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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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October 3, 2022

CFPB Releases Report on Buy Now, Pay Later

In 2021, the five major firms offering buy now, pay later (BNPL) loans originated approximately 180 million loans, with a total value of $24.2 billion and an average value of $135. That's according to a long-awaited report Adobe PDF file formatOff-site link on the US BNPL industry from the Consumer Financial Protection Bureau (CFPB). This report resulted from an increasing number of consumer complaints about BNPL, primarily about fee disclosures and problems with merchandise returns, and requests from some congressional figures. (Read my August 1, 2022, post on BNPL for a refresher on what led to the report.)

The full report provides detailed information about the state of the BNPL industry in the United States over the 2019–21 period. Here are some other findings in the report that I found interesting:

  • While the apparel and beauty sectors still dominate the markets that BNPL lenders serve, their share dropped from 80 percent in 2019 to 59 percent in 2021. Personal effects—which include electronics, fitness and sporting equipment, games and hobbies, and jewelry—made up the second largest segment, at 11 percent of the market.
  • From an underwriting standpoint, 73 percent of the BNPL offers in 2021 were approved, with a charge-off rate of 3.8 percent, up from 2.9 percent in 2020.
  • By the end of 2021, three of the five lenders were imposing late payment fees, which were in the $7 to $8 range. A fourth lender had charged late fees for most of 2021 but discontinued them in the fourth quarter. For the three firms still charging late fees at the end of the year, about 12 percent of borrowers incurred at least one late fee in 2021, and 7 percent of loans incurred at least one late fee.
  • Late fees represented on average 0.28 percent of the BNPL firms' gross merchandise sales.
  • As the chart shows, debit card dominates the payment methods, while check, at less than one-tenth of 1 percent, is the least frequent choice.

  • table 01 of 01: Payment method

  • In 2021, only 60 percent of the dollar value of the merchandise value returned or disputed was refunded, up from 45 percent in 2019. This has been a major source of customer complaints.
  • Discount fees paid by merchants have dropped steadily since 2019 as additional BNPL firms have entered the market. In 2019, the average discount fee was 3.39 percent. It was 2.91 percent in 2020 and 2.49 percent in 2021.

We will report on the business trends cited in the report as well as the CFPB's planned next steps in our next post on this subject.

September 26, 2022

Next-Generation ATMs: Innovations and Updates

Despite the growth of digital payments, cash remains a vital payments instrument, as we have frequently discussed in our posts. And people often get their cash from ATMs, as we've also mentioned here a few times. At a recent conference, we learned more about the latest technologies in the next generation of these machines and in the software that goes into the machines, and heard updates on policies and crimes that Independent ATM deployers (IADs) may encounter. Here are some of the key takeaways from the conference:

  • ATM functionality: Looking for new revenue sources, ATM deployers are evaluating enhanced devices that will support bill payment and other functions for the cash-based customer. With these upgraded ATMs, customers will be able to pay their bills by scanning their bills and inserting cash into an ATM. If this service is priced below what a staffed money service business offers, it will be an attractive alternative.
  • Artificial intelligence: The next-generation ATMs are supported by more sophisticated machine-learning software that can diagnose common problems remotely such as PIN pad errors, provide low- or out-of-cash alerts, reboot systems, arm or disarm alarms, or configure alerts based on the route of the IAD operator. Using this adaptive machine learning, it can often fix these minor problems, saving time and money in avoiding a service call and keeping the ATM functioning and available. Some problems like paper jams, though, will still require an old-fashioned intervention.
  • Crime: While innovations in ATMs and the software that supports them are on the rise, the need to solve for old-fashioned problems like crime remain. The number of attacks against and thefts of ATMs, including attacks on the people who service them, are increasing. Alarms, cameras, and other crime-alert features, such as locational tracking, are often not enough to stop determined criminals. This problem has become so severe that our next Talk About Payments webinar on November 3 will examine these issues and offer some potential defenses in detail. Stay tuned for more information on these webinars in the coming weeks.
  • Music, money, meals: On a lighter note, if you think you’d like to listen to music when you withdraw money from an ATM, you’ll like the new combo jukebox/ATM that plays your favorite tunes and dispenses your cash. The combo is designed to be used in restaurants, entertainment facilities, and other venues where the patrons will be able to stay a while to listen to their favorite tunes.

The conference was a fascinating convergence of technologies, policies, and people. It was also a reminder of the industry-wide commitment to the efforts being made in all areas to keep cash accessible. Some sessions focused on key legal and regulatory issues the industry is facing. We will write more about those in future posts. You can count on us to monitor this banking channel and continue reporting on the evolution of the ATM.

September 19, 2022

Continuous Improvement at the Cash Factory

The tour of the Hershey chocolate factory was a highlight of my midcentury childhood. My brother and I watched mesmerized as a claw-like machine scooped and stirred an enormous vat of brown goop. Our shared thought: Will there be edible souvenirs?

More recently at the Boston Fed, I watched an experimental robot moving shrink-wrapped blocks of cash from point A to point B. The experience was eerily familiar, a lot like the machine at the chocolate factory. And it inspired the same thought: Will there be fungible souvenirs?

Turns out, there are a lot of similarities between chocolate production and FedCash Services, which takes in crumpled bills and turns out shrink-wrapped bundles of neatly pressed $1s, $2s, $5, $10s, $50s, and $100s.

