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Portals and Rails

June 02, 2014

Mobile Payments Fatigue

When I was an elementary school-aged kid, I looked forward to coming home from school and grabbing an ice cold Coca-Cola and a snack before venturing out into the neighborhood to play. And while I can't remember the exact discussions I had with friends around the lunch table when I was that age, I do remember our anticipation of the launch of New Coke in 1985. And oh my, how much my friends and I were disappointed when our lips first met New Coke. My reaction, with most others, was that we wanted our "old" Coke back.

Fast forward nearly 30 years and now my lunch discussions often revolve around payments. Each day I am reminded of my New Coke experience via an e-mail or news article touting or predicting an explosion in mobile payments. I'll admit it—I'm getting mobile payments fatigue. The payments industry has been anticipating mobile payments for years now, yet I find the developments to date mostly disappointing. Sure, I've made plenty of payments using a mobile device to purchase digital goods or even to purchase physical goods in an online marketplace. But outside of a few experiences of purchasing coffee with a closed-loop solution, my mobile device stays in my pocket when I'm making a purchase at the point-of-sale (POS) as I take out my reliable cards or cash.

And that is where my New Coke analogy comes into play. To many people, nothing was wrong with Coca-Cola, yet the coolness of a new product created a great level of expectation—which turned to immense disappointment. At the POS, payments are relatively seamless, yet the newness of mobile payments creates great anticipation, only to end up being disappointing and leaving me thinking, "What's wrong with my current payment choices?"

So much attention on mobile is focused on replacing a current payment form at the POS—perhaps the most seamless piece of the commerce experience. Often in mobile payment discussions, I hear that mobile payments are a technology solution looking for a problem rather than trying to solve a problem. However, I think the industry is looking in the wrong place as the problem isn't with the payment. It's with the overall experience in and around the POS. I believe mobile devices have the ability to transform this experience, but it's not by replacing my cards or cash as a payment method. It's by replacing the entire commerce experience. Are you experiencing mobile payment fatigue? And if so, what will it take to energize you?

Douglas A. KingBy Douglas A. King, payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed

June 2, 2014 in emerging payments, innovation, mobile payments | Permalink

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May 12, 2014

The Art of Balancing Innovation and Regulation

Several factors have converged in recent years to add complexity to the regulatory oversight of retail payments. These elements include new regulation and oversight along with technology advances that have created new payment types. The challenge for regulators in an environment with an abundance of innovation is to align that innovation with appropriate regulation to ensure consumer protection, data security, and fraud mitigation, and to retain consumer confidence in payments.

The 2008 financial crisis led to an increased focus within the regulatory framework on retail payment risk factors. One new regulation was the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank). Dodd-Frank led to many changes—including the creation of a regulatory agency, the Consumer Financial Protection Bureau (CFPB), to focus exclusively on consumer protection. Since the CFPB was created, two of the payments types it has identified as deserving of its oversight are remittances and prepaid cards.

At the same time, evolving technology continues to change the nature of how consumers make payments—moving from the physical to the virtual—and has increased consumers' expectations for speed, control, information, and transparency. Options available for consumers to make payments and for businesses and financial institutions to participate in offering payment services have multiplied as Internet and mobile evolved, cloud-based solutions progressed, and virtual currencies expanded.

Technological advances have led to a retail payments system that is more transparent than ever before, in which all types of entities, from start-up companies to financial institutions, are able to innovate. Nonbank entities are flourishing in retail payments, challenging the historic role of financial institutions as primary payment participants by offering payments products and services in an ever-more complex payments landscape.

While some participants complain that there is too much regulation of payments practices, others call for more or different regulation when problems arise. Still others call for change because they believe the playing field is not level for all participants. Sometimes regulation can be a catalyst for innovation by legitimizing a payments practice after clarifying requirements for all participants. Whatever your perspective, it is a complex undertaking to attain the delicate balance between innovation and oversight.

