Emerging Issues & Trends in the U.S. Payments System

Transcription

1 Emerging Issues & Trends in the U.S. Payments System Conference of State Bank Supervisors Symposium December 9, 2011 Cindy Merritt Assistant Director, Retail Payments Risk Forum Federal Reserve Bank of Atlanta

2 Disclaimer: The views expressed in this presentation are those of the presenter and do not necessarily reflect the views of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Use of mobile device to connect to a financial institution to conduct customer 2

3 Agenda Trends in Retail Payments Mobile Banking and Payments Landscape Mobile Payment Technologies and Disruptors Use of Challenges mobile device to and connect Opportunities to a financial in institution Emerging to conduct Payments customer Fed Role Conclusions 3

4 Retail Payment Trends Changes occurring rapidly in multiple payment venues Convergence of POS, internet and mobile payment channels Intrusion of major corporate entities in the business of mobile payments Use of mobile device to connect to a financial institution to conduct customer Convergence of payment and non-payment industries to provide payment services, including banks, card networks, mobile carriers, internet payment providers New payment technologies (mobile smart phone, tablet, plug-in payment devices, contactless chips, barcodes) New opportunities for fraud; EMV developments Regulatory changes 4

5 What s Driving Changes in the US U.S. Payment tsystem? Continued Decline in Check Volume Migration to Electronic Use of mobile Payments device to connect to a financial institution to conduct customer Increasing Bank/Non- Bank Partnerships Growth in Internet Payments Shifting Demographics 5

6 Electronic Payments are Increasing Billions of Electronic Payment Transactions Prepaid Card, 3.3, 5% ACH, 14.6, 23% Prepaid Card, 6.0, 7% Use of mobile device to connect to a financial institution to conduct ACH, customer Debit Card, 25.0, 39% Credit Card, 21.7, 33% ACH Credit Card Debit Card Prepaid Card Debit Card, 37.9, 45% 19.1, 23% Credit Card, 21.6, 25% 6 Source: Federal Reserve Payments Study 2001, 2004, 2007, and 2010

7 e-commerce Payments are Increasing 30% 25% 24% 20% U.S. Retail Sales Growth (2Q) 18% 16% 14% 15% Use of mobile device to connect to a financial institution to conduct customer 10% 8.1% 7% 4.0% 4.3% 5% 3.8% 1.8% Total Retail 0% (2Q) -5% E-Commerce -10% -8% -9.5% -15% Source: U.S. Census Bureau, Quarterly Retail Sales Reports. August

8 Smart Phones are Driving Increase in Mobile Banking and Payments U.S. Smartphone and NFC Penetration Percentage of Subscribers %S Smartphone Use of mobile device to connect to a financial institution to conduct customer % NFC 8 Total U.S. mobile phone subscriptions almost 95%

9 Retail Payment Terms Mobile Banking Use of mobile device to connect to a financial institution to conduct customer service View account balances, transfer funds between accounts, pay bills or receive account alerts Mobile Payments Use of a mobile device to make a purchase or other payment-related Use of mobile transaction device to connect to a financial institution to conduct customer Payment initiated in physical or virtual space; via SMS, mobile internet, downloadable application, contactless NFC chip, barcode Digital content, goods and services at POS or internet, transit, P2P Mobile Commerce Purchase of goods or services over the Internet or remotely using a mobile device to initiate the transaction e-commerce Purchase of goods or services over the Internet using a PC 9

10 Mobile Application Platforms for Banking and Payments From: Send 20 to Use of SMS mobile device to connect WAP to a financial institution Downloadable to conduct customer App 90% of U.S. phones 60% of U.S. phones 33% of U.S. phones P2P, remittances Mobile web bbrowser Blackberry, iphone, Alerts connects to internet Android, Windows Ease of use Remote payments Customized 160 characters of text Unencrypted so less secure Messages stored by MNO and in handset Potential malware Smaller screen view Slower data transmission Expensive data plan Web threats Faster More secure Strong authentication Expensive data plan Not as ubiquitous Potential malware

