Take On Payments, a blog sponsored by the Retail Payments Risk Forum of the Federal Reserve Bank of Atlanta, is intended to foster dialogue on emerging risks in retail payment systems and enhance collaborative efforts to improve risk detection and mitigation. We encourage your active participation in Take on Payments and look forward to collaborating with you.

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September 28, 2009

Coordinating roles in mobile payments--who will we trust?

The concept of mobile payments is beginning to gain some traction as the industry grapples with environmental complexities—namely the myriad participants in the mobile payments arena, the mulitiple channels for a mobile payment to follow, and the ever-present questions about security. Who can be trusted to intercede among the various entities with an interest in the payments process? While a number of roles in the mobile payments arena are taking shape, the least known and possibly the most confusing is the concept of the trusted service manager (TSM). However, this role is also possibly the most critical to establishing a secure and trusted environment for mobile payments. So what exactly is a TSM and what are its responsibilities?

Complex environment for mobile payments
While anecdotes sometimes dismiss the anticipated speed to market of mobile payments as industry hype, the fact is that the ubiquity of the mobile phone is driving the convergence of telecom and payments. This convergence creates a far more complex environment for payments than ever before. Telecom participants and financial institutions have different regulatory and legal frameworks and distinctly different risk exposure, for example.  Furthermore, the U.S. mobile payments environment will leverage existing payment channels, such as the automated clearinghouse (ACH) and the card networks. No one knows if the industry and market will ultimately prefer a particular channel. The result is an array of business models with a vast number of unrelated players with competing interests for customer revenue.

Stakeholders in the mobile payments business model
In addition to the traditional payments model that includes the customer, financial institutions, and perhaps payment processors, the developing mobile payments ecosystem also includes large groups of mobile network operators and handset makers who have no previous payments life cycle experience. For payment system interoperability, all participants must agree to operate under uniform technical operating and security standards. In this context, the role of a TSM is to manage collaboration among the various stakeholders.

Role of the TSM
The concept of the TSM was introduced by the Global System for Mobile Communications Association (GSM) in 2007 in an effort to improve interoperability among various and unrelated proprietary mobile networks. The core function of the TSM is to serve as a neutral and independent middleman between financial institutions, payment network operators, customers, and the mobile network operators.

Responsibilites envisioned for the TSM include managing contractual relationships with the large number of mobile network operators (MNOs) as well as acting as a single point of contact for banks and other payment service providers to communicate with customers they share with the MNOs and handset makers. The key to the TSM’s success clearly is the financial wherewithal to inspire trust on behalf of the other payment participants and to support agreements with a large number of partners. Finally, the TSM should also provide the oversight for various systems among participants to ensure secure transmission of payments and personal data in the transaction.

Who should fill the role?
While the need for a TSM is recognized, there is no consensus on who should fill that role. MNOs, payment network operators, and financial institutions lack the economic incentives to form alliances with other participants in the payment ecosystem because of their competing interests for customer revenue. Whether the role is filled by a consortium of existing players or by a new entity yet to be formed will depend on an ability to fulfill these critical responsibilities from a position of neutrality and independence.

By Cindy Merritt, assistant director of the Retail Payments Risk Forum at the Atlanta Fed

September 28, 2009 in ACH, card networks, mobile network operator (MNO), payments, trusted service manager | Permalink


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September 21, 2009

Not all payments are equal under "good funds" laws

Anyone who has participated in a real estate closing can attest that it can be a daunting experience. There are many parties with their hands out at the closing table to consummate the deal—the buyer, seller, and attorneys, to name a few. However, it can all collapse like a house of cards if the funds underlying the transaction are not collected or "good."

Ripple effects can be devestating when a lender fails to properly fund an escrow closing transaction. A notable case is the collapse of mortgage lender Abbey Financial in 1994, which resulted in hundreds of consumers over six states stranded with either unfunded mortgages or double mortgages because their first mortgage was not paid off in a loan refinancing. Many of Abbey's checks were dishonored, which left several attorneys with shortfalls in their trust accounts.

The aftermath of Abbey sent shock waves through the mortgage industry and prompted many states to enact "Good Funds" laws to ensure that the money funding a real estate purchase and refinance transaction is secure and ready for disbursement. The purpose of the law is to provide assurance to the consumer and other parties that the funds are in the proper hands before the deed or mortgage is recorded. This thereby protects the seller from conveying property to a buyer whose check is drawn on an account with insufficient funds.

