Take On Payments

About


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.

January 11, 2016


Prisoner Release Cards: How to Protect the Interests of Recently Released Inmates?

I recently watched a late-night comedian criticize prison reentry programs in the United States. The segment focused on the resources—or lack thereof—that are provided to released inmates. One of these resources, I have recently learned, is increasingly a prepaid card.

Upon imprisonment, inmates are given a trust account to hold money that they receive for prison work and from family and friends. When they are released, they may also receive start-up funds to help with the reentry process. According to the Federal Bureau of Prison's Inmate and Custody Management Policy, "an inmate being released to the community will have suitable clothing, transportation to inmate's release destination, and some funds to use until he or she begins to receive income. Based on the inmate's need and financial resources, a discretionary gratuity up to the amount permitted by statute may be granted." While the policy expands the details of what constitutes suitable clothing and the method of transportation, there is no mention of how to disburse funds to the released individuals.

Enter prison-release prepaid cards. Many state and federal prison systems enter into contracts with prepaid card providers pursuant to a public bidding process to provide prison release funds through a prepaid card as an alternative to cash or checks. This shift in disbursement methods may be attributable to concerns about cash controls in the prison setting and the high check-cashing fees some inmates who lack traditional bank accounts incur, to name a couple of possibilities. Regardless of the disbursement method that the correctional agency chooses, this vulnerable population depends on every last penny.

Some people maintain that account fees are too high on these prepaid cards and that agreements with cardholders contain forced arbitration clauses. Could the correctional agency negotiate better terms on behalf of the released prisoner? Or could the inmate possibly be given options for the trust fund distribution—cash, check, prepaid card, or even a Paypal account?

A late-night comedian may have the ability to isolate one slice of the problem with prison release programs, but our regulations shouldn't piece together a solution to an overarching issue. Likewise, there are challenges with creating blanket regulations for a product category like prepaid cards that contains many different products meeting a wide variety of distinct needs, each with unique characteristics and different users. Isn't the goal is to provide released prisoners the freedom to use money that belongs to them, as for any other citizen?

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

January 11, 2016 in prepaid, regulations | Permalink | Comments (0)

January 4, 2016


The Year In Review

2015 marked the end of the era for my favorite late-night talk show host. In his 33 years of bringing laughter to late-night audiences, David Letterman is perhaps best known for his nightly Top 10 list. During the last several years, the Risk Forum's last blog for the year has included our own list of top 10 payments events. Our efforts clearly didn't match Letterman's entertaining Top 10s, and we have decided to retire our Top 10 blog in favor of a year-end review blog.

2015 can easily be characterized as "The Year of Deals." We witnessed two established payment processors, Worldpay and First Data, become publicly traded entities, with IPOs during the year. Following these IPOs, Square became the first "Unicorn"—a tech start-up with a valuation in excess of $1 billion—to test the public markets with its IPO. Beyond the IPOs, there were ample other noteworthy deals in 2015, including Ebay spinning off PayPal as its own entity; Visa acquiring its former subsidiary, Visa Europe; Global Payments' acquisition of Heartland; and a host of mergers such as the one between Early Warning and ClearXchange. On the venture capital and private equity side, indications suggest that 2015 will top 2014's nearly $10 billion investment in financial technology in the United States with payments-related investments leading the way.

Near and dear to the Risk Forum, notable risk-related stories will also make 2015 memorable. The long-anticipated initial EMV liability shift took place on October 1 with mixed reviews from different participants in the payments ecosystem. Data breaches that included the compromise of payment credentials and personally identifiable information seemed to be an almost-weekly event during the year. In response to the increasing incidence of data breaches and anticipated increase in card-not-present fraud, the buzz surrounding tokenization, which began in earnest with the launch of Apple Pay in 2014, intensified within the payments industry.

Mobile proximity payments might be the most frequent payment topic over the past five years, and 2015 was no different. While many have labeled each year over the last five as the "Year of Mobile Payments," mobile still has a way to go before the Risk Forum is willing to give this title to any year, including 2015. However, momentum for mobile proximity payments remained positive with the launch of Apple Pay rivals Samsung Pay and Android Pay. We witnessed a well-known and early established mobile wallet, SoftCard (originally branded as Isis), exit the playing field after being acquired by Google. The Merchant Customer Exchange (MCX), a consortium of retailers, launched a pilot of its mobile wallet—CurrentC—and has also partnered with Chase and its Chase Pay service with entrée to 94 million cards; and two large Financial Institutions, Chase and Capital One, both announced new mobile wallet initiatives. In December, Walmart and Target announced their own mobile payment applications. While mobile proximity payment usage remains minimal, it is becoming increasingly clear that consumers are using their mobile phones to shop online. According to holiday shopping figures from Black Friday through Cyber Monday 2015, mobile shopping accounted for approximately one-third of total e-commerce sales.

Finally, in 2015, the payment industry witnessed the launch of a comprehensive, collaborative effort to improve the speed and security of payments in the United States. In January, the Federal Reserve issued its long-anticipated Strategies for Improving the U.S. Payment System followed by the formation of two task forces, Faster Payments and Secure Payments, seeking to turn these strategies into actionable payment improvements. Related to improving the speed of payments, NACHA membership approved a same-day ACH service after a similar measure failed to gain approval in 2012.

As those in the payments industry have come to expect excitement and innovation, 2015 did not disappoint. And while it's certainly fun to look back, we must always keep looking ahead. Perhaps the most famous late-night talk show host, Johnny Carson, understood this best with his beloved great seer, soothsayer, and sage Carnac the Magnificent persona. Be on the lookout for our upcoming blog where the Risk Forum will channel our inner Carnac with some predictions and expectations for payments in 2016.

By the Retail Payments Risk Forum at the Atlanta Fed

January 4, 2016 in cybercrime, data security, mobile payments, payments study | Permalink | Comments (0)

December 21, 2015


Help Determine the Payment and Fraud Data You See Reported

Information is powerful and can help drive strategy and operational success. Help shape the information you have access to by improving on the survey instruments used in reporting 2015 payments and fraud data.

As has occurred every three years since 2001, the Federal Reserve System is again undertaking a triennial payments survey for noncash payments originated to or received from accounts based in the United States. At the core of this research, we will again be collecting data on the number and value of payments and associated fraud across a broad array of payment channels and applications. Summarized survey results will be shared broadly with survey respondents, the industry, and the public at the end of 2016. Detailed aggregated results are anticipated to be available sometime in the second quarter of 2017. As always, due to the confidential nature of the information being supplied, individual respondents’ data is used only to produce aggregate estimates.

In two previous blogs (here and here), I have documented the need for expanded fraud information for card payments. Stepping back from the specifics of card fraud, I would like to encourage readers to send comments on our prospective survey instruments that were recently posted in the Federal Register. A summary of our survey instruments compared to survey instruments used in the 2013 payments study is available here.

The upcoming study consists of three research efforts:

  • Depository and Financial Institutions Payments Survey (DFIPS)
    The prospective DFIPS survey (Federal Register Notice FR 3066a) is a national survey of institutions that offer transaction deposit accounts, prepaid card program accounts, and credit card accounts to consumers as well as business and government customers. Using a nationally representative stratified random sample of depository institutions, the survey gathers data about noncash payments, cash withdrawals, and deposits that post to customer accounts as well as third-party payment fraud that took place during 2015.

    The DFIPS includes questions on the following topics:
    • Check payments, deposits, and returns
    • ACH payments and returns
    • Wire transfers originated and received
    • General-purpose debit and prepaid cards
    • General-purpose credit cards
    • Cash withdrawals, deposits, and terminals
    • Alternative payment initiation methods
    • Unauthorized third-party payment fraud

  • Networks, Processors, and Issuers Payments Surveys (NPIPS)
    The prospective NPIPS survey set (Federal Register Notice FR 3066b) targets organizations that facilitate payments. The survey set actually contains 19 different surveys, each one tailored to a particular payment channel or respondent type. Respondents answer only the surveys that apply to their organizations.

