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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.

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April 30, 2018


Cash Discount Programs: The Flip Side of Surcharging?

In a recent post, I reviewed the structure of credit card surcharging programs that a panel discussed at the Southeast Acquirers Association conference earlier this year. Since that post, some of my colleagues who have encountered cash discount programs asked me if they were simply the flip side of credit card surcharging. While there are some similarities in the requirements of the two programs, there are some key differences.

Cash discount programs became legal across the United States in October 2011, following the passage of the Durbin amendment of the Dodd–Frank Act. That amendment permitted merchants to offer a discount to cash (or check) customers as an incentive to use those payment methods instead of cards. The way it works is that the merchant charges a service fee to all transactions that the merchant then reverses or discounts if the customer pays with cash or check.

The sample receipts below illustrate the difference between a purchase made with a payment card and a cash payment from a merchant who uses a flat service charge pricing option.

Images-of-reciepts

Unlike surcharges, which apply only to credit card payments, service fees are applied against all types of card payments. And while surcharge program fees are always a certain percentage of the transaction, a cash discount program can use a flat fee (usually based on the average ticket size) or a percentage of the transaction amount. Businesses with a wide range of sales values would best be served using the percentage model, while a flat fee works better for businesses with relatively consistent ticket sizes. Credit card surcharge program rates are capped at 4 percent of the transaction amount, but cash discounting has no restriction. Of course, the higher the service fee the more likely the customer will be to notice and possibly move to another merchant who does not have such a program.

As with surcharges, the cash discount merchant must prominently display consumer notices at the entry points of the store as well as at the register about the service charge—that the customer can reduce or avoid by using cash. In addition, the sales receipt must explicitly display the service charge and, when applicable, the cash discount.

Among the possible benefits, merchants can lower their effective card processing expenses by collecting the service charge. Colleagues at the Boston Fed authored a discussion paper titled "Why Don't Most Merchants Use Price Discounts to Steer Consumer Payment Choice?" in late 2012 that reviewed a number of factors that might cause merchants to think twice about implementing a cash discount program. I believe the factors they reviewed are as relevant today as they were at the time of the paper. As for the credit card surcharge, the merchant has to consider customers' potentially negative response to such a fee, especially if they believe that the merchant has already built much of the cost of payment acceptance into the goods and services.

Merchants have to register credit card surcharge programs with the card brands prior to implementation. However, cash discount programs have no such requirement, so their adoption rate among the merchant community is difficult to quantify. One indicator may be from the Federal Reserve's 2015 Diary of Consumer Payment Choices. According to an analysis of the data, the national sample of respondents indicated they received a cash discount on 1.9 percent of their non-bill transactions that had a median value of $20. Interestingly, in a breakdown by industry type, transactions at automobile/vehicle-related and entertainment/transportation businesses were more likely to offer a cash discount—of 8.2 percent and 5.1 percent, respectively.

What has been your experience with cash discount or credit card surcharging programs? Did such a program cause you to change your initial form of payment?

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

April 30, 2018 in cards, payments | Permalink

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April 23, 2018


Paying with PlasticMetal

I recently had the opportunity to watch a panel of eight millennials discuss their thoughts on money and payments. (The Pew Research Center defines a millennial as anyone born between 1981 and 1996.) While realizing that a sample size of eight young adults is far from representative, I was completely caught off guard at times by what they had to say based on everything I have read or heard about this generation's banking and payment preferences. None of these people lived with their parents and all of them held full-time jobs. So what did I learn from these eight millennials?