What makes a payment "good"?
Typically, a closing agent will deposit all funds connected to a real estate transaction into an escrow account for disbursement at the closing. Most good funds laws stipulate the type of funds (e.g., cashier's checks, or wire transfers) that an escrow agent can accept. However, what is considered "good funds" can vary by state. In Georgia, for example, the law expressly permits certain types of checks:

A settlement agent may disburse proceeds from its escrow account after receipt of any of the following negotiable instruments even though the same are not collected funds: (1) a cashier’s check from a federally insured bank, savings bank, savings and loan association, or credit union…; (2) a check drawn on the escrow account of an attorney or real estate broker…; (3) a check issued by the United States or Georgia…; and (4) a check or checks not exceeding $5,000 in aggregate per loan closing.

Several states have taken a stricter approach in defining acceptable funds. Specifically, wire transfers are often the only funding mechanism allowed and, in some cases, are required for transactions over a certain dollar amount. Although not an exhaustive list, a general Internet search revealed that Indiana, Minnesota, Missouri, and Texas are among those states with good funds laws that limit electronic funds transfers to "wire transfers" instead of the broader "electronic payment," as defined in Regulation CC (12 CFR 220.10 (p)), which would otherwise permit funding using automated clearinghouse (ACH).

For example, the Indiana Good Funds Law defines wired funds as "good" but requires that they be "unconditionally held by and irrevocably credited to the escrow account of the closing agent." Only funds transferred through Fedwire or CHIPS are immediate, final, and irrevocable. Consequently, it appears that Indiana’s law excludes electronic fund transfers through ACH since consumer Regulation E rights with regard to unauthorized ACH credits may create some risk that ACH funding of a real estate transaction could be reversed long after the closing.

Secure funds important in uncertain times
The current housing crisis has undoubtedly caused some anxiety for all parties in a real estate transaction about the risk of a deal falling through. Numerous bank failures and increased real estate fraud have further complicated the process. Although there are differences by state, the good funds laws help to mitigate some of the risks by helping to ensure that the funding of real estate transactions is reliable.

By Jennifer Grier, senior payments risk analyst at the Atlanta Fed

September 21, 2009 in ACH, checks, fraud, risk | Permalink


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September 14, 2009

Stickers and skins--the next phase in proximity payments and mobile payments

I just became the owner of a GO-Tag, an example of a sticker that contains contactless payment technology that you can adhere to an item of your choice. I removed the adhesive backing and attached it to the back of my iPhone, enabling it as a proximity payment device. The sticker contains an embedded chip that uses a technology called near-field communication, or NFC for short, which allows short-range contactless payments. This embedded chip technology is more ubiquitous than you might think. It's also used in transit cards and toll road transponders, in addition to plastic payment cards. In developing countries that did not invest as heavily in magnetic stripe infrastructure as we did here in the United States, chip cards are much more prevalent. And the lack of a legacy infrastructure in those countries has accommodated a smoother transition to the adoption of mobile handsets embedded with contactless technology.

Another innovation is the mobile phone payment "skin," which wraps and adheres to the phone and is embedded with a contactless payment chip. One product we found is called Phoolah. The skin-wrapped phone can be waved at a merchant’s point-of-sale reader to effect a transaction. Both the skin and the sticker are similar in that they work as open-loop, stored-value payments that are limited to a specific population of merchants participating in the rollout phase of both products. And what might make them the next phase in contactless payments is that they separate the payment functionality from the legacy plastic card to some other device, typically a mobile phone.

Both examples of the mobile phone skin and sticker are issued by Metabank and run on the major card association rails. Some of the retailers accepting stickers and skins include 7-Eleven, McDonald's, and CVS, to name a few.

Magnetic stripe inertia
Advocates of chip technology assert that chip technology is more secure than the magnetic stripe variety because it is more difficult to duplicate, a process known as "skimming." Furthermore, because they store more information than stripes, the chips can accommodate more sophisticated security functions such as encryption and authentication. These enhanced security features have influenced the European Payments Council (EPC) to announce recently that it is considering a ban on magnetic stripe cards within the next few years in favor of chip cards augmented by PIN authentication.

However, chip technology has faced some hurdles in the United States as merchants and consumers are comfortable with legacy magnetic stripe products. The infrastructure has been long established in the United States and is expensive to change. Pilot contactless cards have been introduced running the parallel technologies, affording the use of both the chip and the magnetic stripe. The distribution of readers for both contactless and stripe is not consistent and has resulted in a certain degree of confusion for both consumers and operators at the merchant’s point of sale. What may overcome this confusion is the use of mobile phones as devices with embedded chips. The prevelance of mobile telephones in the marketplace may increase the likelihood that consumers will try out the technology.