11 11 Mobile Payments Landscape

12 How U.S. Mobile Payments Compare to Other Countries 12 Emerging markets growth in person-to-person (P2P) and remittance payments High unbanked population and weak banking infrastructure Developed countries More technologically advanced and more cash intensive, not big debit Use of mobile card users device to connect to a financial institution to conduct customer Mobile payments for retail and transportation US U.S. less demand dfor mobile due to strong banking infrastructure, many secure payment alternatives and bank locations, and high adoption of debit card US U.S. focused on mobile banking first leveraging i existing online banking services to offer mobile features such as billpay, alerts, funds transfers, balance checking U.S. shift to mobile payments as large commercial partnerships for mobile wallets emerge for POS payments

13 Evolution of Mobile Banking and Payments in the U.S. Customer comfort with shopping online via mobile transcends to physical POS Mobile wallet emerges here Use of mobile device to connect to a financial institution to conduct customer Retailers shifting from physical POS to internet 13 Online banking led to increased e-commerce now migrating to mobile

14 Many New Players Introduced in the Mobile Payment System Traditional Payment System Participants New Mobile Technology Participants Financial Institutions Mobile carriers AT&T, T-Mobile Customers & merchants Verizon, Sprint Payment Card Networks Handset/OS manufacturers Clearing/settlement t Apple (iphone) Use of organizations mobile device to connect to a financial institution Nokia, Samsung, to conduct Motorola customer Third party processors RIM (Blackberry) Fiserv, FDC, FIS Google (Android) Online payment providers & Chip-makers Social networks Gemalto, DeviceFidelity PayPal, Amazon, Google, Mobile solution providers Facebook Monitise, Clairmail, Intuit, CashEdge, Square Bill-to-mobile vendors Boku, Zong 14 Mobile payment vendors and other providers come from diverse backgrounds, ranging from financial services to telecom and IT solutions

15 Large Banks offer multiple Mobile Banking Functions smaller banks are following 15 Money Movemen nt Mobile Monito oring Advance ed Capabilities Check balances (DDA) View recent transactions (DDA) Check balances (savings) ATM/branch locator View any other account Check balances (Credit Card) View recent transactions (Credit Card) Transfer fundsbetween your accounts intra bank Pay bills Transfer funds between FIs to your own accounts Transfer funds between customers at same FI Bilingual mobile website or application Mobile P2P transfers 78% 78% 100% 100% 100% 96% 91% 91% 87% Use of mobile device to connect to a financial institution 61% to conduct customer 61% View rewards Other: Business Mobile Banking Check balances (prepaid) Mobile Remote Deposit Capture Mobile Personal Financial Management application View Current Rates View and redeem offers based on location Open accounts over mobile phone Enroll using a mobile phone 4% 4% 0% 30% 26% 26% 26% 22% 22% 13% 13% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90%100% Percent of Financial i Institutions i August 2011, n= 23 Base: All financial institutions reviewed Javelin Strategy & Research

16 16 Mobile Remote Deposit Capture Popular Mobile app and camera capture and transmit check image to FI for deposit, with immediate availability Banks & non-banks offer to consumers and small businesses Use of mobile with device low check to connect to a financial institution to conduct customer volumes from remote locations USAA, Chase, USB, PNC, Charles Schwab, PayPal Reduces bank and customer paper handling costs 38% of smart phone users want m-rdc (Javelin survey, March 2011) FRAUD Controls Limit daily deposit amount per customer KYC & customer due diligence Monitor frequency of use Watch for duplicates, double-posting

