Take On Payments, a blog sponsored by the Retail Payments Risk Forum of the Federal Reserve Bank of Atlanta, is intended to foster dialogue on emerging risks in retail payment systems and enhance collaborative efforts to improve risk detection and mitigation. We encourage your active participation in Take on Payments and look forward to collaborating with you.
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December 19, 2022
Our Payments Wishes and Resolutions for 2023
In our year-end webinar last week, the Retail Payments Risk Forum team provided our perspective on several major developments and issues in payments in 2022. Since our time was limited, we wanted to share some additional thoughts and wishes for payments in 2023.
Nancy Donahue: Earlier this year, the Board of Governors finalized guidelines for evaluating nontraditional financial institutions' requests to be granted master accounts and access to the Fed's payment services. Fintech firms have held the promise of greater financial inclusion and wider access to financial services, so it will be interesting to follow this space in 2023.
Scarlett Heinbuch: I am intrigued by cash acceptance in the United States and efforts being made to require brick-and-mortar merchants to accept cash for payment. It will be interesting to see what happens with cash access for people nationwide. I wish for people to be able to pay for goods and services in a way that meets their needs and choices.
Dave Lott: I am especially interested in seeing the uptake by financial institutions and consumers of instant payments with the introduction of the FedNow service. I wish that the issue of consumer liability for electronic peer-to-peer, or eP2P, in cases where the legitimate accountholder initiates the transaction is quickly resolved.
Claire Greene: Like Dave, I'm excited to see the product innovations that I hope will result from the widespread availability of instant payments. The information that must flow with B2B (business-to-business) payments and the plethora of business accounting systems used to record payments and receipts make innovation in this space challenging. These challenges, however, also make B2B payments ripe for change. Let's see what happens.
Catherine Joseph: Although check usage has declined, I plan to continue to follow trends in both consumer and business checks, particularly trends in check fraud, and what actions the industry is taking to increase security and help curb check fraud.
Jessica Washington: My hope is that we can take steps as an industry to improve payments data collection, analytics, and sharing so that we can better inform policy and business decisions. I especially look forward to seeing improvements in fraud and threat data sharing so that we have the room to innovate and improve payment systems.
We want to wish our readers all the joy of the holiday season and best wishes for 2023. Our Take on Payments blog will resume on January 9.
December 5, 2022
The Battle over Consumer Liability for eP2P
Criminals like to use electronic person-to-person/peer-to-peer (eP2P) payments services to execute scams because of the speed and finality with which they can receive their ill-gotten funds. Unfortunately, this very speed and finality can leave victims with no money and often no way to get it back. I posted a few months ago about some litigation brought by consumers against financial institutions (FI) in situations where consumers voluntarily sent funds to scammers using an eP2P service. When the consumers later realized they had been taken, they sought reimbursement from their financial institutions under the liability protections provided under Regulation E. However, because the consumers initiated the funds transfers themselves, these instances did not meet the definition of being unauthorized and were therefore not eligible for reimbursement. I suggested, from my layperson's perspective, that the definition of an "unauthorized transaction" in Reg E was quite definitive in covering only transactions initiated by unauthorized third parties.
Senator Elizabeth Warren (D-MA) released a report last October calling on the Consumer Financial Protection Bureau (CFPB) to "clarify and strengthen" Reg E with regard to the eP2P service offered by Zelle. Although the report focuses on Zelle, other eP2P services such as PayPal/Venmo and Cash App are also used in such scams, as I mentioned at the beginning.
In response to the report and as a follow-up to an earlier meeting with the CFPB, the American Bankers Association (ABA) released a letter on October 27 to CFPB director Rohit Chopra refuting Senator Warren's claims. The letter points out that "fraud is de minimis relative to the transaction volume, with 99.9 percent of the 5 billion Zelle transactions processed in the past 5 years without issue." The ABA letter cites the numerous steps that Zelle and its participating FIs have taken to educate customers and implement safeguards to protect customers against potential scams.
And in the latest development, a recent Wall Street Journal article reported that the Zelle owners were in discussions to develop a reimbursement plan for scam victims. Under the plan, which would apply to all FIs participating in the Zelle network, if it's determined that the customer was tricked into sending funds, the receiving FI would reimburse the initiating FI, which would then reimburse the customer. A major challenge in this process will be like what the United Kingdom's Contingent Reimbursement Model is facing: finding a way to consistently determine whether a reasonable person would be tricked.
One concern is that such a voluntary reimbursement policy could lead to "first-party fraud," whereby the customer claims to be a victim of a scam but is actually colluding with the recipient of the funds. We will continue to closely monitor and report on developments in this issue.
November 7, 2022
More Highlights from the CFPB BNPL Report
My October 3 post on the Consumer Financial Protection Bureau's (CFPB) 2022 report on the buy now, pay later (BNPL) industry highlighted some of the key metrics from the CFPB's data collection efforts of the five major BNPL operators in the United States. In this post, I review some of the benefits, concerns, and planned actions identified in the report.
The report acknowledges several financial benefits of the "pay-in-four" BNPL loans to the consumer—primarily that they don't charge interest, which makes them an attractive alternative to other forms of credit. For example, the report cites data from a 2021 report on the consumer credit card market : the cost of credit in 2020 for revolving cardholders using general purpose cards was 17.7 percent.