Implications for mobile payments
The industry is hard at work addressing the obstacles to mobile payments—different legal frameworks for telecom and financial institutions, the large number of carriers and handset makers, and the need to establish technical standards for consistent interoperability among all industry participants. For now, stickers and skins may provide a low-cost opportunity to both test consumer and merchant acceptance and transition the industry to the next phase of payment innovation.

By Cindy Merritt, assistant director of the Retail Payments Risk Forum at the Atlanta Fed

September 14, 2009 in contactless, payments | Permalink


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September 8, 2009

Will micropayments thrive in social networks? (Part 2 of 2)

This is the second of a two-part series on micropayments and social networks. Last week’s blog posting discussed how some social network sites are exploring the opportunities to offer payment services or are permitting outside payment providers to operate on their social network platforms. Twitpay and Twollars, two third-party platforms used on the Twitter platform, were discussed in Part 1. This week, we examine other players in this emerging market.

Facebook is likewise evolving as an ecosystem for emerging micropayment service providers. Users are increasingly spending real money buying virtual goods on the applications that run on Facebook's platform as well as Facebook credits. Facebook credits are funded using major credit cards and available in U.S. dollars as well as foreign currency denominations. The social network has realized tremendous success since its inception. Recently the research firm Nielsen revealed that Americans spent more time on Facebook sites than other top Internet sites in its June 2009 report.

Table 1: Top 10 Parent Companies/Divisions for June 2009 (U.S., Home, and Work)
Parent Unique Audience (000) Time Per Person (hh:mm:ss)
1 Google 155,606 2:31:08
2 Microsoft 139,099 2:12:20
3 Yahoo! 134,304 3:15:55
4 AOL LLC 92,705 2:43:10
5 News Corp. Online 90,308 1:54:59
6 Facebook 87,254 4:39:33
6 InterActiveCorp 67,283 0:20:05
8 eBay 67,208 1:17:59
9 Apple Computer 59,663 1:19:33
10 Amazon 59,552 0:25:41
Source: Nielsen NetView

In addition to providing the platform for other payment application developers, Facebook recently launched its own virtual currency payment service for applications on its network called "Pay with Facebook." The new service is currently live with its application GroupCard, which allows users to purchase items from $3 to $25 and pay for them with a credit card or Facebook credits.


It will be interesting to see if the growth of the Facebook network drives adoption of the newly introduced payment service.

Spare Change
Spare Change is a payment application currently on social networks Facebook, MySpace, and Bebo that lets users make purchases from social network applications and games and then make payment via PayPal. Users can open a Spare Change account and fund it with a credit card, PayPal, bank account, or mobile phone. According to the Web site, consumers can use Spare Change balances to purchase hundreds of applications easily—an "iTunes-style business model for social networks." Spare Change markets itself as the largest micropayments system for social networks, claiming acceptance by more than 700 different games and applications.

Zong is a payment provider that allows consumers to purchase virtual currency, gifts, and other applications on social networks via the mobile phone in lieu of traditional payment methods. Zong uses the mobile carriers with whom it partners to bill customers for their transactions. Once the consumer has paid his or her mobile phone bill, Zong in turn pays the merchant. The distinguishing feature for Zong’s business model for micropayments is its nine-year relationship with mobile carriers globally. However, at this time Zong is currently available for digital goods and services only.

BOKU functions similarly to Zong in that it enables micropayments for games and applications and doesn’t require users to pay via a credit card or traditional bank account. Instead the transaction charges are itemized on the user's monthly cell phone bill. BOKU's partnership with social network hi5 affords it an international presence where users in 24 countries can purchase virtual currency with their mobile phones. BOKU recently expanded into the United States through agreements with mobile carriers AT&T and T-Mobile.

This certainly isn’t an exhaustive list (and is not an endorsement), but it is enough to give you a general idea of some emerging trends. And while the market audience for the goods and services available on social networks is focused on games and applications, it could change as social networks become increasingly ubiquitous. As social networks evolve, the risk environment for virtual and electronic micropayments will be on our radar.

By Cindy Merritt, assistant director of the Retail Payments Risk Forum at the Atlanta Fed

September 8, 2009 in cards, innovation, payments, social networks | Permalink


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