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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.

Take On Payments

June 18, 2018


Thinking about My Grandmother and Future-Proofing Payments

I often reminisce about times I spent with my grandmother. She passed away when I was only nine years old, but fortunately left me with a host of memories that I cherish. How I loved our trips to Walden Bookstore in the Hickory Ridge Mall whenever she'd visit us in my hometown of Memphis. We'd pick out a book or two and then return home to read them together. I often wonder what she would think about my family's book shopping and reading habits today. Online bookstores, e-readers, and audiobooks downloaded or streamed onto mobile phones would be completely foreign to her as the technology behind these was not even around during her lifetime! How could she ever have known how the world of books would evolve?

And this brings me to the notion of future-proofing payments. Mobile payments just might be the hottest topic when payment professionals get together to discuss the future of payments. It makes sense to think that maybe one day our mobile phones will replace our debit and credit cards and maybe even cash. But to date, the mobile phone has not done for cards and cash what it has done for mp3 players, digital cameras, and portable navigation devices, to list just a few things. Perhaps we need more time for mobile phones to transform payments—or could it be that payments as we know them today will be made over by a technology or device that is not yet widely available or even conceived? Is it possible that the primary payment methods we use today can withstand the test of time and remain our primary methods for many more years? Thinking about my grandmother and books, maybe future-proofing payments is a losing proposition and we should be nimble, ready to adapt to whatever changes come our way.

Join me for the Atlanta Fed's Retail Payments Risk Forum's latest Talk About Payments webinar on Thursday, June 28, from 1 to 2 p.m. (ET), when I will explore the future of mobile payments at the point of sale by first considering the debit card's long rise to prominence. Participation in the webinar is complimentary, but you must register in advance. After completing registration, you will receive a confirmation email with all the log-in and toll-free call-in information.

Photo of Douglas King By Douglas A. King, payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed

June 18, 2018 in banks and banking, emerging payments, mobile banking, mobile payments | Permalink

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April 23, 2018


Paying with PlasticMetal

I recently had the opportunity to watch a panel of eight millennials discuss their thoughts on money and payments. (The Pew Research Center defines a millennial as anyone born between 1981 and 1996.) While realizing that a sample size of eight young adults is far from representative, I was completely caught off guard at times by what they had to say based on everything I have read or heard about this generation's banking and payment preferences. None of these people lived with their parents and all of them held full-time jobs. So what did I learn from these eight millennials?

  • Demand deposit accounts (DDA) with financial institutions are still important. I was surprised that all eight panelists maintain a DDA.
  • Credit card reward programs are strong drivers of payment usage. Six out of the eight panelists stated that credit cards were their preferred method of payment, primarily because of the rewards that their cards offered. One panelist preferred debit cards while another panelist preferred cash. Of the six credit card-preferring millennials, all stated they were purely transactors that pay off their monthly balance, opting not to revolve them.
  • Another strong driver of credit card usage is card design. All of the panelists raved about metal cards. They love how metal cards feel and they love the sound that they make when they drop them on a counter or table to pay. Several expressed that they wanted cards to be even thicker and heavier. In general, the panel thought that paying with a metal card was "cooler" than paying with a mobile phone.
  • Person-to-person (P2P) wallets and applications are used extensively, but primarily for transacting between individuals, not for storing money. All of the panelists use a P2P mobile wallet or application on their phone. However, none maintain a significant balance in their preferred wallet. They opt to transfer their balance to their DDA. A primary reason for not holding funds in a mobile wallet is concern over security. They feel their money is safer with a financial institution.
  • Mobile phones are vital to their livelihood, yet mobile proximity payments have not fully caught on with them. Half of the panel uses their phone at point-of-sale terminals that accept mobile payments; one panelist mentioned the rewards that he receives from his mobile wallet as driving his mobile payment usage. A majority expressed enthusiasm about mobile order-ahead functionality and use it whenever it's available. However, the availability of mobile payments does not drive decisions to shop at specific stores. All use mobile phones for comparison shopping, oftentimes in a physical store.

