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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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September 23, 2019

Designing Disclosures to Be Read

Have you ever wondered if consumers actually look at disclosures for payment services? And if they do look at them, how much time do you think they spend reading them? If the average adult reads around 250 words per minute and a disclosure page contains 1,000 words—likely a low estimate—then a consumer would spend four minutes on the page before clicking accept or reject. I am confident that a more realistic estimate of time consumers spend on these pages falls far short of the time required to read the legally required consumer protection information. How many of us just click on the "I Accept" button without reading the disclosure? Maybe it's time to come up with a better way to disclose.

I believe that disclosures are one of the more dreaded elements in designing, launching, and managing financial services. If you haven't experienced the dread first hand, you can find evidence of it in the countless comment letters submitted by payments stakeholders and posted to the Federal Register when a proposed rule could affect disclosure terms. The work and expense of delivering disclosures at precisely the time required by law are completely wasted when consumers fail to read them.

The goal of disclosures is to educate consumers on a product's terms and conditions, to define their responsibilities, and to ultimately protect them from financial harm or surprises. With this information, consumers can make informed decisions. We should hope consumers comprehend and retain the critical information provided.

Opportunities exist to present important consumer protection information in ways that are far more easily digestible than a thousand-word disclosure in a four-point font. For instance, a gamification model could ask the consumer direct questions related to fees in pop-up windows with animated visual representations of the scenarios. You can brainstorm to come up with messages, jotting down quick ideas—for example, "You chose instant transfer, the fee is $1, Accept or Decline." Or, "Help us monitor your transactions daily, instant transfers will be $0, Accept or Decline." A large font and short words can quickly articulate the key points and big risks. Moreover, building the disclosure logic into the technology better protects the consumer.

Here's some good news—you now have the support of the Consumer Financial Protection Bureau (CFPB) to test your innovative solutions in making disclosures likelier to achieve their aim. The CFPB's Office of Innovation recently issued new policies to encourage innovation. For example, the office instituted a trial disclosure program and has committed to granting or denying applications for these trials within 60 days of submission. Accepted applicants will have up to two years to test their disclosures. They will also have access to state and global regulators through the CFPB's affiliation with the Federal Financial Institutions Examination Council, the Global Financial Innovation Network, and the newly formed American Consumer Financial Innovation Network.

Applicants and disclosures need not be company- or product-specific, although that is an option. Service providers, trade associations, consumer groups, or other third parties may also use the trial application program. Group applications could help spread trial disclosure development costs such that smaller entities would be able to afford to participate in the program. Such intention has been evidenced in the CFPB's Office of Innovation's first "No-Action Letter," issued to more than 1,600 HUD housing counseling agencies, stating that it will not take enforcement action with agencies that enter into "certain fee-for-service arrangements with lenders for pre-purchase housing counseling services."

Have you considered redesigning a payment product or service disclosure that consumers will be likelier to read? Apply to test it , and good luck!

August 19, 2019

Why Should You Care about PSD2?

The revised Payment Services Directive (PSD2) is major payments legislation in the European Union (EU) that is intended to provide consumers increased competition, innovation, and security in banking and payment services. PSD2 specifications were released by the European Banking Authority in November 2017 and requires all companies in the EU to be in compliance by September 14, 2019. Earlier this year, the European Banking Authority had refused a request by numerous stakeholders in the payments industry for a blanket delay of the regulation, citing a lack of legal authority to do so, although it announced it would permit local regulatory authorities to extend compliance deadlines a "limited additional time." In the United Kingdom, however, the Financial Conduct Authority (FCA) announced on August 7 that it was deferring general enforcement of the PSD2 authentication provisions until March 2021, and allowing the industry an additional six months beyond that to develop more advanced forms of authentication. The Central Bank of Ireland has also granted an extension that is expected to be similar to the FCA's, but one has not been announced as of this writing.

The PSD2 has two major requirements: offer open banking and strong customer authentication (SCA). With open banking, consumers can authorize financial services providers to access and use their financial data that another financial institution is holding. (Application programming interfaces, or APIs, allow that access.) The FCA had mandated that open banking for U.K. banks be in place by early 2018 while the rest of the EU kept the open banking compliance deadline the same as that for SCA compliance. While open banking represents a major change in the EU's financial services landscape, the rest of this post focuses on the PSD2's strong customer authentication requirements.

