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 19, 2021
Will the Chip Shortage Affect Payments?
Sitting down to eat at our favorite Mexican restaurant the other evening, my wife and I started our usual conversation on how it's impossible not to devour the chips and salsa that are always immediately placed in front of us. And it seems that there is always an endless supply of these chips, so much so that there are usually always chips left in the basket when we leave the table. Unfortunately, this country and others around the globe are not experiencing a similar oversupply of semiconductor chips. In fact, it's quite the opposite, as many industries, including the payments industry, are facing a shortage of microchips.
The effects of this chip shortage on the automotive, smartphone, and video gaming industry have been covered extensively. But did you know that it has the potential to disrupt the payments industry as well? A recent American Banker article highlights how the global chip supply shortage affects the payment card industry and discusses the potential implications for cardholders.
Recently, someone representing a technology provider for chip-enabled cards told me that approximately 400 million chip cards are issued to U.S. cardholders each year. These cards include replacements for expired, damaged, and lost or stolen cards as well as cards for new accounts. He said he believes that with an approximate chip shortage of 30 percent, the industry may not be able to produce up to 126 million cards in the coming year.
With a shortage of chips and issuers unable to produce their usual allotment of cards, some cardholders could lose access to a revolving credit line from a credit card or to funds in their bank account through their debit card when their current cards expire. As the American Banker article states, it seems logical that to mitigate the shortage, issuers may choose not to reissue inactive or less used cards. This possibility could affect those consumers with credit or debit cards expiring soon who might only use their cards sparingly. As an alternative to physical cards, issuers could choose to issue virtual cards, which could be loaded into a mobile wallet and used anywhere contactless payments are accepted. Though mobile payments are growing, I am not convinced that consumers are ready to adopt virtual cards.
My wife and I will continue to visit our favorite local Mexican restaurant. I also am certain that I won't be able to resist that endless supply of chips that will meet me at our table. But with the current semiconductor chip shortage, I am not as certain about having access to all my accounts, because several of the cards in my wallet are set to expire over the next year.
July 12, 2021
Young and Old Want to Keep Their Money Safe
My colleague Doug King recently moderated a panel about age-related attitudes toward banking and payment practices. He spoke with a boomer, a gen-Xer, a millennial, and a gen-Zer.
Most notable about these panelists: not how different they were from each other but how alike. Keeping in mind that a sample of four is not representative and that all were Federal Reserve employees, panelists of every age agreed about risk when it comes to their money: they hate it.
All four had used a brick-and-mortar bank one way or another in the last year, and there was no interest in switching to a digital-only bank or fintech option—even though all panelists struggled to remember the last time they had written a check. One panelist said, "I stick with what I know." Another: "I just don't have time to do the research." A third, "I'm staying with the traditional, just in case." They wanted not the bricks, not the mortar, but rather the security implied by the existence of solid real estate.
They admitted to more risk-averse behavior: no one—not the youngest, not the IT guy—owned crypto assets. Too risky, they said. Most are storing card numbers with an online merchant with high brand recognition but not at other online shopping websites. It's worth the small amount of time to put in the number at lesser known sites, said three of the four.
Do you see a marketing opportunity out there? Some newer services are selling the idea of speed—that is, payments that are fast and frictionless. Or the social benefits of tagging payments with emojis. Or convenience. Or a user-friendly app. But these four people, at least, want safety.
Of course, newer ways to pay do offer security enhancements—for example, two-factor authentication when you use a phone with fingerprint or face ID authentication to pay. And, with so many choices available, panelists said they would like to better understand their payment options. This means that maybe customers are waiting to hear more about product features and benefits that emphasize security and, according to these four, at least, that are delivered by recognized brands they already know and trust.
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.
June 28, 2021
Talk about Payments during the Pandemic—Join Us on July 13
When the conventional wisdom holds true, it still can be a good idea to look under the hood. Sometimes survey data confirm the conventional wisdom. That's the case with new data from the Diary of Consumer Payment Choice, which show that the use of cash for purchases and person-to-person (P2P) payments dropped in 2020. In 2019, cash was used for 31 percent of these payments while in 2020, the pandemic year, the cash share fell to 23 percent.
"Of course," you may say, "I haven't been shopping or paying others in person. And for months, I avoided handing over a payment to a retail clerk. That's why the share of cash fell." I agree, this is a completely obvious point.
Even the obvious, however, contains nuances. That's why the Talk About Payments webinar on July 13 will ask questions about factors that may underlie these data, including the following:
- What's the impact of remote purchasing on payment instrument choice?
- Were there generational differences in purchasing behavior in 2020?
- Fewer consumers carried a balance on their credit cards in 2020. Did that affect purchasing behavior?
- Are more consumers ready to use payment apps?
I hope you'll join me and Joanna Stavins from the Boston Fed alongside Shaun O'Brien from the Cash Product Office at the San Francisco Fed for the next Talk About Payments webinar, July 13, 2021, at 1 p.m. (ET). We'll chat about not only remote shopping but also other factors that could be affecting the use of cash for purchases and P2P payments.
This webinar is open to the public but you must register in advance to participate. (Registration is free.) You can register online. Once registered, you will receive a confirmation email with login and call-in information. We hope you will join us on July 13, when you will have an opportunity to ask questions about the results of the research.