A key takeaway from synthesizing all of this information is that it's not just mobile phones that pose a major threat to paying with plastic—it's also metal cards. They certainly seem to appeal to the millennials that I heard on stage and drive loyalty from a usage perspective. And while I don't have data to back up this claim, I do think this metal phenomenon spans generations, as I have had people of all ages show off their metal cards to me. Cards as a form factor are here to stay, but could plastic (especially for credit cards) be on its way out?

Photo of Douglas King By Douglas A. King, payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed

April 23, 2018 in banks and banking, cards, debit cards, mobile banking | Permalink

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March 26, 2018


Convenience Always Wins, In One Form or Another

My colleagues and I often write about the frustration that security professionals have that consumer convenience will almost always win over the adoption of more secure practices. We've seen this over the decades with poor password and PIN management and the often lackadaisical approach consumers take to keeping their payment devices safe and secure. This post will take a slightly different tack—it will explore the influence convenience has on the payment card issuance strategy of U.S. financial institutions (FI) and how convenience always seems to win, though sometimes in unexpected ways.

When the various mobile pay wallets were being launched, many observers speculated that they might be the beginning of the end for plastic payment cards. Some, presuming that mobile was a more convenient way to pay, opined that the day would come when FIs would have no reason to continue issuing cards since everyone was going to be using their phones. Although adoption has been increasing, the reality is that mobile payments at the point of sale have been slow to gain traction. Recently released results of a survey of FIs in seven of the Federal Reserve Bank districts revealed that 75 percent of respondents thought it would be at least three years before consumer adoption rates of mobile payments would exceed 50 percent; 40 percent said it would take five years or longer. Consumer surveys consistently indicate that consumers aren't adopting mobile payments because they find their plastic payment card more convenient. So for mobile devices, convenience still has a ways to go.

Some financial-institution-owned ATM operators, continuing efforts to provide alternatives to plastic cards, have recently begun supporting cardless ATM transactions. With this service, you use your FI's mobile banking application to set up or stage an ATM withdrawal, identifying the account and amount to be dispensed. The details of the various technologies differ, but they all work like this: you go to the FI's ATM, select the cardless ATM function, and use a smartphone to either scan a QR bar code or enter a one-time transaction code. (Sometimes you may have to use a PIN.) Nice and convenient! And you don't have to worry about damaged or forgotten cards, or getting your card skimmed. We'll have to wait to see how consumers react to this feature's convenience.

Some FIs currently issue, or plan to issue, dual interface cards when it's time for customers to replace their existing chip card. While costlier to the FI, the new cards include a contactless feature that allows an NFC-enabled terminal such as an ATM or point-of-service device to read the data on the chip when you pass the card within a couple of inches of the reader. Contactless transactions, which are quite popular in Canada and Europe and greatly desired by mass transit systems in the United States, are faster. And we all know that faster means more convenience—right? Like cardless ATM transactions, contactless offers some security benefits. But merchant terminal acceptance remains a concern, just as it has been for the various pay wallet applications.

So it seems that convenience comes in different forms, and it appears that many FIs are betting that, like currency and checks, the plastic payment card is going to be around for quite some time. Perhaps that is the best strategy: offer a wide range of options and let the customers decide for themselves which are the most convenient.

Photo of David Lott By David Lott, a payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed

March 26, 2018 in cards, debit cards, mobile banking, mobile payments | Permalink

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March 19, 2018


Mobile Banking and Payments' Weakest Link: Me

What's the biggest hole in mobile banking security? As my colleague Dave Lott reported in January, bankers say it's consumers' lack of protective behavior when using mobile devices. That means you and me.

In response, financial institutions (FI) have implemented controls including inactivity timeouts and multifactor authentication, as noted in Mobile Banking and Payment Practices of U.S. Financial Institutions, which reported the findings of a 2016 Federal Reserve survey.

