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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 19, 2021

Can the USPS Improve Financial Inclusion?

During the nationwide discussion regarding the distribution of the personal economic impact (stimulus) payments, the subject of having the United States Postal Service (USPS) offer basic banking services again surfaced—an idea that has been raised numerous times in the recent pastOff-site link. The premise is that the USPS, with its 34,000-plus retail locations, could provide a convenient and low-cost financial services channel for the estimated 7 million unbankedOff-site link and 24 million underbankedOff-site link households.

As I began to research this issue, I was surprised to learn that the USPS had provided savings deposit accounts in the past. In 1910, Congress created the Postal Saving System, which began operating on January 1, 1911. The program was designed to get money being held by families into circulation. It found particular favor with new immigrants who were familiar with postal office savings programs in their native countries. An individual could open a savings account with a minimum of $1 (equivalent to approximately $27 today), later raised in 1956 to $5. However, to help customers save lower amounts, the program offered a postal savings card. Customers would purchase postage savings stamps in 10 cent increments and affix them to the card. Once the customers accumulated stamps worth at least $1, they could deposit the card or redeem it for cash.

Initially, the maximum account balance was $500, but that was raised to $1,000 in 1916 and then to $2,500 in 1918. And until May 1916, the deposit limit was $100 per month. Interest was paid on the account at the rate of 2 percent. The USPS deposited the funds in local banks and earned 2.5 percent. The post office used the difference to cover the cost of the operating the program. In her book How the Other Half Banks, author Mehrsa Baradaran writes that the postal savings program "was the most successful experiment in financial inclusion in the United States. More effective than any other philanthropic or mutual effort to bank the poor, postal banking brought millions of new immigrants and rural dwellers into the U.S. banking system all at once. One of the central aims of the postal banks was also the most difficult to measure: teaching habits of thrift and saving to the poor."

At its peak during World War II, the program's deposits reached $3.4 billion ($40.6 billion today adjusted for inflation) with more than four million depositors. As interest rates paid by financial institutions after the war exceeded the rate of the USPS savings program, the program's popularity began to decline. It officially ended on July 1, 1967, with about $50 million in unclaimed deposits that was later turned over to states for holding and distribution under escheatment rules.

Today, Japan and a number of EU countries have successful postal banking programs. On the other side of the coin, Canada stopped its century-old postal banking program in 1969.

In 2014, the USPS Office of Inspector General issued a white paper, "Providing Non-Bank Financial Services for the Underserved Adobe PDF file formatOff-site link," that identified specific services that the USPS could partner with a financial institution on to offer reloadable prepaid cards, domestic and international money transfers, and possibly small dollar loans. The USPS today issues domestic and international postal money orders and cashes postal money orders and U.S. Treasury checks with certain limitations.

So what does the USPS management have to say about offering banking services? This 2016 statement still appears on their website.

The Postal Service's mission is to provide the American public with trusted, affordable, universal mail service. Our core function is delivery, not banking.

To the extent our research concludes that we can legally provide additional services at a profit and without distracting from our core business, we would consider these. However, public policy and regulatory discussions must be addressed before the Postal Service invests in an area outside our core function.

Advocates for the USPS offering financial services argue that providing these basic banking services could be a win-win situation for unbanked/underserved consumers and also bring in additional revenue for the agency. An Atlanta Fed white paper (September 2020) titled "Digital Payments and the Path to Financial Inclusion" lists public banking as a potential option for increasing financial inclusion. What do you think?

January 11, 2021

A Penny for Your Thoughts

Happy 2021 to all our readers! Our Take On Payments posts in 2020 frequently dealt with two aspects of currency, both COVID-related: the hygienic safety of handling currency and the coin circulation disruption. My colleagues also addressed these issues during our year-end "Payments In Review" webinar video file.

