April 30, 2012
Why are my credit and debit cards still embossed?
Having spent a number of years in the payments business focused on cards, I commonly receive questions from family and friends related to cards. I would be a wealthy individual if I received a dollar for every time someone asked me, "When am I going to get a card with a chip in it?" Although I am not able to offer any specifics on timing, I do feel confident in telling them that they are coming within a given time frame.
This past weekend, a neighbor out for a leisurely weekend stroll stopped me and asked, "Why do I still have an embossed credit card?" I must admit that I was a bit stumped by the question and couldn't offer him a reasonable explanation. I could not recall the last time that I had seen a "knuckle buster" machine used to make an imprint of a card. And who hasn't struggled trying to read your embossed card numbers and expiration date to make an Internet or phone transaction? Still pondering the question a few hours later, I did recall the food delivery driver who brought the old carbon paper slip, along with our food, to the door and used a writing pen to make an imprint of my card. I am quite certain that over the past five years, this was the only time an imprint of my card has been made—and this includes using my cards for purchases in taxis, from food truck vendors, and in developing countries such as Honduras, and remote Caribbean islands.
One answer to the need for embossed cards lies with network chargeback rules. Both MasterCard and Visa subject merchants to chargebacks on key-entered card-present transactions with no manual imprint. A key-entered transaction takes place when the terminal cannot read a card's magnetic stripe, so the vendor has to input the card number and expiration date. Even when this occurs, I am not so sure merchants follow the network's chargeback procedures. Do you remember a merchant making an imprint of your card in the rare instance your card information had to be manually keyed? Maybe it's time for the card networks to re-visit their chargeback procedures.
Another reason for maintaining embossed cards is that apparently some merchants, both domestically and internationally, still rely on imprints for transactions. I do not think that I am alone when it comes to my extremely limited experience with manual card imprints over the past five to even 10 years. With highly reliable telecommunication systems and the ever-growing number of mobile card readers, perhaps the networks should require all transactions to be swiped (for mag stripe cards), dipped (for EMV chip cards), or tapped (for contactless cards).
So while I have several answers to my neighbor's question, I am not convinced any of them are reasonable explanations in this day and age. Cards are embossed primarily for legacy reasons, and this embossing is irrelevant for most transactions. Maybe as issuers transition to chip-embedded cards (hopefully), they could subsequently transition away from embossed cards. In a recent American Banker article, Andrew Kahr discussed one good reason to change to nonembossed cards, and that would be to allow banks to instantly issue cards. I am quite certain my eyes would appreciate that change!
By Douglas A. King, payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed
April 30, 2012 in cards, chip-and-pin | Permalink
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Posted by:
C. David |
May 01, 2012 at 08:50 AM
One of the reason that our company still issues embossed cards (in Europe) is that non embossed cards aren't taken seriously. This is obviously a public perception issue but when you have a piece of plastic with a printed PAN, expiry, etc, it just looks like a bit of a cheap imitation of a "real" card. I think this is most likely the biggest hurdle to get people using non-embossed cards.
For what it's worth, I haven't seen a knuckle duster in over 10 years, maybe even longer, but it's slightly different being in the UK as we migrated to EMV a while ago.
Posted by:
chunk |
May 01, 2012 at 07:04 AM
March 05, 2012
Generations of payment innovations
Bob Kennedy is a director and payments expert in the Fed Atlanta's supervision and regulation department. As Bob prepares for retirement next month, we sat down to talk about his thoughts on the retail payments environment in the United States.
P&R: Bob, you've gained a reputation in industry circles as an expert in the payments field and a frequent speaker at industry events with a long and distinguished career in bank supervision. Can you tell us a little about your background and your retail payments experience?
Bob: I actually come from a banking family. My grandfather actually set up a bank in the 1890s in a small town in rural Alabama to provide simple financial services to businesses and over time it grew and expanded to more consumer-based financial services. My father took over the business and employed me as early as age 12 on the teller line one day a month after school, authenticating customers who came in to cash their social security checks.