Baking these controls into mobile apps makes sense because research on consumer behavior suggests that expecting consumers to independently take steps to protect their accounts and data is not realistic. Take as one example: I co-wrote a paper with Joanna Stavins for the Boston Fed reporting the results of our investigation into consumers' responses to the massive Target data breach. We found that while consumers do react to reports of fraud, their reactions can be short-lived. In addition, consumers' opinions may change, but their behavior may not. In other words, considerations aside from security could take priority. (See also a report on the 2012 South Carolina Department of Revenue breach.)

Debit and credit card data for 40 million cards used in Target stores were stolen in late 2013. The breach was widely reported in the news media and caused many financial institutions to reissue cards. Because it was primarily a debit card breach, one might reasonably expect consumers to take a jaundiced view of debit cards after the breach.

And, indeed, that was the case. The Survey of Consumer Payment Choice was in the field at the time of the Target breach. Some consumers answered questions about the security of debit cards before the breach became public. Others answered after.

Consumers who rated card security after the breach rated debit cards more poorly relative to the average rating of the other payment instruments—cash, paper checks, ACH methods, prepaid cards, and credit cards. So in that sense, they reacted to the news.

One year later, consumers in 2014 rated the security of debit cards more poorly both relative to their ratings of other payment instruments and absolutely (that is, a greater percentage of consumers rated debit cards as risky or very risky). In contrast, compared to 2013, the absolute security ratings of cash improved. There was no change in the security ratings of credit cards.

The more important question: Did consumers change their behavior in response to this massive and widely reported data breach? The answer: not according to this survey data. There was no statistically significant change in consumers' method of payment mix in 2014. Debit cards remained the most popular payment instrument among consumers in 2014, accounting for almost one-third of their payments per month.

What does this mean for financial institutions? Realism about my willingness to take action is well placed. You can't count on me.

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

March 19, 2018 in account takeovers, banks and banking, cards, debit cards, identity theft, mobile banking, mobile payments | Permalink

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March 12, 2018


Webinars Discuss Mobile Banking and Payments Survey Results

Earlier this year, I wrote a post highlighting some of the Mobile Banking and Payments Survey results that were consolidated from the seven Federal Reserve districts that conducted the survey: Atlanta, Boston, Cleveland, Dallas, Kansas City, Minneapolis, and Richmond. The 706 responding financial institutions gave us valuable information about their current and planned services as well as security features for their mobile banking and mobile payments products. (You can download a copy of the report from the Boston Fed's website.)

You can get a more detailed review of the survey findings when the Boston Fed's Payment Strategies Group conducts two webinars on March 21 and March 22.

Attendees will learn about:

  • Current developments in mobile financial services
  • Practices, products, and trends related to consumer mobile banking and payment services
  • Financial Institution perspectives on mobile security, concerns, and mitigation tools

There is no charge for the webinars but you must register. To view both webinars, you must register for both. Select a link below, then click the Register button. After you have registered, you will receive a confirmation email with the access information.

REGISTER for Part I: Consumer Mobile Banking, Wednesday, March 21, 2018 at 2 p.m. (EDT)

REGISTER for Part 2: Consumer Mobile Payments, Thursday, March 22, 2018 at 2 p.m. (EDT)

Feel free to share this post with any of your colleagues who may wish to attend. If you have any questions about the webinars, please email elisa.tavilla@bos.frb.org.

Photo of David Lott By David Lott, a payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed

March 12, 2018 in banks and banking, mobile banking, mobile payments | Permalink

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January 8, 2018


Consolidated Mobile Banking and Payments Survey Results Published

In earlier posts, we published highlights of the 2016 Mobile Banking and Payments Survey of Financial Institutions in the Sixth District results as well as a supplement showing the results by financial institution (FI) asset size. The survey was designed to determine the level and type of mobile financial services that FIs offered and to find out what plans FIs had to offer new services.

Six other Federal Reserve Banks also conducted the survey in their districts, and we've combined all the data into a single report. Marianne Crowe and Elisa Tavilla of the Boston Fed's Payment Strategies group led the team that consolidated the data. The report—now available on the Boston Fed's website—addresses mobile banking and payment services from the perspective of the FI. The report offers additional value with its inclusion of a large number of small banks and credit unions (under $500 million in assets), a group from which data are often difficult to obtain.

