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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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 11, 2019
AI and Privacy: Achieving Coexistence
In a post early last year, I raised the issue of privacy rights in the use of big data. After attending the AI (artificial intelligence) Summit in New York City in December, I believe it is necessary to expand that call to the wider spectrum of technology that is under the banner of AI, including machine learning. There is no question that increased computing power, reduced costs, and improved developer skills have made machine learning programs more affordable and powerful. As discussed at the conference, the various facets of AI technology have reached far past financial services and fraud detection into numerous aspects of our life, including product marketing, health care, and public safety.
In May 2018, the White House announced the creation of the Select Committee on Artificial Intelligence. The main mission of the committee is "to improve the coordination of Federal efforts related to AI to ensure continued U.S. leadership in this field." It will operate under the National Science and Technology Committee and will have senior research and development officials from key governmental agencies. The White House's Office of Science and Technology Policy will oversee the committee.
Soon after, Congress established the National Security Commission on Artificial Intelligence in Title II, Section 238 of the 2019 John McCain National Defense Authorization Act. While the commission is independent, it operates within the executive branch. Composed of 15 members appointed by Congress and the Secretaries of Defense and Commerce—including representatives from Silicon Valley, academia, and NASA—the commission's aim is to "review advances in artificial intelligence, related machine learning developments, and associated technologies." It is also charged with looking at technologies that keep the United States competitive and considering the legal and ethical risks.
While the United States wants to retain its leadership position in AI, it cannot overlook AI's privacy and ethical implications. A national privacy advocacy group, EPIC (or the Electronic Privacy Information Center), has been lobbying hard to ensure that both the Select Committee on Artificial Intelligence and the National Security Commission on Artificial Intelligence obtain public input. EPIC has asked these groups to adopt the 12 Universal Guidelines for Artificial Intelligence released in October 2018 at the International Data Protection and Privacy Commissioners Conference in Brussels.
These guidelines, which I will discuss in more detail in a future post, are based on existing regulatory guidelines in the United States and Europe regarding data protection, human rights doctrine, and general ethical principles. They call out that any AI system with the potential to impact an individual's rights should have accountability and transparency and that humans should retain control over such systems.
As the strict privacy and data protection elements of the European Union's General Data Privacy Regulation take hold in Europe and spread to other parts of the world, I believe that privacy and ethical elements will gain a brighter spotlight and AI will be a major topic of discussion in 2019. What do you think?
By David Lott, a payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed
January 28, 2019
A Cryptocurrency Primer
Every day, my newsfeed is full of stories about cryptocurrency, blockchain, and distributed ledger technology. I even see stories on how we can create our own digital currency, a notion that conjures up for me visions of my face on a coin, just like suffragette Susan B. Anthony. Could my own digital currency, known hereafter as the NEDNote, become a reality? My husband is a software engineer, so the technical piece is covered, but maybe offering a primer on the history of cryptocurrency and its confusing and rapidly changing nomenclature is the best place to start before I launch the NEDNote into the cryptographic biosphere.
The concept of virtual currency as a substitute for fiat currency dates back to the 1980s, with David Chaum being credited with introducing digital cash. (Fiat currency, often referred to in cryptocurrency discussions, is legal tender backed by a government or central bank.) Although early attempts at virtual currencies were made in the late ’90s, the anonymous white paper published in 2009 under the pseudonym Satoshi Nakamoto is credited for creating the first decentralized cryptocurrency, Bitcoin, and the blockchain database. And with that paper, a new lexicon began to emerge, some of which I define here.
- Cryptocurrency, short for cryptographic currency, is a subset of digital currency.
- Cryptography in the cryptocurrency world refers to the algorithms that encrypt data for transmission. In the analog world, think how the Navajo language was used to transmit secure messages during World War II.
- Distributed ledger technology (DLT) refers to the infrastructure that allows a repeated digital copy of data to be available at multiple locations. With DLT, transactions take place over a peer-to-peer network, and do not require the use of a central administrator to govern or validate the transaction, but rather employ consensus algorithms to replicate the data across locations.
- Blockchain is a type of DLT that organizes records in blocks, which are then linked with cryptographic hashes to create the chain. Each block consists of these hashes, data, and a unique timestamp. Because no trusted source or authority exists for the blockchain, it is necessary that data somehow be validated before anything can be added.
- Validation protocols include “proof-of-work” and “proof-of-stake,” the two primary methods of validating transactions on a blockchain.
- Proof-of-work involves mining and timestamping, which are key validation computations. Mining both validates transactions and obtains new cryptocurrency. The mathematical calculations performed in the mining process build the hash function that links the block to the chain. Miners are rewarded with new cryptocurrency for their contributions to the validation process. Timestamping tracks historical changes made to the data contained in the block.
- Proof-of-stake employs a consensus method to determine ownership of the cryptocurrency. This method requires less computing power to complete than does proof-of-work validation but does not reward miners with new currency.
- A crypto wallet provider is a cryptocurrency storage service that is online (hot wallet) or offline (cold storage). Hot wallets are connected to the internet and are frequently hosted by an online exchange platform. Cold storage, which is not connected to the internet, is viewed as more secure.
For many years, my husband allowed the SETI Institute to harness the excess processing power of our home computers in the search for extraterrestrial intelligence, when we could have been mining for cryptocurrency and making the NEDNote a reality. In my next post, I’ll talk about how cryptocurrencies are exchanged and some of the associated risks.
By Nancy Donahue, project manager in the Retail Payments Risk Forum at the Atlanta Fed
December 10, 2018
A Look in the Rearview Mirror of Payments for 2018
I'm sure just about everyone else in the payments industry would agree with me that 2018 was yet another exciting year for payments. The year was filled with a host of newsworthy events, but fintech most certainly took center stage in the financial services industry, including payments. Whether the news highlighted an announcement of a new product to increase financial access or discussed the regulatory challenges and associated concerns within the fintech space, it seemed that fintech made its way into the news on a daily basis. Still, for payments, 2018 will be remembered for more than just fintech.
The Retail Payments Risk Forum's last Talk About Payments webinar of 2018 will feature Doug King, Dave Lott, and Jessica Washington sharing their perspectives and memories on the year-in-payments in a round table discussion. Among the topics they will discuss are consumer payment preferences, the changing retail environment, and the state of fraud—and fintech, of course. We encourage financial institutions, retailers, payments processors, law enforcement, academia, and other payments system stakeholders to participate in this webinar. Participants will be able to submit questions during the webinar.
The webinar will be held on Thursday, December 20, from 1 to 2 p.m. (ET). Participation in the webinar is free, but you must register in advance. To register, click on the TAP webinar link. After you complete your registration, you will receive a confirmation email with all the log-in and toll-free call-in information. A recording of the webinar will be available to all registered participants in various formats within a couple of weeks.
We look forward to you joining us on December 20 and sharing your perspectives on the major payment themes of 2018.
By Douglas A. King, payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed