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March 16, 2020
Are Emerging Payments More Vulnerable to Fraud?
Whenever I am in a conversation about new or emerging payment products or services, I invariably get asked whether I think they will attract heightened attention from criminals. My personal opinion is, "YES, at least initially!" Why do I have that opinion? The conventional wisdom is that criminals recognize that new payment systems are likely to have some security gaps in the beginning that can be exploited. There are a number of examples I can cite to support this position.
Consider the payment card enrollment process that accompanied the introduction of the Apple Pay wallet in late 2014. Whether it was a rush to get cardholders enrolled or because of loopholes in the Identification and Verification (ID&V) process, a number of the banks offering the service fell victim to fraud early on. Criminals enrolled a number of stolen credit and debit cards in the service and then were able to make high-dollar purchases because of weak verification controls. Some industry observers cited initial fraud losses in the 600-to-800-basis-point range at some of the early issuers. This rate compares to an overall in-person, payment card fraud rate of 12.2 basis points in 2015 cited in the Federal Reserve's Payments Study supplement Changes in U.S. Payments Fraud from 2012 to 2016. Fortunately, the affected banks reacted quickly and shored up their payment card enrollment processes.
Also consider the implementation of faster payments in the United Kingdom in 2008. As did other countries implementing faster payments, the United Kingdom tried to limit fraud by taking a measured approach. In the beginning, only credit push transactions with a maximum value of £10,000 (approximately $15,000) were eligible. (Most of the initial participating banks had lower limits.) In 2010, the maximum amount was raised to £100,000. Now the maximum limit is £250,000, although financial institutions may still set lower limits and differentiate between consumer and commercial account payments. My colleague Julius Weyman highlighted some of the fraud risks in faster payments in his 2016 working paper reviewing overall risks in faster payments schemes around the globe. He pointed to the 132 percent increase in online banking fraud the United Kingdom experienced in the year following implementation.
There is growing concern among consumers in the United States and the United Kingdom about the liability for authorized push payments—such as P2P payments—because of their near-real-time nature and their finality. In a future post, I'll examine this issue with authorized push payments and look at how the United Kingdom is dealing with it.
So circling back to my initial question, do you believe that the fraud rates for new and emerging payment products are likely to be higher than the more established payment products? Let us know what you think.
May 6, 2019
Business Email Compromise Moves Mainstream
The Retail Payments Risk Forum has blogged extensively on business email compromise (BEC) over the past few years. With losses attributed to BEC already in the billions of dollars and the number of attacks increasing over 475 percent from fourth-quarter 2017 to fourth-quarter 2018, the topic warrants continued attention. As the "business email" part of the phrase suggests, businesses and executives of businesses have been the primary targets of this type of fraud. The goal of most of these incidents is to trick businesses into moving funds into the criminals' accounts using wire transfers.
When perpetrators of this fraud scheme experienced great success with businesses and executives as their primary targets, they quickly moved to include ordinary individuals. That is, the fraud has gone mainstream, evolving beyond businesses and executives with wire transfers as the key payment platform. As the scheme has begun to involve employees as victims and reached the person-to-person payment arena, fraudulent transactions are occurring more often using ACH, not just wire transfers. Since BEC is not just for businesses and their executives anymore, BEC is sometimes more aptly referred to as EAC—that is, email account compromise.
In April, CNBC reported a new scheme whereby the fraudsters are targeting the human resources function of businesses to change employees' direct deposit payroll information to an account held by the fraudster. The fraudster either spoofs an employee's email account or gets access to it and then sends a message to human resources requesting a change to the banking account associated with their direct deposit. While the amounts fraudulently transferred in this scheme are generally well below those of the traditional BEC scheme, they are simple and cheap to execute and could become more attractive for criminals.
In more troubling news on this fraud scheme, the Association for Financial Professionals (AFP) reported that the number of businesses reporting that they had been victims of actual or attempted fraud increased significantly for both ACH credit and debit transactions, while instances of fraud involving checks, cards, and wire transfers declined. And what could be the reason behind this increase in ACH fraud? According to a representative with the AFP, "a likely explanation for the higher fraud lies in the popularity of ACH…for schemes like business email fraud."
