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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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March 5, 2018

Webinar to Explore Faster Settlement and Funds Availability

"I'd gladly pay you Tuesday for a hamburger today." Have you ever thought of this comical catchphrase, spoken by the character J. Wellington Wimpy in the long-running comic strip Popeye, when you hear conversations about faster payments? Hamburgers and jokes aside, there are important considerations for getting paid tomorrow for an agreement or exchange made today. That's why the main ingredient to faster payments is settlement.

Settlement provides the decisive transfer of funds between participants. In today's world, we want everything fast, especially money owed to us. A business that waits two to four days for an ACH transaction to process may be waiting too long. The ACH network has recently expedited settlement and now funds availability. Effective March 16, 2018, phase 3 of Same-Day ACH will roll out, making ACH funds availability faster than ever. However, there are still options and business cases that influence how services might be made available to participants. After all, a faster settlement is more than a credit risk discussion.

The Atlanta Fed's Retail Payments Risk Forum is hosting a Talk About Payments (TAP) webinar to discuss the new faster funds availability that Phase 3 of Same-Day ACH will usher in.

The TAP discussion will explore opportunities this faster payment option makes available, along with risk considerations. We encourage financial institutions, retailers, payments processors, law enforcement, academics, and other payments system stakeholders to participate. Participants will be able to submit questions during the webinar.

The TAP webinar—titled "A New Faster Payment Settlement"—will take place on Wednesday, March 14, from 1 to 2 p.m. (ET). Participation in the webinar is complimentary, but you must register in advance at the TAP webinar web page. After completing registration, you will receive a confirmation email with all the log-in and toll-free call-in information.

We hope you will join us for our next TAP webinar March 14.

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

August 14, 2017

Extra! Extra! Triennial Payments Data Available in Excel!

In countless old black-and-white movies, street newspaper vendors would shout out the latest sensational news from hot-off-the-press special editions. The Fed is no different in that we want to shout out that it is no longer necessary to mine the PDF-based Federal Reserve Payments Study report to extract the study's data. For the first time, we are offering our entire aggregated data set of estimated noncash payments in an Excel file. The report accompanying the data is here.

The data set is very rich and covers the following categories:

Accounts and cards
Private-label credit processors
Checks Person-to-person and money transfer
ACH Online bill pay
Non-prepaid debit Walk-in bill pay
General-purpose prepaid Private-label ACH debit
Private-label prepaid issuers & processors Online payment authentication
General-purpose credit Mobile wallet
Private-label credit merchant issuers  

Here is another table that is just one extract from the non-prepaid debit card portion of the extensive payments data available.

To get a taste of what this data can teach us, let's look closer at the cumulative volume distribution by payment dollar value threshold for non-prepaid debit cards (the data are shown above) along with general-purpose credit cards. The number and value of both types of payments grew substantially from 2012 to 2015, the last two survey periods. The chart compares these distributions, showing more vividly how this growth affected the relative proportions of payments of different dollar values.

Chart-two

For example, debit card payments below $25 accounted for 59.1 percent of all payments in 2012 versus 61.8 percent in 2015—evidence that debit card purchases are migrating to lower ticket amounts. The trend is even more dramatic over the same time span for general-purpose credit cards.

Because this is a distribution, increases in the relative number of small-value payments must be offset by decreases in the relative number of large-value payments. Unfortunately, our previous survey capped the payment threshold at $50 in 2012. Otherwise, we would see the dashed 2012 lines crossing over the solid 2015 lines at some payment value threshold above $50. In brief, the results suggest cash payments are continuing to migrate to debit cards, while credit cards may be garnering some share at the expense of both cash and debit cards.

The challenge is on for you data analysts out there. Please share your findings.

Photo of Steven Cordray  By Steven Cordray, payments risk expert in the Retail Payments Risk  Forum at the Atlanta Fed

August 7, 2017

Are Business Payments Directories Coming to the Fore?

Financial institutions (FIs), service providers, and particularly businesses have been dreaming of a ubiquitous payments directory for business-to-business (B2B) payments over the last five years or so. Payments directories give payers the ability to quickly look up accurate account and routing information to originate payments of all types to payees. Directories reduce friction and time needed to efficiently and accurately make payments and accelerate the transition away from checks.

That the dream is getting closer to reality became obvious to me in April, when I attended a NACHA Payments Conference that included the panel discussion "Can a B2B Directory Service Advance e-Payments?" Significantly, one of the panelists was the chair of the Business Payments Directory Association (BPDA), a nonprofit initiative to advance an open, nonproprietary B2B directory for small and large businesses. The independent BPDA has the support of the Business Payments Coalition comprising banks, industry associations, service providers, and businesses.

Businesses wanting to pay other businesses have a variety of payment instruments to choose from—check, ACH credit, wire, and card—with consequential differences among them such as costs, payment reconciliation, and funds availability. Though ACH has made significant inroads into B2B payments, particularly for large businesses, checks are still the fallback payment method when payers are not sure if the payee is willing to accept anything else. Checks are still widely accepted, and attaching associated remittance information with the check is straightforward. The ease of paying by check contrasts with the potential difficulty of determining whether the payee is willing to accept electronic payments and of getting accurate account and routing information.

