February 08, 2010
Same-day ACH provides faster payments "across the pond"
Speed and convenience are driving innovations in payments. Nowhere can that be seen more clearly than the United Kingdom, where Faster Payments Service (FPS) is described as "ACH on steroids." FPS is a payments innovation that provides near real-time delivery and 24/7 accessibility for consumers. It enables customers to make electronic payments, typically via the phone and Internet, in a matter of hours rather than days.
The need for financial institutions to better compete with other same-day clearing changes (i.e., image exchange) coupled with consumer demand for immediacy and convenience in payments has spurred efforts to introduce expedited payments services like FPS both abroad and in the United States.
How does it work?
Launched on March 27, 2008, FPS was the culmination of a three-year initiative to reduce clearing times on phone, Internet, and standing order payments in the United Kingdom that previously took three days to process. The design and implementation of this new payments infrastructure involved several partners, including the U.K.'s Office of Fair Trading, the Payments System Task Force, the former APACS (Association for Payment Clearing Services), U.K. Payments, VocaLink, and 13 founding member banks.
The new service runs alongside existing payments channels in the United Kingdom such as BACS and CHAPS. The daily operations of FPS are managed by CHAPS, which is also responsible for the U.K.'s real-time, gross settlement payment system (CHAPS Sterling). CHAPS would be the equivalent to Fedwire and CHIPS in the United States. However, VocaLink provides the central infrastructure for FPS through its ATM/Debit network.
FPS only supports credit payments and imposes a £100,000 maximum on standing orders (regular payments made on the same date to a specific beneficiary) and a £10,000 maximum on single immediate payments (SIP) or ad hoc transactions. Customers are able to initiate payments over the phone or online all day, every day.
In its first year, FPS processed 180 million transactions representing £70 billion. According to a recent PricewaterhouseCoopers and VocaLink report, FPS had processed 240 million transactions as of July 2009. Much of this volume is made up primarily of payments between personal account holders or from personal accounts to business accounts (i.e., bill payments).
FedACH to offer same-day service
There is particular interest in the U.K.'s experience with Faster Payments as similar efforts are under way to develop a same-day ACH service in the United States. In March 2009, the Federal Reserve announced plans to develop an intraday service for certain existing ACH debits. In particular, the new service would be limited to consumer checks converted to ACH (ARC, BOC, and POP) as well as consumer debits generated from Internet and telephone transactions (WEB and TEL).
There are at least two key differences in the United Kingdom and FedACH same-day services. Unlike the U.K.'s Faster Payments service, the FedACH settlement of same-day payments will not be real time. Settlement for ACH same-day will occur only once a day at 5 p.m. (see chart below). Also, consumer and corporate credits will not be included in the service.
However, similar to FPS, the FedACH same-day service is not mandatory. An opt-in participation agreement will be required from any financial institution engaging in the service. It is anticipated that the faster settlement will allow participating banks to gain earlier availability of funds as well as to identify return items and potentially fraudulent transactions earlier. Implementation of the service is scheduled for the second quarter of 2010.
| FedACH Same-Day | U.K. Faster Payments Service | |
| What types of payments are eligible? | Consumer checks converted to ACH and debits initiated over the telephone or Internet | Electronic payments made via the Internet, telephone and standing order payments |
| When will the service launch? | Second quarter 2010 | FPS was launched on May 27, 2008. |
| What type of settlement will it offer? | The same-day ACH service will be a batch-processed, gross settlement system. | FPS is a real time (no batches), net settlement system. |
| Is the service real time? | Entries will be deposited by 2 p.m., delivered by 4 p.m., and settled at 5 p.m. | FPS processes near real-time payments made via the phone or internet. P2P payments are processed 24/7/365, while standing orders are processed during banking hours. |
| What infrastructure does it use? | The FedACH network | VocaLink's existing ATM/Debit infrastructure | Source: Federal Reserve, CHAPS |
Global payments context is changing
The payments world is changing as emerging product innovations provide faster processing and delivery of payments. In general, faster payments reduce temporal risk to the parties to a transaction, which is the lag time between the deposit of an item into a clearing system and the delivery and settlement of that item. There are lessons to be learned with each development—whether in the United States or across the globe—that can help better inform the design and implementation of future payments services. Ultimately, all of the participants benefit by collaborating to ensure a more secure payments system.
By Jennifer Grier, senior payments risk analyst in the Retail Payments Risk Forum at the Atlanta Fed
February 8, 2010 in ACH, Payments | Permalink | Comments (0) | TrackBack (0)
February 01, 2010
New prepaid card functionality: Card-to-card funds transfer
Innovators now have developed a new prepaid card feature that facilitates a seamless transfer of funds from one card to another, providing a more efficient person-to-person (P2P) payment process that includes remittances. Prepaid cards, also known as stored value cards, are another alternative to paper-based P2P payments and have been a boon to underbanked consumers, allowing them to participate in the electronic economy.