As I've researched the coin circulation issue, I've frequently visited the website of the U.S. MintOff-site link, since it's the part of the U.S. Treasury responsible for the production of circulating and commemorative coins as well as precious metal bullion coins (gold, silver, platinum, and palladium). The Mint is also the custodian for the country's gold and silver reserves.

Can you name all the Mint facilities currently operating? Most people I have asked can easily name Philadelphia, Denver, and San Francisco. Would you have included West Point, New York? Better known for the nearby military academy, West Point has a facility that was established in 1938 as a depository for bullion. It began producing pennies in 1973 and became an official Mint facility in 1988. Today, the "W" mint mark can be found on circulating quarters.

What about the conversation that arises from time to time on discontinuing the penny? Canada stopped producing its penny in 2012 and adopted a round-up/round-down phasing-out program in February 2013, when the Royal Canadian Mint stopped distributing the penny. The Canadian government's reasons for the action are similar to arguments made by U.S. penny opponents: pennies are excessively costly to produce relative to their face value, consumers have increasingly hoarded them, they are said to be bad for the environment, and they impose handling costs on retailers, financial institutions, and the economy in general.

According to the Mint's 2019 Annual Report, it cost 1.99 cents to produce and distribute a penny that year. Often overlooked in the penny discussion is the fact that the 2019 cost of producing and distributing a nickel at 7.62 cents also exceeded its face value. It will be interesting to see how workplace modifications in response to the pandemic affected these costs. Overall, however, the Mint makes a profit in its overall operations due to seigniorage, which is the difference between the face value and the cost of producing circulating coinage. In 2019, the Mint transferred $540 million to the Treasury General Fund because of seigniorage.

You can read about all this and more on the Mint website. You can also take a tour of the facilities. While physical tours of production facilities of the Mint are currently closed due to COVID restrictions, the website offers virtual tours of the Philadelphia Mint and the coin production at the San Francisco Mint.

I hope you found this information interesting and that it made cents (pun intended). The Federal Reserve continues to monitor consumer cash usage during the COVID pandemic through various research channels and will be reporting on updated findings later this year. As to the 1¢ piece, a penny for your thoughts!

January 4, 2021

Two Sides of the Same Story: Electronic P2P Growth in the 2010s

My colleague, T, got married last month. To celebrate, our group at the Atlanta Fed offered best wishes over a video chat and chipped in on a gift. Dispersed to home offices in Georgia, Alabama, Tennessee, and Massachusetts, here's how we anted up:

  • 62 percent used a P2P payment app
  • 25 percent paid with a paper check
  • 13 percent paid with cash

The two-thirds of us who chose an electronic way to pay seem to be aligned with the zeitgeist. For the third quarter of 2020, various P2P payment apps reported strong growth in payment volume. These results could be due to recommendations to social distance that have us worried about getting close enough to a payee to hand over the payment.

Even before COVID-19, however, P2P services were taking off in the United States. During the latter half of the 2010s, Fed survey data show the growth of electronic P2P from the perspectives of both the financial services side and the consumer side of payments execution.

First, the financial services side. According to the Federal Reserve Payments StudyOff-site link (FRPS), the number of noncash payments through person-to-person and money transfer (P2P&MT) services more than doubled from 2015 to 2018, increasing from 397 million to 841 million (25 percent year-over-year growth). Most of the growth came from payments initiated from websites and apps on mobile devices. Mobile P2P, for example, was up 275 percent over the three-year period. This category aggregates data from the various P2P services to give a picture of all U.S.-domiciled P2P and MT transfers handled by the covered providers but overlooks similar transactions internal to a depository institution or not made on a named P2P or MT system.

chart 01 of 02: p2p and money transfer payments by channel in millions

When we think of P2P, splitting the bill at a restaurant comes to mind. The average value of these payments reported in the FRPS, however, tells a different story. The average value of P2P payments drifted down from $446 in 2012 to $349 in 2015 to $246 in 2018—still quite high for a bite to eat. Other uses, such as providing financial support to a family member, repaying a roommate for a portion of the rent, or paying a household employee, are likely important, although smaller-value payments are increasing.

