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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February 22, 2010
Check fraud: Old problem, new approach?
Despite signs of declining check volume and ongoing predictions of checks' imminent demise, check fraud is a growing problem. Industry experts estimate that check fraud will cost billions in 2010. The question now is whether this fraud can be thwarted with traditional mitigation efforts or if something new is needed.
One explanation for the continued proliferation of check fraud is technology. Fraudsters today have increased access to check paper stock, high-quality color printers, and scanners that facilitate the creation of a near-perfect document that can pass for a real check. Industry experts state that compromised online banking accounts also contribute to check fraud because fraudsters are able to view cleared check images which are then used to extract sequence numbers and other pertinent data for subsequent replication.
Recent studies reveal check fraud's persistence
Last month, the Financial Crimes Enforcement Network (FinCEN) released its Suspicious Activity Report (SAR) filings for mid-year. The report revealed that during the first six months of 2009, SAR filings for suspected check fraud increased for all industries required to file SARs under the Bank Secrecy Act (BSA). A breakdown for each industry revealed that SAR filings by depository institutions increased by 19 percent for check fraud and by 36 percent for suspected counterfeit checks. SAR filings by money services businesses for traveler's check fraud increased by 76 percent.
Similarly, the 2009 AFP Payments Fraud and Control Survey found check fraud dominated the overall payments fraud landscape for those surveyed in 2008. The results underscored the importance of specific fraud control measures to mitigate risk and reduce exposure to losses. Of those who responded to the AFP survey, 91 percent indicated they had experienced actual or attempted check fraud.
Types of Fraud Resulting from Using Checks
(Percent of organizations that suffered check fraud in 2008)
|In percentages:||All respondents||Revenue greater than $1 billion||Revenue less than $1 billion|
|Counterfeit checks (other than payroll) with the organization's MICR line data||72||75||68|
|Payee name alteration on checks issued||59||63||50|
|Other||7||5||12||Source: 2009 AFP Payments Fraud and Control Survey, p. 13, available at: http://www.afponline.org/pub/pdf/2009_Payments_Fraud_Survey.pdf.|
Are yesterday's best practices today's best approach?
Check fraud is a decades-old problem that shows persistent signs of survival. Preventive efforts to mitigate check fraud risk range from ceasing all use of checks to using advanced software systems that offer automatic check stock and signature verification and can detect even the most sophisticated counterfeit checks. But can new approaches to check fraud enable a bank's loss prevention team to catch and prevent more check fraud? Or is the fight against check fraud best won through traditional and well-established risk-management practices?
One well-known method for business customers to combat check fraud is through the use of a tool known as positive pay. This bank service allows a company to send to its paying bank an electronic file of check payment information, which the bank then matches against the information provided by its business customer. The paying bank pays checks that match the information provided and dishonors those that do not. Other bank services available to combat check fraud include ACH debit blocks and filters. An ACH debit block works like a stop payment order by automatically returning all ACH debits and credits that, for example, exceed preset dollar limits established by the bank customer. The bank customer can also set filters to permit fund transfers to only preapproved payees.
While there is no "one-size-fits-all" solution, well-established risk-management practices have proven time and again to be successful mitigators of fraud risk. The back-to-basic tools such as segregation of duties, dual controls, and timely reconciliations are just some of the risk-management tools best known for their effectiveness at combating check fraud.
Where do we go from here?
While acknowledging that nothing is impervious, the combination of both new and old techniques can contribute significantly to solving some of the challenges that check fraud presents. Armed with an arsenal of tools, financial institutions can be well-equipped to monitor and maintain a high level of account security effectively.
By Ana Cavazos-Wright, payments risk analyst in the Retail Payments Risk Forum at the Atlanta Fed.
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February 16, 2010
Haitian crisis: Are mobile payment discussions an unexpected consequence?
The earthquake in Haiti caused massive destruction that ultimately leveled the capital city of Port-au-Prince and resulted in the deaths of thousands of people. As charitable assistance has poured in from around the world, an unexpected revelation has come to light with respect to the potential for mobile phone–enabled payments. Within a matter of days, wireless network operaters facilitated millions of dollars in donations, demonstrating how quickly people all over the world could assemble to adopt a single payment method for a specific purpose. Through the use of text messaging, or SMS (short message service), via the mobile phone, consumers could send payments to a variety of charitable organizations providing aid to Haiti.
Convenience of text messaging can drive adoption
I heard someone say recently that "convenience is like a drug for consumers." This convenience is possibly why texting is outpacing e-mail messaging as a mainstream form of communication—the ubiquity of mobile phones makes texting increasingly easier, cheaper, more convenient, and perhaps a natural vehicle for sending payment instructions. According to research released by Nielsen Mobile, the typical U.S. consumer sends and receives more SMS text messages than telephone calls. Mobile SMS is already widely used in developing countries to facilitate mobile money transfers for domestic person-to-person payments and cross-border remittances.
