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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July 6, 2021
Think Like a Genius for Payments Innovation
Ron Klein filed the patent for the magnetic strip used on credit cards in 1966, and it was awarded in 1969. His invention revolutionized the payments industry, increased efficiency, and reduced fraud. I was fortunate to meet Ron, known as "The Grandfather of Possibilities", at an entrepreneur's conference several years ago. Being in the payments world, I wanted to know how he got the idea for the magnetic strip that is still on the back of credit and debit cards today.
Ron, an engineer by training, said department stores came to him with two problems. It took too long for customers to make charge purchases, and the burden of proof was on the merchant. For example, prior to the magnetic strip and online authorizations, the customer's name and account number were embossed on credit cards. Lost, stolen, canceled or past due accounts were listed in a monthly printed bulletin sent to merchants. Clerks at the point of sale waded through thousands of numbers to see if the card was not listed, and therefore acceptable. A merchant accepting a card listed in the bulletin was liable for the transaction.
Ron's first solution: He compiled the monthly records of negative accounts and stored the information on magnetic drums. The merchant then had a keypad that was connected to the stored data to look up numbers. While that expedited the POS process, it didn't go far enough to solve the problem. Keying in the card number was time-consuming.
Ron said he decided to "put some smarts in that piece of plastic" by applying reel-to-reel tape recorder technology. His idea? Record the account number on the tape, build a device that reads it like a tape recorder, connect it to the stored data, and voila! The credit card validity checking system is born!
At 85, Ron continues to mentor, coach, and inspire others to solve challenges. This requires, he said, a certain mindset: Be smart, daring, and different, and don't be afraid of making mistakes. If you want to solve a problem, you need to take some time to think about it in a certain way. Simply put, Ron said there is a gift behind every challenge that, if explored with an inquisitive mind, can bring forth innovations that can make things better for people.
I was thinking about Ron in the context of today's payments innovations, or the challenges we currently face, such as the chip shortage or fraud. What problems do you think need to be solved? By thinking like a humble genius, we see that every challenge brings an opportunity for advancing innovation.
May 24, 2021
Mindfulness Can Ease Payments Stressors
Making a $26 purchase recently, I was surprised when my debit card was declined. My account had money in it, so I couldn't understand what was wrong. Fortunately, I had cash and prepared to pay with it. Then, the clerk pointed to a notice taped to the terminal: "No cash accepted."
Behind me, people were growing impatient, sighing, and shuffling their feet. I tried a credit card I keep for emergencies, and it went through. Relieved to complete the purchase, I left and called the bank. My account was fine; the problem was with the merchant's terminal.
Back in my car, I breathed a sigh of relief but thought about how uncomfortable I felt standing in line, having two payment methods rejected, needing to scramble to find another way to pay, and sensing the impatience of others behind me. I also thought about the alarm I felt when my debit card was declined. Had my account been attacked and emptied by fraudsters? I realized this transaction had triggered a typical stress response: increased heart rate, anxious feelings, sweaty palms, disrupted breathing patterns, all physical and emotional reactions to a simple payment transaction that almost wasn't completed.
May is Mental Health Awareness Month, and it helps to be more aware of any stress we have while making our daily payment transactions. We are all affected by money and need it to function in our daily lives. We often take payments for granted but it's our primary method for getting what we need and want. Money, and conflicts over money, are significant stressors for people. One way to help with stress reduction is mindfulness, the practice of bringing your attention to the present moment, taking a deep breath, and relaxing. In this situation, I used mindfulness techniques to reduce the physical and emotional effects I was feeling. I was grateful I had learned these techniques for staying calm and reducing my stress response.
I think about people who are having payments rejected for whatever their circumstances, whether it's due to bank error, merchant error, a fraud alert, or the merchant not accepting a payment type such as cash or check. This can be particularly stressful if you need groceries, a prescription, gas, or emergency supplies and can't get them because either you or the merchant can't complete your transaction due to each one's payment choices or available options.