    The NPIPS includes payment and fraud questions across the following classifications:
    • General-purpose/private-label credit cards
    • Debit cards
    • General-purpose/private-label prepaid cards
    • ATM cards
    • Various payment form factors such as chip, no chip, and mobile
    • Payment applications such as electronic benefit transfers, person-to-person payments, bill pay, transit payments, and more

  • Check Sample Survey (CSS)
    The CSS survey (Federal Register Notice FR 3066c) estimates the distribution of checks by categories such as payers, payees, and purposes. Survey data are based on a representative, random sample of checks written and processed by large commercial banks and, for the first time, may include additional checks processed by the Federal Reserve.

Please review these survey documents and provide your comments as to how they could be improved. You can make submittals through the Federal Register by clicking here. Comments are due by January 25, 2016.

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

December 21, 2015 in payments study | Permalink | Comments (0)

December 14, 2015


Down and Out in Myanmar

Here in the United States, we have gotten used to cash being the default payment method when other payment methods are not accepted or fail for one reason or another. But a few years ago, I had the pleasure of traveling to a country where cash was pretty much the only acceptable payment method. My experience there really made me appreciate the existence of mobile money transfer (MMT) services like M-Pesa. These MMTs are rapidly spreading across the developing world. Unfortunately for me, however, I had no access to an MMT in the country I visited.

In 2010, my wife was sent on a three-year assignment to her employer's Asian offices in Singapore. During one of my periodic visits, my wife and I vacationed in Myanmar, also known as Burma. Myanmar has a predominately cash-based economy.

Let me provide a little geography and history. Myanmar is bounded by Bangladesh, India, China, Laos, and Thailand. Before independence in 1948, it was ruled by the British, except during World War II, when the country was occupied by Japanese troops. At the end of the war, the country reverted to British rule. In 1962, a military coup led to nearly 50 years of military rule. In the year we visited, fewer than 600 tourists arrived at the international airport in Yangon, the busiest airport in the country.

Before our visit to Myanmar, we wired funds to a tour operator's account in Thailand to pay for the services of a driver, a guide, and some of our lodging. We estimated that we would need about $3,000 for the rest of our travel expenses during our three-week visit. At the time of our visit, Myanmar was under stringent trade sanctions due to the repressive military regime, so no international payment networks operated in the country. Consequently, the coin-of-realm for international tourists was U.S. hundred-dollar bills that could be exchanged for kyats, the local currency.

What we didn't understand is that the money exchangers required U.S. bills of the 1996 series or later with no folds, tears, markings, or stains of any sort. Yikes, we are essentially talking about uncirculated, brand-new bills. Since no international ATMs operated in the country, our first visit was to a local bank. The teller agreed to exchange only $500 after scrutinizing in microscopic detail (like a paleontologist examining a fossil) for 15 minutes our thirty $100 bills. This would cover less than our first week of expenses. We had thousands of dollars burning a hole in our pocket and no place to spend it. We were hard up.

We were getting anxious after several failed attempts at other bank branches, so our guide suggested using an unofficial currency marketer to see if we could exchange more bills. We walked a serpentine route to an untouristed, possibly unsafe area of town. Our guide took us to a money exchanger who grudgingly exchanged an additional $500. Even with further economizing, we estimated we were still short in funds for the last week of our trip. Success arrived when we met fellow travelers with excess funds they were willing to exchange.

I have wondered to this day why the reluctance to accept less-than-pristine bills. Obviously, one concern is the possible counterfeiting of $100 U.S. notes by the government of North Korea, according to some press accounts.

But whatever the reason, it left us spending $1,000 less than we anticipated. If we had had access to an MMT, we presumably would have been able to more freely purchase goods and service without wondering whether our cash would be accepted—though it should be noted that we may still have had problems with the initial cash load at an MMT money transfer agent.

Stepping back, the lessons we learned include the various risks associated with a cash economy, such as counterfeiting and, on a personal level, the disappointment of a diminished vacation due to the time and anguish spent in exchanging money. As I said in the beginning, I can appreciate firsthand the real advantages of moving away from cash to a low-cost, widely accepted mobile money transfer service. In Kenya, for example, M-Pesa reported in 2015 a 22.8 percent growth in revenue and 13.86 million active customers out of a population of 45 million. Meanwhile, next time I go to Myanmar, I'll know what to bring.