And as I mentioned earlier, fraudsters aren't limiting this scheme to businesses. In fact, I was a target of an EAC scam earlier this year when fraudsters took control of a relative's email account. But for a bit of good news (at least for me), I was immediately suspicious and a phone call to the relative confirmed that my gut feeling was accurate. This image is a screenshot of the text conversation I had with my "relative."
To piggyback on a recent post by my colleague on using discipline to fight BEC: having the discipline to make a follow-up call to the person emailing a request for funds or a change to bank account information can make the difference between being a victim and being a spoiler.
How are you attacking this growing threat, and what are you doing to educate your employees and customers?
October 23, 2017
ACH and Consumer-Only Payments: Will the Twain Ever Meet?
For many years, person-to-person (P2P) payment providers have touted the emergence of compelling P2P mobile-based products that exploit some combination of financial institutions (FIs) and fintech providers. Several players have made notable inroads into P2P with certain demographics and use cases, but the overall results in terms of absolute numbers are far from ubiquitous. This post uses hard numbers to explore what progress ACH has made with P2P payments.
During a payments conference earlier this year that showcased findings from the Fed's triennial payments study (here and here), the table below was presented showing the number and value shares of domestic network ACH payments in 2015. The table is complicated because it shows both debit pull and credit push payments by consumer and business counterparties. Despite the complexity, the table distills ACH to its essence by removing details associated with the 14 transaction payment types (known as Standard Entry Class codes) that carry value for domestic payments. Many of these individual codes reflect similar types of payments (for example, three codes are used for converting first presentment checks to ACH). As expected, virtually all payments involve at least one business party to each payment. Consumer-only payments are negligible.
In a typical use case for consumer-only ACH, a consumer transfers funds from one account to another account across financial institutions. As shown in the solid red oval, 0.04 percent of all domestic payments were consumer-to-consumer payments, where the payee initiated a debit to the payer's bank account. For consumer credit push payments, the figure is 0.3 percent. The combined figure rounds to 0.3 percent. On the value side for consumer-only payments (in the dashed red oval), debit pulls, credit pushes, and the combined figure were 0.02 percent, 0.2 percent, and 0.2 percent, respectively. These types of payments typically reflect P2P payments1, when one consumer pushes funds to another consumer.
The next table shows the figures that prevailed in 2012. Given the modest share by both number and value across both years, it is apparent—and interesting—that ACH has made little progress in garnering consumer-only payments. Although ACH is ubiquitous on the receipt side across all financial institutions, it is not so for consumers, given the lack of widely promoted and compelling service offerings from FIs and no standardized form factor like there is for card payments. Additionally, many small FIs do not offer ACH origination services.
This lack of adoption is not unique to ACH. Although some of the electronic P2P entrants are experiencing significant growth, it will be some time before they supplant the billions of P2P cash and check payments. P2P players on the FI-centric side include Zelle, which a large consortium of banks owns. Non-FI providers include PayPal and its associated Venmo service. Given the lack of ubiquity with the new offerings, the fallback option for consumer-only payments is cash and checks. As the payments study reports, check use is still declining, though the most recent trend shows that this decline has slowed. ACH or other electronic options still seem a good bet to continue to erode paper options, but perhaps the market is signaling that paper options have ongoing utility and are still preferred if not optimal for some users in some instances.
So what would it take for ACH to gain some traction in the consumer payments space? Perhaps the presence of same-day ACH, in which credits were mandated in September of 2016 and debits followed in September 2017, offers some opportunity for compelling service offerings coupled with a user-friendly way to send an emergency payment to your ne'er-do-well son.
What are your views on the viability of ACH garnering more P2P payments?
By Steven Cordray, payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed
1 Sometimes account-to-account (A2A) transfers are lumped in with P2P payments.
January 9, 2017
The Year in Review
As we move into 2017, the Take on Payments team would like to share its perspectives of major payment-related events and issues that took place in the United States in 2016, in no particular order of importance.
Cybersecurity Moves to Forefront—While cyber protection is certainly not new, the increased frequency and sophistication of cyber threats in 2016 accelerated the need for financial services enterprises, businesses, and governmental agencies to step up their external and internal defenses with more staff and better protection and detection tools. The federal government released a Cybersecurity National Action Plan and established the Federal Chief Information Security Office position to oversee governmental agencies' management of cybersecurity and protection of critical infrastructure.