Consolidated-survey-respondents-by-asset-size

The seven districts participating were Atlanta, Boston, Cleveland, Dallas, Kansas City, Minneapolis, and Richmond. A total of 706 FIs responded.

Here are some of the key learnings from survey responses regarding mobile banking:

  • Retail mobile banking offerings are approaching ubiquity across financial institutions in the United States. Eighty-nine percent of respondents currently offer mobile banking services to consumers, and 97 percent plan to offer these services by 2018.
  • By the end of 2018, 77 percent of bank and 47 percent of credit union respondents will be providing mobile banking services to nonconsumers including commercial and small businesses, government agencies, educational entities, and nonprofits. Commercial and small businesses will be the most prevalent.
  • Among FIs offering and tracking business mobile banking adoption, more than half still have adoption rates of less than 5 percent.
  • The most important mobile banking security concern that respondents cited is the consumer's lack of protective behavior. In response, FIs have implemented a range of mitigating controls. To enhance security and help change consumer behavior, more than 80 percent of respondents support inactivity timeouts and multi-factor authentication (MFA) as well as mobile alerts.

And here are some important findings regarding mobile payments:

  • Implementation of mobile payment services is growing as FIs respond to competitive pressure and industry momentum. In addition to the 24 percent already offering mobile payments, 40 percent plan to do so within two years. However, the current offering level fell substantially short of the expected 57 percent predicted by the responses to the 2014 survey.
  • Mobile wallet implementations are increasing steadily, with Apple Pay as the current leader.
  • Enrollment and usage remain low. Eighty-one percent of the respondents had fewer than 5 percent of their customers enrolled and actively using their mobile payment services.
  • Asset size makes a difference in many areas: larger FIs have greater resources to expend on new services, implementations, and security technologies and controls.
  • Banks and credit unions often differ in approaches and strategies for mobile payments.

We will conduct the survey again this year and are eager to see how the mobile banking and payments landscape has changed. If you have any questions about the survey results, please let us know.

Photo of David Lott By David Lott, a payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed

 

January 8, 2018 in banks and banking, mobile banking, mobile payments, payments study | Permalink

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January 2, 2018


2017 Year-End Review

In December 2013, the Retail Payments Risk Forum began an annual tradition of authoring an end-of-year post highlighting what we consider to be the most significant payment topics or events of the year. We continued that tradition this year, but we changed our platform, instead covering our top events in our Talk About Payments webinar series. Watch a recording of the webinar's presentation.

We encourage you to listen to the webinar, during which we discussed in more detail the following key payment stories of 2017:

  • Fraud schemes
  • Data breaches
  • Chip migration
  • Payments security
  • Same-day ACH–phase II
  • Person-to-person payments
  • Fintech
  • Mobile payments
  • Virtual currency/Distributed ledger

As we begin 2018, we in the Risk Forum look forward to continuing our efforts to mitigate payments risks through industry collaboration and convening. We will also continue to offer our insights using multiple platforms, including this weekly blog and our quarterly webinar series, Talk About Payments. As always, we value your feedback and comments, so do not hesitate to reach out to any of the Risk Forum team members.

Best wishes for a happy, and fraud-free, new year from all of us at the Retail Payments Risk Forum!

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Mary Kepler
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Julius Weyman
Photo of Doug King
Doug King
Photo of David Lott
Dave Lott
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Jessica Washington
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Steven Cordray

 

January 2, 2018 in chip-and-pin, mobile banking, mobile payments | Permalink

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December 11, 2017


Fintechs and the Psychology of Trust

In the 14th century, Chaucer used the word trust to mean "virtual certainty and well-grounded hope." Since then, psychologists have described trust as an essential ingredient for social functioning, which, in turn, affects many economic variables. So how do we define trust in the 21st century, in the age of the internet? In particular, how do fintechs, relative newcomers in the financial services industry and not yet coalesced into an industry, gain the trust of the public? Would they more effectively gain that trust by relying on banks to hold them to certain standards, or by coming together to create their own?

