Take On Payments

March 13, 2023

Instant Payments and the Challenges of Inclusive Product Design

True confessions: I recently played around with a popular weight-loss app, but I didn't bear up so well under feedback that I'll call—for lack of a better term—negative reinforcement.

Problem: Too many of my foods are in the red zone. Whole milk! Olive oil! A teeny tiny piece of chocolate! Since apparently my eating habits were such a mess, I figured there was no hope. Less than a week in, that app was history.

My experience reminds me of recent work on product design and payments inclusion. Could it be that my whole milk and chocolate are the equivalent in payments of anonymity and low cost? I want both my preferred foods and help to eat healthily. Many consumers, including unbanked consumers, also want two things: the features of cash (anonymity and low cost among them) and help to pay and budget using 21st-century tools.

Data from the Federal Deposit Insurance Corporation  and the Survey and Diary of Consumer Payment Choice (SDCPC) show that we are not there yet. Each data source finds low rates of adoption of P2P apps, among unbanked households for the FDIC and among unbanked individuals for SDCPC.

This finding is eerily familiar. In 10 years of investigating consumer payments, I've seen a lot of ideas for bringing everyone in the United States into the 21st-century payment system. Especially for US adults without bank accounts, various solutions with seemingly great potential come along and then are just okay. Mobile. Apps. Basic banking. Consumer education. No strikeouts, no home runs.

I'm sure you can think of lots of reasons for these just-okay results: cost (or perceived cost), inconvenient access without a bank account, lack of trust, low adoption rates of smartphones for some groups. But what about product design? One expert, speaking on a 2021 San Francisco Fed podcast episode, said that low-income people have been treated as "secondary users to products that were designed for other people in mind."

Today, with Real-Time Payments and the FedNow Service, we're on the cusp of a new opportunity to make payments accessible for all. The US Faster Payments Council  is advising that products be designed not only to meet the needs of early adopters and existing customers but also to meet the financial lives of the underserved. In other words, treat underserved people as primary users with particular preferences and needs, just as you would treat early adopters and current account holders. For the underserved, faster payments providers should "design for people with tight budgets," include features to ease administrative tasks, and provide mobile-first access, among other recommendations.

Most importantly, providers should include the users in the design process. As a payments innovator said to me last year, "When it comes to product design, you can't assume you know what someone wants without doing the work." As I learned from the experts at ,Commonwealth, which offers a toolkit for inclusive product design: design with people, not for people.

What's your organization doing to make instant payments work for everyone? I'm looking for case studies on this topic. Please be in touch if I can learn from you.

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

• March 13, 2023 in
  • financial inclusion
  • P2P
  • payments
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February 27, 2023

Are Digital Payments Failing the Unbanked?

Data  from the 2021 Survey and Diary of Consumer Payment Choice (SDCPC) give some hints into how US adults without bank accounts manage their financial lives, particularly when it comes to methods of digital access outside of a bank account.

Most US adults these days receive income through digital means. For example, the US Treasury reported in 2021 that they used direct deposit to distribute more than 85 percent of the third round of economic impact payments. People with bank accounts can receive income directly into their account. People without bank accounts are more likely to use prepaid cards for this purpose. However, they tend to own different types of prepaid cards when compared to people with bank accounts. People without bank accounts are more likely to have payroll cards and government benefit cards that facilitate the receipt of income.

For people with bank accounts, apps facilitate digital pay. Adults without bank accounts are far less likely to be using a payment app compared to other adults: half as likely to have any sort of payment app, about a third as likely to have PayPal, and highly unlikely to have Venmo. People without a deposit account have no access to Zelle, the payment app exclusively accessed through a bank account. This slow uptake of payment apps is notable because many commenters have been expecting fintech to create new, cost-effective, and convenient avenues of access for people without access to traditional bank accounts.

Despite their use of prepaid cards, people without bank accounts make most of their payments in cash. Even in 2021, people without bank accounts were three times as likely as other consumers to have used a paper money order in the past 12 months. And using a paper payment instrument inhibits access to the digital economy.

In the 14 years since the Federal Deposit Insurance Corporation’s first National Survey of Unbanked and Underbanked Households, the central story in payments has been about the transition from paper to electronic ways to pay. As the SDCPC data show, unbanked consumers are not enjoying the full benefits of innovations in digital payments. The Cleveland Fed recently posted a review of the literature into the causes and consequences of not having a bank account, which you can read on its website.

As payment innovation continues to flow, how can the payment process become more inclusive? We would appreciate your thoughts and comments.

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

• February 27, 2023 in
  • ACH
  • cards
  • cash
  • financial inclusion
  • payments
  • payments studies/research
  • TOP payments inclusion
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February 6, 2023

Driving a Resurgence in Black Banking

Editors' note: Today's post was written by guest blogger Megan Houck, senior business analyst in the Atlanta Fed's Research Division, in honor of Black History Month.

The number of Black-owned financial institutions in the United States had shrunk from more than 50 in the 1970s to just 20 by 2020, according to the National Black Bank Foundation (NBBF). Many were forced to shutter during the savings and loan crisis of the 1980s. Even more closed during the Great Recession of the 2000s. What efforts are being made to ensure that Black-owned businesses receive equitable access to credit?

Historically, minority depository institutions (MDIs) formed to serve the needs of various ethnic populations denied credit by other institutions. The Small Business Administration  has noted that Black-owned businesses typically face higher interest rates and more loan denials. According to the 2021 Small Business Credit Survey, 16 percent of Black-owned firms received the full amount of the financing for which they applied, compared to 35 percent of White-owned firms. While both demographics saw their ability to secure a loan erode during the pandemic (these numbers were 26 and 54 percent, respectively, in 2019), the low number of approvals for Black-owned businesses in the current climate is concerning. Ensuring that MDIs have capital to offer loan seekers is one way to address this issue.

In addition to providing business credit, MDIs offer banking services to individuals in disadvantaged communities. When banks provide services to their own communities, they help alleviate many of the trust issues that practices like redlining and predatory fees created, practices that have led many people to avoid traditional banking.

Founded in Atlanta in 2020, the NBBF and its investment unit, the Black Bank Fund, aim to empower Black-owned financial providers and their communities. Since its creation, the NBBF has formed syndicates of Black-owned banks to underwrite two multi-million-dollar loans: a $35 million loan to the Atlanta Hawks in 2020 for an updated practice and sports medicine facility and a $25 million loan to Major League Soccer in 2022. These loans have helped participating financial institutions diversify risk and, with the resulting earnings, strengthen their capital position. In turn, these banks are better positioned to support the communities they serve, offering low-cost home and business loans to people and businesses who might otherwise not have access to them.

Robert James II is CEO of Carver Financial Corporation and a board member of NBBF. His bank, Carver State Bank, was the lead originator on the Hawks transaction. He told the National Bankers Association, "Black history, sports history, business history, and American history was made through the hard work, perseverance, expertise, and most of all, the spirit of collaboration of the Black banks." James also sits on the Atlanta Fed's Community Depository Institutions Advisory Council and provides our president and economists with insights into his experiences at the local level for his own bank and nationally with the NBBF.

In honor of Black History Month, we celebrate the spirit of collaboration.

By Megan Houck, a senior business analyst in the Atlanta Fed's Research Division

• February 6, 2023 in
  • financial inclusion
  • TOP payments inclusion
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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.

By the Retail Payments Risk Forum Team: Jessica Washington, Dave Lott, Scarlett Heinbuch, Claire Greene, Nancy Donahue, and Catherine Joseph.

• December 19, 2022 in
  • cash
  • financial inclusion
  • TOP payments inclusion
  • supervision and regulation
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