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

Take On Payments

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March 31, 2014


Ignore Millennials at Your Own Risk

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

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

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

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

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

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March 24, 2014


The Fraudsters Are Omni-Channel--and Omnipresent

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

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

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

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

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

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March 17, 2014


The Challenge to Create an Awesome Mobile Payments Experience

Almost every year for the last decade, those who have followed the mobile payments industry have heard the expectant statement, "This is the year for mobile payments." This year is no exception. We see the stories about mass adoption of mobile payments in other parts of the world, so we wonder, why not here in the United States? A U.S.-centric mobile payments conference I attended recently had as a recurring theme the notion that mobile payments in the United States had not yet caught on because providers had not yet developed an overall package of elements that would create a compelling mobile experience for the user.

In 1998, former Intel chief executive officer Andy Grove, coined the term "strategic inflection point" to describe a fundamental change in any business, technological or not. He said that for a change to achieve mass adoption by consumers, it had to be at least 10 times better than consumers' current experience—something Grove referred to as the "10X" factor. Achieving the 10X factor for mobile payments will likely involve lower costs, increased comfort with security and privacy, new functionality, enhanced user friendliness, increased convenience, or a "cool" factor, such as new technology often offers.

Conference panelists in general shared the view that the payment transaction itself is one small—but critical—element of the overall mobile experience. One point they made is that, because of their experience with other payment methods, consumers expect the mobile payment to be secure, fast, and accurate. These panelists echoed the work of the Mobile Payments Industry Workgroup (MPIW), a joint endeavor between the Federal Reserve Banks of Boston and Atlanta and the major stakeholders in the U.S. mobile ecosystem. The MPIW was created four years ago to facilitate the development of a vision for a mobile payments environment that will be effective, secure, and ubiquitous. This group has met frequently to address the issues of technology, standards, security, privacy, functionality, regulation, and adoption barriers. You can read results of these efforts on the Boston Fed's website.

Smartphone penetration levels continue to rise and are expected to approach saturation level within the next five years. Nevertheless, consumer research studies consistently show that not only are consumers very concerned about security and privacy when it comes to using their smartphones for mobile banking and payments, but they also are highly satisfied with their current payment method. The industry can address the security and privacy issues through a strong consumer education and awareness campaign. However, moving consumers from their current habits will require the achievement of a strategic inflection point—something that many payments industry stakeholders have tried to achieve over the years but have failed to do so.

Portals and Rails would like to know what you think are the other elements of the overall mobile experience needed to achieve the 10X factor?

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

March 17, 2014 in innovation, mobile payments | Permalink

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March 10, 2014


Who Is Responsible for Consumer Security Education?

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

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

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

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

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

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

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

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

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March 3, 2014


An Efficient Mobile P2P Payment: The Paper Check

Having had the chance to spend some time reviewing the 2013 Federal Reserve Payments Study, I was struck by the lasting power of the check in the consumer-to-consumer (or P2P) space. Although overall check usage has declined (checks written by businesses and by consumers to businesses have all declined significantly), check usage in the P2P space increased between 2006 and 2009 and was stable from 2009 to 2012. And this has occurred when the number of bank and nonbank mobile P2P payment solutions that have entered the marketplace or matured during the past few years.

As a parent of two young children, I have acquired ample experience in the P2P payments space—that is, in paying babysitters. As a self-proclaimed payments geek, I am always interested in learning how the babysitter prefers to be paid. Cash remains king with most, at least the high school-aged ones. We have one college-aged sitter who likes being paid through a nonbank P2P payment provider. And most recently, another college-aged sitter wanted to be paid by check, which really caught me off guard. She informed me that she uses her mobile banking app to process her checks through mobile remote deposit capture (RDC) and that she prefers having access to the funds through her debit card over cash. The amazing thing that has struck me from these weekly transactions is the efficiency of this P2P payment transaction.

If the babysitter makes the mobile deposit before 9 p.m. (ET), she has access to the funds the following day. If after 9 p.m. , the funds are available to her in two days. On my end, the transaction appears in my banking activity the morning following the deposit. Talk about efficient—fast and inexpensive (no fees paid by either of us)!

Obviously, the efficiency of this transaction would have been diminished were this not a face-to-face transaction. And maybe that is where the true value of online or mobile P2P payments comes into play. However, the resilient check and mobile RDC banking application worked really well in this face-to-face setting. According to a recent report, mobile RDC was offered by approximately 20 percent of U.S. banks in 2013, up from 7 percent at the end of 2012. As more financial institutions roll out the offering in the upcoming year, maybe it will be the case that the old paper check is here to stay and will flourish in the P2P payments space. And based on my experience, that might not be a bad thing!

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

March 3, 2014 in checks, mobile banking, mobile payments, payments study | Permalink

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