Photo of Deborah ShawBy Deborah Shaw, a payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed

May 12, 2014 in innovation, mobile payments, regulations, regulators | Permalink

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April 22, 2014

My Bleeding Heart

Over the past week, there has been much discussion about the OpenSSL coding flaw, the Heartbleed bug. OpenSSL is a commonly used implementation of Secure Sockets Layer (SSL). A diverse array of devices use OpenSSL to secure Internet communications. Heartbleed could allow someone to monitor log-in transactions as well as to grab and extract confidential data from affected websites and from hardware such as servers, mobile phones, and laptops. Research indicates that as many as 20 percent of all Internet sites could have been affected by this bug, including many high-profile sites. Google confirmed that phones operating Android 4.1.1 were also vulnerable to the bug, and they will remain so until the user installs its recent patch.

If there is a silver lining from the Heartbleed bug news, perhaps it is that the largest financial institutions have indicated they are not vulnerable. Even so, many smaller and mid-size banks and credit unions could still be vulnerable. Thus, the Federal Financial Institutions Examination Council issued a release urging financial institutions to incorporate patches on systems, applications, and devices that use OpenSSL. But unfortunately, this silver lining from the large banks isn’t enough to stanch this payments risk expert’s bleeding heart.

So what's the reason for my distress if the largest banks don’t appear to be vulnerable? I do not think that I am alone in admitting that I have used my credit card credentials all over the Internet. While I can count the number of cards that I have in my wallet, I couldn't begin to tell anyone the number of websites that those card credentials have been used or stored over the last two years—which is when Heartbleed appeared. Sure, I have a few go-to sites for online shopping, as I suspect many do, but I have used my cards and created accounts on many sites that I rarely visit or maybe even just visited once for a specific purchase. Are some of these sites vulnerable to this bug? I have a sinking feeling that the answer probably is "yes." And if my log-in credentials were extracted from websites other than my financial institution, I'll sheepishly admit that may be bad news as I have not always followed the best practice of maintaining separate IDs and passwords for each site. Is it really feasible to do that for so many sites?

No doubt talk and discussions in the days ahead will revolve around whether or not OpenSSL is a secure implementation of the SSL and transport layer security protocols. However, I think the heart (ahem) of the discussion of the Heartbleed bug should revolve around the use of passwords and card credentials on the Internet. This bug potentially exposes the flaws of relying on user IDs and passwords and highlights the vulnerability of using sensitive card data in the online environment. These flaws are well-documented, and fortunately, solutions are being discussed to mitigate these risks. My bleeding heart anxiously awaits their implementation.

Douglas A. KingBy Douglas A. King, payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed

April 22, 2014 in cybercrime, mobile payments | Permalink

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March 17, 2014

The Challenge to Create an Awesome Mobile Payments Experience

Almost every year for the last decade, those who have followed the mobile payments industry have heard the expectant statement, "This is the year for mobile payments." This year is no exception. We see the stories about mass adoption of mobile payments in other parts of the world, so we wonder, why not here in the United States? A U.S.-centric mobile payments conference I attended recently had as a recurring theme the notion that mobile payments in the United States had not yet caught on because providers had not yet developed an overall package of elements that would create a compelling mobile experience for the user.

In 1998, former Intel chief executive officer Andy Grove, coined the term "strategic inflection point" to describe a fundamental change in any business, technological or not. He said that for a change to achieve mass adoption by consumers, it had to be at least 10 times better than consumers' current experience—something Grove referred to as the "10X" factor. Achieving the 10X factor for mobile payments will likely involve lower costs, increased comfort with security and privacy, new functionality, enhanced user friendliness, increased convenience, or a "cool" factor, such as new technology often offers.

Conference panelists in general shared the view that the payment transaction itself is one small—but critical—element of the overall mobile experience. One point they made is that, because of their experience with other payment methods, consumers expect the mobile payment to be secure, fast, and accurate. These panelists echoed the work of the Mobile Payments Industry Workgroup (MPIW), a joint endeavor between the Federal Reserve Banks of Boston and Atlanta and the major stakeholders in the U.S. mobile ecosystem. The MPIW was created four years ago to facilitate the development of a vision for a mobile payments environment that will be effective, secure, and ubiquitous. This group has met frequently to address the issues of technology, standards, security, privacy, functionality, regulation, and adoption barriers. You can read results of these efforts on the Boston Fed's website.

