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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December 2, 2019
Making the Choice to Use Cash
INTERIOR, VETERINARY HOSPITAL—LATE NIGHT (2019)
Male, 60ish baby boomer, in work clothes and yellow reflective vest approaches the desk.
"Picking up a prescription.'
"That's $15.17," says the receptionist.
Waiting puppy owner—off-the-clock Payments Risk Expert—slouched in plastic chair, swings around to face desk. She stares rapt at boomer in work clothes.
A moment's pause.
Boomer rummages deep in his right pants pocket, then the left. Crumpled bills appear in his fist. A dime, a nickel, and 2 pennies fall to the counter.
Payments Risk Expert leans back, satisfied, and smiles.
That was Yours Truly at the vet last month. Research based on data from the Diary of Consumer Payment Choice predicts that anonymous pet owner would be likely to choose cash and, in the moment, he did.
Oz Shy, senior policy adviser and economist at the Atlanta Fed, applied machine learning algorithms to examine some 17,000 in-person payments from the 2017 and 2018 Diary of Consumer Payment Choice. The decision tree that resulted (below) predicted the likely behavior of my boomer.
Reading from left to right, you can see that the first fork occurs for payments above and below $10. For payments less than $10, U.S. consumers are most likely to choose cash (choices to use cash are represented by the green boxes).
The second fork, for payments of $10 or more, is determined by household income. For payments of $10 or more, people with household income greater than $110,000 are most likely to use a credit card (orange boxes show the choice to use a credit card).
The next fork again occurs for transaction value. For payments equal to $20, it's probable that consumers will choose cash. (In his paper , Oz relates this choice to the denomination typically available from ATM withdrawals.)
Now age comes into play: For payments less than $20 (remember, $15.17), consumers 54 and older (boomers) choose cash.
Voila! The pet-owning baby boomer plays to type.
Oz's research illustrates the importance of transaction value for payment instrument choice. For in-person payments of less than $10, consumers—whatever their household income or demographics—are most probably going to use cash. And for larger transaction values, the decision tree also shows that income and age matter for the choice to use (or not use) cash and other payment instruments.
You can read the paper, "How Currency Denomination and the ATM Affect the Way We Pay," here .
November 25, 2019
We Are Thankful For...
Several years ago, I began the practice of making a list around Thanksgiving of things I am thankful for. I was pondering what I might include on my list this year while I was stuck in traffic behind an awful wreck I was thankful I wasn’t involved in. And then the idea hit me that maybe we at the Risk Forum should create our own list focused on what we are thankful for in payments.
To keep the list at proper blog length, I asked each Risk Forum member to name just one item. Without further ado, the Risk Forum presents to you our 2019 Thanksgiving week "What we are thankful for in payments" list.
- Nancy Donahue, project manager: I’m thankful that my debit card has only been breached once this year and although the criminal lived it up at several fast food restaurants and c-stores, it was less than $100 total and I got my money back!
- Claire Greene, payments risk expert: I am thankful that direct deposit lets me put my finances on autopilot. I’ve split my paycheck into different accounts: one for retirement, one for the mortgage, one for saving, and one for everyday expenses.
- Douglas King, payments risk expert: I am thankful for the ability to pay via self-checkout at my local grocery store and receive cash back when using my debit card.
Pictured from left: Jessica Washington, Douglas King, Nancy Donahue, Dave Lott, Catherine Thaliath, Julius Weyman; Not pictured: Claire Greene
- Dave Lott, payments risk expert: I am thankful for law enforcement and other security professionals who work diligently to protect the integrity of our payments system.
- Catherine Thaliath, project management expert: I am thankful for credit card rewards programs. It is nice to get rewarded with cash back or even a free plane ticket just by using your credit card for everyday purchases!
- Jessica Washington. payments risk expert: I am thankful for payments industry collaboration. This year I have seen improvements in fraud information sharing across stakeholders; partnerships between fintechs, financial institutions, and payment networks to promote financial inclusion; and working groups embracing emerging payment innovations.