The main sales pitch that BNPL firms present to the merchant is that BNPL increases the potential for incremental sales; with this option, the customers may purchase a more expensive product or additional products. While the CFPB report does not have any specific metrics on incremental sales, it does cite a number of claims from the BNPL firms about how BNPL could increase average sales amounts and attract new customers. The report mentions another benefit for merchants: the BNPL firm providing the credit assumes all the risk of nonpayment. As I mentioned in my earlier post, the firms reported that 3.8 percent of loans were charged off in 2021—up from 2.9 percent in 2020.
Any extension of credit risks consumers assuming more debt than they can afford. In particular, the report cites "loan stacking" as a possible danger. Loan stacking occurs when the customer obtains multiple BNPL loans from different lenders, "stacking up" the payment obligations of each loan on top of one another. BNPL firms try to minimize this danger by limiting initial loan amounts. However, since most BNPL providers don't report loan activity to the major credit reporting agencies, they can't know how many BNPL loans the consumer may have gotten from other BNPL firms and, therefore, they have no knowledge of the consumer's full debt. This concern is increased by the trend shown in the data that the repeated use of BNPL has increased over the last three years. In the fourth quarter of 2021, the five lenders surveyed reported an average usage rate per unique customer of 2.8 loans used during the quarter. This figure only reflects the number of loans with a particular lender. In the first quarter of 2019, this average was 1.9 loans.
Besides the risk of credit overextension, the report details other potential harms, including:
- a lack of clear and consistent disclosures
- inconsistent practices regarding merchandise disputes
- mounting late fees and bank fees for multiple representments of returned payments
- the requirement to use autopay or the difficulty in selecting another payment method
- the use of customer data for purposes other than handling the transaction
The next question is this: With this data in hand, what does the CFPB plan to do about rules or guidance for the BNPL industry? In a prepared statement issued in conjunction with the report's release, CFPB director Rohit Chopra outlined several actions the organization would take immediately, including continually monitoring the BNPL industry. The CFPB staff will identify potential guidance or rules that will require the same consumer disclosures and protection that credit cards are subject to. The CFPB will continue to encourage the development of processes for BNPL firms to work with the credit reporting agencies so that loan experiences are reported regularly and accurately and a consistent methodology is used to estimate the debt burden of a household.
The execution of supervisory examinations has been inconsistent due to the variety of the business structures of the BNPL firms. The CFPB is encouraging voluntary examinations but is also looking into its authority to mandate examinations. Related to consumer data protection and privacy, the CFPB plans to work with the Federal Trade Commission on developing rules that will be applicable to all businesses regarding using data for something other than the BNPL transaction itself.
While the BNPL industry is in its early stages, it is becoming a major part of the retail credit landscape. We will continue to follow and report on developments in this industry.
October 24, 2022
What the Payment Choice Act Means for Cash
Since the first paper bills emerged in the United States in 1690, cash has been a payment choice for governments, merchants, and consumers in our nation.
The pandemic, though, changed things for cash users. Notices appeared at merchant locations like coffee shops, restaurants, and other retail sites throughout the country: "Credit or Debit Card Only" or "We are going cashless!" Merchants may choose not to accept cash for a variety of reasons, including hygiene concerns, banking office closures or reduced hours that often made it harder to get cash for the till, and coin supply issues that made it hard to make change even when cash was accepted. Surprisingly, even as the pandemic's influence is lifting, some merchants still refuse to accept cash.
However, that may change with the Payment Choice Act of 2021 (H.R.4395), introduced on July 9, 2021, and sponsored by Rep. Donald M. Payne Jr. (D-New Jersey). The proposed legislation is designed "to prohibit retail businesses from refusing cash payments, and for other purposes." The bill passed in the house twice: first on June 21, 2022, as an amendment to the Financial Services Racial Equity, Inclusion and Economic Justice Act, and on July 14, 2022, as an amendment to the National Defense Authorization Act. The bill would need to be passed by the Senate to be enacted and we will keep an eye on its progress. A similar bill, Cash Always Should Be Honored, was introduced in 2019 by Rep. David Cicilline (D-Rhode Island), who was concerned that cashless businesses discriminate against customers who do not have access to a credit card. The bill did not move forward but the PCA captures the original intention.
Key points in the Payment Choice Act include:
- Requires retail businesses—those that sell or offer goods or services at retail to the public and accept in-person payments at a physical location—to accept cash as a form of payment for sales in amounts less than $2,000
- Prohibits them from charging cash-paying customers a higher price compared to customers not paying with cash
- Provides for enforcement through preventative relief and civil penalties
Our work in payments inclusion informs us that cash is a primary payment choice for about 7.1 million US households (5.4 percent) that choose not to use banks. These rates are highest among low-income, Black, Hispanic, Native Americans, and people with disabilities. When cash is not accepted, it can create a barrier that excludes primary cash users from the payments system and from getting needed goods and services. This can create hardship for people and may also result in loss of business for merchants.
But isn't cash acceptance a requirement? The answer is no. While cash is US legal tender, merchants don't have to accept it. According to the Board of Governors of the Federal Reserve System, "there is no federal statute mandating that a private business, a person, or an organization must accept currency or coins as payment for goods or services."
Some states and cities (New Jersey, Colorado, Washington, DC, New York City, Philadelphia, and San Francisco) have enacted similar merchant cash acceptance policies. Other states, like Georgia, have bills pending. These legislative actions create a mandate for businesses that may override their choice to not accept cash as a payment option while protecting consumers' preferences to use cash. What do you think?
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