This in-person point of sale issue has the power to affect you in ways you may not even recognize, causing feelings of shame, embarrassment, anger, and anxiety. Payments inclusion initiatives can address some of these issues. In addition, by simply acknowledging that any of the monetary transactions we make in a day can cause stress, we can increase our awareness of how we respond to help us remain calm and reduce mistakes. When we take a deep breath and a minute to be mindful, we can reduce our body's automatic stress response, which benefits us in other areas of our lives.
May 10, 2021
My wife recently asked me whether I realized that if The Wonder Years was remade today it would be set in 2001. Really? The Wonder Years was my favorite show growing up and one that we recently rewatched with our kids. This coming-of-age drama set in 1968 featuring the fictional Arnold family and their awkward teenage son, Kevin, first aired in 1988. At the time, 1968 seemed like ages ago to this then 10-year-old boy.
This led me to think about changes in payments and commerce over the past twenty years and how my soon-to-be teenage son would, much like I did, think how "old" things such as payments and commerce would feel to him in a show set twenty some-odd years prior. While a whole dissertation could probably be written on the changes, I want to keep this blog post short, fun, and focused on recalling just one shopping experience I had that my son would find so foreign today.
Remember when we stood in line, or perhaps even camped out overnight, to buy concert tickets at a Ticketmaster outlet? The concert venues usually had a ticket office but there were also different Ticketmaster outlets throughout town, often in record stores, and my group of friends would strategize about which location might have the fewest people in line before ticket sales launched (usually at 10 a.m. on Saturdays). My favorite location for finding the shortest line was a Piggly Wiggly, a grocery store chain found in the South. As far as my payment type for concert tickets, it was always cash. If I bought extra tickets for friends, they always paid me back in cash. The payment type wasn't the only thing that was paper. The tickets were printed at the time of purchase, and a paper ticket stub ultimately became a memento of the event.
I find myself using "remember when" more and more as I get deeper into my middle-aged years. If you find yourself uttering those words, I'd like to encourage you to add to the blog by sharing your own experiences by using the comments feature. Or, email me and I will be happy to compile a list to share with our readers.
If you would rather not share a personal past commerce or payment experience that today's kids would find unbelievable with the Risk Forum, I encourage you to check out this website, where you can find payments data from the Federal Reserve Payments data dating to 2001. While the website might lack anecdotal stories that have today's kids going "wow," it's chock full of data and just might leave you thinking, "wow, remember when..."
September 18, 2017
The Rising Cost of Remittances to Mexico Bucks a Trend
From time to time, I like to look back at previous Risk Forum activities and see what payment topics we've covered and consider whether we should revisit any. In September 2012, the Risk Forum hosted the Symposium on 1073: Exploring the Final Remittance Transfer Rule and Path Forward. Seeing that almost five years have passed since that event, I decided I'd take another, deeper look to better understand some of the effects that Section 1073 of the Dodd-Frank Act has had on remittances since then. I wrote about some of my findings in a paper.
As a result of my deeper look, I found an industry that has been rife with change since the implementation of Section 1073 rules, from both a regulatory and technology perspective. Emerging companies have entered the landscape, new digital products have appeared, and several traditional financial institutions have exited the remittance industry. In the midst of this change, consumers' average cost to send remittances has declined.
Conversely, the cost to send remittances within the largest corridor, United States–Mexico, is rising. The rising cost is not attributable to the direct remittance fee paid to an agent or digital provider but rather to the exchange rate margin, which is the exchange rate markup applied to the consumer's remittance over the interbank exchange rate. As remittances become more digitalized and the role of in-person agents diminishes, I expect the exchange rate margin portion of the total cost of remittance to continue to grow.
Even though the average cost of sending remittances to Mexico is on the rise, I found that consumers have access to a number of low-cost options. The spread between the highest-cost remittance options and the lowest-cost options is significant.
With greater transparency than ever before in the remittance industry, consumers now have the ability to find and use low-cost remittance options across a wide variety of provider types and product options. To read more about the cost and availability of remittances from the United States to Mexico and beyond in a post-1073-rule world, you can find the paper here.
By Douglas A. King, payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed