Charles Davidson: Hello, and welcome back to another episode of the Economy Matters podcast. I'm Charles Davidson, a staff writer for the Atlanta Fed's Economy Matters magazine. Today, we're talking about the rapidly changing payments landscape with Cheryl Venable, who is a senior vice president and head of the Fed's Retail Payments Office, and Mary Kepler, also a senior vice president and the Atlanta Fed's chief risk and compliance officer. Mary's duties also include overseeing the Atlanta Fed's Retail Payments Risk Forum. So Cheryl, Mary—thanks a lot for taking time to talk with us today.
Cheryl Venable: Thanks for having us.
Mary Kepler: Sure.
Davidson: Well first off, the Fed has the Retail Payments Office. Can you explain for our listeners, Cheryl, what exactly is the Retail Payments Office, or as we call it, the RPO?
Venable: So the Retail Payments Office is housed here, out of the Federal Reserve Bank of Atlanta, and we have responsibility for the Federal Reserve's check and automated clearinghouse businesses, which include clearing and settling ACH and check types of payments. We do this on behalf of the entire Federal Reserve System, so this is a consolidated responsibility that we provide on behalf of the Federal Reserve.
The Atlanta Fed's Cheryl Venable (left) and Mary Kepler
Davidson: Now, payments—it sounds pretty obvious what we're talking about, but could you quickly explain, when we do say "payments," broadly what exactly do we mean?
Venable: Many times when we talk about payments, we categorize them into five major buckets. We talk about check, ACH, wires, cards—which would include things like debit cards, credit cards, prepaid cards—and cash. Those are the primary areas of payments. There's been a lot of innovation around payments over the years, but many times what we're seeing is that innovation is occurring around how users interface with these sorts of back-end clearing and settlement systems. A lot of the cards and ACH still support these innovations for the actual clearing and settlement of the payment themselves.
Davidson: Right, so the sort of "deep plumbing" is still kind of the same?
Venable: That's what we're seeing right now.
Davidson: Interesting. So, what does the Fed have to do with all this? I know that we do process some payments, a lot are handled by private sector entities. So, what's sort of our general role in the payment system?
Venable: We talk about ourselves having a couple of hats when we are working in payments. As you just described, we are a provider and an operator of some of the payment systems. So we process check, ACH, and wire payments and we also handle cash, obviously. We also play a leader/catalyst role in the payment system, where we are working with the industry to drive change, really improvements in the efficiency, the effectiveness, accessibility of the payment system. So we really do play two distinct, different roles in the payment system today.
Davidson: Right. Well, I know one of the things we do is conduct a broad study of the payments landscape every three years, to keep track of the trends. Still, can you talk a little about a time when a new trend surprised you or surprised the Fed?
Kepler: Well, the payment study began in the early 2000s, and the goal at that time was to understand the volume of checks. I can say that what they learned at that first payment study was a surprise. The volume of checks was much less than originally thought. Since that time, the payment studies that have occurred every three years have indicated, really, an expected trend. All electronic payments continue to grow, checks continue to decline. Probably not surprising to anyone listening, is that debit cards are now the most commonly used payment form. Eighty percent of us consumers use them at the point of sale.
Davidson: Right. What about cash? We sometimes hear an expression that cash is king. Has cash been demoted to some level below king by now?
Kepler: Well, cash is still used and it's used in a lot of transactions, most commonly in small-dollar transactions. Every time a natural disaster occurs, I think we're reminded of how important cash can be because there's no electricity, so you can't use cards, you can't visit the ATM machine. The San Francisco Fed has a great interest in the volume of cash because they're the Cash Product Office, and they conduct surveys occasionally. I saw a recent survey that indicated for the first time that people would admit, that cash is now lower in volume than cards.
Davidson: That's interesting. I'm a big contributor to the rise of cards, I have to say. Speaking of methods of payments, we hear a lot these days about mobile payments—paying by smart phones, chip cards, and so on. Why do a lot of these advances seem to be occurring in just the past year or two? Or, is that just a misperception and it's been a more gradual evolution?
Kepler: I feel like technology, and the availability—or affordability—of the technology, has a lot to do with the changes in the past couple of years. I read a statistic recently that there are over 200 million mobile phones in the United States and about 75 percent of them are smart phones. So, these are fantastic, powerful computers that we have in our hands now, almost all of us—it's nearing ubiquity. With that kind of technology, I think that you see a lot of innovation in payments.