  • Quality control: maintaining consistent chocolate texture, removing ripped bills from circulation
  • Heavy stuff to move around: a crate of chocolates, a pallet of $100s
  • Inventory to track: Hershey Kisses or $20s

Today, let's focus on supply chain management. A collaboration of the Federal Reserve and all the organizations that help get cash to businesses and consumers is working to bring supply chain best practices to the tracking of cash as it circulates among the Federal Reserve Banks, financial institutions, retail businesses, and armored carriers. The foundation for this endeavor: uniform standards and barcodes.

This effort, named "Cash VisibilityOff-site link," will replace paper manifests and physical signatures with electronic records of cash custody. Currently, cash delivered to Reserve Banks from financial institutions is labeled with the financial institution's ABA number and accompanied by a paper manifest listing the dollar value per bag. The armored carrier waits while the Reserve Bank counts and examines the bags, and the paper manifest is edited by hand to account for any adjustments. For example, a ripped bag may be rejected and its entry crossed off the manifest. Each party—armored carrier and Reserve Bank—signs and retains a copy of the paper manifest. Later, a Reserve Bank worker keys the information into the FedCash Services system from the paper manifest.

Going forward, this paper process will be replaced. Each bag will be barcoded and associated with an electronic (or "e-") manifest including the total deposit amount, and, in a change from current practices, a denominational breakdown of the cash in the bag. Hand counting of bags will be replaced by scanning. Adjustments will be made to the electronic record, not to a paper list, and entry to inventory and accounting systems will be automated.

For armored carriers, going digital has the potential to reduce the time it takes to deliver and pick up cash from the Federal Reserve Banks. For FedCash Services, financial institutions, and armored carriers, digitization is expected to reduce manual data entry, cut down on keying discrepancies, and streamline exception processing.

In addition to increasing efficiency and decreasing risks like those cited above, uniform standards also could open up new opportunities. For example, entities in the cash supply chain could gain insights into the movement of cash to support innovation and decision-making. Automated methods could speed up the notification of cash deliveries in weather or other emergencies, strengthening the overall resiliency of the cash supply chain. Building on the electronic record, financial institutions could report more efficiently to cash-intensive retail businesses that are their customers.

To standardize tracking, participants in the cash supply chain will apply to the international standards organization GS1 US for a company prefix—that is, a unique number that will identify each entity in the cash supply chain. The Federal Reserve has developed an API (FedCash E-Manifest Service) to support the electronic systems for receiving and paying cash and is helping financial institutions and armored carriers implement the API.

Cash is paper. But record-keeping about it doesn't have to be.

To learn more, armored carriers and financial institutions can join the e-manifest readiness programOff-site link. If you are in the Midtown Atlanta area any day Monday through Thursday, visit the Atlanta Fed's Monetary Museum and you will be able to watch our cash team—including the robots—in action.

September 12, 2022

The Not-Quite-Forgotten Check

When did you last write a check? Last month, I wrote my first check in almost 10 years to send funds to sponsor an out-of-state friend for a charity event. This was after I failed to convince my Luddite friend to sign up for an electronic peer-to-peer (P2P) app so I could send the funds almost instantly.

That experience caused me to think a bit more about that somewhat forgotten payment method: the hand-written paper check. The triennial Federal Reserve Payments Study as well as the annual Diary of Consumer Payment Choice (DCPC) have consistently shown that check usage continues to decline. The 2020 DCPC revealed that of the average of 35 payments (including cash) made per month, 2.3 were made by check. The 2016 DCPC showed an average of 46 payments per month with 3.3 of those using a check. While the share of overall payments made by check dropped by just about one-half of a percentage point, the absolute number of checks written dropped by 30 percent in just those four years.

With the decline in check usage, why are financial institutions and merchants seeing an increase in fraud losses related to checks? The simple answer is because checks are easy to counterfeit or alter. The industry has made efforts over the years to improve check document security, including techniques such as microprinting, holograms, embedded fibers, and tamper-resistant paper. Despite these defenses, most would consider the check to be "low tech" and, as this blog has often stated, criminals go for the low-hanging fruit, making checks ripe for the picking. Anyone with graphics software and a high-quality printer can readily turn out counterfeit checks. Blank check stock, some even incorporating the defenses mentioned above, can be purchased at most office supply and stationary outlets. The 2022 Association of Financial Professional's Payment Fraud and Control: Key Highlights Adobe PDF file formatOff-site link report noted "that check fraud remains the most prevalent form of payments fraud," with two-thirds of their professionals reporting their organization had experienced some level of check fraud.

Losses from check fraud come in a variety of forms. I wrote about cashier's check fraud scams in a recent post. Criminals often use money mule networks to cash counterfeit checks or to purchase with a counterfeit check merchandise that the criminal then sells at a discounted price. The criminal may deposit counterfeit or altered checks and then take advantage of the time gap between funds availability and when the check is returned after being identified as fraudulent. Check out this comprehensive guide to check fraudOff-site link.

The industry is now seeing small to mid-size financial institutions and merchants targeted. To mitigate check fraud, the best action for both consumers and businesses is to monitor checking accounts closely to spot any unauthorized items posting to the account. For businesses, consider positive-pay software that automatically alerts you of incoming checks with altered amounts or checks that may have been counterfeited. For financial institutions, software that verifies document integrity or detects transaction data anomalies can be useful. For merchants, third-party check verification services as well as strong customer documentation will help minimize losses.

Although it may be another decade before I write another check, the prevalence of check fraud relative to check use suggests that Take On Payments will continue to highlight this topic and discuss the industry's efforts to combat fraud.