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

December 14, 2015 in mobile money transfer, P2P | Permalink | Comments (0)

December 7, 2015


Inquiring Minds Want to Know More about Card Fraud

As I described in an earlier post, while doing research on expanding card fraud data collection in the Fed's upcoming 2016 triennial payments study, I came across a gap in publicly available detailed fraud data for the United States compared to what is available in other countries. Fortunately, prospective survey instruments accompanying the Federal Reserve Payments Study posted in the Federal Register for the upcoming study promise to remedy the problem. In particular, the Networks, Processors and Issuers Payments Surveys lists the following fraud classifications; I've included capsule descriptions for each.

  • Lost card: Fraudulent payments result from the use of a lost card.
  • Stolen card: Fraudulent payments result from the use of a stolen card.
  • Card issued but not received: Fraudulent payments result from use of an intercepted new or replacement card in transit to a card holder.
  • Fraudulent application: Fraudulent payments result from a new card that is issued based on a falsified or stolen identity.
  • Counterfeit card: Fraud is perpetrated at the point of sale by someone using an altered or cloned card based on card account details fraudulently obtained.
  • Fraudulent use of account number: Fraud is perpetrated remotely (that is, via phone, mail, or Internet) using card account details fraudulently obtained.
  • Other (including account takeover): All other fraud not covered above. In particular, "other" covers a form of identity theft whereby an unauthorized party gains access to and use of an existing card account.

The last triennial payments study (2013) used a bifurcated classification, distinguishing only card-present and card-not-present fraud across various card payment types. If in its place we used a more detailed classification system, it could offer a richer understanding about whether fraud was perpetrated by gaining possession of an existing card, through a data breach, or through identity theft.

But even this level of specificity may not be enough. If we were to use only the detailed classifications I provide above to map card-present and card-not-present fraud data, we still might assume that card-present fraud encompasses all fraud except for fraudulent use of account number. So by extension, what is excluded must represent card-not-present fraud, right?

But we should not be so hasty in making such assumptions.

The rub is that how each fraudulent payment is classified can depend on the case management system the issuing bank uses. For example, suppose that the skimming of a card results in the rightful card holder reporting 10 fraudulent payments. Two payments are made at the point of sale and the other eight payments are made online. Using the definitions above, some case management systems would treat all of the payments as counterfeit card while other systems may flag two as counterfeit card and the others as fraudulent use of account number. Flagging all 10 of the payments as counterfeit card would lead to overstating the number of overall card-present fraud payments at the expense of understating card-not-present fraud. Without additional detail on where the payments were initiated, we would be uncertain about the shares of card-present and card-not-present fraud.

So given the tradeoffs and trying to anticipate fraud reporting needs in the future, would it not be better to retain and possibly improve existing measurements of fraud while offering other complementary measurements to fill in the gaps? Making this more concrete, I proffer that we should be interested in the distribution of how the card or card information was obtained using the categories above as well as how the fraud was perpetrated by card entry mode and card verification methods. Being specific on the latter, we could report on fraud based on chip versus nonchip cards, point-of-sale payment versus remote payment, signature versus PIN authentication methods, and so forth. In fact, a closer review of the updated survey instruments for 2016 reveals that both survey approaches are in fact what is used.

What suggestions do you have for classifying card fraud data? All comers are encouraged to respond to the Federal Register Notice.

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

December 7, 2015 in cards | Permalink | Comments (0)

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 | Comments (0)

November 23, 2015


Bitcoin's Bright Side

My kids' anticipation for the holiday season is at an all-time high because of the upcoming release of the new Star Wars movie. They are fans of Yoda, Chewbacca, and Luke, but are obsessed with the "Dark Side" and its band of characters, most notably Darth Vader. There is something about the mystery of the "dark side" that draws people in. Perhaps that is one reason that so much of the media coverage and discussion of Bitcoin has been focused on its being the preferred payment instrument for criminal enterprises.