What if something goes wrong?
In many developing countries, mobile money transfer payments are transmitted via SMS without a bank partner to facilitate clearing and settlement. As described in an earlier post, Safaricom's M-pesa service provides mobile phone–enabled payments through text message instructions, with cash-out needs accommodated by agents, typically a village store or wireless retailer. But many of the payments are peer-to-peer in nature and funded by topping up the consumer's mobile phone bill. In the Haiti example, customers also could fund the payment by adding the value of the donation to their phone bills or by debiting a bank account.
Of course, the legal and regulatory environments in the United States differ markedly from developing markets like Kenya, where the M-pesa mobile payments service has grown so rapidly. The risk environments also differ significantly. In Kenya, a consumer faces less risk of loss in a mobile-enabled payment environment than the cash-based system that prevailed only a few years ago. U.S. consumers have many choices in payments and enjoy legal protections if service providers fail to consummate the payment transaction.
So what happens if the $20 donation instruction you sent to Haiti appears as a $200 or even a $2,000 charge on your bill? What if there is a disagreement about the error between you and your wireless carrier? What else could go wrong?
Protection for consumers
One of the growing challenges created by payment innovations is the creation of new laws and rule sets, which provide different protections depending on the payment type. This challenge is further complicated as payments converge and assume different formats along the supply chain. For example, a payment initiated via a credit card on a mobile device is subject to error resolution procedures and consumer protection standards established by the card networks. Similarly, Regulation E covers electronic transactions initiated from a bank deposit account. But if you disagree with a charge to your phone bill for a payment, it is questionable whether the error resolution provisions of Regulation E would even apply. As telecom firms become more important participants in retail payments, what laws and rule sets can consumers look to for protection when things go awry?
Of course, these issues are highly hypothetical but also very possible. Telecom firms and mobile payment service providers are filling new roles in mobile payments, forcing business models that we know today into a new paradigm. Perhaps the crisis in Haiti will serve as a catalyst for proactive thinking on risk issues so that all industry participants can work together to build a safe and trusted mobile sector of commerce.
By Cindy Merritt, assistant director of the Retail Payments Risk Forum
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February 8, 2010
Same-day ACH provides faster payments "across the pond"
Speed and convenience are driving innovations in payments. Nowhere can that be seen more clearly than the United Kingdom, where Faster Payments Service (FPS) is described as "ACH on steroids." FPS is a payments innovation that provides near real-time delivery and 24/7 accessibility for consumers. It enables customers to make electronic payments, typically via the phone and Internet, in a matter of hours rather than days.
The need for financial institutions to better compete with other same-day clearing changes (i.e., image exchange) coupled with consumer demand for immediacy and convenience in payments has spurred efforts to introduce expedited payments services like FPS both abroad and in the United States.
How does it work?
Launched on May 27, 2008, FPS was the culmination of a three-year initiative to reduce clearing times on phone, Internet, and standing order payments in the United Kingdom that previously took three days to process. The design and implementation of this new payments infrastructure involved several partners, including the U.K.'s Office of Fair Trading, the Payments System Task Force, the former APACS (Association for Payment Clearing Services), U.K. Payments, VocaLink, and 13 founding member banks.
The new service runs alongside existing payments channels in the United Kingdom such as BACS and CHAPS. The daily operations of FPS are managed by CHAPS, which is also responsible for the U.K.'s real-time, gross settlement payment system (CHAPS Sterling). CHAPS would be the equivalent to Fedwire and CHIPS in the United States. However, VocaLink provides the central infrastructure for FPS through its ATM/Debit network.
FPS only supports credit payments and imposes a £100,000 maximum on standing orders (regular payments made on the same date to a specific beneficiary) and a £10,000 maximum on single immediate payments (SIP) or ad hoc transactions. Customers are able to initiate payments over the phone or online all day, every day.
In its first year, FPS processed 180 million transactions representing £70 billion. According to a recent PricewaterhouseCoopers and VocaLink report, FPS had processed 240 million transactions as of July 2009. Much of this volume is made up primarily of payments between personal account holders or from personal accounts to business accounts (i.e., bill payments).
FedACH to offer same-day service
There is particular interest in the U.K.'s experience with Faster Payments as similar efforts are under way to develop a same-day ACH service in the United States. In March 2009, the Federal Reserve announced plans to develop an intraday service for certain existing ACH debits. In particular, the new service would be limited to consumer checks converted to ACH (ARC, BOC, and POP) as well as consumer debits generated from Internet and telephone transactions (WEB and TEL).