The question is, will this enhanced convenience help drive the adoption of prepaid payment card products?
Prepaid cards were first introduced in 1994 by retailers as proprietary gift cards that could be used only at the stores of the issuing merchant. These are referred to as "closed system" cards and include the popular "loyalty" cards typically issued by one or a group of merchants. Other early uses of stored value cards in the United States included prepaid telephone calling cards, mass transit cards, public benefits payments, and even child support payments. In contrast, "open system" cards are typically issued by a bank under branding of the major card networks and functional wherever they are accepted.
Popularity growing but still lagging traditional debit and credit
Today pre-paid cards are increasing in popularity, but a recently released survey conducted by the Boston Fed shows most consumers still prefer credit or debit cards over prepaid cards.
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ENLARGE |
However, changes in fee and interest programs among banks issuing credit cards may change consumer preferences. As card legislation limits the interest and fees that card companies can impose on borrowers, many banks have started to implement across-the-board increases in interest charges and eliminating loyalty programs for borrowers with higher credit quality.
State of adoption
Prepaid card users can now transfer funds from one card to another through the Internet or by phone. MetaBank is a major U.S. issuer of prepaid open-loop products licensed through the major card networks. Many of these products are marketed to underbanked communities. Also, many of these products may be used for cross-border remittances in addition to domestic person-to-person transfers. Prepaid card products in other markets throughout the world are offering this feature as well. For example, this service is offered in India free of charge to bank customers of DBC (Development Credit Bank Ltd.). Visa Europe offers cards with this feature, allowing recipients to receive funds in all major currencies directly to their Visa card using the global Visa network. If the recipient does not have a Visa card, he or she can collect the cash from a nominated bank branch. In all, Visa Europe’s money transfer operates as card-to-card, card-to-card via email, and card-to-cash.
Convenience as a driver
In a final analysis, technology is driving the development of myriad alternatives in the P2P space, as with other retail payments. How prepaid instruments evolve, in whatever physical form they take — be it a plastic card, a fob, or a cell phone — will ultimately depend on consumer preference. Expanding the functionality of the prepaid instrument for money transfer could be a driver of a new type of prepaid product.
By Ana Cavazos-Wright, payments risk analyst, and Cindy Merritt, assistant director in the Retail Payments Risk Forum at the Atlanta Fed
February 1, 2010 in Card-to-Card, Credit, Debit, P2P, Prepaid | Permalink | Comments (0) | TrackBack (0)
January 25, 2010
Connecting the dots needed to reduce payment risks
Some say baseball is not only America's Game, but also a metaphor for life in America. As a lifelong fan I have noticed that each year a couple of rookie players explode onto the scene in April, putting up terrific numbers and establishing themselves as the sport's next great icons. Usually by mid-May they have disappeared from the league leader boards as their numbers fall precipitously. Why? Because the league knows very little about the players' strengths and weaknesses in April, but as time wears on, pitchers make adjustments to exploit the rookies' weaknesses. Don Sutton, an announcer for the Atlanta Braves, says that baseball is a game of continuous adjustments. The rookie wunderkinds will only be successful over the long run if they are able to make the adjustments necessary to counter the pitchers' new approach.
In today's payments world, rookie fraudsters are having significant success penetrating corporate payroll and accounting systems using Trojan horse and key-logging software to insert bogus payments into the company's disbursement streams without the company realizing until it is much too late. So called "money mules," hired by the kingpin fraudster, receive the "stolen" funds in new accounts and immediately wire them to faraway places after taking their promised cut. Such schemes have been much discussed in the payments industry press over the past few months.
My wife's sister is the bookkeeper for a small firm, and in that role she is responsible for most of the company's disbursements, including payroll. Over a glass of eggnog or some acceptable substitute, I told her about these schemes and she listened, wide-eyed. We discussed the controls that were in place in the company that could detect and prevent them from becoming a victim, and I began to realize the problem we face as an industry in addressing such new threats. Like the rookie baseball player, we must begin to adopt a mentality of constantly adjusting to the ploys of the fraudsters to ensure our future success. For example, a company could add a new step to their disbursement process that would check payroll totals for reasonableness in terms of numbers and dollars, scan preliminary logs of payees, names or accounts, etc., before pressing the transmit button. The challenge is to figure out how to share threat information broadly enough to reach the point of common sense protection. There can be no remedy if there is no awareness.
A number of organizations are working on education and communications efforts within their industries, but the best protection is always a first-line defense at the point of greatest vulnerability—the corporate originator of payments. While we in banking view the depth and breadth of our industry as daunting, it is trivial compared to the universe of American business, from large mega-corporations who can invest millions in protection to small entrepreneurs engaged in realizing their lifelong dreams, totally oblivious to the dangers of the brave new world. What, then, can we do to address this seemingly impossible challenge?