Same-Day ACH—Last September, NACHA's three-phase rules change took effect, mandating initially a credit-only same-day ACH service. It is uncertain this early whether NACHA will meet its expectations of same-day ACH garnering 1 percent of total ACH payment volume by October 2017. Anecdotally, we are hearing that some payments processors have been slow in supporting the service. Further clarity on the significance of same-day service will become evident with the addition of debit items in phase two, which takes effect this September.
Faster Payments—Maybe we're the only ones who see it this way, but in this country, "faster payments" looks like the Wild West—at least if you remember to say, "Howdy, pardner!" Word counts won't let us name or fully describe all of the various wagon trains racing for a faster payments land grab, but it seemed to start in October 2015 when The Clearing House announced it was teaming with FIS to deliver a real-time payment system for the United States. By March 2016, Jack Henry and Associates Inc. had joined the effort. Meanwhile, Early Warning completed its acquisition of clearXchange and announced a real-time offering in February. By August, this solution had been added to Fiserv's offerings. With Mastercard and Visa hovering around their own solutions and also attaching to any number of others, it seems like everybody is trying to make sure they don't get left behind.
Prepaid Card Account Rules—When it comes to compliance, "prepaid card" is now a misnomer based on the release of the Consumer Financial Protection Bureau's 2016 final ruling. The rule is access-device-agnostic, so the same requirements are applied to stored funds on a card, fob, or mobile phone app, to name a few. Prepaid accounts that are transactional and ready to use at a variety of merchants or ATMS, or for person-to-person, are now covered by Reg. E-Lite, and possibly Reg. Z, when overdraft or credit features apply. In industry speak, the rule applies to payroll cards, government benefit cards, PayPal-like accounts, and general-purpose reloadable cards—but not to gift cards, health or flexible savings accounts, corporate reimbursement cards, or disaster-relief-type accounts, for example.
Mobile Payments Move at Evolutionary, Not Revolutionary, Pace—While the Apple, Google, and Samsung Pay wallets continued to move forward with increasing financial institution and merchant participation, consumer usage remained anemic. With the retailer consortium wallet venture MCX going into hibernation, a number of major retailers announced or introduced closed-loop mobile wallet programs hoping to emulate the success of retailers such as Starbucks and Dunkin' Brands. The magic formula of payments, loyalty, and couponing interwoven into a single application remains elusive.
EMV Migration—The migration to chip cards and terminals in the United States continued with chip cards now representing approximately 70 percent of credit/debit cards in the United States. Merchant adoption of chip-enabled terminals stands just below 40 percent of the market. The ATM liability shift for Mastercard payment cards took effect October 21, with only an estimated 30 percent of non-FI-owned ATMs being EMV operational. Recognizing some of the unique challenges to the gasoline retailers, the brands pushed back the liability shift timetable for automated fuel dispensers three years, to October 2020. Chip card migration has clearly reduced counterfeit card fraud, but card-not-present (CNP) fraud has ballooned. Data for 2015 from the 2016 Federal Reserve Payments Study show card fraud by channel in the United States at 54 percent for in person and 46 percent for remote (or CNP). This is in contrast to comparable fraud data in other countries further along in EMV implementation, where remote fraud accounts for the majority of card fraud.
Distributed Ledger—Although venture capital funding in blockchain and distributed ledger startups significantly decreased in 2016 from 2015, interest remains high. Rather than investing in startups, financial institutions and established technology companies, such as IBM, shifted their funding focus to developing internal solutions and their technology focus from consumer-facing use cases such as Bitcoin to back-end clearing and settlement solutions and the execution of smart contracts.
Same Song, Same Verse—Some things just don't seem to change from year to year. Notifications of data breaches of financial institutions, businesses, and governmental agencies appear to have been as numerous as in previous years. The Fed's Consumer Payment Choices study continued to show that cash remains the most frequent payment method, especially for transactions under 10 dollars.
All of us at the Retail Payments Risk Forum wish all our Take On Payments readers a prosperous 2017.
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