- Julius Weyman, vice president and forum director: I am thankful that I can write a check where it makes sense; pay online where it makes sense; get paid via ACH (no choice in that, but wouldn’t choose otherwise); pull bills from a real wallet (not the fake kind) and pay that way, where it makes sense; and use a card (and get rewards), which almost always makes sense and is the one I use the most.
And we are thankful for YOU: our readers of Take On Payments and supporters of the Risk Forum. We sincerely appreciate your comments, kudos, and criticism, and hope that you all find value in the information we provide and share. As we enter into these crazy last weeks of 2019, we wish you and yours a wonderful holiday season.
August 5, 2019
A Call to Action on Friendly Card Fraud and Loss?
I have recently had two conversations about the topics of friendly fraud and loss, one from a merchant's perspective and another from a financial institution's issuer perspective. Friendly fraud is often used interchangeably with first-party fraud, as was the case in the conversations, but they are quite different. First-party, sometimes called "bust-out," fraud occurs when an individual applies for and receives a loan or credit line with no intention of ever making a payment. (The term "bust-out" comes from when the individual maxes out the credit, getting as much "free" stuff as possible and making no plans to pay.) First-party fraud is generally considered credit fraud and not payment fraud.
Friendly fraud occurs when a cardholder disputes a transaction that the cardholder never intended to pay even though products or services were properly rendered. Sometimes cardholders dispute legitimate transactions that they honestly do not recognize or remember—think of an annual recurring charge that might slip a cardholder's mind, or the merchant name on the statement is the parent company and not the more easily recognized d/b/a store name. If the resolution of such a dispute is such that either the merchant or issuer takes a loss, this is not true payment card fraud but should be classified as a loss rather than fraud.
The two conversations were clearly around friendly fraud and loss situations that are transaction fraud rather than credit account fraud. Both the merchant and financial institution claimed that friendly fraud and loss transactions are growing rapidly yet are not necessarily being properly captured or categorized. One of the organizations even went so far as to suggest that third-party card fraud is being greatly overstated because a significant portion of that fraud is actually friendly fraud and loss, and this mismeasurement is directing fraud discussions and mitigation decisions away from creating ways to better identify and mitigate friendly card fraud and loss.
So I issue a call to action for Take on Payments readers with multiple questions:
- What is your experience with friendly fraud and loss?
- Are you able to track these independently of third-party fraud?
- If so, are you seeing growth in friendly fraud and loss, as the merchant and financial institution stated was happening?
- What's the driving force in the friendly fraud and loss that you are experiencing?
- Does this particular fraud warrant more discussion by the industry, and in particular the Risk Forum, as it has not been an area of focus of ours relative to third-party card fraud?
Feel free to email me at firstname.lastname@example.org or use the comment button below. I would greatly value your thoughts on this topic.
By Douglas A. King, payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed
July 8, 2019
A Tip for Summer Travel
Because I study payments, people like to brag to me about the ways they pay. "I never use cash." "I don't carry cash, even when I travel." "I buy a pack of gum with my phone." "I haven't seen a dollar bill in five years." Et cetera.
Lots of times, I get these comments while I'm traveling. Like me, the people I chat with are traveling. Handing over a bag to a skycap. Getting housekeeping services in a hotel. Eating a burger at the bar.
So please tell me, all you smartphone-carrying, thin-wallet sophisticates, how do you tip?
When I was a kid, hotel rooms had tiny paper envelopes "for the maid," my father said. Filling the envelope was the last step before loading kids and caboodle into the car. Before we got to drink Tang and eat powdered-sugar donuts, we thanked the housekeeper. Like Tang, those envelopes are becoming an artifact of the past, with the result that you might expect: declining tip income for service workers.
Plea to app developers: find a way to make it easy to tip on the go. There are plenty of tipping apps out there, and from my point of view, they work fine for relationship tips—for example, an app payment to a hair stylist. But what about the one-time tip? When I'm running for the subway I can't (or won't) stop to open or download an app and key in a dozen letters or numbers to thank Keytar Bear, a busker who performs here and there in Boston.
This brings up a key obstacle to apps for tipping: not only do I have to have the app, but the service person does also.
What could be easier to adopt and use than the $2 bill I keep in the outside pocket of my backpack for Carlos, the best guitar player in Harvard Square? I don't have to ask, "Do you accept this or that?" I don't scan or key. I just wave to Carlos, drop the cash, and keep moving.
To tip in cash, we need to carry cash. About 20 percent of respondents to the 2017 Diary of Consumer Payment Choice reported that they carried no cash on any of their three reporting days. My Atlanta Fed colleague Oz Shy cites Rule #1 of tipping: "There are no rules about tipping." So I'll offer a guideline, not a rule: "Carry a bit of cash."
If you haven't found a cashless solution, go to a bank or credit union and get yourself a stack of $2 bills (Thomas Jefferson on the front, signing of the Declaration of Independence on the back, so appropriate in July). Stash them with your carryon bag.
It's summer travel season. In 40 states, the minimum wage requirements are lower for tipped workers. How do you thank the people who made your stay clean and comfortable? How do you tip?
By Claire Greene, a payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed
June 3, 2019
Hitting the Brakes on the Cashless Society
"Reverse ATMs" is a term I learned from reading my colleague Oz Shy's new working paper, "Cashless Stores and Cash Users." At venues that don't accept cash at the register, the patron puts cash into the reverse ATM and a loaded prepaid card comes out. Mercedes-Benz Stadium in Atlanta, for example, is one of the latest venues to adopt this practice.
Speaking of "reverse," I'm sure you know that some states and municipalities are seeking to reverse what may—or may not—be a trend toward brick-and-mortar retailers not accepting cash. Refusing to accept cash has been illegal in Massachusetts, where I live, since 1978. More recent developments:
- Philadelphia will ban cashless stores beginning in July.
- In March, New Jersey outlawed cashless restaurants and stores.
- In May, the San Francisco Board of Supervisors voted to require brick-and-mortar businesses to accept cash.
- Also in May, Representative David Cicilline (D-RI) introduced the Cash Buyer Discrimination Act, which would require businesses all across the United States to accept cash.
These and other proposed laws are predicated on the idea that people without access to payment cards or digital payments are harmed when they cannot make purchases using their payment instrument of choice: cash. Oz's paper adds to the conversation by examining the choices consumers make at the point of sale, depending on their access to different ways to pay.
Using data from the 2017 Diary of Consumer Payment Choice, Oz found that consumers who own different mixes of payment instruments use cash with different intensity to make in-person purchases:
- Diary respondents who own neither a credit card nor a nonprepaid debit card made almost 9 in 10 of their in-person payments with cash, on average. The median share of cash purchases was 100 percent.
- Diary respondents who own at least one credit card and one nonprepaid debit card make about one-third of their in-person payments with cash, on average. The median share was 20 percent.
Oz goes on to calculate the cost to the cash payers who do not have credit or nonprepaid debit cards of switching from cash to a prepaid card. He finds that, all things being equal, for some consumers, using cash would have to cost twice as much as using a prepaid card for the cash users to be indifferent to switching. Oz's conclusion: "A complete transition to cashless stores imposes a measureable burden on consumers who do not have credit or [nonprepaid] debit cards." For perspective, 8.5 percent of respondents with household income below the U.S. median ($61,000) did not have a credit card or nonprepaid debit card in 2017, according to the diary.
As this research shows, cash is important to some consumers. The cashless society could be on a collision course with reality.
March 18, 2019
The Patriots of the Payments Landscape
Last February, the New England Patriots and their future first-ballot Hall of Fame quarterback, Tom Brady, won their sixth Super Bowl title since 2002. Over this 17-year period, they have played for the National Football League title nine times. In college football, a similar scenario has emerged, with two teams (the University of Alabama and Clemson University) winning seven out of the last 10 collegiate football national titles. It is proving to be very difficult to upend the dominant players in this sport, and many football fans and pundits believe that such domination makes the overall sport less interesting (especially if your favorite team isn’t Alabama, Clemson, or the Patriots). They think it’s bad for the sport and argue it would be better to see more variety in championship teams. As I think about that perspective, my mind drifts to a payments conversation that I am often a part of in both business and social settings: Where are payments going to be in the next three to five years?
While it would be much "more entertaining" in my social settings to be able to discuss some great shift in payments on the horizon, the fact is that right now payments is in a place similar to football’s. Card-based payments are sitting on top of the non-cash-based payments world and will be difficult to dethrone anytime soon. According to the Federal Reserve Payments Study 2016 (the last report that provided annual estimates for both automated clearinghouse (ACH) and check payments), card payments, by number of transactions, made up 72 percent of noncash payments. Now the latest figures from the payments study’s 2018 Annual Supplement report reveal that there were 123.5 billion card transactions in 2017, a figure representing robust growth of 10.1 percent from 2016. The report also highlights that, during this 2016–17 period, the number of network ACH payment transactions grew at an accelerated pace of 5.7 percent while large-institution check payments declined in number of transactions at an accelerated pace of 4.8 percent. The Federal Reserve is currently conducting its triennial payments study, which will provide updated national estimates on all noncash payments for 2018.
In the future, we might be dipping cards more often, tapping contactless cards, or even tapping our phones more, but it’s hard to envision a new payment channel making much headway in the next three to five years. Cards just have too big of a share and are experiencing accelerating growth. Consumers are not only accustomed to using them, but they also find that cards work very efficiently for them. And just like the football fans and pundits who talk or write about the need for different champions in the football world, payments professionals and pundits are enamored with writing about and discussing how blockchain, distributed ledger technology, faster payments, or some other brave, new technology are going to be the next frontier in payments. And you know, they might be right one day, but it’s not going to happen anytime soon, certainly not before Mr. Brady finds his way into the Hall of Fame.
By Douglas A. King, payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed
February 4, 2019
So, How Often Do You Dip?
Remember how s-l-o-w dipping your payment card seemed when you were shopping back in 2015? Molasses? Honey? The dregs of the ketchup bottle? These days, I'm dipping more—that is, inserting my card into a chip reader—and complaining about it less. (I don't have a contactless card, so tapping isn't yet an option for me.) I still think swiping is faster, but familiarity means that dipping bugs me less. And it's become rare for me to encounter a jerry-rigged chip reader with the insert slot blocked by cardboard or duct tape, forcing me to swipe instead.
Turns out my shopping experiences—dipping more—line up with new data released by the Federal Reserve Payments Study in December 2018. The study reports some information on how in-person general-purpose card payments were authenticated in the United States in 2017.
For the first time, more than half of these payments by value were chip-authenticated in 2017. In contrast, just three percent of general-purpose card payments used chips in 2015—hence, my lack of familiarity with dipping back in the day. Because contactless chip cards were in use before the EMV-based dipping method began to take off in 2015, these data are an approximation of the increasing use of dipping, not an exact measure.
The chart below is based on figure 8 in the Federal Reserve Payments Study: 2018 Annual Supplement; it shows the substantial uptake in chip authentication at the point of sale from 2016 to 2017. (Check out the supplement for more detail.)
By number, more than 40 percent of general-purpose card payments were chip-authenticated. By card type, credit card payments are most likely to be chip-authenticated and prepaid card payments are least likely to be chip-authenticated (see the chart below). Prepaid cards are less likely to be chip-enabled, certainly a factor in the low shares of chip authentication, in part because of a business decision not to go to the expense of adding chips to low-value cards.
By this time next year, my view of dipping could have changed again. A large card issuer has announced that all its credit cards will be tap-to-pay (that is, contactless) by mid-2019, so it's possible that my dipping will go the way of swiping.
For me, it feels more natural and faster to insert a chip card than it did a year ago. How about you?
By Claire Greene, a payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed
January 22, 2019
Why Are Millennials So Risk-Averse?
Although millennials have been known to be the most charitable age group compared to earlier generations, they are, ironically, holding their money very close when it comes to taking financial risks. According to a recent study from the Federal Reserve, millennials are less well off than previous generations of young adults. They tend to have higher levels of student debt, lower incomes, and fewer assets to their name. In addition, millennials have grown up watching various financial crises in the United States and around the world, including the bursting of the housing bubble, the dot-com collapse, and the Great Recession. The last crisis was unfortunately around the time this generation began entering the workforce. Dealing with these financial obstacles has negatively impacted their attitude towards financial risk-taking, including investing and even opening up a new credit card. A 2017 survey, for example, found that millennials are more afraid of credit card debt than of dying or war.
Source: credible.com, "Survey: Millennials Fear Credit Card Debt More Than Threat of War and Dying"
Millennials’ tend to see credit cards—mistakenly—only as one more way to take on additional debt. But are they doing themselves a disservice by not taking advantage of an opportunity to quickly build up or improve their credit? Doing so could better enable them to qualify for a loan to purchase a home or start a new business. Furthermore, using credit cards wisely could actually help millennials save money in the long run through rewards and cash-back programs. And when it comes to investments, millennials are opting out of long-term investments like mutual funds, preferring instead to spend their money on immediate experiences, such as traveling and going to concerts, where they can see the "return on their investment" instantly.
The misconceptions and overall distrust in the financial system from this generation speak to a need for more millennial-focused financial education tools and advisers, especially those who understand the struggles of this generation as they navigate through mounds of student debt. Tools and advice that are more dedicated to millennials’ specific needs—whether it’s through a millennial-focused financial management gaming app or a generation Y robo adviser—would go a long way toward helping millennials increase their financial literacy and begin to trust the financial system. The Federal Reserve has many financial education tools. For example, the Atlanta Fed offers financial tips, updated monthly, in the Atlanta Fed’s digital magazine Economy Matters. And check out these resources from the St. Louis Fed:
- Credit Bureaus: The Record Keepers (Page One Economics)
- Online Course for Consumers (Credit Cred)
- Credit Card Statement (Personal Finance 101 Financial Forms Explained
- Credit Report (Personal Finance 101 Financial Forms Explained)
- Build Credit and Control Debt (Building Wealth: A Beginner’s Guide to Securing Your Financial Future)
With some financial education, this generation might gain greater confidence and take more risks with their money so they could build more wealth.
By Catherine Thaliath, project management expert in the Retail Payments Risk Forum at the Atlanta Fed
- Making the Choice to Use Cash
- We Are Thankful For...
- Will Payments Be Getting REAL?
- Financial Solutions for the Younger Generation
- Encouraging Password Hygiene
- Should We Throw in the Towel When It Comes to Data Breach Prevention?
- Looking for Partners in Safer Payments
- The Range of Un-Friendly Fraud
- Payments Webinar October 10: Cash in the 21st Century
- "Insuring" Ransomware Will Continue to Flourish
- December 2019
- November 2019
- October 2019
- September 2019
- August 2019
- July 2019
- June 2019
- May 2019
- April 2019
- March 2019
- account takeovers
- ATM fraud
- bank supervision
- banking regulations
- banks and banking
- card networks
- check fraud
- consumer fraud
- consumer protection
- credit cards
- cross-border wires
- data security
- debit cards
- emerging payments
- financial services
- financial technology
- identity theft
- law enforcement
- mobile banking
- mobile money transfer
- mobile network operator (MNO)
- mobile payments
- money laundering
- money services business (MSB)
- online banking fraud
- online retail
- Payment Services Directive
- payments fraud
- payments innovation
- payments risk
- payments study
- payments systems
- phone fraud
- remotely created checks
- risk management
- Section 1073
- skills gap
- social networks
- third-party service provider
- trusted service manager
- Unfair and Deceptive Acts and Practices (UDAP)
- wire transfer fraud
- workforce development
- workplace fraud