  • Demand deposit accounts (DDA) with financial institutions are still important. I was surprised that all eight panelists maintain a DDA.
  • Credit card reward programs are strong drivers of payment usage. Six out of the eight panelists stated that credit cards were their preferred method of payment, primarily because of the rewards that their cards offered. One panelist preferred debit cards while another panelist preferred cash. Of the six credit card-preferring millennials, all stated they were purely transactors that pay off their monthly balance, opting not to revolve them.
  • Another strong driver of credit card usage is card design. All of the panelists raved about metal cards. They love how metal cards feel and they love the sound that they make when they drop them on a counter or table to pay. Several expressed that they wanted cards to be even thicker and heavier. In general, the panel thought that paying with a metal card was "cooler" than paying with a mobile phone.
  • Person-to-person (P2P) wallets and applications are used extensively, but primarily for transacting between individuals, not for storing money. All of the panelists use a P2P mobile wallet or application on their phone. However, none maintain a significant balance in their preferred wallet. They opt to transfer their balance to their DDA. A primary reason for not holding funds in a mobile wallet is concern over security. They feel their money is safer with a financial institution.
  • Mobile phones are vital to their livelihood, yet mobile proximity payments have not fully caught on with them. Half of the panel uses their phone at point-of-sale terminals that accept mobile payments; one panelist mentioned the rewards that he receives from his mobile wallet as driving his mobile payment usage. A majority expressed enthusiasm about mobile order-ahead functionality and use it whenever it's available. However, the availability of mobile payments does not drive decisions to shop at specific stores. All use mobile phones for comparison shopping, oftentimes in a physical store.

A key takeaway from synthesizing all of this information is that it's not just mobile phones that pose a major threat to paying with plastic—it's also metal cards. They certainly seem to appeal to the millennials that I heard on stage and drive loyalty from a usage perspective. And while I don't have data to back up this claim, I do think this metal phenomenon spans generations, as I have had people of all ages show off their metal cards to me. Cards as a form factor are here to stay, but could plastic (especially for credit cards) be on its way out?

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

April 23, 2018 in banks and banking, cards, debit cards, mobile banking | Permalink

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April 16, 2018


Merchant Surcharging: Winners and Losers

It isn't too often that we at the Retail Payments Risk Forum get to interact with card-acquiring stakeholders on such an interactive basis, so it was especially interesting—and valuable—for me to attend a lively session on surcharging at the Southeast Acquirers Association conference in March. I found the session to be quite informative about credit card surcharging and cash discounting programs that processors and independent sales organizations offer.

Incidentally, Jim Daly, senior editor of Digital Transactions, recently wrote an article for the publication—"Surcharging Is the Wave of the Future, ISO Executives Say"—on this very session.

Card brands have allowed merchants to levy surcharges on credit cards since 2013, after a legal settlement with merchants. Under the rules, merchants can charge what it costs them to accept a credit card. This rate, normally defined as the contracted discount rate, is capped at 4 percent of the transaction amount. Ten states have statutes prohibiting surcharging, but recent court decisions in some of those states have found the prohibitions to be unconstitutional. More legal challenges are under way.

While the panel at the conference was highly optimistic about the proliferation of these programs, their viewpoint is understandable since their companies offer these programs as revenue generators. Other industry stakeholders I have talked to since the conference have been less optimistic and view the potential as a niche market currently representing less than 1 percent of the U.S. merchant base.

In any case, I can understand why a merchant might want to pass that incremental cost on to me if my payment method costs the merchant more than other payment methods. It's my choice to use that particular method. Of course, the merchant who chooses to implement such a program takes the financial and reputational risk of driving its customers to other businesses that do not impose such a surcharge or that have a lower surcharge.

So how does the implementation of a credit card surcharge affect the various stakeholders of a transaction? Let's assume a merchant pays a 3 percent discount rate under its current processing agreement for accepting credit cards. In the non-surcharge environment, for a $45 transaction, the cardholder customer is billed $45; the merchant receives a net $43.65; and the merchant's processor collects $1.35, which is the 3 percent discount rate. In a surcharge environment, the cardholder would be charged $46.35; the merchant would receive $45; and the processor would collect the same $1.35. So the cardholder pays more, the merchant retains that extra money, and the processor maintains the same revenue amount.

Under the terms of the 2012 legal settlement, the merchant can assess the surcharge only on credit card transactions, not debit or prepaid cards, and must place clear disclosures for the customer at entryways and the point of sale. Additionally, the customer's receipt must have an itemized entry identifying the surcharge.

It will be interesting to see whether surcharge programs proliferate in the future, as the panelists forecast. What do you think?