17 Mobile P2P Payments are Growing Electronify personal checks used for Replaces cash and informal payments checks Addresses low dollar money Babysitter, transfers housekeeper, Leverages consumer comfort with landscaper Family/college online banking Use of mobile device to connect to a financial institution students Mobile P2P models to conduct customer School fees Bank/card network partnerships with Medical, legal, rent 3 rd parties Cross-border Bank-owned Bank joint ventures remittances 17

18 Corporate and Brokerage Mobile Financial Applications Businesses monitor and conduct financial business remotely 54% of banks consider developing their mobile corporate banking services a high priority (Aite, 2011) Use Corporate of mobile Treasury/cash device to connect management to a financial institution to conduct customer functions Monitor transactions and cash flows View account balances Initiate, approve wires Transfer funds Receive alerts Mobile brokerage/financial trading apps 28% of brokerage account owners used mobile investing services in 2Q2011 (Compete s Mobile FS Intelligence Survey) e-trade, Merrill Lynch, Charles Schwab Wells Fargo CEO, Wall Street Systems, Chase, CBIC, BB&T 18

19 Mobile Payment Disruptors in the Payments Space are Growing 19

20 New technologies enable mobile payments and loyalty at Point of Sale NFC (Near Field Communication) Enables contactless transactions, data exchange, and wireless Wallets: Google Isis Visa Use of mobile device to connect to a financial institution to conduct customer connections between two devices in close proximity Built into mobile handset SIM card Micro SD chip 20

21 Use of 2D Barcode at Merchant POS Addresses Niche Markets Starbucks iphone application for closed loop prepaid account on mobile Tap barcode from mobile to merchant reader to pay Use of mobile device to connect to a financial institution Reload to funds conduct customer Track rewards 26 million Starbucks transactions since inception one year ago Expanded to Target and Safeway stores 9000 locations accept mobile payments now 21

22 Checkout Use of mobile device to connect to a financial institution to conduct customer The NEW Payment Landscape: No Longer Just Green and White 22 22

23 Large Alternative Payment Providers Support Internet and Mobile Channels Payment Provider Prepaid Access e-wallet Mobile Proximity- POS Mobile Remote - Internet Mobile Bill-to- Carrier P2P or C2B Amazon X X X C2B Payments PayPal X X X X X Both Google Use of mobile device to connect X to a financial X institution X to conduct customer Both Wallet Serve X X Both (AMEX) Square X Both itunes (Apple) Facebook Credits X X C2B X X X C2B 23

24 Shift from Mobile Payments to Mobile Wallet Wallet is software application loaded on mobile device for controlled and secure partitioning of payment credentials (payment cards, coupons, transit tickets and medical information), and management of payments made from mobile phone OPEN mobile wallet Supports multiple payment credentials, issuers and applications Use of Stores mobile credentials device to connect safely in to secure a financial element institution (chip) to in conduct mobile device customer Uses contactless NFC technology and enabling apps Clears and settles over existing rails (credit, debit, prepaid, ACH) but open to new channels Uses dynamic data authorization for security Based on global l standards d and industry certification 24

25 Mobile Payment Market Disruptors VISA wallet NFC-enabled microsd chip Stores Visa account info for online and POS payments Rollout Fall 2011 Use of mobile device to connect to a financial institution to conduct customer Isis wallet NFC-enabled microsd chip AT&T, Verizon, Discover, BarclayBank, Visa, MC, AMEX Trial 2012 in SLC, Austin, TX Will include UTAH Transit 25

26 26 Google has Expanded its Payments Role with Mobile Wallet U.S Mobile Subscriber Market Share May % 2.4% Google Checkout less than 3.5% of Google s total revenue (2Q2011) Merged Google Checkout and Wallet services in Nov % Google Android OS has 38% of 24.7% Use of mobile device to connect to a financial institution to conduct customer U.S. mobile market share Launched NFC mobile wallet in 26.6% 6% September 2011 with Sprint, MC, Citi and First Data Google Android Apple iphone Samsung Nexus phone RIM Blackberry Microsoft Google prepaid card Source: comscore July 2011 About 15 merchants signed up, including Transit Includes POS contactless payments, coupons, merchant deals, loyalty program