Second, the consumer side. Data from the Survey of Consumer Payment Choice (SCPC) show the whole wallet—that is, cash, paper check, and money order as well as card and digital payments from an account. Consumers also report multiple cards and accounts from (potentially) multiple providers, giving context for payment choice and, like the FRPS, aggregating information from multiple industry sources. As recently as 2017, the SCPC found that 71 percent of consumers' P2P payments were made with a paper payment instrument (cash, check, or money order). By 2019, the share of paper P2P had dropped to 55 percent. One-quarter of P2P payments were comprised of digital payments from an account, which are initiated through online banking by providing a routing and account number to the payee, or through an app such as PayPal, Venmo, or Zelle (which themselves may be executed by a card, ACH payment, or balance stored in a digital wallet). The increase in digital payments from an account and the sharp decline in paper payments reinforces what we've already seen from the financial services providers.

chart 02 of 02: p2p payments by consumers percentage shares by payment instrument

To learn more about these data on your own, check out the detailed data releaseOff-site link of the 2019 Federal Reserve Payments Study or play around with the interactive charts to the Survey of Consumer Payment Choice.

December 14, 2020

Fighting Financial Crimes outside Financial Institutions

Take On Payments is taking a short break and will return on January 4 in the new year.

You don't have to know anything about money laundering to know that it doesn't involve someone running a bundle of dirty cash through the washing machine, or even laundromats more generally. Well, it does, but only in the metaphorical sense. Money laundering refers to the act of legitimizing ill-gotten gains—that is, "cleaning" it to hide illegal activity. Anyway, we've touched on the topic of money laundering a few times in this blog, mainly focusing on how financial institutions might identify and report individuals acting as money mules. Today, I'm going to look at the types of businesses that are at risk of being used by money launderers.

Desmond Alston, my colleague in the Risk and Compliance Division at the Federal Reserve Bank of Atlanta and a Certified Anti-Money-Laundering Specialist, or CAMS, shares his expertise. Desmond explains that money laundering is a three- step process:

  1. Placement: Dirty money is placed into a legitimate financial system.
  2. Layering: The source of the money is concealed through a series of transactions, or layers of movement.
  3. Integration: Money is returned to the criminal from what appears to be a reputable source.

Any business that provides the capacity for this sort of manipulation—not just depository financial institutions—can be a conduit for money laundering. Desmond points out:

  • "Insurance companies can be conduits. A launderer can purchase a life insurance policy with a payment of criminally derived funds and then cancel the policy before a penalty would be applied or absorb a small penalty as a cost of the money laundering scheme. The resulting refund would be from a reputable source.
  • "At a casino, a launderer could use criminal proceeds to buy chips, hang around for a while, eat a hamburger, gamble a bit—or not at all—and then cash out."

That's why it makes sense for organizations in many industries—art and antiquities dealers, auto dealerships, travel agencies, and charitable organizations as well as financial businesses like foreign exchange, mortgage lenders, and money service businesses—to make sure staff members are knowledgeable about money laundering. If these sorts of entities fail to file suspicious activity reports, or SARs, for cash transactions that exceed reporting minimums, they are complicit in the crime of money laundering.

Nonfinancial businesses can protect themselves by employing the five components of a solid anti-money-laundering (AML) and compliance program: (1) written policies, procedures, and internal controls; (2) supervision by a designated compliance officer; (3) training and development for staff at all levels; (4) customer due diligence; and (5) independent audit of the AML program.

It's probable, however, that laundromats have no worries—they just don't have the cash flow. While early 20th-century mobsters did indeed intermingle cash from legitimate businesses like laundromats with cash from bootlegging and other crimes, they rapidly moved on to international accounts. The term "money laundering" was first widely used by journalists in connection with the financing of the Watergate burglaries in the early 1970s, when laundromats were not part of the picture.

Thanks, Desmond, for this helpful information.