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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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December 23, 2019

New Data Posted for Federal Reserve Payments Study

If you're looking for payments reading during the holidays, take a look at a new report, the Federal Reserve Payments Study 2019, which was published last Thursday on the Federal Reserve's websiteOff-site link.

The report finds that growth in card and ACH payments has accelerated.

Here are some key findings:
  • The number of ACH credit and debit transfers grew by 6 percent a year between 2015 and 2018, exceeding the 4.9 percent per year growth rate recorded for the period from 2012 to 2015.
  • Debit and credit card payments grew at an accelerated rate of 8.9 percent a year between 2015 and 2018, up from the 6.8 percent yearly rate of increase from 2012 to 2015.
  • For general-purpose cards overall, the value of remote payments in 2018 nearly equaled that of in-person payments.
  • More than half of in-person general-purpose card payments were chip-authenticated, up from 2 percent in 2015.
  • Payments made by check fell 7.2 percent a year from 2015 to 2018.

The 2019 Federal Reserve Payments Study covers card (credit, non-prepaid debit, and prepaid debit), ACH, and check payments and ATM withdrawals. In these days of fintech and new ways to pay with a phone or fingerprint, these core noncash payment types are used not only in traditional ways but also to make possible alternative payment methods and services.

We look forward to continuing the payments conversation with you on January 6, 2020, when I will be challenging you to a game of pay-with-your-phone bingo.

April 22, 2019

The Prepaid Rule: All Jokes Aside

A payments compliance rule took effect this year on April Fools' Day, and it occurred to me that when a compliance deadline is approaching, you might not feel like joking around. The Prepaid Accounts Final Rule was issued a few years ago, in 2016, but after a number of postponements, its effective date is finally behind us.

The rule standardizes disclosures, error resolution procedures, consumer liability limits, and access to records. These changes are intended to provide comprehensive consumer protections for prepaid accounts under the Electronic Fund Transfer Act, or Regulation E. The rule is fairly comprehensive, but for the sake of brevity, I'm going to look at only a couple areas of the rule—those that stand out to me.

Consumers can now expect protections over their transaction accounts regardless of whether the account is offered directly by a traditional financial institution or by a third party, such as a fintech or merchant, as they make electronic payments (debit, prepaid, ACH). Also, fintech companies that allow consumers to store funds or are thinking about adding that ability may want to prepare themselves to be designated as prepaid services providers and therefore subject to the regulatory and licensing requirements that go along with that designation. To that point, I am not surprised to see several big names recently listed on the FinCen Money Service Business Registration as "Providers of prepaid access." (To see the list, scroll down the web page to the MSB registration form; on the MSB ACTIVITIES field, click the down arrow to open the dropdown list; select Provider of prepaid access and click the Submit button.)

Established prepaid issuers have long been preparing for the new prepaid rule despite the stops and starts of an effective date and the uncertainty about some of its key provisions. Because consumers open prepaid accounts in a variety of ways—from starting a new job to purchasing prepaid cards at a retail checkout lane—it can be difficult to accommodate the disclosure requirements, such as those for listing fees, that the prepaid rule prescribes. Most issuers have changed product packaging to accommodate the new disclosures. These changes required complicated logistics coordination for the prepaid supply chain to replace old, noncompliant inventory with new, compliant card packages. Some issuers are still grappling with how to list types of fees that may not apply to their particular account program.

Many issuers had already been providing some level of consumer protection from unauthorized transactions before the rule requirement took effect. Now there will be a standard expectation. Limited liability and error resolution benefits need apply only to customers who have successfully completed the identification and verification process, if there is one for their particular program. Regulation E's error resolution and limited liability requirements do not extend to prepaid accounts (other than payroll or government benefit accounts) that have not completed the verification process, one of the key revisions after the rule's initial issue.

The rule will change the way we categorize prepaid services. For instance, in the past, discussion around prepaid products focused on whether the product was open- or closed-loop, and whether it was reloadable or nonreloadable. While those characteristics still exist, they are not necessarily a determinant as to whether the rule applies to a particular product or not. There are clear exclusions for certain products like those that are marketed and labeled as gift cards, health care savings cards, or disaster relief cards. However, even if a product doesn't have "prepaid" on its label, it may still fall under Regulation E. Coverage extends to asset accounts that consumers can use to conduct transactions with multiple, unaffiliated merchants for goods or services, to pull cash from automated teller machines, or to make person-to-person transfers.

For both incumbents and those finding themselves new in prepaid, it has been no joke to prepare to comply with the new rule. Despite the extra burden, do you think we will look back on this milestone favorably in the future? I think the new prepaid rule will lead to strengthening trust and confidence in these products. The Consumer Financial Protection Bureau (CFPB) pledges to be vigilant in evaluating new rules. Moreover, the CFPB is required to submit a formal evaluation five years following a rule's effective date. The industry should be ready to help measure the rule's impact.

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

July 12, 2018

Behind the Growth in Debit Card Payments

U.S. consumers make more payments with nonprepaid debit cards than with other types of cards (credit and prepaid) combined. The 2016 Federal Reserve Payments Study found that consumers made 57.5 billion payments in 2015 using nonprepaid debit cards.

