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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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November 12, 2019

Financial Solutions for the Younger Generation

Earlier this year, I wrote a post about how millennials tend to be risk-averse when it comes to making financial decisions. Because millennials grew up watching various financial crises, such as the dot-com collapse and the Great Recession, they may have formed a negative attitude toward financial-risk-taking and an overall distrust in the financial system. I’d referred to a 2017 surveyOff-site link that showed that millennials are more afraid of credit card debt than of dying. This speaks to a need for more focused financial education tools and advisers to help young people—millennials and Gen Zers alike—increase their financial literacy and gain more trust in the financial system.

I recently attended Finovate 2019, a conference where technology startups showcased their latest fintech innovations in seven-minute demos. Industry leaders shared their insights on various topics in financial services, investing, insurance, and biometrics, to name a few. As a millennial, I found what resonated with me the most were all the developments targeted to my age group, from fractional investment apps to interactive robo advisers that aim to make the entire banking experience less intimidating.

One of the biggest financial burdens that millennials face today is paying off massive amounts of student loan debt. An NPR articleOff-site link states that "student loan debt in the United States has more than doubled over the past decade to about $1.5 trillion." In fact, millennials and Gen Zers have become so crippled by student loan debt that they are delaying and even forgoing the American dream of becoming homeowners because they perhaps mistakenly view it as taking on additional debt, despite all the benefits of owning a home. Similarly, they view credit cards as just another way to take on debt, not as an opportunity to build up or improve their credit.

But now, thanks to startups like those at Finovate, apps and other software are now addressing the student loan debt problem by providing advice to families on the cost and return on investment of college, based on career and salary, as well tools that project financial aid packages for each school. One intriguing millennial- and Gen Z-focused app showcased at the conference was a gamified money management app that rewards users in real cash for saving or achieving a financial goal. Another was a financial literacy app that breaks down complex financial concepts into a quiz format and rewards users with cash or gift cards when they complete the quiz.

It is encouraging to see fintechs and even banks taking notice of the financial needs of the younger generations and developing products and services that better cater to their unique expectations, in a fun, creative way. Could these apps help these young people shift from their current, risk-averse mindset and give them greater confidence in the financial system so that they can take more risks with their money and ultimately build more wealth? Let us know.

October 21, 2019

Looking for Partners in Safer Payments

The Federal Reserve Bank of Atlanta is currently identifying financial technology companies (fintechs) involved in payments. Our goal is to build relationships with these companies so we can understand their issues and challenges.

The Federal Reserve's mission for payments is to ensure an effective and efficient system. In pursuing this mission, the Atlanta Fed focuses on the accessibility, integrity, and confidentiality of payments. We play a significant role in this mission by virtue of being an operator of ACH and check clearing as well as a payments researcher.

We are also at the center of an important regional hub of fintech activity. In Georgia, there are 120 fintech companies employing more than 38,000 workers. According to the Technology Association of Georgia, the top 20 Georgia-based fintech companies generate $72 billion in revenues annually, and 70 percent of all domestic card transactions flow through Georgia-based fintechs, earning this region the nickname of "Transaction Alley."

In addition, venture capital investment in fintech contributes to Atlanta being ranked as the 13th most important fintech hub in the world and fourth in the United States (behind San Francisco, New York, and Chicago), according to the University of Cambridge's 2018 Global Fintech Hub Index .

Given our expertise, our role in payments toward furthering the Federal Reserve’s mission, and our location, the Atlanta Fed, in partnership with fintech companies in Transaction Alley, has a unique opportunity to have a real impact on advancing safety in this innovative payments space.

Fintechs in payments aim to produce useful and profitable payments-related products and services but may lack awareness of consumer compliance and rights or the importance of development practices that culminate in safe and secure products and services. Our work will focus on safer payments innovation for payments used by consumers.

The Atlanta Fed is also interested in experimenting with innovative technology used by fintech companies where we believe the technology could solve our business problems or be beneficial to us. This experimentation will give us first-hand experience and deep knowledge of fintech-developed technology and therefore an understanding of the contribution and impact the technology has on the payments ecosystem.

Through this work, we hope also to advance economic mobility and resilience, another priority for the Atlanta Fed. Our desire is to engage fintechs with products or solutions that provide low-cost, accessible options to advance financial inclusion and improve consumers' financial health.

Together with the payments fintech industry, we can bring clarity regarding the impact of fintech solutions on the payments system. So we encourage the fintech payment innovators to partner with the Atlanta Fed to understand payments risk and create safer payments solutions.

Get in touch with me at Mary.Kepler@atl.frb.org to start the conversation.

September 3, 2019

Is Friction in Payments Always Bad?

Numerous posts in this blog have noted the conventional wisdom that the less friction there is for a consumer in making a payment, the likelier it is that the consumer will have a good experience. Merchants, especially ecommerce retailers, point to studies consistently showing that when customers are required, for stronger authentication, to enter more information than they're used to during a payment, the cart abandonment rate increases and merchants lose sales. I have learned from my own conversations with merchants that some have backed away from adding more risk management tools because they would rather take the financial loss from a fraudulent transaction than discourage an otherwise legitimate sale. This balancing act between reducing friction for the customer and reducing fraud risk to the merchant or payment card issuer is a constant challenge.

