues to support anonymity, it will be difficult for that to happen.

While regulation can stifle innovation, I believe that BSA/AML regulation of digital currencies could help increase the adoption of this type of payment instrument by the mainstream. One need look no further than the prepaid card industry to understand the potential impact. Many factors have played into that industry’s phenomenal growth rate, but the BSA/AML regulatory requirements also played a role by providing a credibility to prepaid cards that did not exist in their infancy.

What are your thoughts on the need for BSA/AML regulation of digital currencies?

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

June 3, 2013 in cybercrime, emerging payments, money laundering, regulations | Permalink


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Great Post.
In my opinion all e-currencies need to be regulated, specially the more popularly used ones. It will be sad to see another one going down like LR.

Posted by: Bhagesh Nair | June 4, 2013 at 04:48 PM

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January 22, 2013

Parallel Paths or Course to Collision? Technology's Effects in the Payments Industry

I don't believe anyone would challenge the statement that the pace of technological change is faster than ever and is likely to increase its velocity going forward. I remember a conversation with my grandfather in the mid-1970s about the biggest changes he'd experienced in his lifetime, which spanned the first two-thirds of the 20th century. Those changes centered on the automobile and airplane (his lifelong vocation was a railroad machinist/mechanic), electricity for the masses, medicine, and radio and television. Today, we can look back just 10 years and see the exponential level of changes in technology that have impacted our everyday lives in these same areas—transportation, energy, medical care, and communications.

Many of these technological changes have affected the banking world, sometimes in ways that create conflicts among various service channels. Recent changes in the way that U.S. banking customers deposit funds, for example, have the potential to create such conflict across channels.

The all-time teller gets a new face
Since the widespread introduction of the full-service ATM in the United States in the early 1970s, this automated delivery channel has seen little change in functionality. Sure, there have been major technology changes that have improved the channel but not fundamentally changed it. Such improvements include the migration from offline to online transaction authorizations, the ATM's ability to dispense multiple denominations of currency instead of a fixed amount, improved display graphics and component reliability, and the sharing of ATMs through the emergence of regional, national, and international interchange networks. Past efforts in the U.S. to add additional functions and migrate the ATM more to a self-service kiosk have not met with great success. There appears to be another attempt to introducing such functions as remittances, bill payment, money orders, postage stamps and ticketing as ATM volume stagnates.

Deposits made through ATMs seldom represent more than 10 percent of total banking transaction volume, and are more often in the 5–8 percent range. Research has consistently shown that consumers are apprehensive about placing checks and currency in ATMs since ATMs do not verify the deposit envelope contents, as tellers do. Truth be told, banks generally didn't actively promote deposits through ATMs for economic reasons. Because deposit envelopes can be deposited empty, most banks required them to be processed under dual control. As a result, until relatively recently, the cost of handling a single ATM deposit was about $1.50 to $2.

A big breakthrough in ATM deposits was seen in 2006–07, when several of the largest U.S. banks began testing ATMs that could accept envelope-free deposits of checks and currency. This method offered consumers images of their checks or detailed listings of the deposited currency before the transaction was final. Because consumers had this opportunity to verify their deposits, they had a much higher level of comfort. Additionally, consumers could now make their deposits much later in the day and still have them included in that day's processing. These banks soon began widespread implementation of such functionality in a vast majority of their locations, and other top-tier banks followed suit. The reassurance of the deposit verification and the increased convenience has led to a sharp increase in deposit transactions through the ATMs equipped with this feature. Furthermore, studies show that the cost of a deposit transaction dropped below 50 cents.

It appeared like a win-win-win outcome. ATM channel managers and manufacturers both were pleased with the new functionality. And bank customers were obviously pleased, as evidenced by the increased deposit transaction volume through the ATM.

Meanwhile, in a parallel universe...
At the same time that ATMs were getting new functionality, the remote deposit capture product was being developed. This product was first offered to commercial bank customers that received moderate volumes of checks. Company employees scanned the checks on dedicated equipment and then transmitted the captured images to the bank. This product was made possible under the provisions of Check 21. Then the banks expanded the service to include low-volume check businesses using generic scanners that the business likely already possessed. And most recently, a number of banks have begun offering remote deposit capture to both consumer and commercial customers as part of their mobile banking service with the camera feature on a smartphone.

In our ever-changing technology environment, the role of product and channel management has never been more difficult. Products that are technology-dependent can have an extremely short lifecycle and face competition from other sources. Will the proliferation of the remote deposit mobile application dampen the demand for envelope-free deposit accepting ATMs, especially at the smaller banks? Will these technologies collide, or will they continue to move down parallel paths? How will this technology and others come to impact the future of the ATM? We would like to hear your perspective.

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

January 22, 2013 in emerging payments, innovation, mobile banking | Permalink


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Banks and Financial institutions invest heavily in improving customer convenience and customer experience. Envelope free ATMs are one such facility that has gained significance off-late. In emerging markets like India, ATMs function well as a self-servicing kiosk. Many ATMs in India support P2P transfers and even opening of "fixed deposit" accounts. Pilots are underway to provide options to open Mutual Fund accounts. Obviously these services attract more customers to the ATM outlets.

On the other hand, remote deposit captures have gained significant acceptance in the market recently. With the smartphones volumes increasingly eating into the feature phone’s market share, “remote deposit capture” is set to gain more popularity, given its sheer convenience to the customer.

At the same time, one has to bear in mind the preferences of Gen Y. Today, customers want everything “on the move”. The advent of mobile technology only accelerates this process. With more innovations coming up in mobile based micro payments, the usage of cash will decrease gradually. It may even reach a negligible size down the years. Paper based checks are already on the decline and will meet its natural death soon – Regulatory bodies in some European countries had mandated the stoppage of check payments long back. With papers based payments going down, the demand for remote deposit capture will also decline.

So when we compare envelope free ATMs with remote deposit captures, my take is that both will meet their natural death soon – may be in a few years. However, in the current scenario, given the nature of Gen Y, remote deposit capture will stand to gain over envelope free ATMs.

Posted by: Pari | January 29, 2013 at 09:33 AM

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