In 2004, social psychologists Hans-Werver Bierhoff and Bernd Vornefeld, in "The Social Psychology of Trust with Applications in the Internet," wrote about trust in relation to technology and systems. They observed that "trust and risk are complementary terms. Risk is generally based on mistrust, whereas trust is associated with less doubts about security." They further explained that trust in technology and systems is based on whether an individual believes the system's security is guaranteed. Psychologically speaking, when companies show customers they care about the security of their information, customers have increased confidence in the company and the overall system. Understanding this provides insight into the development of certification authorities, third-party verification processes, and standardized levels of security.

To understand how fintechs might gain the trust of consumers and the financial industry, it's worth taking a step back, to look at how traditional financial services, before the internet and fintechs, used principles similar to those outlined by Bierhoff and Vornefeld. Take, for example, the following list of efforts the industry has taken to garner trust (this list is by no means comprehensive):

  • FDIC-insured depository institutions must advertise FDIC membership.
  • All financial institutions (FI) must undergo regulator supervision and examination.
  • FIs must get U.S. Patriot Act Certifications from any foreign banks that they maintain a correspondent account with.
  • Organizations with payment card data must comply with the PCI Standards Council's security standards and audit requirements.
  • Organizations processing ACH can have NACHA membership but must follow NACHA Operating Rules and undergo annual audits and risk assessments.
  • The Accredited Standards Committee X9 Financial Industry Standards Inc. has developed international as well as domestic standards for FIs.
  • The International Organization for Standardization has also developed international standards for financial services.
  • The American National Standards Institute provides membership options and develops standards and accreditation for financial services.

FIs have often been an integral part of the standards creation process. To the extent that these standards and requirements also affect fintechs, shouldn't fintechs also have a seat at the table? In addition, regulatory agencies have given us an additional overarching "virtual certainty' that FIs are adhering to the agreed-upon standards. Who will provide that oversight—and virtual certainty—for the fintechs?

The issue of privacy further adds to the confusion surrounding fintechs. The Gramm-Leach-Bliley Act (GLBA) of 1999 requires companies defined under the law as "financial institutions" to ensure the security and confidentiality of customer information. Further, the Federal Trade Commission's (FTC) Safeguards Rule requires FIs to have measures in place to keep customer information secure, and to comply with certain limitations on disclosure of nonpublic personal information. It's not clear that the GLBA's and FTC's definition of "financial institution" includes fintechs.

So, how will new entrants to financial services build trust? Will fintechs adopt the same standards, certifications, and verifications so they can influence assessments of risk versus security? What oversight will provide overarching virtual certainty that new systems are secure? And in the case of privacy, will fintechs identify themselves as FIs under the law? Or will it be up to a fintech's partnering financial institution to supervise compliance? As fintechs continue to blaze new trails, we will need clear directives as to which existing trust guarantees (certifications, verifications, and standards) apply to them and who will enforce those expectations.

As Bierhoff and Vornefeld conclude, "it is an empirical question how the balance between trust and distrust relates to successful use of the Internet." Although Chaucer was born a little too soon for internet access, he might agree.

Photo of Jessica Washington  By Jessica Washington, AAP, payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed

 

 

December 11, 2017 in banks and banking, financial services, innovation, mobile banking | Permalink

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December 4, 2017


What Will the Fintech Regulatory Environment Look Like in 2018?

As we prepare to put a bow on 2017 and begin to look forward to 2018, I can’t help but observe that fintech was one of the bigger topics in the banking and payments communities this year. (Be sure to sign up for our December 14 Talk About Payments webinar to see if fintech made our top 10 newsworthy list for 2017.) Many industry observers would likely agree that it will continue to garner a lot of attention in the upcoming year, as financial institutions (FI) will continue to partner with fintech companies to deliver client-friendly solutions.

No doubt, fintech solutions are making our daily lives easier, whether they are helping us deposit a check with our mobile phones or activating fund transfers with a voice command in a mobile banking application. But at what cost to consumers? To date, the direct costs, such as fees, have been minimal. However, are there hidden costs such as the loss of data privacy that could potentially have negative consequences for not only consumers but also FIs? And what, from a regulatory perspective, is being done to mitigate these potential negative consequences?