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

April 16, 2018 in cards | Permalink

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April 9, 2018


Fintech for Financial Wellness

When you hear the term fintech, you might free-associate "blockchain" or "APIs" or "machine learning." Chances are "financial opportunities and capabilities for all" might not be the first topic to spring to mind. Recently, I've been learning about the vast ecosystem of fintech entrepreneurs seeking to improve what the Center for Financial Services Innovation calls "financial health"—that is, our financial resiliency in the face of adversity, ability to take advantage of opportunities, and ability to manage day-to-day finances.

Consumer-focused fintech projects ask the question: Can we use data to improve financial wellness for individuals?

Some of these projects are directed toward specific groups. There are apps to help SNAP (Supplemental Nutrition Assistance Program) recipients manage benefits, enable immigrants to import their credit history from their home countries into U.S. credit reporting tools, and teach recent college grads about financial decisions such as paying off student loans or signing up for employer-sponsored retirement accounts.

Some can help you to:

  • Analyze your cash flows over the course of the month and tell you how much you could save.
  • Save or invest when you make purchases by automatically rounding up and putting your change into an account.
  • Analyze your accounts to identify peaks and valleys in your income and help you smooth it out.
  • Know when you have enough money to pay a particular bill and let you pay it by swiping your finger.
  • Link saving to opportunities to win prizes by incorporating lotteries.
  • Know, via text message, if you're likely to overdraw your account in the next few days.

Recent research finds that these sorts of interventions can be effective. For example, in "Preventing Over-Spending: Increasing Salience of Credit Card Payments through Smartphone Interventions," the authors find that people who use an app that suggests weekly savings goals significantly reduce their expenditures. This trial took place with a small sample of Swiss credit card users. As part of the experiment, participants reviewed and classified every credit card transaction, thus making every payment more visible to them. On average, participants reduced their weekly spending by about 14 percent.

Of course, not only entrepreneurs but also economists, policymakers, and traditional institutions appreciate the importance of financial education. Increasing financial literacy makes for a stronger economy, and financial education is an important part of what the Fed does. Just last week, Atlanta Fed president and CEO Raphael Bostic spoke about the importance of financial literacy. You can read his remarks here.

If you, too, care about improving financial wellness for everyone and want to learn more, please reach out to share information and ideas.

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

April 9, 2018 in fintech, innovation | Permalink

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April 2, 2018


Advice to Fintechs: Focus on Privacy and Security from Day 1

Fintech continues to have its moment. In one week in early March, I attended three Boston-area meetings devoted to new ideas built around the blockchain, open banking APIs, and apps for every conceivable wrinkle in personal financial management.

"Disruptive" was the vocabulary word of the week.

But no matter how innovative, disruptive technology happens within an existing framework of consumer protection practices and laws. Financial products and tools—whether a robofinancial adviser seeking to consolidate your investment information or a traditional checking account at a financial institution—are subject to laws and regulations that protect consumers. As an attorney speaking at one of the Boston meetings put it, "The words 'unfair,' 'deceptive,' and 'misleading' keep me up at night."

A failure to understand the regulatory framework can play out in various ways. For example, in a recent survey of New York financial institutions (FI)s by the Fintech Innovation Lab, 60 percent of respondents reported that regulatory, compliance, or security issues made it impossible to move fintech proposals into proof-of-concept testing. Great ideas, but inadequate infrastructure.

To cite another example, in 2016, the Consumer Financial Protection Bureau took action against one firm for misrepresenting its data security practices. And just last month, the Federal Trade Commission (FTC) reached a settlement with another firm over allegations that the firm had inadequately disclosed both restrictions on funds availability for transfer to external bank accounts and consumers' ability to control the privacy of their transactions. Announcing the settlement, acting FTC chairman Maureen Ohlhausen pointed out that it sent a strong message of the "need to focus on privacy and security from day one."

As Ohlhausen made clear, whoever the disrupter—traditional financial institution or garage-based startup—consumer protection should be baked in from the start. At the Boston meetings, a number of entrepreneurs advocated a proactive stance for working with regulators and urged that new businesses bring in compliance expertise early in product design. Good advice, not only for disrupters but also for innovation labs housed in FIs, FIs adopting third-party technology, and traditional product design.

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

April 2, 2018 in innovation, regulations, regulators | Permalink

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