Davidson: Right, and along the lines of innovation, at the Fed, one of the things we try to do is to help steer the industry toward handling payments more efficiently, which I guess presumably means faster and more securely. So first, why does the Fed care about faster, secure payments? Secondly, what do we do to help realize this move toward faster and more secure payments? What do we actually do to promote that?
Venable: The U.S. payment system that is safe, efficient, and broadly accessible is really vital to the U.S. economy. As we just talked about, there's millions and billions of transactions that flow through these various payment systems. The Fed plays a very important role, both as provider, as we talked about, but also as a catalyst for change in driving those improvements in the U.S. payment system.
In January of last year, 2015, we released what we called the strategies for improving the U.S. payment system. Since that time we've been working really collaboratively with the industry to determine ways by which to meet the objectives that we outlined in that strategy paper, which was focused on becoming faster, more secure and more efficient. We do that in multiple ways. Some of the things that we're doing to enhance our check and ACH Services and the way that we process those transactions are in an attempt to meet those objectives. We've also done it by standing up two different task forces with the industry specifically focused on faster payments, and one on secure payments. That faster task force is focused on working with the industry to identify criteria that a faster payment system in the U.S. should meet in order to drive faster clearing and settlement of those transactions, and also to evaluate alternatives for how to actually implement those sorts of solutions. So that's really the faster piece, and I'll let Mary speak to the secure task force.
Davidson: All right. Mary?
Kepler: The secure payments task force is working with the industry to push the concept of security and payments. And really what's behind that is the idea that when you move toward electronic payments, several threats emerge that really don't exist with other payment types, the paper payment types. As we move down this electronic road of no return, we need to ensure that there's authenticity in the payment, confidentiality of the payment, and then integrity of the payment. These three things really are how we break down the components of payment security, and without any one of them, the users can lose trust in the payment system. We don't want that to happen.
Davidson: It occurs to me that, the payment system is sort of like an umpire in a baseball game or the referees in a football game—you don't want to notice it because if something goes wrong, that tends to be when people think about it and it gets a lot of attention. Is that right?
Kepler: I think that's a good analogy.
Venable: Yes, I would agree.
Davidson: Mary, another one for you. I want to combine a couple of questions in one here and that has to do with combating the risk—the role that industry and law enforcement plays—and then, what's our role, the Fed's role, in likewise combating the risks?
Kepler: Well, the industry itself is developing and implementing solutions all the time that address security. For example, the industry shares information about security issues, whether it's cyber threats to the payment system itself or specific things that have happened to a payment type. The industry really does share a lot of information about that. They also share fraudulent schemes so that financial institutions are aware of potential fraudulent payment efforts out there. I think that the Fed is interested in, first of all, that communication, making sure that the industry shares the information. The Fed is also interested in having the industry focus on this because, again, we go back to the loss of trust in the payment system.
I will tell you, too, that law enforcement has a really difficult job when it comes to security in payments. With electronic payments, they have become global. There are no boundaries when it comes to electronic payments, and so you will see perpetrators of fraud and cyber attacks that we don't know where they are. Many times they aren't within the borders of this country. Law enforcement can identify potentially when something is happening, but may not always have the authority to find these people and bring them to justice. It's very difficult. We as the Fed are interested in making sure law enforcement knows about the fraudulent schemes and security issues. With that knowledge, they are better equipped to find these perpetrators and take care of them.
Davidson: I'm wondering, does the Fed or anybody else in some sense conduct a cost-benefit analysis? What I mean is, a lot of these advances speed things up and really increase the convenience for the consumers, and probably for businesses, too. But at the same time, as we've just talked about, it also can foster new risk or different types of risks. So is there some player out there who sort of weighs those things or is that something that everybody does on some level?
Venable: I guess, from my perspective, I think every participant in the payment system is evaluating that risk from their perspective. In fact, that has been a conversation in the faster payments task force. Obviously, it's clearing the settlement of a transaction, but with that, you have to then speed up your risk management activities around that particular transaction to make sure that it still is secure. We're having similar conversations with the industry as it relates to the adoption of a new capability in the automated clearinghouse space with same-day ACH, we will now be able to settle ACH transactions same day. The industry is having similar evaluation of their risk management strategies to ensure that they are keeping pace with the actual settlement of the transaction. I'm not aware if that's being evaluated on a more holistic industry view, but Mary has been involved in the secure task force.
Kepler: Right. To my knowledge it's not being evaluated in a more holistic way. To give you an example of the lack of a holistic view of this, when it comes to fraud, the numbers are small enough in individual organizations that they are willing to take certain risks instead of incur a cost to completely combat it. That's pretty common. When you compare the cost of fraud and payments to say, the loss due to credit cards—that's a credit loss—the loss from the credit side is enormous. It's exponentially higher than the loss from fraud.
Davidson: You're talking about people just not paying their bill. Old-fashioned kind of stuff.
Kepler: Right, exactly. So, everybody needs to look and see if they can make a business case for doing these kind of things to combat the security issues. They don't always make business sense. That's why the Fed cares, I think, because we're concerned about trust in the system.
Davidson: So, Mary, is it the case, in a broad sense, of course we hear when there's a huge breach at some retailer, but in general, the payment system really is pretty safe, isn't it overall?
Kepler: Well, I think from the consumer standpoint it's very safe, even though all of our data is out there due to multiple data breaches we've all been victims of. The fact is, regulation protects us as consumers, so we very rarely are liable for any kind of fraudulent activity as long as we follow the rules of reporting it in a timely manner. Most consumers consider that safe.
Davidson: I'm going to switch gears a little bit here and talk for a second about mobile payments. People who follow the payments industry or read stories occasionally probably are aware that in a lot of other countries they conduct a bigger share of their payments by mobile devices than we do here in the U.S. Why is that?
Kepler: We'll start with the example of M-Pesa, which is the system used in Kenya, the mobile payments system used in Kenya. Quite often it's referred to as a great success. I think it is for their country, but here's the difference: in the United States we have had an established financial system where most of the population has a banking relationship. We also have a telephone infrastructure. Those two things combined in the United States have provided for safe payments over the years. In Kenya, there are neither of those things. People don't have banking relationships, and people don't have access to an established telecommunications system.
So, mobile phones were an excellent way to, first of all, bring communications to a country like that, and some brilliant people realized it's also an excellent way to facilitate payments because paper payments in Kenya were very dangerous. So I wouldn't say the United States is wildly behind. We've had a great system. It's hard to implement something new in our very complex country with lots of financial institutions and lots of choices.
Davidson: One other question about—this isn't really about mobile payments per se, but the chip cards—a lot of debit cards now have the little chip that gets read instead of just the old swiping.
Kepler: Well, it might surprise you to know that the chip is actually about 20 years old. It's new to us in the United States, and again I go back to how we've had this telecommunications infrastructure that has allowed us to, on a real-time basis, authenticate the cards as we're using them, when we swipe them with that magnetic stripe. In other countries where they didn't have that online, real-time authentication, they had to go to a more secure system, and the chip itself is a little computer that is safer, and it allows for better authentication. So we have gone to this, I think, really because it's a global environment now, and so we're just finally adopting something that's been out there for a long time.
Davidson: Right, because it seems a little slower, actually, than swiping, in my experience.
Kepler: [toward Venable] Have you had an experience?
Venable: Yes, I have used my chip cards, and I would agree, it is slower. But being on the inside and knowing about payments, you know that it is promoting the security of the transaction. So I, as a consumer, understand it, but I think it probably does challenge others to understand why is it better because it's not speeding up their experience.
Davidson: A couple of last questions, turning to Bitcoin. We used to hear a lot about Bitcoin. It was in the news it seemed every day, but it's fallen out of the headlines. Is there anything about Bitcoin that particularly interests the Fed?
Kepler: Well, Bitcoin itself is one of many virtual currencies. There's Dogecoin and Litecoin and, oh, I don't know—probably "Mary Kepler-coin" if I wanted to invent one. But that is not really of interest to the Federal Reserve. What's really of interest is the underlying technology. It's called a distributed ledger technology. This is what Bitcoin is built on. There are many financial institutions who've have already picked up on how valuable this underlying communications technology is. In fact, large financial institutions have come together for a consortium to figure out how do they use this distributed ledger technology to transfer other things of value. So, think about contracts, or shares of securities, and how can the distributed ledger technology transfer these assets and account for them? I think that's what we're going to see in the next few years that's really exciting about Bitcoin.
Davidson: Well, Mary and Cheryl, thank you so much for your time today, I think that was really interesting.
Kepler: My pleasure.
Venable: Thank you.
Davidson: Again, I'm Charles Davidson, staff writer with the Atlanta Fed's Economy Matters magazine. Thanks for spending time with us today, and please visit Economy Matters at frbatlanta.org/economymatters and read some of the interesting features that we have there. You can also learn more about the bank's Retail Payments Risk Forum at frbatlanta.org/rprf and also, you can learn more about payments at fedpaymentsimprovement.org. That covers that project that Cheryl described earlier, and also at frbservices.org. Thanks a lot for listening.