27 Mobile Becoming Ubiquitous PayPal Facts 100+ million active accounts (2011) 27 Processed 18% of all global Total Payment Volume (TPV) (2Q2011) 8 million customers use PayPal Mobile daily to make purchases valued at $10M (July 2011) Use of mobile device to connect to a financial institution to conduct customer PayPal mobile TPV estimated at $3B in 2011 vs. $750M in 2010 PayPal Mobile Services Basic mobile to view PayPal balances and transactions using SMS, WAP or iphone App Mobile P2P between PayPal P accounts, bank to receiver s PP account; Discover card to PayPal account Developing POS capability with FigCard (app and merchant USB plug-in terminal device Zong for digital content paid through mobile carrier

28 APPLE itunes - Another New Alternative Payment Provider to Watch Over 200 million itunes accounts One of the biggest credit card subscribers online App Store Over 425,000 mobile apps Use of mobile $2.5 Billion device total to connect revenue to a to financial developers institution selling to their conduct apps customer via Apple App Store Over 100 million iphones sold as of March 2011 Rumors that new iphone5 will have NFC, allowing for POS purchases Potential to become a major payment platform? itunes payments Stores credit card/billing information like an e-wallet Has a mobile phone payments application 28 28

29 New Mobile Alternatives for POS Credit Card Payments Intermediaries enable small merchants to accept credit/signature debit card payments in lieu of cash or checks with mobile plug-in device and app Payment provider is merchant acquirer Use Potential of mobile concerns device to connect to a financial institution to conduct customer Security risk if hardware not encrypted Charge-back process Merchant incentive with lower fees Examples Square ROAMpay Intuit GoPay 29

30 Other Payment Disruptors Transition from Internet to Mobile AMEX Serve Online, mobile and offline (prepaid card) Can be funded with bank, credit, debit or prepaid account P2P, C2B ios and Android App Use of mobile device to connect to a financial institution to conduct customer Launched in March 2011 Amazon Mobile Payments Services Can be used within a native mobile application or on mobile website Allows for integration of Amazon s 1-Click checkout Launched in October 2009 Exploring NFC-based mobile payment and marketing services 30

31 New Payments Players - Digital Content and Social Media Networks 31 Bill-to-Carrier Model (Zong, Boku) Originally created to charge small value digital purchases or donations to wireless bill Start-ups developed as payments intermediary between internet merchant and mobile carrier for billing Issue: is mobile carrier acting like a bank? Facebook Use of mobile device to connect to a financial institution to conduct customer 750 million people worldwide use Facebook daily Facebook Credits used to buy virtual objects, games, and apps on Facebook Buy Facebook credits with Zong, charge to mobile phone or fund with PayPal, credit card, FB gift card, mobile payment at POS Today FB credits only work within the social network, without bank involvement. Could they spill over to physical POS payments? Will growth of Facebook and mobile gaming increase use of Bill-to-Mobile providers?

32 Mobile Payment Challenges and Opportunities 32

33 Mobile Payment Opportunities and Challenges 33 OPPORTUNITIES CHALLENGES More security options Lack of consumer demand Merchant efficiencies Business model revenue Consumer convenience, sharing demographic & life style Customer ownership changes Merchant investment Marketing & Locationbased services (LBS) stakeholders Collaboration of many Convergence with value- Low number of NFC chipenabled phones in U.S. added services Financial inclusion Lack of global standards Use of mobile device to connect to a financial institution to conduct customer Unclear regulatory direction

34 Mobile Payment Risks & Mitigation Tools Risks Mobile device lost or Unauthorized access to Potential virus or stolen device, financial data malware Mitigation Tools Require password to Use of mobile device to connect Limit to a and financial monitor use phone institution to Provide conduct ID customer theft transaction dollars protection features Multi-factor Alerts to notify of (mobile anti-virus authentication to access suspicious i activity it software) financial accounts Remote device deactivation capability Auto device log-out Consumer education for mobile device and app security Mobile policies & procedures Provide guidelines to avoid downloading malicious, unsecure or phony apps 34