Payment services were pretty simple back then. At our little bank, customers had traditional demand deposit accounts but we did not issue checkbooks. So when they wanted to make a purchase at a merchant they would use counter checks and fill in their account information. The merchant would call my father at the bank to verify the customer's identity and funds availability.
By the 1960s, things were getting more complicated. Our customers were starting to shop more in nearby cities, so they asked us for preprinted checkbooks. My father lost an important control when we started to issue these, but we recognized the need to change with our customers so we could keep their business. Then in the 1970s, our customers demanded credit cards. The point of this history summation is that the family bank had to change to adapt to consumer demand. The same holds true today as we continue to see disruptive forces that are changing the payments business.
P&R: How would you characterize the general landscape today for bank adoption of emerging retail payments?
Bob: I would characterize the landscape as exciting because nothing is static—there is a lot going on, and we're seeing community banks beginning to adopt new types of payments. Banks are adapting to consumer demand, as before, but at the same time they need to be able to find a reward for providing the product or service, and that's in the form of revenue or customer retention. They have to have a use case for offering new services.
One of the biggest drivers of change in retail payments these days is the demand for payments data, which has become a virtual treasure trove in the sense that it provides tangible evidence about consumer decisions about products and services. A consumer who buys something has made a clear decision about the product, the retailer, and the date and time when he or she makes the purchase. This is why data mining is becoming so important to merchants in developing marketing strategies.
For example, a large retailer with a decoupled debit card may obtain information about individual consumer spending habits that it uses to help understand future potential consumer choices about products and services. According to a recent article by Charles Duhigg in the New York Times, this retailer has collected tons of data on every regular customer they have. With a "Guest ID" that the store assigns to these regulars, they track everything they buy. I believe this is why a lot of big nonbank firms like Google and PayPal are trying to establish a foothold in retail payments through the introduction of new payment channels. They recognize the monetary value of payments data at the point of sale.
P&R: What are the primary risk concerns for banks in retail payments today?
Bob: There are multiple risks for banks to consider, including operational and liquidity risks. Clearly, for U.S. banks, strategic risk is critical today with nonbank firms introducing disruptive innovations and evolving as a competitive force for banks that must remain relevant and profitable at the same time. They are forced to continually assess their business models as a result. On the positive side, we are seeing new partnerships. I read about the new alliance with Regions Bank and Western Union, leveraging each firm's agent or branch networks to provide remittance and banking services on a complementary, cross-selling versus competitive basis.
That brings us to vendor management. With banks outsourcing and partnering with nonbank, third-party firms, increased oversight for those relationships is required, along with more expertise at the bank level. For many community banks, hiring that level of expertise is challenging, and they need to rely on the risk management services from their core processors.
In addition, liquidity risk for banks in this new payments landscape has been heightened by the more rapid clearing and settlement of payment files.
Finally, security and privacy are big issues for U.S. financial institutions today, not only from a regulatory perspective but also—more importantly—from the need to protect the bank's reputation among its customers as a trusted payments partner.
P&R: What trends should industry stakeholders watch going forward?
Bob: Technological advancements are making our retail payment systems more effective, efficient, and easy. U.S. banks are doing a good job and approaching these new services and partnerships with sound due diligence. Retail payments will continue to change going forward, with disruptive services and nonbank firms appearing in ways we cannot predict. I think it will continue to be an exciting area to watch for a long time.
March 5, 2012 in banks and banking, cards, privacy | Permalink
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December 19, 2011
The many flavors of EMV
As 2011 comes to an end, EMV (Europay, MasterCard, and Visa) transactions are still the exception in the United States. However, the United States has made some progress towards an EMV migration—several financial institutions are now issuing EMV cards for select portfolios. Also, on the acquiring side, some large merchants voiced strong opinions during the year about adopting the EMV standard. And towards the end of summer, Visa announced details of its "chip migration and adoption of mobile payments acceleration plan."