Early in the year, there was a splash in the regulatory environment for fintechs. The Office of the Comptroller of the Currency (OCC) began offering limited-purpose bank charters to fintech companies. This charter became the subject of heated debates and discussions—and even lawsuits, by the Conference of State Bank Supervisors and the New York Department of Financial Services. To date, the OCC has not formally begun accepting applications for this charter.

So where will the fintech regulatory environment take us in 2018?

Will it continue to be up to the FIs to perform due diligence on fintech companies, much as they do for third-party service providers? Will regulatory agencies offer FIs additional guidance or due diligence frameworks for fintechs, over and above what they do for traditional third-party service providers? Will one of the regulatory agencies decide that the role of fintech companies in financial services is becoming so important that the companies should be subject to examinations like financial institutions get? Finally, will U.S. regulatory agencies create sandboxes to allow fintechs and FIs to launch products on a limited scale, such as has taken place in the United Kingdom and Australia?

The Risk Forum will continue to closely monitor the fintech industry in 2018. We would enjoy hearing from our readers about how they see the regulatory environment for fintechs evolving.

Photo of Douglas King By Douglas A. King, payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed

 

 

December 4, 2017 in banks and banking, financial services, innovation, mobile banking, regulations, regulators, third-party service provider | Permalink

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November 6, 2017


My Fingertips, My Data

I am not a user of old-style financial services. While I remember learning how to balance a checkbook, I never had to do it, since I never had checks. Recently, my financial adviser suggested several mobile applications that could help me manage my finances in a way that made sense to me. I researched them, evaluated a few, and decided which one I thought would be the best. I'm always excited to try new apps, hopeful that this one will be the one that will simplify my life.

As I clicked through the process of opening an account with my new financial management app, I entered the name of my financial institution (FI), where I have several accounts: checking, savings, money market, and line of credit. The app identified my credit union (which has over $5 billion in assets and ranks among the top 25) and entered my online banking credentials—and then I was brought up short. The app was asking for my routing and account number. As I said, I don't own any checks and I don't know how to find this information on my credit union's mobile app. (I do know where to find it using an internet browser.) I stopped creating my account at this point and have yet to finish it up.

I later discovered that if I banked with one of the larger banks, for which custom APIs have been negotiated, I would not have been asked for a routing and account number. I would have simply entered my online login details, and I'd be managing my finances with my fingertips already. I started digging into why my credit union doesn't have full interoperability.

In the United States, banking is a closed system. APIs are built as custom integrations, with each financial institution having to consent for third parties to access customer data. However, many FIs haven't been approached, or integration is bottlenecked at the core processor level. It is bottlenecked because if they deny access to customer data (which some do), the FI has no choice in the matter.

New Consumer Financial Protection Bureau (CFPB) guidance on data sharing and aggregation addresses the accessibility and ownership issue. The upshot of the CFPB's guidance is that consumers own their financial data and FIs should allow sharing of the data with third-party companies. But should doesn't equal will or can.

The CFPB guidance, though not a rule, is in the same vein as the European Union's PSD2 (or Directive on Payments Services II) regulation, whereby FIs must provide access to account information with the consumer's permission. This platform, which represents an open banking approach, standardizes APIs that banks can proactively make available to third parties for plug-and-play development.

While open banking is a regulatory requirement in Europe, market competition is driving North American banks to be very interested in implementing open banking here. An Accenture survey recently found that 60 percent of North American banks already have an open banking strategy, compared to 74 percent of European banks.

It is no surprise that bankers are becoming more comfortable with the shift-in-ownership concept. FIs have been increasingly sharing their customers' data with third parties. Consumer data are what fuel organizations like credit agencies, payment fraud databases, identity and authentication solutions, and anomaly detection services, to name a few. As these ownership theories change, we will also need to see new approaches to security. What are your thoughts about open banking?

Photo of Jessica Washington  By Jessica Washington, AAP, payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed

 

 

November 6, 2017 in banks and banking, data security, emerging payments, innovation, mobile banking | Permalink

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