There are at least two key differences in the United Kingdom and FedACH same-day services. Unlike the U.K.'s Faster Payments service, the FedACH settlement of same-day payments will not be real time. Settlement for ACH same-day will occur only once a day at 5 p.m. (see chart below). Also, consumer and corporate credits will not be included in the service.
However, similar to FPS, the FedACH same-day service is not mandatory. An opt-in participation agreement will be required from any financial institution engaging in the service. It is anticipated that the faster settlement will allow participating banks to gain earlier availability of funds as well as to identify return items and potentially fraudulent transactions earlier. Implementation of the service is scheduled for the second quarter of 2010.
|FedACH Same-Day||U.K. Faster Payments Service|
|What types of payments are eligible?||Consumer checks converted to ACH and debits initiated over the telephone or Internet||Electronic payments made via the Internet, telephone and standing order payments|
|When will the service launch?||Second quarter 2010||FPS was launched on May 27, 2008.|
|What type of settlement will it offer?||The same-day ACH service will be a batch-processed, gross settlement system.||FPS is a real time (no batches), net settlement system.|
|Is the service real time?||Entries will be deposited by 2 p.m., delivered by 4 p.m., and settled at 5 p.m.||FPS processes near real-time payments made via the phone or internet. P2P payments are processed 24/7/365, while standing orders are processed during banking hours.|
|What infrastructure does it use?||The FedACH network||VocaLink's existing ATM/Debit infrastructure|
|Source: Federal Reserve, CHAPS|
Global payments context is changing
The payments world is changing as emerging product innovations provide faster processing and delivery of payments. In general, faster payments reduce temporal risk to the parties to a transaction, which is the lag time between the deposit of an item into a clearing system and the delivery and settlement of that item. There are lessons to be learned with each development—whether in the United States or across the globe—that can help better inform the design and implementation of future payments services. Ultimately, all of the participants benefit by collaborating to ensure a more secure payments system.
By Jennifer Grier, senior payments risk analyst in the Retail Payments Risk Forum at the Atlanta Fed
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February 1, 2010
New prepaid card functionality: Card-to-card funds transfer
Innovators now have developed a new prepaid card feature that facilitates a seamless transfer of funds from one card to another, providing a more efficient person-to-person (P2P) payment process that includes remittances. Prepaid cards, also known as stored value cards, are another alternative to paper-based P2P payments and have been a boon to underbanked consumers, allowing them to participate in the electronic economy.
The question is, will this enhanced convenience help drive the adoption of prepaid payment card products?
Prepaid cards were first introduced in 1994 by retailers as proprietary gift cards that could be used only at the stores of the issuing merchant. These are referred to as "closed system" cards and include the popular "loyalty" cards typically issued by one or a group of merchants. Other early uses of stored value cards in the United States included prepaid telephone calling cards, mass transit cards, public benefits payments, and even child support payments. In contrast, "open system" cards are typically issued by a bank under branding of the major card networks and functional wherever they are accepted.
Popularity growing but still lagging traditional debit and credit
Today pre-paid cards are increasing in popularity, but a recently released survey conducted by the Boston Fed shows most consumers still prefer credit or debit cards over prepaid cards.
However, changes in fee and interest programs among banks issuing credit cards may change consumer preferences. As card legislation limits the interest and fees that card companies can impose on borrowers, many banks have started to implement across-the-board increases in interest charges and eliminating loyalty programs for borrowers with higher credit quality.
State of adoption
Prepaid card users can now transfer funds from one card to another through the Internet or by phone. MetaBank is a major U.S. issuer of prepaid open-loop products licensed through the major card networks. Many of these products are marketed to underbanked communities. Also, many of these products may be used for cross-border remittances in addition to domestic person-to-person transfers. Prepaid card products in other markets throughout the world are offering this feature as well. For example, this service is offered in India free of charge to bank customers of DBC (Development Credit Bank Ltd.). Visa Europe offers cards with this feature, allowing recipients to receive funds in all major currencies directly to their Visa card using the global Visa network. If the recipient does not have a Visa card, he or she can collect the cash from a nominated bank branch. In all, Visa Europe’s money transfer operates as card-to-card, card-to-card via email, and card-to-cash.
Convenience as a driver
In a final analysis, technology is driving the development of myriad alternatives in the P2P space, as with other retail payments. How prepaid instruments evolve, in whatever physical form they take — be it a plastic card, a fob, or a cell phone — will ultimately depend on consumer preference. Expanding the functionality of the prepaid instrument for money transfer could be a driver of a new type of prepaid product.
By Ana Cavazos-Wright, payments risk analyst, and Cindy Merritt, assistant director in the Retail Payments Risk Forum at the Atlanta Fed
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