The perceived cost of a full EMV migration has been a great barrier for the U.S. payments industry. Further complicating the migration are the different ways issues and merchants can implement EMV. In particular, the various transaction authorization processes of card authentication, cardholder verification, and payment authorization take place in an online or offline environment or a combination of the two.
This week's post highlights the differences between offline and online transactions and the implications for U.S. migration to EMV-supported card payments.
Offline EMV
Prior to the introduction of chip cards in the United Kingdom, cards used the same magnetic stripe technology that is currently the standard in the United States. However, the difference is that in the United Kingdom most card transactions were authorized offline. In an offline authorization environment, card transactions are batched over a given time period and then transmitted to issuers, usually at the close of business, for authorization. Because the offline authorization environment does not permit real-time authentication, fraud rates were significantly higher than in markets using online authorization. To mitigate the additional risk inherent in the offline environment, the United Kingdom adopted the EMV standard—more specifically, chip and PIN.
In an offline EMV chip-and-PIN transaction, the payment terminal communicates with the integrated circuit card (ICC), or chip, embedded in the payment card rather than using telecommunications to connect and communicate with the issuing bank. This communication between the ICC and terminal allows for real-time card authentication, cardholder verification, and payment authorization. However, because most payment terminals (not unattended terminals) now support online authorization, payment authorization usually occurs online while card authentication and cardholder verification usually take place offline.
Online EMV
In contrast to the United Kingdom's predominately offline authorization experience, nearly all card transactions in the United States are authorized online. This environment allows issuers to authorize transactions at the time of sale using multiple fraud and risk parameters.
In an online EMV transaction, the ICC-embedded card generates a cryptogram that is authenticated by the issuer during the authorization request. Assuming the card is authenticated and the merchant requires cardholder verification, either the terminal transmits the cardholder's encrypted PIN to the card issuer for verification or the merchant verifies the customer's signature to the signature on the card. Finally, for payment authorization, the terminal transmits payment-related information and a transaction-specific cryptogram to the issuer, which then authorizes or declines the transaction. This online payment authorization process is the same process that magnetic stripe cards currently use.
What does this mean for a U.S. EMV migration?
Unfortunately, the many methods for card authentication, cardholder verification, and payment authorization that EMV supports could lead to many different implementations in the United States. The few EMV-issuing financial institutions in the United States have reached no consensus when it comes to cardholder verification methods. Some issuers support offline PIN, others support online PIN, and still others support signature-only verification. Perhaps most critical to the EMV discussion is whether to support online or offline transactions, or both.
The costs associated with an offline implementation are higher. First, ICCs in an offline environment require an additional processor on the card—to support dynamic data authentication—that ICCs in an online environment do not. Second, PIN management in the offline environment involves manipulation of the PIN resident within the ICC, a process that requires issuers to purchase technologies they do not need in the online environment.
From a risk standpoint, both offline and online EMV card authentication support dynamic data and offer superior protection against counterfeit fraud compared to the magnetic stripe. For PIN cardholder verification, offline and online PIN offer the same protection against lost or stolen card fraud.
Offline EMV implementations were necessary in many markets around the globe because of a lack of telecommunications access at the payment terminals. Because the United States already operates in an online environment and the costs to implement an offline adoption are higher, the business case for an online EMV implementation is stronger than an offline adoption. Further, with most payment terminals in the world now supporting online transactions, global interoperability of online-only EMV cards is not the barrier that it was in the past.
By Douglas A. King, payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed
December 19, 2011 in cards, chip-and-pin, EMV | Permalink
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On your point relative to Online PIN I would like to suggest that most credit card networks (excluding the ATM portion) do not today support the transmission of the PIN from the POS device to the Issuer Host. To upgrade the credit networks to support the encryption and transport of the PIN to the Issuer has a cost. Not simply in the device but also in all the various processors in the chain. Further most POS devices now installed do not support Online PIN.
