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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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January 23, 2023

The Year of the Mobile Payment—Really!

Since the launch of payment wallets in 2014–15, several of my colleagues and I have facetiously joined in the chorus of mobile payment advocates that "20xx (pick your year) is the 'Year of the Mobile Payment.'" Well, it appears that 2021–22 can be legitimately declared as the year when consumer adoption of mobile devices (smartphones and tablets) for payments reached the tipping point.

The Federal Reserve's Survey and Diary of Consumer Payment Choice showed that in October 2021, a little over two-thirds (68 percent) of a nationally representative sample of more than 4,600 consumers used their mobile devices for at least one payment in the previous 12 months. This was an increase from 46 percent from the October 2020 study, as the chart shows.

Chart 01 if 01: Share of Consumers Making Mobile Payments

Clearly, the increased adoption was significantly assisted by the COVID pandemic. That's when consumers shifted to online shopping due to health concerns or physical retail businesses closed or reduced their operating hours. Responding to this change, retailers have made major investments in their ecommerce channel to be able to provide shopping convenience to their customers with a variety of delivery options.

One of the pressing questions we're faced with as the consumer economy comes out of the post-lockdown period is whether these shifts in payment use will continue or will slowly return to pre-COVID patterns. If the recent Thanksgiving-Black Friday-Cyber Monday shopping numbers are any indication, payments with mobile devices are here to stay. One firm reportedOff-site link that 55 percent of online sales on Thanksgiving Day came through a smartphone, an increase from 51 percent in 2021. Mobile sales continued to represent most sales (51 percent) during Cyber Week. The report noted one interesting change in consumer shopping habits: curbside pickup was used in only 13 percent of online orders on both Thanksgiving and Black Friday, which was a decrease from 21 percent in 2021. Christmas sales figures have yet to be reported but I expect more of the same trend.

So I ask you with a loud voice to join me in the mobile payments chorus as we acknowledge that the Year of the Mobile Payment has finally arrived!

January 17, 2023

Consumer Research Finds an Association between BNPL and Overdrafts

In our 2021 and 2022 blogging about buy now, pay later (BNPL), we have told an on-the-one-hand, on-the-other-hand story.

On the one hand:

  • Interest-free loans are a bargain that help consumers spread out the costs of large-dollar purchases.
  • BNPL is a low-cost substitute for credit card debt.
  • Consumers without credit cards or without a credit history can borrow to smooth out ups and downs in income.

On the other hand:

  • BNPL encourages consumers to make purchases they may not be able to afford in the long run.
  • BNPL inspires consumers to buy more than they otherwise might.
  • Consumers may incur late fees, and their credit rating may be affected.

Two papers, each analyzing large data sets of consumer transactions, add to this weighing up by finding a relationship between use of BNPL and incurring overdraft fees. These papers compare pools of consumers who have used BNPL to pools of consumers with similar characteristics who have not used BNPL.

Both papers find that total spending increases after an individual starts using BNPL.

Neither paper can establish, however, which comes first: the choice to use BNPL or the tendency to overdraft. As deHaan and coauthors write, "the results cannot differentiate between a causal effect of BNPL versus consumers experiencing a coinciding shock (e.g., a layoff) that causes both BNPL adoption and declines in financial health."

For a pay-in-four purchase, payments are made at the time of purchase and then automatically over the next six weeks. The CFPB has reported Adobe PDF file formatOff-site link that nine in 10 BNPL payments are made with a debit card. Automatic debit payments imply that the harmful effects and the full costs of BNPL can occur at not only the BNPL lender but also at the customer's financial institution, where overdrafting could occur. This makes it difficult for those effects to be fully quantified. These findings on overdrafting pose a challenge for consumer protection and consumer education.

These papers add to our understanding of consumer finance and consumer decision-making. I encourage you to read them.

January 9, 2023

Open Banking's Slow March Advances

In June, I wrote about the revived and deliberate process of the Consumer Financial Protection Bureau (CFPB) in developing rules covering the implementation of open banking in the United States. I promised that the Retail Payments Risk Forum would continue to follow developments in open banking, so in this post, I'm providing a small update.