Smartphone penetration levels continue to rise and are expected to approach saturation level within the next five years. Nevertheless, consumer research studies consistently show that not only are consumers very concerned about security and privacy when it comes to using their smartphones for mobile banking and payments, but they also are highly satisfied with their current payment method. The industry can address the security and privacy issues through a strong consumer education and awareness campaign. However, moving consumers from their current habits will require the achievement of a strategic inflection point—something that many payments industry stakeholders have tried to achieve over the years but have failed to do so.

Portals and Rails would like to know what you think are the other elements of the overall mobile experience needed to achieve the 10X factor?

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

March 17, 2014 in innovation, mobile payments | Permalink

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March 10, 2014

Who Is Responsible for Consumer Security Education?

A theme that consistently appears in our Portals and Rails blogs is the continual need for consumer education when it comes to protecting account access credentials. Financial institutions have generally taken this responsibility seriously, running frequent verbal and print campaigns reminding customers to safeguard their payment cards, monitor account activity frequently, and adopt strong password and PIN access practices.

But as payment channels and access devices expand outside the bank-controlled environment, who then becomes responsible for customer education? The representatives of mobile phone carriers and handset manufacturers, for example, are often in sales mode. The last thing they want to do is scare off a potential sale by identifying the potential for fraud with their product or service.

When I recently went to purchase a new mobile phone that was equipped with a number of strong security safeguard options, the sales representative was more interested in selling me high-margin accessories than telling me how to safeguard the phone and its contents. While I understand the motivation of the sales representative, especially if he works under a sales incentive compensation plan, wouldn’t it easy for the carrier or phone manufacturer to provide a brochure promoting safe practices?

Unfortunately for the financial institutions, the stakes are high. For them, the financial impact of fraudulent activity on a customer's account is often a one-two punch. First, various regulations and rules are in place to protect consumers from liability, so the financial institutions generally write off the fraud loss. Second, and perhaps more painful, victims of fraud often move their accounts even though their financial institution is not at fault. The challenge of consumer education by the bankers is becoming more and more difficult as the opportunity for direct contact with the customer lessens with every new payment transaction product or service.

As we've seen before, in the aftermath of recent card transaction and customer data breaches, the negative reputational and financial impact from fraud is felt not just by financial institutions but also by the retailer or company that was breached. Will such events cause these other stakeholders to take a more proactive role and join financial institutions in educating their customers?

Portals and Rails is interested in hearing from you as to how the payments industry might best address customer awareness and education regarding security.

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

March 10, 2014 in banks and banking, consumer fraud, consumer protection, data security, mobile payments | Permalink

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March 03, 2014

An Efficient Mobile P2P Payment: The Paper Check

Having had the chance to spend some time reviewing the 2013 Federal Reserve Payments Study, I was struck by the lasting power of the check in the consumer-to-consumer (or P2P) space. Although overall check usage has declined (checks written by businesses and by consumers to businesses have all declined significantly), check usage in the P2P space increased between 2006 and 2009 and was stable from 2009 to 2012. And this has occurred when the number of bank and nonbank mobile P2P payment solutions that have entered the marketplace or matured during the past few years.

As a parent of two young children, I have acquired ample experience in the P2P payments space—that is, in paying babysitters. As a self-proclaimed payments geek, I am always interested in learning how the babysitter prefers to be paid. Cash remains king with most, at least the high school-aged ones. We have one college-aged sitter who likes being paid through a nonbank P2P payment provider. And most recently, another college-aged sitter wanted to be paid by check, which really caught me off guard. She informed me that she uses her mobile banking app to process her checks through mobile remote deposit capture (RDC) and that she prefers having access to the funds through her debit card over cash. The amazing thing that has struck me from these weekly transactions is the efficiency of this P2P payment transaction.

If the babysitter makes the mobile deposit before 9 p.m. (ET), she has access to the funds the following day. If after 9 p.m. , the funds are available to her in two days. On my end, the transaction appears in my banking activity the morning following the deposit. Talk about efficient—fast and inexpensive (no fees paid by either of us)!