This whole question of Online versus Offline PIN is then compounded when one looks at the question of International acceptance. Again the International Credit Card networks and all the domestic networks would also need to support the transport of the PIN in order to allow PIN to be used as the means of cardholder verification.
Posted by:
Philip Andreae |
February 16, 2012 at 09:38 AM
October 25, 2010
Can mobile payment adoption define the "end game" for technology investment?
Payment cards in the United States have been stuck for years in a chicken-and-egg quandary when it comes to chip technology. Merchants are reluctant to invest in developing the technology until consumer demand for it is there. But without the technology, it may be that consumer demand just won't be there. Add to this the competing forces that are at play: various stakeholders are pulled in different directions—contact versus contactless technology—and the cost of capital for technological investment is borne disproportionately among these stakeholders.
At the same time, we hear anecdotal evidence that losses from payment card fraud are on the rise. As we've described in previous posts, like this one, this trend could change the paradigm, spurring those in the industry to invest in more fraud-resilient, smart-card technologies. With this pressure, it's inevitable that payments card will shift from magnetic strip to chip card technology. But the problem is that chip card technology is constantly evolving, and those stakeholders bearing the costs for investment in new computer chips and terminal hardware infrastructure want some assurance that their investments are sound before they choose which technology path to follow, contact, or contactless.
In the interest of promoting global interoperability as well as battling magnetic-strip payment card fraud, now may be the time for an industry dialogue on a strategy for investment in smart technology. One question we should be asking ourselves in this discussion is, should we avoid investing in contact card technology if contactless mobile payments represent the end game?
Smart card basics: Contact versus contactless
Contact and contactless smart cards are so named because of the way that the embedded computer chip communicates with a terminal at a merchant's point-of-sale or at an ATM. In the case of contact technology, the data stored in the embedded computer chip is transferred to the reader when the card physically touches the reader. With a contactless card, the data is transferred using some type of radio frequency transmission such as near-field-communication (NFC) technology, which is the current contactless card technology standard. NFC technology, of course, precludes the need for a physical connection between the card and the reader. The user can use it in a variety of devices, including the mobile phone. Importantly, contactless technology in the chip can work with the phone itself to authenticate the user and thereby reduce payments fraud.
Countries that rely on smart card payments are using various combinations of contact and contactless payments that conform to certain security standards and specifications to protect consumers and merchants from payments fraud. To encourage consumer adoption, some issuers have introduced dual-interface cards, with both contact and contactless functionality, so that consumers can use either card at the point-of-sale terminal. This approach, with a dual-interface card, optimizes utility for consumers as retail payments evolve to the mobile channel, potentially empowering both the use of contact cards and contactless mobile payments.
The outlook for contactless mobile payments
Although the evolution of mobile payments in the United States has so far been slow, merchants are introducing new pilots with increasing frequency, and many industry stakeholders want to accelerate the deployment of a universal contactless mobile payments infrastructure. Moreover, U.S. consumers are relying more and more on their mobile phones for new and unexpected applications, which points to a good chance of success for mobile-based payments and related activities in the future. In fact, according to a report from the Pew Research Center, 85 percent of American adults today own a mobile phone, more than any other device.
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Building consensus in the face of market forces
The recent deployment of contactless card payments in global markets is contributing to the establishment of an infrastructure for contactless mobile. In essence, here in the United States, we can go in either direction, contact or contactless. However, in a world where all stakeholders shared the same fully transparent information and vision for the future, could it be possible to leapfrog spending our investment dollars on contact cards and readers and instead use capital on contactless technology? We can avoid the costs for interim technology solutions if industry stakeholders can agree on a future direction despite the different economic incentives and costs demanded. Really, if NFC deployment is the ultimate endgame for mobile payments, bypassing the investment in contact technology as an interim step is a viable, if not ambitious, consideration.