In an October 25 speechOff-site link at this year's Money20/20 conference, CFPB director Rohit Chopra delivered a detailed roadmap and timeline for the rulemaking process for open banking. Chopra noted, "While not explicitly an open banking or open finance rule, the rule will move us closer to it, by obligating financial institutions to share consumer data upon consumer request, empowering people to break up with banks that provide bad service and unleashing more market competition." Concurrent with Chopra's speech, the CFPB issued a 71-page document Adobe PDF file formatOff-site link outlining the proposals and possible alternatives to open banking.

As I noted in my earlier post, before the CFPB can formally issue proposed rules, it must convene a panel of federal agencies representing "small entities" (businesses, government agencies, and organizations) to provide recommendations on regulatory alternatives to minimize the burden on impacted small entities. The agencies on the panel are the CFPB, the Small Business Administration's Office of Advocacy, and the Office of Information and Regulatory Affairs in the Office of Management and Budget. The CFPB is also conferring with other federal regulatory agencies and stakeholders.

The feedback from the affected small entities is due by January 25, 2023, and is expected to be published by the end of the first quarter of 2023. Taking into consideration the input received, the CFPB will issue a set of proposed rules covering data sharing later in 2023. There will be a public comment period with the expectation that the final rule will be issued sometime in 2024 with an implementation date.

In the published outline of the proposed rule, the CFPB makes clear that this will be an incremental process as far as the scope of coverage is concerned. The proposed rules will initially cover only Regulation E (deposit transaction accounts) financial institutions, Regulation Z (credit cards) issuers, and non-financial institutions that "issue digital credential storage wallets." These groups are referred to as "covered data providers." The proposed rule also addresses requirements for third-party data processors—those that receive or aggregate data authorized by the consumer. In particular, the CFPB is soliciting feedback on the disclosures that the data provider must offer the consumer and on how the covered data providers will verify that the third party has the authority to obtain the consumer's data.

We will continue to follow and report on the developments relative to the implementation progress of open banking in the United States.

December 19, 2022

Our Payments Wishes and Resolutions for 2023

In our year-end webinar last week, the Retail Payments Risk Forum team provided our perspective on several major developments and issues in payments in 2022. Since our time was limited, we wanted to share some additional thoughts and wishes for payments in 2023.

Nancy Donahue: Earlier this year, the Board of Governors finalized guidelines for evaluating nontraditional financial institutions' requests to be granted master accounts and access to the Fed's payment services. Fintech firms have held the promise of greater financial inclusion and wider access to financial services, so it will be interesting to follow this space in 2023.

Scarlett Heinbuch: I am intrigued by cash acceptance in the United States and efforts being made to require brick-and-mortar merchants to accept cash for payment. It will be interesting to see what happens with cash access for people nationwide. I wish for people to be able to pay for goods and services in a way that meets their needs and choices.

Dave Lott: I am especially interested in seeing the uptake by financial institutions and consumers of instant payments with the introduction of the FedNow service. I wish that the issue of consumer liability for electronic peer-to-peer, or eP2P, in cases where the legitimate accountholder initiates the transaction is quickly resolved.

Claire Greene: Like Dave, I'm excited to see the product innovations that I hope will result from the widespread availability of instant payments. The information that must flow with B2B (business-to-business) payments and the plethora of business accounting systems used to record payments and receipts make innovation in this space challenging. These challenges, however, also make B2B payments ripe for change. Let's see what happens.

Catherine Joseph: Although check usage has declined, I plan to continue to follow trends in both consumer and business checks, particularly trends in check fraud, and what actions the industry is taking to increase security and help curb check fraud.

Jessica Washington: My hope is that we can take steps as an industry to improve payments data collection, analytics, and sharing so that we can better inform policy and business decisions. I especially look forward to seeing improvements in fraud and threat data sharing so that we have the room to innovate and improve payment systems.

We want to wish our readers all the joy of the holiday season and best wishes for 2023. Our Take on Payments blog will resume on January 9.