Many merchants have incorporated mobile devices' biometric authentication features into their mobile apps to keep the customer from having to provide additional authentication data. Some other vendors have recently developed risk mitigation and authentication tools that work completely in the background and give them more confidence that the individual conducting the transaction is legitimate. These tools range from behavioral analytics that rely on patterns of previous transactions—whether they're based on a specific customer or on a group of customers with a similar profile—to electronic device information, called device fingerprinting, that validates that the device being used is actually the customer's. The customer is unaware that these tools are being used, so experiences lower friction.

A new term being used for what is regarded as an improved payment experience is the invisible payment transaction. This happens when a payment is triggered automatically without any customer intervention at the time of the transaction. The best examples of invisible transactions are in the sectors of subscription or card-on-file services. Subscription services include any service where the customer has provided, for example, a payment card or deposit account for a transaction and authorized the merchant or service provider to make future payments using that account. Online retailers, rideshare services, and recurring payments for health clubs, parking garages, utility companies, and charitable organizations are all types of businesses that use subscription services. A relatively recent entrant in the invisible payment segment is the computer/camera monitored shopping experience at some retailers.

So do invisible payments mean we've achieved nirvana? While they certainly provide the lowest level of customer interaction, they also have some possible disadvantages. Consumer advocates are concerned about the impact such payments might have on an individual's budget management. What if they forget about a subscription payment, and when it's deducted from their account, it creates an overdraft or insufficient funds return? Will invisible payments result in increased spending by the consumer? And then there is the bother of updating a bunch of subscriptions if the consumer changes the funding account.

While research has shown that consumers see convenience as a positive factor, they also want to be confident that there is a security process that will make them less likely to be victims of fraud. Will we ever reach the place of total payments peace and happiness with the right balance of security and convenience? Please let us know what you think.

April 1, 2019

Contactless Cards: The Future King of Payments?

Just over two years ago, my colleague Doug King penned a post lamenting the lack of dual interface, or "contactless," chip payment cards in the United States. In addition to having the familiar embedded chip, a dual interface card contains a hidden antenna that allows the holder to tap the card on or wave it near the POS terminal. This is the same technology—near field communications (NFC)—that various pay wallets inside mobile devices use.

Doug is now doing his daily fitness runs with a bigger smile on his face as the indicators appear more and more promising that 2019 will be the year of the contactless card. Large issuers have been announcing plans to distribute dual interface cards either in mass reissues or as a cardholder's current card expires. Earlier this year, some of the global brand networks launched advertising campaigns to make customers aware of the convenience that contactless cards offer.

So why have U.S. issuers not moved on this idea before now? I think there have been several reasons. First, for the last several years, financial institutions have focused a lot of their resources on chip card migration. Contactless cards will create an additional expense for issuers and many of them wanted to let the market mature as it has done in a number of other countries. They were also concerned about the failure of contactless card programs that some of the large FIs introduced in the early 2000s—most merchants lacked terminals capable of handling the technology.

The EMV chip migration solved much of the merchant terminal acceptance problem as the vast majority of POS terminals upgraded to support EMV chips can also support contactless cards. (While a terminal may have the ability to support the technology, the merchant has to enable that support.) Visa claims that as of mid-2018, half of POS transactions in the United States were occurring at terminals that were contactless-enabled. Another factor favoring contactless transactions is the plan by major U.S. mass transit agencies to begin accepting contactless payment cards. According to the American Public Transportation Association's 2017 Ridership Report, there were 41 transit agencies in the United States with annual passenger trip volumes of over 20 million trips.

Given that consumer payments is largely a total sum environment, these developments have led me to ask myself and others what effect contactless cards will have on consumers' use of other payment forms—in particular, mobile payments. As my colleagues and I have written numerous times in this blog, mobile payments continue to struggle to obtain consumer adoption, despite earlier predictions that they would catch on quickly. There are some who believe that the convenience of ubiquity and fast transaction speed will favor the dual purpose card. Others think that the increased merchant acceptance of contactless will help push the mobile phone into becoming the primary payment form.

My personal perspective is that contactless cards will hinder the growth of in-person mobile payments. There are those who claim to leave their wallet at home and never their phone, and they will continue to be strong users of mobile payments. But the reality is that mobile payments are not accepted at all merchant locations, whereas payment cards are practically ubiquitous. While I am a frequent user of mobile payments, simply waving or tapping a card appeals to me. It's much more convenient than having to open the pay application on my phone, sign on, and then authorize the transaction.

Do you believe the adoption of contactless cards by consumers and merchants will be as successful as it was for EMV chip cards? And do you think that contactless cards will help or hinder the growth of mobile payments? Let us hear from you.

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