By Cindy Merritt, assistant director of the Retail Payments Risk Forum
October 25, 2010 in cards, chip-and-pin, consumer protection, contactless, mobile payments | Permalink
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September 08, 2009
Will micropayments thrive in social networks? (Part 2 of 2)
This is the second of a two-part series on micropayments and social networks. Last week’s blog posting discussed how some social network sites are exploring the opportunities to offer payment services or are permitting outside payment providers to operate on their social network platforms. Twitpay and Twollars, two third-party platforms used on the Twitter platform, were discussed in Part 1. This week, we examine other players in this emerging market.
Facebook
Facebook is likewise evolving as an ecosystem for emerging micropayment service providers. Users are increasingly spending real money buying virtual goods on the applications that run on Facebook's platform as well as Facebook credits. Facebook credits are funded using major credit cards and available in U.S. dollars as well as foreign currency denominations. The social network has realized tremendous success since its inception. Recently the research firm Nielsen revealed that Americans spent more time on Facebook sites than other top Internet sites in its June 2009 report.
| Table 1: Top 10 Parent Companies/Divisions for June 2009 (U.S., Home, and Work) | |||
| Parent | Unique Audience (000) | Time Per Person (hh:mm:ss) | |
| 1 | 155,606 | 2:31:08 | |
| 2 | Microsoft | 139,099 | 2:12:20 |
| 3 | Yahoo! | 134,304 | 3:15:55 |
| 4 | AOL LLC | 92,705 | 2:43:10 |
| 5 | News Corp. Online | 90,308 | 1:54:59 |
| 6 | 87,254 | 4:39:33 | |
| 6 | InterActiveCorp | 67,283 | 0:20:05 |
| 8 | eBay | 67,208 | 1:17:59 |
| 9 | Apple Computer | 59,663 | 1:19:33 |
| 10 | Amazon | 59,552 | 0:25:41 |
| Source: Nielsen NetView | |||
In addition to providing the platform for other payment application developers, Facebook recently launched its own virtual currency payment service for applications on its network called "Pay with Facebook." The new service is currently live with its application GroupCard, which allows users to purchase items from $3 to $25 and pay for them with a credit card or Facebook credits.
It will be interesting to see if the growth of the Facebook network drives adoption of the newly introduced payment service.
Spare Change
Spare Change is a payment application currently on social networks Facebook, MySpace, and Bebo that lets users make purchases from social network applications and games and then make payment via PayPal. Users can open a Spare Change account and fund it with a credit card, PayPal, bank account, or mobile phone. According to the Web site, consumers can use Spare Change balances to purchase hundreds of applications easily—an "iTunes-style business model for social networks." Spare Change markets itself as the largest micropayments system for social networks, claiming acceptance by more than 700 different games and applications.
Zong
Zong is a payment provider that allows consumers to purchase virtual currency, gifts, and other applications on social networks via the mobile phone in lieu of traditional payment methods. Zong uses the mobile carriers with whom it partners to bill customers for their transactions. Once the consumer has paid his or her mobile phone bill, Zong in turn pays the merchant. The distinguishing feature for Zong’s business model for micropayments is its nine-year relationship with mobile carriers globally. However, at this time Zong is currently available for digital goods and services only.
BOKU
BOKU functions similarly to Zong in that it enables micropayments for games and applications and doesn’t require users to pay via a credit card or traditional bank account. Instead the transaction charges are itemized on the user's monthly cell phone bill. BOKU's partnership with social network hi5 affords it an international presence where users in 24 countries can purchase virtual currency with their mobile phones. BOKU recently expanded into the United States through agreements with mobile carriers AT&T and T-Mobile.
This certainly isn’t an exhaustive list (and is not an endorsement), but it is enough to give you a general idea of some emerging trends. And while the market audience for the goods and services available on social networks is focused on games and applications, it could change as social networks become increasingly ubiquitous. As social networks evolve, the risk environment for virtual and electronic micropayments will be on our radar.
By Cindy Merritt, assistant director of the Retail Payments Risk Forum at the Atlanta Fed
September 8, 2009 in cards, innovation, payments, social networks | Permalink
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August 31, 2009
Will micropayments thrive in social networks? (Part 1 of 2)
This is the first of a two-part series on micropayments and social networks.
One of the most recent, and indeed interesting, phenomena is the entrance of social networks into the micropayments arena. Micropayments, generally defined as small-dollar transactions of $25 or less, are inherently inefficient. Converting them into electronic payments from the traditional cash market is costly, since fees such as interchange can consume a large percentage, if not all, of the transaction.
However, things have been changing recently as the environment for small payments has grown more hospitable. Credit card companies have introduced contactless payment devices to address the costs associated with unattended purchases such as parking meters and vending machines. The emergence of online payment network contenders such as PayPal, Amazon, Google, and others has fueled the growth of online micropayment transactions, as has the growth in online media sales, such as the 99-cent songs on Apple’s iTunes.
Several social networks have gained popularity recently as trusted sites for the exchange of information, digital media, and communication. This popularity and trust can help foster the network effect necessary for establishing an effective payment system. However, developing a new payment system is a risky venture, and many micropayment provider start-ups are not successful.
While some social network sites are exploring the opportunities to offer payment services, they are also permitting outside payment providers to place their applications on the social network platforms. These payment providers are able to leverage the social network platforms providing online payment solutions and monetizing digital currency.
The demand for digital currency via social networks and the ability to monetize transactions in virtual economies are garnering attention from venture capitalists—and they’ve captured our attention, for the moment. The remainder of this blog as well as next week’s will examine a few examples of the emerging micropayment service providers that we found. Keep in mind, our list is by no means an endorsement or an exhaustive list.
Twitpay
First, consider Twitter, a social networking site that lets users give short updates to other users about what they are doing. Twitter has, in essence, created an ecosystem in which third-party service providers are leveraging it to enable micropayments. A recent person-to-person (P2P) start-up called Twitpay allows Twitter users to send payments to other Twitter users—that is, as long as they both have PayPal accounts. As a third-party application that merely uses the Twitter platform, Twitpay has no formal ties to Twitter, aside from the similar name.
Here is how the application looks on the Twitpay site.
The user fills in the payment instructions and presses the “tweet” link at https://twitpay.me. The application delivers the payment to the recipient’s Twitter Twitpay account. The recipient pays the cost of the transaction, which currently consists of PayPal’s commercial transaction fee of 2.9 percent of plus 30 cents. A user also can replenish his Twitpay account using PayPal.
Twollars
Another third-party application that recently started using the Twitter platform is Twollars, a vehicle for charitable giving in small-dollar denominations that allows Twitter account holders to donate to a charity or cause of their choice. Twollars was conceived in January 2009 as a way for people on Twitter to thank one another for sharing digital content and giving advice and information. Symbolic currency on “twollars” can be converted by charities into real currencies, such as dollars and euros, for example, again via PayPal. The Twollars Web site contends that Twollars can only be converted into real currency through donations to good causes. Charities can start campaigns on Twitter to raise funds. Any Twitter user starts with 50 Twollars. The Twitter platform allows even the smallest charity to reach a large audience. The site even allows businesses to reward customers with Twollars to be used for a charitable cause of their choice.
Next week in Part 2, we look at Facebook as well as other players in this emerging market such as Spare Change, Zong, and BOKU.
By Cindy Merritt, assistant director of the Retail Payments Risk Forum at the Atlanta Fed
August 31, 2009 in cards, innovation, payments, social networks | Permalink
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June 15, 2009
Zero balance? Credit card companies may zero in on "deadbeats"
Payment industry experts suggest that credit card companies will make up for lost income from congressionally-mandated curtailment of fees and penalties by going after credit card "deadbeats," which may not mean what you think. To credit card companies, "deadbeats" are customers who pay off their balances regularly and provide little or no revenue to the card issuers. Because banks are expected to lose substantial revenues as a result of the new legislation, they are looking to replace those revenues, more than likely through a revival of annual fees and the elimination of reward programs that the credit card deadbeats currently enjoy.
