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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April 3, 2017
Governance Down Under
When I was a product manager responsible for faster ACH, I had a ringside seat to the lengthy maneuvering required to garner sufficient votes to mandate same-day ACH after the first attempt failed. We can anticipate similar maneuvering as we continue making fundamental improvements to payments, including the various initiatives under way around faster payments.
All of this harkens back to a compelling conference presentation that treasury representatives of a very large U.S. retailer gave several years ago. That presentation focused on the potential benefits of adopting a comprehensive, self-regulating governance model like Australia's. The Australian Payments Clearing Association (APCA) offers key payment stakeholders a seat at the table, thus balancing competing interests among parties in the payment chain.
I agree that the APCA could offer a template for any governance model being contemplated in the United States.
The APCA, to paraphrase, characterizes itself as being responsible for managing and developing regulations, procedures, policies, and standards governing payments clearing and settlement. Standing with and behind them is the authority conferred by the Reserve Bank of Australia (RBA), that country's central bank.
The 100-plus APCA members include a broad cross section of financial institutions, major retailers, and payments providers. The APCA board comprises an independent chair, the chief executive officer, two additional independent directors, eight nonvoting appointed or elected directors, and an RBA representative.
The expected completion later this year of a new payments system will be one of the APCA's more noteworthy achievements. The New Payments Platform, or NPP, will offer a low-value, faster payments service. The APCA partnered with 12 financial institutions to fund the NPP's development costs.
The APCA is divided among the following operational areas:
- Direct debit/credit—is equivalent to ACH in the United States
- Wire transfers
- Cash—sets rules for the exchange and distribution of cash among participating financial institutions
- Card issuers/acquirers—sponsors a forum for collaboration
- COIN (Community of Interest Network)—offers a shared infrastructure supporting connectivity for payments such as checks, direct debit and credit, cards, bill pay, and others
Here in the United States, the Federal Reserve has already created a couple of agencies with some similar features: a task force on faster payments and another task force focused more broadly on secure payments for legacy and emerging payments. Both task forces include broad representation from financial institutions, payment providers, businesses, consumer groups, regulators, law enforcement, and others. Perhaps the biggest difference between the APCA and these two work groups is the ad-hoc, limited duration of the Fed groups and their mandate, which is limited to an advisory role. But there are some other activities that the APCA handles that here in the United States are handled by various disparate entities, a situation that hampers coordinated action.
What are your views on what, if anything, we should do to enhance payments governance in the United States?
By Steven Cordray, payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed
January 30, 2017
Pssst…Have You Heard about PSD2?
No, I'm not talking about the latest next-generation video gaming console. I am referring to the revised Directive on Payment Services (PSD2) that the European Parliament adopted in October 2015 and that will serve as the legal foundation for a single market for European Union (EU) payments. The original PSD was adopted in 2007 but, according to official statements, the Parliament found that an update was necessary to incorporate new types of payment services, improve consumer protection, strengthen payment transaction security, and increase competitiveness with an expected result of lower consumer fees in the payments processing market. PSD2 applies only to digital payments and must be in force in all EU countries by January 13, 2018.
The directive and subsequent implementation rules that the European Banking Authority* is developing make a number of major changes in the European banking landscape, including:
- Opens up the regulated financial services system to merchants and processors who might initiate payments on their consumer customer's behalf as well as data aggregator firms. In particular, PSD2 will apply to any financial institutions already operating within the scope of the PSD but will also apply to third parties such as operators of e-commerce marketplaces, gift card and loyalty plans, bill payment service providers, public communication networks, account access services, mobile wallets, and those who receive payment by direct debit.
- Requires financial institutions, upon the request of their customers, to allow these approved nonbank, third parties significant, but not unlimited, access to the customer's account and transaction data through APIs (application program interfaces). Many financial institutions see having to turn over customer data to potential competitors as a significant threat to the retention of their customer's business as well as concerns with data security.
- Sets out two-factor customer authentication as an absolute minimum, with additional security such as one-time passwords required for higher-value transactions. The card issuer must actively authenticate all transactions above 10 euros. Critics of these provisions point out that the criminals will have fixed transaction amounts and authentication methodology information to modify their attacks.
- Supplementing card interchange limits imposed in December 2015, prevents merchants from adding surcharges to payment card transactions. Under the original directive, each country established rules regarding surcharging on card payments. It has been a common practice of European merchants to levy a surcharge on payment card transactions to offset the interchange fee paid to issuers.
While such a comprehensive single package of regulations is unlikely to occur in the United States, various flavors of these items have been and continue to be discussed. Do you favor such types of regulation here in the United States? I suspect the answer depends on your role in the payments ecosystem. I am interested in hearing from you.
By David Lott, a payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed
* Final rules are expected to be published in January 2017.
October 6, 2014
Starting Off on the Right Note with Mobile Enrollment
In Rogers and Hammerstein’s Sound of Music, the classic song “Do-Re-Mi” begins “Let's start at the very beginning / A very good place to start...” Such a suggestion is essential in ensuring that the person enrolling in a payments system is, in fact, who he or she claims to be. The USA Patriot Act requires financial institutions (FIs) to develop a formal customer identification program that validates the customer when the account is opened. This program must specify the documentation that is used for authentication.