Obviously, the efficiency of this transaction would have been diminished were this not a face-to-face transaction. And maybe that is where the true value of online or mobile P2P payments comes into play. However, the resilient check and mobile RDC banking application worked really well in this face-to-face setting. According to a recent report, mobile RDC was offered by approximately 20 percent of U.S. banks in 2013, up from 7 percent at the end of 2012. As more financial institutions roll out the offering in the upcoming year, maybe it will be the case that the old paper check is here to stay and will flourish in the P2P payments space. And based on my experience, that might not be a bad thing!

Douglas A. KingBy Douglas A. King, payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed

March 3, 2014 in checks, mobile banking, mobile payments, payments study | Permalink

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October 28, 2013

New Portals: Established Rails

Rails Do consumers understand that the consumer protection rules that apply to a mobile payment depend on the payment source—such as a debit or credit card—and not the portal—the mobile device? Purchasing goods and services using a mobile device appears to be a brand new way to make payments. But the mobile device is merely a new portal that leads to the same underlying rails: traditional retail payment sources.

Mobile wallet applications, whereby the consumer can access payment options through a mobile device, are typically sourced to the consumer's debit or credit card. The mobile carrier's billing option allows the consumer to charge an inexpensive product directly to the mobile phone bill. The consumer then pays that bill using a traditional method, such as a check. A Federal Trade Commission study of payment funding sources for 19 mobile providers in 2012 reports payment by credit or debit cards as the most common payment type, with 15. Next are bank account debit (7), multiple funding sources (7), then billing to a mobile carrier account (4).

It is important for financial institutions to educate their consumer customers about the rules and regulations related to traditional retail payment sources that support mobile purchases. Consumers should know about the mobile wallet, for example. Consumers can "carry" many payment sources in their mobile wallets, but they should be aware that each source has different consumer protection provisions. For example, the time periods for reporting disputes and liability limits are different. Education by banks can reduce confusion about the process consumers must follow if they experience a problem with any purchases. Additionally, education can make consumers more aware that the rules that apply to card payments, for instance, apply whether they make the payment in person, on the phone, online, or with their mobile devices.

Banks are in a critical position to be able to share their expertise on traditional retail payment sources as consumers increase their usage of the mobile device to initiate payments. How is your institution educating consumers about mobile payments?

Photo of Deborah ShawBy Deborah Shaw, a payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed

October 28, 2013 in consumer protection, mobile payments | Permalink

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May 13, 2013

Which Is Riskier, Change or Avoiding It?

There is no denying that any level of change brings with it some level of risk. However, sometimes avoiding change can result in even greater risk. That is the quandary many retail banks find themselves in today as they grapple with the issues of mobile banking and payments and their role in the bank's overall delivery-channel strategy. Sustainability and regeneration are principles normally associated with the community development and environmental arenas, but they can be easily applied to the banking industry and its consumer delivery channels.

Numerous research studies document a large gap in banking attitudes and product or channel usage between the Gen Y or millennial customers and the older customer segments (those who are over 35, if you consider that old). (The Retail Payments Risk Forum discussed some of this research in a paper posted on our website in April.) Younger customers have less loyalty to bank brand, readily adopt new technology, are highly influenced by advertising and peers, expect free or low-cost banking products and services, and are driven by convenience. While they do have a higher overall trust level of banks compared to nonbanks, the gap is not anywhere near as large as that of the older customer segment. The younger segments have eagerly adopted online and mobile banking and are viewed as the early adopters of mobile payments. In fact, when they select a financial institution, the quality and expansiveness of the mobile banking offering is a major factor in their decision.

So what does this changing landscape have for the future of the traditional brick-and-mortar-branch delivery channel? For some time, banks have tried to establish branches primarily as sales centers while moving basic service transactions to alternative automated, less-expensive delivery channels. This effort will continue, but banks must also regenerate their overall delivery-channel strategy to provide sales and service capabilities through virtual channels in order to attract and retain the growing Gen Y customer segment. This regeneration and sustainability effort involves the "right sizing" of each channel to provide their existing and future customers with the appropriate level of services and features as well as capacity to meet service quality goals. Not only will this effort require risk assessments to be continually made for each delivery channel, but also to develop a holistic risk assessment of each customer across all delivery channels.