Congress passed credit card reform legislation in early June to limit some of the unscrupulous pricing schemes that have evolved in recent years—sudden, unexpected hikes in interest rates and double-cycle billing, for example. The law goes beyond codifying the Federal Reserve's regulatory rules already scheduled to go into effect in July 2010 by adding tougher restrictions and extending consumer protections.
Reform may have been necessary, but will the current legislation result in unintended consequences for consumer retail payment behavior?
Pricing for risk
In the early days of the credit card product, banks charged a flat interest rate and an annual fee, which made sense since they only gave cards to their most creditworthy customers. The development of credit scoring models in the late 1980s enabled banks to expand their market by allowing them to measure their potential credit risk for an individual cardholder and price for that risk accordingly.
As the competition for credit card business heightened in the 1990s, competitive pricing schemes evolved with teaser periods permitting low- or no-interest payments on new accounts and transferred balances. This practice permitted consumers to transfer balances frequently for introductory period financing. At some point, the transfer game would inevitably get out of hand and the consumers would become overextended financially. As those overextended cardholders began to experience debt service problems, the credit card issuers responded by repricing their card products to compensate themselves for the additional risk. In fact, some issuers targeted the subprime customer segment exclusively.
Since the reform effectively reduces revenue potential at a time when charge-offs are rising, card issuers will likely rethink their pricing models. If they shift these lost revenues as additional costs or reduced benefits for creditworthy customers, will these customers opt for other payment mechanisms?
Credit or debit?
Will increased costs for credit card products drive credit card deadbeats to use their debit cards instead? While they are different products governed by different sets of laws, many issuers now provide the same consumer protections for debit cards that they do for credit cards. Yet credit cards still have their advantages in terms of the "pay now" or "pay later" decision option. And if you have a dispute over a credit transaction, you still don't have to make the payment until the problem is resolved. With a debit card dispute, the money has already left your account, and your arguments are focused on how to get it back. So a few distinctions favoring credit cards remain. Whether or not deadbeats will pay for them remains to be seen.
By Cindy Merritt, assistant director of the Retail Payments Risk Forum at the Atlanta Fed
June 15, 2009 in cards, payments, risk | Permalink
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March 10, 2009
B2B: Will checks ever really go away?
While check writing in the aggregate is on the decline, one last bastion may remain in the business-to-business (B2B) arena. While consumers are adopting electronic payments at an increasing rate, most B2B payments continue to be made by check—roughly 74 percent, according to a 2007 survey conducted by the Association of Financial Professionals (AFP). This study found that the average business surveyed makes 65 percent of its B2B payments to suppliers by check, with 18 percent by automated clearinghouse (ACH) credit and 11 percent by wire transfer. With the myriad payment choices available to suit a variety of user preferences for both consumers and businesses, why has the migration to electronic payments by businesses lagged that of consumers?
The adoption of electronic payments by consumers has exceeded analysts' projections in recent years as a result of a confluence of a number of different variables, namely convenience, security, and efficiency, which have provided the necessary incentives for adoption. The Internet has emerged as an increasingly trusted payments and product distribution channel as well, facilitating the initiation of electronic payments via both card networks and the ACH. While the same benefits of electronic commerce are desirable to the B2B payments segment, the complexity of the B2B payments landscape along with technology constraints for smaller business partners contribute to a less rapid adoption than seen in the consumer-to-business segment. What are the major B2B barriers to adoption, and how are they being addressed?
The problem with cards
Cards are an expensive proposition for payments between trusted and known business partners, particularly for large value payments. While they offer advantages such as financial management and control, they also impose a hefty interchange fee of roughly 2 percent of the transaction. If you know and trust your customer, you are probably more inclined to write a check, which has no transaction fee. This scenario is likely to be particularly true during times of economic downturn such as we are now experiencing.