That's a 26 percent increase over 2012, when consumers made 45.7 billion nonprepaid debit card payments.

No doubt, effects of more favorable economic conditions—including declining unemployment, increasing wages, and greater consumer confidence—were important factors in increased consumer spending from 2012 to 2015. But from a payment choice perspective, such as which method or card to use, what might be driving this increase of almost 12 billion? Two factors related to those choices could be at play:

  • Maybe people started using the cards more intensively. That is, people who owned nonprepaid debit cards started using them more often, making more payments per card per month.
  • Maybe people started using the cards more extensively. That is, more people owned and actively used a nonprepaid debit card or more people owned and actively used multiple cards.

For this discussion, an "active" card is defined to be one that is not expired and had purchase activity or bill pay associated with the card during at least one month of the year 2015 or, for the 2012 estimate, at least one transaction during the month of March 2013. Note that the difference between the 2012 and 2015 estimates could, in part, be related to the different definitions of the measurement periods. (The Federal Reserve Payments Study also measures nonprepaid debit, credit, and prepaid cards that are in circulation but not used.)

Let's look at the numbers:

  • In 2012, there were 173.9 million active consumer nonprepaid debit cards in circulation. These cards are linked to a transaction account at a financial institution and can be used to make purchases at the point of sale.
  • In 2015, there were 209.6 million active consumer nonprepaid debit cards. That's an increase of 21 percent over the three years.
  • In 2012, U.S. consumers made 21.9 purchases per month per active nonprepaid debit card. In 2015, on average, across the months, they made 22.8 per card. That's almost flat—an increase of just four percent in the number of payments per card per month over three years.

These numbers overall tell us that increases in payments per card is not the main driver of this phenomenal increase in the number of nonprepaid debit card payments (see the chart). Note that payments per card is an average of various behaviors. Some people could be using their cards more—for example, new debit card owners may be moving from using cash or prepaid cards. Others could be using their cards less—for example, new owners of credit cards may be moving away from debit cards.

Number-of-non-prepaid-debit-cards-increases-chart

Rather, the increased number of active cards seems to be the source of the jump in the number of nonprepaid debit card payments. Here are some factors that could relate to the greater numbers of cards:

  • The U.S. population ages 18 and older grew from 240 million to 247 million during this time, a three percent increase (American FactFinder search).
  • The percentage share of consumers with a bank account (and thus able to own a nonprepaid debit card) increased from 91.8 percent in 2011 to 93 percent in 2015 (FDIC Survey of Banked and Unbanked Consumers [2012 estimate not available]).
  • By birth year, the share of people more likely to own a debit card increased. Young people born between 1995 and 1997 turned 18 between 2012 and 2015—about 14 million of them (American FactFinder search). At the same time, the population of people born before 1940 declined by about 4 million between 2012 and 2015.

Whatever the source of the increase in the number of cards, we see here that typical behavior for an active nonprepaid debt card is around 23 purchases per month. How many times per month do you use your card or cards?

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

May 7, 2018

Evidence of the Digital Age

Are you one of the estimated 90 percent of Americans who have shopped online over the past year? According to the most recent data published by the Federal Reserve Payment Study, remote payments grew faster than in-person payments by both volume and value. For example, from 2015 to 2016, remote general-purpose credit card payments grew at the rate of 16.6 percent, compared to 7.9 percent for in-person credit card payments. (See the chart.) Remote spending drove almost all of the growth of the general-purpose prepaid card during 2015–16, according to the study. If we had any doubts before, this growth shows us clearly that we're in the digital age, a time in history when digital technology has become ubiquitous.

General-purpose-card-payments-growth-rates

The shift from in-person payment to remote payment is certainly telling a story that will affect our future conversations and research. We need to take into consideration that as remote payments grow, they will become less and less connected to a physical card. Eventually, consumers may stop considering them to be card payments at all. They will likely start thinking first of their ability to make a payment with a digital account, with subsequent transactions eligible to ride a number of different payment rails, like ledger transfers, ACH, or other faster payments models.

The U.S. Census Bureau estimated that total ecommerce sales for 2017 were about $453.5 billion, an increase of 16 percent from the year before and accounting for 8.9 percent of total sales in 2017. Last year the Department of Commerce reported ecommerce sales have been growing nine times faster than traditional in-store sales since 1998. And remote payments will continue to accelerate. Consider the top retail trends of the year, according to research from the National Retail Federation:

  • Online purchase, store pickup: Stores are adding lockers for easier pickup.
  • Talking tech: Virtual assistants are rapidly growing in popularity and are ready and able to help customers make purchases.
  • Showrooms without inventory: Stores offer browsing, testing, and fitting, with the customer subsequently making the purchase online. This approach helps showrooms reduce their overhead and give consumers customized options.
  • Membership clubs: Stores collect customers' money upfront (sort of like prepaid) and send merchandise later, depending on what analytics have taught them about their customers and consultative sales touchpoints.

Future Federal Reserve Payment Studies will continue to track shifts in payments. However, we may need to adapt the ways we discuss these types of payments as the digital-first age leads to innovative transaction accounts with subsequent remote payments untethered from plastic cards.

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