Let us know what changes, if any, you are making in your overall delivery-channel strategy to address the changing demographics of existing and potential bank customers.

David LottBy David Lott, a retail payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed

May 13, 2013 in mobile banking, mobile payments | Permalink

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March 25, 2013

What's Next in Mobile Payments?

I recently participated in two banking conferences that displayed the full spectrum of strategic options and plans of banks regarding mobile payments. The first event was the annual operations/technology conference of a statewide bankers' association with all the attendees being small- to mid-sized community banks. All these banks currently offer an online banking application to their customers; about half of these have customized their online banking application for mobile device usage. Only one bank indicated they had a mobile payments application currently in operation. I was surprised to find that only a couple other banks planned to offer a mobile payments application within the next 12–18 months.

Later in the day, a panel of four MBA graduate students from a prestigious business school of a private southeastern university gave their views on mobile payments. The objective of this panel was to help the bankers understand the key drivers of this demographic's banking relationships and needs. All four panel members indicated they frequently accessed their banks' online banking services with their mobile devices as well as their laptops and tablets. They also unanimously stated they would switch financial institutions if the banks didn't offer the service or if they began charging a fee for the service. Interestingly, only one panelist used the mobile payments application from his bank, and his usage was infrequent. The reasons the panel members gave for their disinterest in mobile payments included difficulty of use of a mobile phone versus a laptop or tablet for bill payment or little need for the service because they found their existing payment methods to be as or more convenient.

At the Bank Administration Institute's (BAI) Payments Connect 2013 conference the following week, a featured track of the two-and-a-half-day event was the wide range of marketing, operational, risk, and technology issues related to mobile banking and payments. The prognosis for mobile payments couldn't have been more optimistic, with a number of panelists declaring that the tipping point for mobile payments had been realized earlier in the year. They credited the adoption rate for smartphones and other indicators they believed to be key drivers. Of course, we have to realize that many expressing such optimism worked for a company that has a vested interest in the success of mobile payments. However, that optimism was supported by a number of research studies delivered during the conference that concluded that the rate of smartphone penetration, the growing volume of mobile payment transactions, and overall consumer attitudes would translate to successful mobile payments programs.

One of the questions bankers frequently asked during the BAI conference was what a panelist would recommend the bank do regarding their mobile payments strategy. While there were some slight variations, panelists consistently responded that banks should get involved now and try a number of different, small-scale strategies. Several panelists used the gambling analogy of placing a distributed number of bets of small amounts rather than going "all in" with one particular mobile payments scheme. They acknowledged that the technology winner(s) of mobile payments was far from certain at this point, with near field communication, QR codes, and cloud options all in different states of adoption and each with their individual advantages and disadvantages.

The practice of "spreading your bets" is certainly a valid risk management strategy, but how practical is such a strategy for small financial institutions? The large banks have their research-and-development budgets, IT development staff, and other resources that allow them to participate in multiple pilot programs, but smaller institutions do not have such resources. Most would be able to offer only a mobile payments program supported by their core application processing provider.

As with many new payment products in the past, larger banks have led the initial efforts, and the smaller banks followed suit after customer demand for the service became more certain and with the realization that not offer the service would put them at a competitive disadvantage. Could this be the reason many banks, especially the smaller ones, have been sitting on the sidelines for now until the mobile payments picture becomes a bit clearer? Let us know what you think.

David LottBy David Lott, a retail payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed

March 25, 2013 in mobile banking, mobile payments, payments | Permalink

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March 18, 2013

March Madness on the Hardwoods, Mobile Madness in the Payments Arena

As an avid sports fan, I am eagerly anticipating college basketball's annual rite of spring commonly known as "March Madness." This nickname for the NCAA's Men's Division I basketball tournament is derived from the amazing finishes and upsets that regularly occur during the tournament each year. A big part of the intrigue around this tournament involves millions of people that will "fill out a bracket," meaning they prognosticate the winner of every game, ultimately choosing the winner of the tournament.

