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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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January 23, 2023

The Year of the Mobile Payment—Really!

Since the launch of payment wallets in 2014–15, several of my colleagues and I have facetiously joined in the chorus of mobile payment advocates that "20xx (pick your year) is the 'Year of the Mobile Payment.'" Well, it appears that 2021–22 can be legitimately declared as the year when consumer adoption of mobile devices (smartphones and tablets) for payments reached the tipping point.

The Federal Reserve's Survey and Diary of Consumer Payment Choice showed that in October 2021, a little over two-thirds (68 percent) of a nationally representative sample of more than 4,600 consumers used their mobile devices for at least one payment in the previous 12 months. This was an increase from 46 percent from the October 2020 study, as the chart shows.

Chart 01 if 01: Share of Consumers Making Mobile Payments

Clearly, the increased adoption was significantly assisted by the COVID pandemic. That's when consumers shifted to online shopping due to health concerns or physical retail businesses closed or reduced their operating hours. Responding to this change, retailers have made major investments in their ecommerce channel to be able to provide shopping convenience to their customers with a variety of delivery options.

One of the pressing questions we're faced with as the consumer economy comes out of the post-lockdown period is whether these shifts in payment use will continue or will slowly return to pre-COVID patterns. If the recent Thanksgiving-Black Friday-Cyber Monday shopping numbers are any indication, payments with mobile devices are here to stay. One firm reportedOff-site link that 55 percent of online sales on Thanksgiving Day came through a smartphone, an increase from 51 percent in 2021. Mobile sales continued to represent most sales (51 percent) during Cyber Week. The report noted one interesting change in consumer shopping habits: curbside pickup was used in only 13 percent of online orders on both Thanksgiving and Black Friday, which was a decrease from 21 percent in 2021. Christmas sales figures have yet to be reported but I expect more of the same trend.

So I ask you with a loud voice to join me in the mobile payments chorus as we acknowledge that the Year of the Mobile Payment has finally arrived!

May 16, 2022

The Cost of "Free"

When I began my banking career in the early 1970s, we essentially had only three consumer payment methods: cash, check, and credit (or charge) card. My checking account had a monthly service charge, and the account permitted me to write 15 checks a month—any more than that cost me 15 cents each. The overdraft/nonsufficient fee was $15 per check. My credit card had an annual fee of $25.

Today, I pay no fees for my checking account, debit card, online banking services, mobile banking services, electronic bill payments, or electronic wallet. I pay no annual fees for my credit cards unless a card is a premium card that bundles other products such as product protection or roadside assistance. (Of course, my statement about free checking is slightly exaggerated—most banks impose some sort of monthly maintenance fee, which you can often avoid by keeping a minimum balance or having a recurring direct deposit.)

The banking and payments industry has invested billions of dollars in these free channels and products. But is there really such a thing as a free lunch? Have financial institutions (FI) adopted a benevolent social policy giving everyone the right to free banking services?

It’s more complicated than that. Publicly traded FIs answer to their stockholders, and even nonprofit credit unions must generate sufficient revenue to maintain their financial health. So how can they offer all these free services and products? I believe there are four primary reasons that FIs are willing to forego explicit pricing for their services. The first is competition. Banks must compete in their market with the pricing of their products and services along with other factors such as quality of service and convenience of location. Second, debit card usage creates significant interchange revenue for the issuing FIs. Third, core deposits are the lifeblood of an FI's ability to fund its credit-related, revenue-generating products. Fourth, the bundling of services like bill payment and direct deposit have been shown to create a level of "stickiness"—in other words, the bundling increases the level of dissatisfaction a consumer must experience to believe it is worthwhile to move their account.

Will the bundling of these free services continue, or will the evolutionary cycle return to more explicit fees? Many FIs have been announcing of late that they are eliminating or reducing their overdraft/nonsufficient fund (OD/NSF) fees. The Consumer Financial Protection Bureau estimates that FIs collected almost $15.5 billion in OD/NSF fees in 2019Off-site link, which was about two-thirds of their fee income. You have to wonder if fees in other products and services will increase to replace this lost revenue. What do you think?

March 14, 2022

Thumbs Up: Smartphone Apps versus Websites

Sitting in front of my computer, I recently picked up my smartphone and unlocked my banking app with my thumbprint to see if a check I had written had cleared my account. Before going any further, let me acknowledge that, yes, this payment professional still writes checks every now and again! I learned the check had cleared, logged off the app, and resumed my day in front of my computer. This got me thinking about a change in my behavior that has occurred over time. Even when I am right in front of my computer, I find myself using my smartphone apps almost exclusively instead of visiting the full-function websites from my laptop or desk computer. Why?

