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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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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

December 3, 2018

Building Blocks for the Sandbox

I just returned from a leave of absence to welcome my third child to this world. As I catch up on payments news, one theme emerging is the large number of state and federal regulatory bodies launching their own fintech sandboxes. Typically, these testing grounds allow businesses to experiment with various "building blocks" while they innovate. Some businesses are even allowed regulatory relief as they work out the kinks. As I've researched, I've found myself daydreaming about how my new little human also needs to work with the right building blocks, or core principles, to ensure he develops properly and "plays nice" in the sandbox.

But—back to work. What guidance do fintechs have available to them to grow and prosper?.

On July 31 of this year, the U.S. Department of the Treasury released a report suggesting regulatory reform to promote financial technology and innovation among both traditional financial institutions and nonbanks. The report in its entirety is worth a review, but I'll highlight some of it here.

The blueprint for a unified regulatory sandbox is still up for discussion, but the Treasury suggests a hierarchical structure, either overseen by a single regulator or by an entirely new regulator. The Treasury suggests that Congress will likely have to assist by passing legislation with the necessary preemptions to grant authority to the newly created agency or a newly named authoritative agency.

The report outlines these core principles of a unified regulatory sandbox:

  • Promote the adoption and growth of innovation and technological transformation in financial services.
  • Provide equal access to companies in various stages of the business lifecycle (e.g., startups and incumbents). [The regulator should define when a business could or should participate.]
  • Delineate clear and public processes and procedures, including a process by which firms enter and exit.
  • Provide targeted relief across multiple regulatory frameworks.
  • Offer the ability to achieve international regulatory cooperation or appropriate deference where applicable.
  • Maintain financial integrity, consumer protections, and investor protections commensurate with the scope of the project, not be based on the organization type (whether it's a bank or nonbank).
  • Increase the timeliness of regulator feedback offered throughout the product or service development lifecycle. [Slow regulator feedback is typically a deterrent for start-up participation.]

Clearly, the overarching intent of these principles is to help align guidance, standards, and regulation to meet the needs of a diverse group of participants. Should entities offering the same financial services be regulated similarly? More importantly, is such a mission readily achievable?

People have long recognized the fragmentation of the U.S. financial regulatory system. The number of agencies at the federal and state levels with a hand in financial services oversight creates inconsistencies and overlaps of powers. Fintech innovations even sometimes invite attention from regulators outside of the financial umbrella, regulators like the Federal Communications Commission or the Federal Trade Commission.

In the domain of financial services are kingdoms of industry. Take the payments kingdom, for example. Payments are interstate, global, and multi-schemed (each scheme with its own rules framework). And let's be honest, in the big picture of financial services innovations and in the minds of fintechs, payments are an afterthought, and they aren't front and center in business plans. Consumers want products or services; payments connect the dots. (In fact, the concept of invisible payments is only growing stronger.)

What is more, a fintech, even though it may have a payments component in its technology, might not identify itself as a fintech. And a business that doesn't see itself as a fintech is not going to get in line for a unified financial services regulator sandbox (though it might want to play in a payments regulator sandbox).

When regulatory restructuring takes place, I hope it will build a dedicated infrastructure to nurture the payments piece of fintech, so that all can play nice in the payments sandbox. (Insert crying baby.)

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

September 10, 2018

The Case of the Disappearing ATM

The longtime distribution goal of a major soft drink company is to have their product "within an arm's reach of desire." This goal might also be applied to ATMs—the United States has one of the highest concentration of ATMs per adult. In a recent post, I highlighted some of the findings from an ATM locational study conducted by a team of economics professors from the University of North Florida. Among their findings, for example, was that of the approximately 470,000 ATMs and cash dispensers in the United States, about 59 percent have been placed and are operated by independent entrepreneurs. Further, these independently owned ATMs "tend to be located in areas with less population, lower population density, lower median and average income (household and disposable), lower labor force participation rate, less college-educated population, higher unemployment rate, and lower home values."