Generally, PSD2 requires financial service providers to implement multi-factor authentication for in-person and remote financial transactions performed through any payment channel. As we have discussed before in this blog, there are three main authentication factor categories:

  • Something you know (for example, PIN or password)
  • Something you have (for example, chip card, mobile phone, or hardware token)
  • Something you are (for example, biometric modality such as fingerprints or facial or voice recognition)

PSD2 compliance requires the user to be authenticated using elements from at least two of these categories. For payments that are transacted remotely, authentication tokens linking the specific transaction amount and the payee's account number are an additional requirement.

The regulation provides for a number of exemptions to the SCA requirement. Key exemptions include:

  • Low-value transactions (under €30, approximately $33)
  • Transactions with businesses that the consumer identifies as trusted
  • Recurring transactions for consistent amounts after SCA is used for the first transaction. If the amount changes, SCA is required.
  • "Low-risk" transactions based on the acquirer's overall fraud rate calculated on a 90-day basis. Transaction values can be as high as €500 (about $555).
  • Mail-order and telephone-order payments, since they are not considered electronic payments covered by the regulation
  • Business-to-business (B2B) payments

Since PSD2 does not apply to payments where the acquirer or the issuer is not based in the EU, why would understanding this regulation be important to non-EU consumers and payment system stakeholders? From 2015 through 2018, the Federal Reserve established and provided leadership for the Secure Payments Task Force as it identified ways to enhance payments security, especially for remote payments. One critical need the task force identified is stronger identity authentication. So far, the United States has avoided any legislation concerning authentication, but will actions like the PSD2 create pressures to mandate such protections here? Or will the industry continue to work together through efforts like the FedPayments Improvement Community to develop improved authentication approaches? Please let us know what you think.


July 29, 2019

You Can't Manage What You Can't Measure

Peter Drucker famously applied the adage you can't manage what you can't measure to widgets at General Motors. Researchers, fintech entrepreneurs, elected leaders, and others who are trying to ensure economic mobility for all would do well to remember this advice. To be able to interpret or conclude that real improvements are occurring due to financial innovation, it is important to understand the metrics used for assessing economic mobility.

One important resource for data on financial inclusion is the Group of Twenty (G20) Global Partnership for Financial Inclusion (GPFI). This group has produced a number of excellent documents on financial inclusion. I want to bring special attention to the G20 Financial Inclusion Indicators  and the interactive dashboard.

These indicators grew out of the original Basic Set of Financial Inclusion Indicators, which was created in 2012. Updated this past April, the indicators are meant to measure achievements and disparities in the use of digital financial services along with the technology or environment that is needed to enable use of these services. The dashboard interprets recent data collected for certain indicators. You can download country-level raw data based on variables that you customize. Also on the G20 site is an interactive data visualizer that will let you see how the United States compares to other countries by each indicator.

There are three dimensions to the measurement: (1) access to financial services, (2) use of financial services, and (3) quality of products and service delivery. Here are some indicator categories related specifically to payments:

  • Retail cashless transactions
  • Adults using digital payments
  • Mobile phone or Internet-based payments
  • Payments using a bank card
  • Debit card ownership
  • Proximity to physical points of service (i.e. branches, ATMs, access to internet)
  • Enterprises that send or receive digital payments
  • Received wages or government transfers into an account

The GPFI encourages individual countries to supplement the G20 Indicators with country-specific metrics. Following are several additional sources contributing to measurements of financial inclusion for the United States:

  • U.S. Financial Health Pulse by the Financial Health Network: Measures financial health using the Center for Financial Services Innovation Financial Health Score measurement methodology, consumer surveys, and transactional records.
  • The Opportunity Atlas by the U.S. Census Bureau and Opportunity Insights: Maps the neighborhoods in the United States that offer children the best chance to rise out of poverty.
  • Small City Economic Dynamism Index by the Federal Reserve Bank of Atlanta: Provides a snapshot of the economic trajectory and current conditions of 816 small and midsized cities across the United States. It includes 13 indicators of economic dynamism for metropolitan and micropolitan areas with populations above 12,000 and below 500,000.
  • Payment Volume Charts Treasury-Disbursed Agencies> by Bureau of the Fiscal Service:: Offers downloadable reports that compare monthly and cumulative electronic funds transfer payment volumes for different time periods.
  • Model Safe Accounts by the Federal Deposit Insurance Corporation: Offers an overview and report of a pilot program designed to evaluate the feasibility of financial institutions offering safe, low-cost transactional and savings accounts that are responsive to the needs of underserved consumers.

Keeping data at the forefront of the discussion on financial inclusion will better inform strategies, help organizations and entrepreneurs build better products and services, and help policymakers and many others monitor the effect of initiatives.

Photo of Jessica WashingtonBy Jessica Washington, AAP, 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.