As I was thinking about the upcoming tournament, I realized a similar situation is developing with mobile payments at the point of sale (POS). It seems that every day, I read an article or blog with differing viewpoints on what company, wallet, or solution will come out as the "winner" for mobile payments at the POS. This got me thinking how a "bracket" would look for the mobile payments ecosystem. Interestingly, many of the attributes usually found with the successful basketball teams in March are similar to those attributes I believe are necessary for successfully competing in the mobile payments arena.

Fundamentals are extremely important
Teams that are fundamentally sound tend to perform well in the tournament. Fundamentally sound teams run an efficient offense with a high point per possession percentage and low turnover margin, rebound well, and make a high percentage of their free throw shots.

Likewise, in the mobile proximity payments arena, I expect the winner(s) will nail down the fundamentals of the transaction that consumers and merchants alike expect: ease and quickness. Just as basketball teams can employ innovative styles or plans, mobile payment providers are also developing the latest and greatest add-on to the payments experience. However, if both fail to deliver on basic fundamentals, success can be elusive.

Track record of successful risk taking
Besides excelling at the basic fundamentals, teams that make a high percentage of their three-point shots usually do well during March Madness. The three-point shot is the riskiest shot in the game, yet carries the highest reward. Teams who capitalize this risk with a high success rate are difficult to beat.

Besides the fundamentals of a payment transaction, it is no secret that consumers and merchants want more for paying with their mobile phone at the POS. Discounts, couponing, and instant offers through past purchase behavior and geolocation seem to be a major opportunity of differentiation with mobile payments. But I am not convinced these carrots are enough for any particular player to obtain widespread or mass mobile payment adoption. The player that is able to completely transform a consumer's shopping experience with the mobile phone will likely come out ahead. I believe this will require some risk taking by doing something different from the rest of the field beyond coupons, offers, and discounts. Perhaps this might be a mobile solution that allows a consumer to make a purchase and completely bypass the checkout line and POS while also updating the merchant's inventory level in real time. Established companies, as well as young companies led by teams or individuals, with a successful track record of risk taking should be considered closely.

Excellent defense
A common phrase heard in many sports, basketball included, is "defense wins championships." Basketball teams that hold their opponents to a low field goal percentage and generate a high number of turnovers have proven to be extremely difficult to beat in the tournament.

In the world of payments, defense is all about mitigating fraud. For a mobile payments solution to be successful, it must be as secure. And I could even argue that it must be more secure than current payment methods. Research has consistently shown that consumers must perceive these payments to be secure if they are going to adopt them. Secure solutions developed by companies that are trusted by consumers stand to have a solid chance to move ahead in a "mobile payment POS bracket."

The winning team
Using the same attributes of successful tournament teams and applying them to the mobile payments POS space, I think the ultimate winner of a "mobile payment POS bracket" must offer at least the following three attributes in a cost-effective manner:

  • Enable a quick and simple transaction.
  • Greatly transform the shopping experience by being unique and different.
  • Offer a secure solution that consumers will understand and trust.

More often than not, the traditional and established basketball powers come out on top of the tournament, but it's those unexpected upsets by upstarts and underdogs that put the "madness" in the NCAA Tournament. How will the situation for using mobile phones at the POS play out? Will an established payment provider come out on top of the "mobile payment POS bracket" or will an upstart be that "bracket buster"?

Douglas A. KingBy Douglas A. King, payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed

March 18, 2013 in innovation, mobile payments | Permalink

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Excellent discussion and apt analogy. I would add that just like the NCAA Tournament the winner(s) get to the final grouping by winning one game at a time and moving inexorably forward while not letting the hype and hoopla distract them from their goal. In mobile payments, this may mean incremental improvements and constant adjustment to the transaction process with an occasional "fast break" from the old paradigm will ultimately result in an application that addresses all of the needed attributes.

Posted by: Bob Skattum | March 19, 2013 at 11:21 AM

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