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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 9, 2020

The Cash Battle Escalates

On the first day of a conference I recently attended, I participated in a town hall panel on the "right to choose cash." And on the last day, I presented key findings on cash usage from the Federal Reserve's Diary of Consumer Payment Choice (DCPC).

Between these bookend sessions, there were numerous remarks and discussions in other sessions and during networking breaks about how consumers' use of cash is changing. I heard the phrase "war on cash" quite a bit, although I think "battles against cash" is more accurate. Not surprisingly, the conference was the ATM Industry Association's annual conference.

For an industry whose primary product is currency, we can understand the importance of this topic to the ATM owner and operators.

There is no question that technology has permitted businesses that previously were cash-only to now either exclude cash or allow payment cards. Vending machines, mass transit fares, and parking meters—which all used to be cash-only—are prime examples of this transition. Since we have no federal law requiring businesses to accept cash, a few scattered private business owners have refused to take it. They cite the costs of handling cash and the security risks of robbery and employee theft as major disadvantages. Of course, every payment method has its advantages and disadvantages. On the positive side, cash payments are immediate and final, and are highly convenient, especially in natural disasters when electrical and connectivity infrastructure is disrupted.

Cash acceptance also has societal implications. The DCPC results show that unbanked households used cash for almost 62 percent of their payments, compared to 27 percent for underbanked households and 20 percent for fully banked households. (Unbanked households don't have checking or savings accounts, while underbanked households have accounts but also get financial products and services outside of the banking system.)

Additionally, lower income correlates to higher cash usage, as the chart shows.

Chart 01 of 01: Payment Shares by Income, October 2018

It is largely because cash-exlcusion practices can harm the un- and underbanked and low-income households that politicians have introduced or enacted legislative action to ban businesses from refusing to accept cash. Massachusetts has had such a ban since 1978 and was recently joined by New Jersey as well as the cities of San Francisco, Philadelphia, Washington, DC, and New York City. The states of Oregon, Wisconsin, New Hampshire, and Vermont have seen similar bills introduced. At the federal level, H.R. 2650, the Payment Choice Act, has received bipartisan sponsorship (28 Democrats and 8 Republicans) and now sits in the House Financial Services Committee.

Federal Reserve Bank of Atlanta president Raphael Bostic in recent remarks noted that some of the new ways business owners are conducting business are biased in that they lock out those who still use cash. He suggested that perhaps the definition of financial inclusion needs to be expanded to include the notion that every person should be able to use anywhere the payment channels they rely on for their transactions.

Take On Payments will continue to follow these cash battles.

March 2, 2020

Back to the Future in Payments

The year 2000 feels like a long time ago. The dot-com boom was peaking. Some millennials were teens; the youngest were in pre-K. Grammy winner Billie Eilish was not born yet. I was using a flip phone—does anybody remember tapping the "5" three times to key in an "L"?

In payments, too, Y2K feels a long way away. Just look at the growth in the everyday ways to pay electronically: prepaid and nonprepaid debit cards, credit cards, and ACH transfers. From 2000 to 2018, these electronic payments in aggregate grew at a compound annual growth rate of 9.8 percent, from 29.9 billion payments to 159.7 billion, according to new data from the Federal Reserve Payments Study released in December 2019.

chart 01 of 01: Number of card and ACH payments in billions

Nonprepaid debit cards, which represented 45 percent of these electronic payments in 2018, had the fastest growth since 2000 (12.8 percent a year). Standing at a mere 8.3 billion payments in 2000, nonprepaid debit card payments ballooned nearly nine times, reaching 72.7 billion payments in 2018. This total number of nonprepaid debit card payments in 2018 is approximately equal to the total number of noncash payments of all payment types (cards, ACH, and paper checks) reported for 2000 in the first triennial study: 72 billion.

This one fact encapsulates much that has happened in payments over the last two decades in the United States. Underlying this growth, we can see the effects of widespread acceptance of debit at the point of sale as well as consumers' willingness to use debit cards as the go-to payment choice for small-dollar-value payments. More recently, debit card growth can be linked to the growth of e-commerce, the decline of checks, the rise of electronic ways to pay bills, and the introduction of the smartphone and mobile commerce.

These facts and many more are available in the 2019 report of the Federal Reserve Payments StudyOff-site link. A link labeled "Accessible Version" sits under each figure—click that to see a table of the data underlying each chart. So, depending upon your particular area of interest in the way payments methods are used, the report should provide you with an in-depth look.