Because the Bitcoin protocol does allow for a level of anonymity that is attractive to criminals, the Bank Secrecy Act (BSA)/Anti-Money Laundering (AML) Act compliance risks are heightened for transactions with bitcoin. Over the past several years, companies have emerged within the Bitcoin ecosystem seeking to make it more accessible to obtain and easier to use for legitimate payments. But how do they manage the BSA/AML compliance risks?

To minimize these risks, companies in the Bitcoin ecosystem are adopting policies, practices, and procedures that leverage the transparency but also minimize risks associated with the level of anonymity Bitcoin offers. These practices are intended to make Bitcoin a safer payment system, while also enhancing the ability of financial institutions, which might otherwise be cautious about the BSA/AML risks, to bank Bitcoin-related companies successfully.

The Retail Payments Risk Forum took a deep dive into the types of companies entering the Bitcoin ecosystem, assessing the regulatory landscape and identifying measures that these companies can take to fulfill regulatory obligations and minimize BSA/AML regulatory compliance risks. Among one of the measures identified in a paper available on the Atlanta Fed's website, Bitcoin-related companies should have a BSA/AML compliance program in place that is led by a dedicated compliance officer with support from a staff of professionals.

Just as in the Star Wars movies, which depict the ongoing struggle between the good guys—the Rebels—and the Dark Side, Bitcoin will continue to have a tug of war between the good forces and the bad. While the criminal element will continue to force attention to the risks of Bitcoin, it will be up to the new entrants into the Bitcoin ecosystem to mitigate these risks if Bitcoin is to enter the mainstream. Details on managing BSA/AML risks associated with Bitcoin can be found in the paper.

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

November 23, 2015 in regulations, regulators | Permalink | Comments (0)

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 | Comments (0)

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 | Comments (0)

November 2, 2015


Will NACHA's Same-Day ACH Rules Change Be an Exception-Only Service, At Least in the Short Term?

In May 2015, the 40-plus voting members of NACHA contingently approved mandating the acceptance of domestic same-day ACH payments by receiving banks. The voting members approved a three-phase development lasting 18 months. The first phase, starting in September 2016, is limited to credit pushes, followed one year later by debit pulls in the second phase. All payments are subject to a $25,000 maximum. By the final phase in March 2018, receiving banks will be required to make credit payments available to the receiving account holder by 5 p.m. local time to the receiving bank. Funds availability in the earlier phases is by the receiving bank's end-of-processing day. The service offers both a morning and afternoon processing window. A same-day return-only service is offered at the end of the business day. Lastly, originating banks are obligated to pay a 5.2 cent fee for every payment to recover costs to receiving banks.

Last month, the Federal Reserve Board of Governors removed the contingent part of the above approval by allowing the participation of FedACH, which serves as an ACH operator on behalf of the Reserve Banks. Approval followed a review of comments submitted by the public, of which a preponderance of the responses was favorable to FedACH participating in the service.

This was not the first time NACHA tried to mandate same-day ACH. Back in August 2012, a ballot initiative to mandate acceptance failed to receive a supermajority required for passage. Failure was due to a variety of reasons, and it was difficult to discern one overriding reason.

I think that most observers would agree that the earlier rollout of the Fed's proprietary opt-in, same-day service in August 2010 and April 2013 set the groundwork for mandating same-day.

As with any collaborative organization like NACHA, compromises were needed to garner sufficient votes for passage. The compromises included:

  • Same-day payment eligibility rules change due to a multi-phase development cycle requiring one-and-half years to complete from start to finish.
  • Providing certainty to the receiver that funds availability will be expedited on the day of settlement as part of the final phase, rather than earlier, which only requires posting by the receiving bank's end-of-processing day. The bank's end-of-processing day can be as late as the morning of the following business day.
  • Delaying a debit service by one year after the rollout of the phase one credit service will, to the potential surprise of the payment originator, delay settlement of debits one business day later than would occur for credits.
  • Any payment amount over $25,000 will settle one business day later than the payment originator may have expected if the payment originator is not aware of the payment cap.

Given these compromises, what do you think financial institutions can do to accelerate broader adoption of same-day?

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

November 2, 2015 in ACH, regulations, regulators | Permalink | Comments (0)

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