Essentially, any B2B directory should contain all the information a payer needs to specify the payee’s payment account and route the payment electronically. Typically, directories by themselves do not clear and settle payments. The idea behind the BPDA initiative is that each payee in the directory is provided an electronic payment identity (EPI). That EPI uniquely identifies a payee and supports multiple payment accounts. It also specifies the payee’s preferred way to be paid, the type of remittance information needed, and preferred remittance delivery methods. A payee owns its EPI, which is portable across multiple subdirectory providers. As envisioned, a central node would link multiple subdirectories containing EPIs, each managed by a subdirectory provider that validates payee information so that it can be trusted. Subdirectory providers can include FIs, service providers, and payment networks. All of this is managed by the BPDA that sets rules, credentials subdirectory providers, payees and payers, and oversees the central node.

The image illustrates the process. Payers query the system to retrieve account and routing information from payees. They can then use this information to originate a payment through existing payment rails.

Chart-one

The BPDA lists several advantages of this approach, including these:

  • Payees can centrally communicate preferred payment methods and the information needed to effect payments by payers.
  • Payers can centrally retrieve accurate payee payment and remittance content and delivery preferences.
  • Friction for noncheck payments between payees and payers is reduced.
  • Minimizes misdirected payments.

One lingering concern about having a centralized directory is the risk that fraudsters could gain access to account numbers of large businesses for producing counterfeit checks or unauthorized transactions. In addition to the need for robust credentialing, one mitigant the system offers is that account information can be made private and restricted to specific payers.

It will be interesting to see how this nascent service shakes out given hurdles in governance framework, garnering industry support, developing a funding model, and, of course, getting businesses to enroll and participate. What are your views on the future of B2B directories?

Photo of Steven Cordray  By Steven Cordray, payments risk expert in the Retail Payments Risk  Forum at the Atlanta Fed

June 26, 2017

Responsible Innovation, Part 2: Do Community Financial Institutions Need Faster Payments?

In my last post, I introduced themes from a summit that the Retail Payments Risk Forum cohosted with the United Kingdom's Department for International Trade. The summit gathered payments industry participants to discuss faster payments and their effects on community financial institutions (FIs). This post, the second of three in a series, tackles the question of whether community FIs and their customers actually have an appetite for increasing the speed of payments.

A summit attendee from WesPay, a membership-based payments association in the United States, presented the findings of a survey of 430 U.S. FIs about current payments initiatives. An important discovery was that awareness and adoption of faster payments solutions remains low, as the responses to two survey questions indicate:

  • For same-day ACH, a majority (57 percent) indicated that the first phase—faster credits—"has had no measurable impact on our customers'/members' transactions."
  • When asked about the Federal Reserve Faster Payment Task Force, 34 percent of respondents indicated they were unaware of the initiative, and 46 percent indicated they had only high-level knowledge.

Responses to another of WesPay's survey questions suggest that, although there may be low awareness of many current initiatives, many financial institutions are recognizing that faster payments are inevitable. A majority (60 percent) agreed that faster payments initiatives are "an important development in the industry. However, our institution will be watching to see which platform becomes the standard."

NACHA's representative presented statistics from phase one of same-day ACH, with reminders about the phases to come.

  • Same-day ACH reached a total of 13 million transactions in the first three months (launched September 23, 2016).
  • Phase 2 will allow for direct debits to clear on the same day (to launch September 15, 2017).
  • Phase 3 will mandate funds availability for same-day items by 5 p.m. local time (to launch March 16, 2018).
  • The current transaction limit is $25,000, and international ACH is not eligible.

Results of a study by ACI Worldwide, a global payments processor, look a little different from WesPay's survey results. The study looked at small to medium-size enterprises to gauge real-time payments demand. For the U.S. respondents, the research revealed that:

  • Fifty-one percent are frustrated by delays in receiving payments.
  • Forty-two percent are frustrated by outgoing payments-delivery timeframes.
  • Sixty-five percent would consider switching banks for real-time payments.

We don't know yet what U.S. adoption rates will be, but Faster Payments Scheme Ltd. (FPS) in the United Kingdom already has a story to tell. U.K. panelists attending the summit at the Atlanta Fed stated that FPS has had constant adoption growth due to cultural change and customer expectations.

  • FPS reached a total of 19 million transactions in the first three months (launched May 27, 2008).
  • The FPS transaction limit increased in 2010 from £10k to £100k, and then to £250k in 2015.
  • On April 2014, Paym, a mobile payments service provider, launched, using FPS. Paym handles person-to-person and small business payments, similar to Zelle in the United States, which started up in June 2017, using ACH.
  • FPS had a total volume of 1.4 billion items in 2016.

For payment networks offering new solutions, community FIs are the critical mass that ensures adoption. Their participation will require practical benefits with a lot of support before they are willing to commit. Some community FIs might be forced to adopt new systems because everyone else has. Will new networks in the United States contest same-day ACH, which already has the advantage of ubiquity? Likely, as options develop, so will customer culture and expectations.

In the final installment of this "Responsible Innovation" series, I will look at future impacts of faster payments.

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