ACH and wire transfers
Wire transfers are important for payments that are high dollar and require immediate settlement. Their high cost limits their use, however. Also, wire transfers tend to be used by larger versus smaller business organizations. The ACH is growing more popular for larger organizations for payments between major trading partners but is used more to receive than to make payments. It is also important to note that NACHA rules currently prohibit the conversion of business checks in the ACH. While the ACH format permits the transmission of payments and remittance data, there are a number of other alternative methods to deliver remittance information.
Obstacle: no standard remittance information
One clear obstacle to the migration from paper to electronic payments is the lack of standardization in the way remittance information is sent with the payment. Because of variations in data formats, trading partners may not be able to send or receive automated remittance information with electronic payments, inhibiting the automation of accounts receivable systems. Smaller organizations typically lack full integration between electronic payment and accounting systems, as their incentives to invest in the enabling technology are likely to differ from their large corporate counterparts.
Since electronic payments are typically faster than checks, an accounts receivable function might embrace an electronic payment in order to reduce the time to collect receivables, in direct contrast to an accounts payable function. Sophistication and size generally correlate to willingness to invest in the technology to adopt electronic payments.
Moving from checks to electronic payments can reduce fraud
In the AFP's 2008 Payments Fraud and Control Survey organizations of all sizes reported more attempted or actual payments fraud in 2007 from checks than from other payment methods. However, the report also notes that the majority of survey respondents did not actually suffer financial loss from the fraudulent activitity, suggesting that effective use of risk mitigants to control fraud once it is identified.
| Payment Methods Subject to More Payments Fraud in 2007 Compared to 2006 (Percent of Organizations Subject to Greater Amount of Attempted or Actual Payments Fraud) | |||||||||||||||||||||||||||||||||
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| * receive only | Source: 2008 AFP Payments Fraud and Control Survey | ||||||||||||||||||||||||||||||||
B2B future is likely electronic
While the pace of migration to B2B electronic payments may not accelerate in today's distressed financial environment, eventually the obstacles to the electronification of B2B will be resolved. For now, the bottom line is that businesses want to send payments in the most cost-effective way possible, and no one payment type may suit every payment need. Just as consumers will continue to avail themselves to the full spectrum of payment alternatives, depending upon what is cheapest, trusted, and most convenient, so too will businesses choose payment options that makes the most business sense.
Electronic payments are growing in the B2B space, but not by leaps and bounds, even in recent times when the economic outlook was favorable and financial institutions were readily investing in payments technology. While the future of B2B payments will likely be electronic versus paper-based, there is no clear evidence to show whether businesses will choose one electronic option to the exclusivity of another. For now, checks continue to represent a good value proposition to businesses, particularly when they can be imaged during the collection process to avoid transportation costs.
By Cindy Merritt, assistant director of the Retail Payments Risk Forum at the Atlanta Fed
March 10, 2009 in ACH, cards, checks | Permalink
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B2B electronic payments may not accelerate in today's distressed financial environment, eventually the obstacles to the electronification of B2B will be resolved. For now, the bottom line is that businesses want to send payments in the most cost-effective way possible, and no one payment type may suit every payment need.
Posted by:
B2B portals |
October 07, 2009 at 09:59 AM
I understand the fact that cards, ACH, and wire transfers are in effect, to some degree, competing with one another based on the size of the transaction, but are they also targeting different types of payments/transactions from different types of businesses? It seems like consumers are paying for everything by either credit card or an automatic bank withdrawal (checks are a payment choice of the past or in some sense a last resort). Are there any statistics available that show or breakout percentages of B2B or consumer payments by avenue over time? Are they heading in an evident direction? Do you think that one type may win out over the other in the near future?
Posted by:
Megan |
March 20, 2009 at 09:47 AM
One thing to consider as a positive for embossing is someone who has difficulty seeing; they can feel the embossing if they are using the card over the phone, or even if they are swiping at POS to make sure they're getting their card back.
Of course, what I've found when designing card plastic is that embossing can also step on the text on the back of the card, obscuring fun things like Customer Service phone numbers.
Your article makes a good point tho; do we really need embossing in the 21st century, especially with the push to EMV that will happen in the next few years?