The answer is simple: ease of access. I can get to my information through apps on my smartphone using just my thumbprint but accessing that same information from my computer through a website requires me to remember and type in my username and password. In fact, every app on my smartphone that requires a log-in allows me to authenticate using my thumbprint. Truthfully, I’m not so good at remembering my passwords even using the methods I teach others to use: create difficult yet supposedly easy-to-remember passwords. Perhaps this is why password managersOff-site link remain so popular. I continue to hold out from using a password manager with hopes that biometric authentication will become more common on websites and remembering passwords will be a thing of the past (except when biometric authentication fails). If smartphone apps authenticate me with my fingerprint or face, then why don’t websites do that when my laptop has a fingerprint reader and camera just as smartphones do?

While the same biometric functionality is currently available on my computer, the main barrier is that websites struggle to support and accept biometric validation due to different implementations across various web browsers and operating systems. Several organizations and standards bodies are considering this issue. The FIDO (Fast Identity Online) Alliance was formed in 2013 to produce stronger authentication standards and reduce password reliance. The FIDO2 Project, a joint effort between FIDO and the World Wide Web Consortium (W3C), released specifications in 2019 for W3C’s Web Authentication (WebAuthn) product that allows a website to use the FIDO authentication through a standard API implemented in a browser using public key cryptography and biometric authentication. Unfortunately, its uptake has been slow primarily because of the inconsistent user experience from website to website.

I should note that biometric authentication for apps on phones has not necessarily eliminated passwords, though it certainly feels like it, at least until the biometric authentication fails. Rather, biometrics serve as an alternative method of accessing the app’s username and password combination. The fingerprint and facial recognition is a template algorithm stored in a highly secure location on our phones. When an app requests my thumbprint and the stored algorithm confirms a match, the equivalent of a password manager opens on my phone and I am authenticated.

Is the end drawing any closer for manually entering online passwords, and are you looking forward to that day? Taking it further, will the day ever come when passwords are eliminated? Personally, I hope so and am very much looking forward to that day. If it doesn’t happen, then, based on my own habits, the days of visiting my financial institution’s website and others’ sites might be altogether forgotten.

February 14, 2022

Contactless Card Pay More Than Doubled in 2020, but from Small Base

Readers of this blog know that we at the Retail Payments Risk Forum have for years scratched our heads at the tepid growth of contactless card payments:

  • Doug King in 2017: Wouldn't it be nice to tap and pay?
  • Dave Lott in 2019: Contactless cards: the future king of payments?
  • Me in 2020: Are contactless cards having their moment?

Now, data released in December by the Federal Reserve Payments StudyOff-site link find that amid the decline in the number and value of in-person card payments from 2019 to 2020, in-person contactless card pay increased both by number and value. You can see the appeal of contactless card pay in the COVID-19 pandemic: The ability to tap or wave a card or mobile device at the in-person point of sale could be perceived to reduce the risk of contagion.

From 2019 to 2020:

  • The number of contactless card payments more than doubled (up 140 percent from 1.6 billion payments to 3.7 billion)
  • The total value of contactless card payments also more than doubled (up 120 percent from $50 billion to $110 billion)

The number and value of contactless card payments also doubled from 2018 to 2019, although on a smaller base. The 2020 growth is especially impressive in the context of the overall decline in the number and value of in-person card payments that year. But am I convinced that contactless pay is having its moment? Well, no. That’s because looking at percentage increases can be misleading when the base is so small.

With their 2020 growth, contactless card payments remain less than 5 percent of in-person card payments by number (figure) and 3.5 percent of in-person card payments by value. Maybe not the "king of payments" quite yet.

chart 01 of 01: Contactless Card Payments

I am willing to believe, however, that throughout 2020 and 2021 merchants ramped up their ability to accept contactless cards for in-person payments (along with screens and procedures to separate employees and customers)—even as they pushed customers toward delivery and curbside pick-up. With acceptance more widespread, consumers should be less likely in 2022 to run into the sort of difficulties my friend encountered in August 2020, when she tried to find a merchant that could successfully accept a completely contactless payment.

For more on newer and emerging payment methods, see the most recent report of the Federal Reserve Payments StudyOff-site link.