The answer would seem to lie in harnessing the amazing technology present in the world today, the same technology being used by the bad guys. Just as nuclear technology can be used to pursue both good and bad objectives, so can e-mail systems, social networking, twittering, and other yet-to-be-discovered advents of the new century. My sense is that the problem lies in discerning how to connect the dots. In other words, how can we as a society create a massive web of "community of interest" associations that allows information to reach the eyes and ears of all (or most) of those who need to hear it?
From my background as a math major, I know that the shortest distance between two points is a straight line (actually, I think you can get this from high school geometry). Noting that every company needs a bank, my sense is that the straight line for this effort runs directly from the central industry sources of fraud knowledge, to the banking community, to a bank's business customer base. Simultaneously, another connection at the top of the chain runs from industry sources to other parties in the regulatory and law enforcement businesses.
Over the past few months, we at the Retail Payments Risk Forum have become aware of and frequently engaged with several organizations who are interested in and trying to enhance the current communications and education process. For example, a new interagency fraud working group, co-chaired by the Department of Justice and the Federal Reserve Board, has been created to share information between bank and nonbank regulators and the law enforcement community. An effort to construct an educational toolkit for banks to use to report fraudulent activity is being developed under the auspices of BITS. In an ideal world, we would all work together to harvest the unique capabilities of each of the many efforts under way and try to coordinate them in such a way as to minimize duplication, maximize knowledge, ensure accuracy, and expedite wide distribution of information. In the months ahead, the Forum will be trying to work across many interested parties to see if there is a model for accomplishing this goal that could be deployed to the benefit of all possible victims in the "fraud value chain."
By Rich Oliver, executive vice president, FRB Atlanta's Retail Payments Risk Forum
January 25, 2010 in Corporate Internet fraud, Fraud, Fraud awareness, Internet fraud education, Money mules, Payments risk | Permalink | Comments (0) | TrackBack (0)
January 19, 2010
Retail Payments Risk Forum hosts conference on risks in emerging payments
Conference Summary: HTML | PDF
The third annual Retail Payments Risk Forum conference, "Emerging Retail Payment Risk Issues: An Industry, Regulatory and Law Enforcement Dialogue," has come and gone, drawing a mix of bankers, regulators, and law enforcement representatives Nov. 5–6 at the Atlanta Fed. Unfortunately, many of the risks and fraud threats to emerging payments discussed at the conference will be with us awhile.
The good news is that the conference is one of the ways the stakeholders can collectively advance the fight against risk and fraud, through sharing information and strengthening relationships. Much of the information shared at the conference is now available on this site, including a conference summary and the presentations delivered by conference speakers.
As in the past, attendees participated in breakout sessions designed to promote the development of actions that all group participants could take during the year to collaboratively address issues of risk discussed during the conference.
Emerging payments create challenges and opportunities
Some key themes covered in the conference focused on the challenges and opportunities for payments risk management in an environment of technological change. The keynote speaker highlighted the fact that financial services companies must adapt to an array of transformative technologies in a time when consumer confidence and trust in financial institutions are threatened. Nonbanks continue to enter the retail payments marketplace to compete with regulated financial institutions for market share. An expert panel spoke on emerging payment market developments and outlined the trends and risks in new payment channels and devices, noting that contactless devices, mobile commerce, and social networking platforms are areas to watch. The person-to-person payment area is particularly ripe for innovation.
Alternative payment types and new providers can lead to increased security and fraud risks, requiring increased public and private engagement to promote effective risk-mitigation practices industrywide. This engagement is difficult as many financial institutions' risk management efforts can be fragmented by payment delivery type. While financial institutions must look across payment channels to develop holistic risk-mitigation programs, time-tested practices of ensuring dual controls and segregating duties in operations are still critical elements of effective risk management. Newer fraud schemes such as corporate account takeovers, analogous to corporate identity theft, can be combated effectively with current risk management tools if properly implemented.
Growing threats from data breaches and cybercrime
Still, the growing threats to cybersecurity by global crime rings represent a significant industry challenge. Panel experts discussed private and public partnerships and initiatives in place to respond to increased fraud in retail payments and improve the resiliency of the financial services sector. Law enforcement representatives discussed trends in criminal activity and recent successes in shutting down global crime rings. Industry practitioners discussed the need for better information sharing with financial institutions and law enforcement agencies to prevent criminals from migrating across payment systems and financial institutions.
Conclusion
This event offered the participants a deep and broad update on trends and issues of the day as the payments industry, regulators, and law enforcement all seek to work together to understand, mitigate, and deter risks and fraud in the emerging payments environment. Clearly, further work remains, and the landscape is ever changing. But the challenges faced are common to all parties, presenting an imperative for common understanding, information sharing, and collaborative action.
By Cindy Merritt, assistant director of the Retail Payments Risk Forum
January 19, 2010 in Currency, Events, Identity fraud, Patents, State attorneys general, Suspicious activity reports, Welcome | Permalink | Comments (0) | TrackBack (0)