However, once the account is open, FIs have greater latitude in their procedures for identifying customers when the FIs handle account access requests, such as when a customer requests a change of address or enrolls in a third-party program that uses a card that the FI has issued to the customer. At that stage, it’s up to an FI’s own risk-management policies as to what documentation to require.
This situation can be risky. For example, let’s look at what happens when a customer wants to add a payment card to a mobile wallet that a third party operates. When the customer adds the card—enrolls with the third party—how can the FI that issued the card know that not only the payment card being added but also the mobile phone itself belongs to the right individual? How can the issuer efficiently and effectively ensure that the payment card information being loaded on a phone hasn’t been stolen? Adding any sort of verification process increases the friction of the experience and can result in the legitimate user abandoning the process.
Most mobile wallet operators use several techniques to validate that both the mobile phone with the wallet and the payment card belong to the rightful customer. (These operators send a request to the issuing FI as part of their enrollment process.) Some FIs require the operator to have customers submit their payment card information along with their cards’ security code and additional data, such as the last four digits of the social security number. Others may require just the payment card number, expiration date, and card security code, although such a minimal requirement offers little protection against a stolen card being added to a criminal’s phone. Still others require the customer to submit a photo of the payment card taken with their phone to verify possession of the card. If the issuer can obtain some of the phone’s device information, it can increase the level of confidence that the authorized cardholder is using their phone.
Regardless of what process is used, having strong identification controls during the initial enrollment step is essential to a sound risk management program.
By David Lott, a payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed
February 21, 2012
Security in the mobile wallet: Is it good enough yet?
For years we've heard about the future mobile wallet—using the phone to carry payment cards, loyalty rewards, bank account access, and identification instead of a traditional leather wallet. The wallet will also be able to hold electronic receipts for purchases made using the phone at a merchant's point of sale. 2012 portends to be the year of reckoning, with several trials scheduled for rollout. If your wallet resembles the one in the Seinfeld episode about George Costanza's exploding wallet, an electronic wallet contained in your mobile phone is a welcome prospect.
But the truth is that while recent developments in the application of near field communication (NFC) technology for mobile wallet trials have come faster than most industry expectations, a variety of hurdles are likely to waylay widespread adoption in the near term; namely, hurdles relating to security.
Different security deployments for mobile wallets may postpone widespread adoption
While, as noted in our 2011 mobile industry position paper, firms engaged in rolling out new mobile payments services have agreed that successful near-term adoption will rely on common standards for security and interoperability, free market dynamics dictate that all players in this new mobile ecosystem will not necessarily work together, motivated instead by a responsibility to create shareholder value. As a result, current industry discussions show that the service providers—namely, the mobile operators and the financial institutions partnering in these new business models—are considering different security deployments.
A recent article by Dan Balaban in the February 13 issue of NFC Times summarizes the situation well:
"While mobile operators continue to push for the SIM card to become the de facto secure element in NFC phones, some banks and other service providers still are seeking alternatives. The products that continue to draw the attention of a number of banks include microSDs, as well as iPhone attachments—the latter using either microSDs or embedded secure chips as secure element. Of course, there are no strong signals yet that microSDs, either as part of phone attachments or working in full NFC handsets, will challenge SIM cards or embedded chips as the primary secure element in contactless-mobile phones. At present, the microSDs generally carry higher costs, face logistical problems and still lack standards."
It stands to reason that a lack of standards in security can threaten consumer trust when something goes wrong, as we saw this week with the Google Wallet, the first U.S. mobile wallet deployment to date. Google has stopped activating new prepaid accounts in its mobile wallet after discovering a security flaw that allows unauthorized users to access the prepaid account without requiring a PIN. While the flaw is related more to the wallet application than to the security technology in the chip used to store data in the handset, the negative press from the event may impact consumer adoption for other mobile wallet trials scheduled to rollout in 2012.
Security standards for mobile apps may lag development cycle
According to ViaForensics, the lack of standards for mobile application security may challenge application testing methodologies. In fact, a February 13 post on ViaForensics' blog asserts that "...the speedy mobile development cycle and this lack of experience in the platforms is causing coders to throw all of those secure development principles the industry has fought for over the past five years right out the window when it comes to mobile apps..." While attention to security for mobile applications is evolving, ViaForensics's recent study found that financial services applications had the largest percentage of apps that passed their security tests.
Regulatory considerations for financial institutions
In most developed countries, such as the United States, mobile financial services are deployed in bank-led service models, partnering with the mobile telecom operators. A recent article published by the Federal Deposit Insurance Corporation, "Mobile Banking: Rewards and Risks," aptly notes that any financial service provider that engages a third-party service provider such as a telecom firm is expected to conduct appropriate due diligence to ensure they are working with reliable and reputable vendors to develop secure applications. Regulators will look to financial institutions to make sure their mobile services partners are fulfilling meeting the terms of third-party agreements with respect to application and device security.
Widespread adoption may occur gradually
While stakeholders develop common standards for device and application access, and data security, it may take a while for mobile wallets to become commonplace. Reported security mishaps may be beneficial, in the end, if they serve to temper consumer adoption while financial institutions and their mobile services partners work to identify and manage potential security issues.
By Cynthia Merritt, assistant director of the Retail Payments Risk Forum
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