February 24, 2020

Mules May Pack More Than Money

My colleague Dave Lott recently blogged on global law enforcement efforts to crack down on money mules. In his post, he categorized the two main groups of money mules: the innocents and the criminals. It just so happened that last November, I received an email trying to recruit me to be a mule (see the image).

email recruiting me to be a mule

I recently watched a fascinating video describing another type of unwitting mule. The nearly 20-minute video video fileOff-site link from the DEF CON 27 Hacking Conference is well worth your time. Nina KollarsOff-site link offers a highly entertaining glimpse into an interesting mule scheme known as triangulation fraud. (You can see the diagramOff-site link she uses in KrebsOnSecurity.) Rather than helping criminals launder money by moving ill-gotten funds, the mules in triangulation fraud help launder money by unwittingly purchasing legitimate, usually discounted, ill-gotten products from the criminals on a third-party marketplace. These criminals use data from stolen credit cards or synthetically created identities to purchase the products and then "cash out," or launder the funds by reselling them. Criminals will obviously use the data to purchase high-end products for their own use, but the adage that "cash is king" is true for criminals as well and they often look to turn their ill-gotten goods into cash.

The triangulation fraud scheme places the mule in an interesting position, as Kollars highlights in her video. While some people may not suspect they've been caught up in a fraudulent scheme, she was astute enough to know something fishy was going on and that she was, in fact, receiving illegally purchased goods—or, in essence, stolen goods. Ultimately, she reached out to the manufacturer of the products she received in an effort to return them. She also contacted law enforcement. Kollars acknowledged that even though she knew she was dealing with criminals, the deals were so good it was tempting to continue transacting with them.

We often write in this blog about the financial losses due to fraud of the various affected parties, including consumers, financial institutions, and businesses. But there is another important negative consequence I want to highlight now: mules help criminal and terrorist organizations fund illicit activities such as drug trafficking and terrorist activities by participating in moving money around the globe or by purchasing products, as Kollars describes in the video. It is imperative that people who suspect they are looking at a triangulation scheme or otherwise being recruited as mules immediately reach out to law enforcement. These schemes may seem small and harmless, but they are a form of money laundering. Let's all do our part to educate potential mule recruits about these schemes to stop them from being lured in and, if someone tries to recruit them, about the importance of notifying law enforcement immediately. We can all work together to put an end to the recruitment of unsuspecting citizens by global criminal and terrorist organizations.

February 18, 2020

Am I Average? Adventures in Survey Research

The results of the 2018 Diary of Consumer Payment Choice, released in December 2019, show us that, as a percentage share of all types of payments by number, consumers use debit cards for 28 percent of payments, cash for 26 percent, and credit cards for 23 percent.

I can hear you thinking, "No, that can't be."

"Not in my household. We never use cash. And we always choose credit first to get the points." Your skepticism likely is related to the fact that the diary reports averages for a representative sample of U.S. consumers age 18 and older. That means that all sorts of people are included in the estimates of payment instrument use: highly educated and without a high school diploma, born in the United States and born elsewhere, 18-year-olds and 85-year-olds, people who live in cities and people who live in small towns.

Some of those people are a lot like you. Others, not so much.

For example, if you're reading the Take on Payments blog, I'd venture to guess that your household income was north of the U.S. median of $61,937 in 2018, the year this data was collected. And income matters a lot for consumer behavior.

Let's see what happens when we take income into account for payment instrument use, still using the data from the 2018 Diary of Consumer Payment Choice. Kevin Foster, survey expert at the Atlanta Fed, helped me with this analysis:

  • Of payments reported by people in households earning less than $60,000, 32 percent by number were in cash, 31 percent with debit cards, and 15 percent with credit cards.
  • Of payments reported by people in households earning more than $60,000, 22 percent were in cash, 27 percent with debit cards, and 28 percent with credit cards.

Note the heavy use of cash by the people in households earning less than $60,000 and the use of credit cards by the group earning more.

When I see data on consumer behavior—the percentage of people who dye their hair, for example—I can't resist asking myself, "Am I average?" Or even, "Am I above average?"—as are the residents of Lake Woebegone. Add a bit of demographic data, and my assessment of how "average" I am changes. Instead of the percentage of all people who dye their hair, compare me to the percentage of women older than 45 who dye their hair, for example.

From hair styling choices to payments choices, not only income but also demographic characteristics like age and gender are important for consumer behavior. That's why the data set for the Diary of Consumer Payment Choice includes a full set of demographic variables (such as age, education, and household size) as well as information about income and employment status. All the data, including a code book explaining all the variables, are available online. So feel free to slice and dice the data as much as you like.