This finding directly relates to the issue of financial inclusion, an issue that is a concern of the Federal Reserve's. A 2016 study by Accenture pointed "to the ATM as one of the most important channels, which can be leveraged for the provision of basic financial services to the underserved." I think most would agree that the majority of the unbanked and underbanked population is likely to reside in the demographic areas described above. One could conclude that the independent ATM operators are fulfilling a demand of people in these areas for access to cash, their primary method of payment.

Unfortunately for these communities, a number of independent operators are having to shut down and remove their ATMs because their banking relationships are being terminated. These closures started in late 2014, but a larger wave of account closures has been occurring over the last several months. In many cases, the operators are given no reason for the sudden termination. Some operators believe their settlement bank views them as a high-risk business related to money laundering, since the primary product of the ATM is cash. Financial institutions may incorrectly group these operators with money service businesses (MSB), even though state regulators do not consider them to be MSBs. Earlier this year, the U.S. House Financial Services Subcommittee on Financial Institutions and Consumer Credit held a hearing over concerns that this de-risking could be blocking consumers' (and small businesses') access to financial products and services. You can watch the hearing on video (the hearing actually begins at 16:40).

While a financial institution should certainly monitor its customer accounts to ensure compliance with its risk tolerance and compliance policies, we have to ask if the independent ATM operators are being painted with a risk brush that is too broad. The reality is that it is extremely difficult for an ATM operator to funnel "dirty money" through an ATM. First, to gain access to the various ATM networks, the operator has to be sponsored by a financial institution (FI). In the sponsorship process, the FI rigorously reviews the operator's financial stability and other business operations as well as compliance with BSA/AML because the FI sponsor is ultimately responsible for any network violations. Second, the networks handling the transaction are completely independent from the ATM owners. They produce financial reports that show the amount of funds that an ATM dispenses in any given period and generate the settlement transactions. These networks maintain controls that clearly document the funds flowing through the ATM, and a review of the settlement account activity would quickly identify any suspicious activity.

The industry groups representing the independent ATM operators appear to have gained a sympathetic ear from legislators and, to some degree, regulators. But the sympathy hasn't extended to those financial institutions that are accelerating account closures in some areas. We will continue to monitor this issue and report any major developments. Please let us know your thoughts.

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

August 27, 2018

Who Owns Your ATM?

Counting the number of ATMs in the United States has been a challenge since 1996, when independent operators (nonfinancial institutions) started deploying ATMs/cash dispensers. That was when Visa and MasterCard dropped their prohibition against surcharges. But a recent study sponsored by the National ATM Council largely overcame that challenge while also gathering some interesting results about the locational aspects of the independently owned ATMs compared to machines owned by financial institutions (FI).

The study was conducted earlier this year by a team of economics professors from the Department of Economics and Geography in the University of North Florida's Coggin School of Business. The study's primary objective was to determine whether the locations of independently owned ATMs and FI-owned ATMs were different in terms of demographics and socioeconomic status.

Using a database from Infogroup, the team identified 470,135 ATMs operating in 2016. About 41 percent of these were FI-owned, and the rest were independently owned. The majority of the independent ATMs are in retail establishments, with heavy concentrations in convenience stores, pharmacies, and casual dining locations.

FI owned ATMs Duval Median Household Income 2016 Independently owned ATMs Duval Median Household Income 2016
(Click on the images to enlarge.)

The research team plotted the locations of all the ATMs, overlaying demographic and socioeconomic data they obtained from the U.S. Census Bureau and its American Community Survey. Among the 10 main elements the researchers used were median age, unemployment rate, education level, household income, disposable income, and average home values.

They concluded that the independent ATMs "tend to be located in areas with less population, lower population density, lower median and average income (household and disposable), lower labor force participation rate, less college-educated population, higher unemployment rate and lower home values."

So what does this mean?

Well, it means that the independently owned ATMs are providing a vital service in rural and inner-city areas. Other studies—such as the Federal Reserve's Diary of Consumer Payment Choice—have shown that lower-income households (those earning less than $50,000) use cash as their primary method of payment. Therefore, these independent ATM owners are giving these households access to financial services that would otherwise be limited.

A post from December 2014 highlighted some of the challenges the independent operators were facing. Stand by for a future post that will provide an update on this part of our country's payment ecosystem.

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