35 U.S. out of sync with other developed countries. Only just starting to discuss limited EMV for overseas travelers. 35 EMV CHIP + PIN Debate Most developed countries have adopted or planning to adopt EMV (orange and brown) Use of mobile device to connect to a financial institution to conduct customer EMV (European MasterCard/Visa) Global standard for chips to replace mag stripe on cards and mobile phones Chip+PIN combined with mobile phone provides increased fraud protection Account credentials and PIN stored on EMV chip in phone & remain encrypted to terminal while obtaining i authorization i Visa Global POS Liability Shift Policy: PCI compliance by 2015 Liability shift in U.S. for domestic and cross-border counterfeit transaction effective October 1, 2015 Liability for counterfeit fraud to party that has not made investment in EMV chip cards (issuers) or terminals (merchants acquirers) Source:

36 Current Regulatory Landscape Regulation has not kept pace with innovations in emerging payments such as internet, mobile and stored value Generally, the regulatory regime applicable to existing payment methods and models governs internet and mobile payments since non-banks rely on traditional retail funding sources But no formal interpretation exists Use Many of mobile regulatory device agencies to connect touch to a payments financial and/or institution wireless to conduct transactions customer with little overlap Mobile carriers and other alternative payment providers may be unfamiliar with legal requirements, such as: Consumer protection, BSA/AML, KYC, state money transmitters, risk compliance FCC only oversees mobile carrier standards and competition No coordination of regulation of mobile payments, creating gaps where coverage and liability are unclear Alternative payment providers and start-ups may not have experience, money or interest in compliance 36

37 What Rules & Regulations may apply to Alternative Payment Providers? Should apply to Non-banks Provider Terms & Conditions User Agreement Privacy and Security Policies Money Service Business Regs Money Transmitter Licenses By State Bank Secrecy Act (BSA) Money Laundering Gramm Leach Bliley (GLBA) Data Security & Privacy Unlawful Internet Gambling Enforcement Act (UIGEA) Consumer Financial Protection Bureau (CFPB) FI and Payments specific: less clear NACHA ACH rules EFTA/REG E UCC Article 4A OFAC U.S. Treasury REG CC Remotely Created Checks Credit & debit card network rules REG Z - Truth in Lending Fair Credit Reporting Act Use of mobile device to connect to a financial institution to conduct customer 37

38 Fed Role in Evolution of Mobile Payments Industry Workgroup (MPIW) Fragmentation, no communication between key stakeholders on direction of mobile payments in U.S. Fed as neutral organization able to convene diverse representation ti of stakeholders in mobile payments Use of mobile device to connect to a financial institution to conduct customer Boston and Atlanta Fed research groups shared interest in mobile payments - partnered in 2009 and convened first meeting in January 2010 Goal: Understand industry yperspectives p on mobile payment developments in U.S. and expectations of Federal Reserve 38

39 MPIW Objectives Establish dialogue and transparency among participants to better understand industry roles in the evolving U.S. mobile payments ecosystem Build relationships, discuss roles, and share ideas to build consensus on mutual points of value, challenges and opportunities in mobile payments Discuss possible business cases for future collaborative activities to help build critical mass for mobile payments Establish a manageable scope of action for the MPIW going g forward Use of mobile device to connect to a financial institution to conduct customer 39

40 Many Roles in NFC Mobile Payments Handset / NFC Chip Manufacturers MNOs Customer Mobile solution & application vendors Card Issuing FI(s) Payment Processors Technical TSMs Use of mobile device to connect to TSM? a financial institution to conduct customer Debit/Credit ACH network Role of Trusted Service Manager Intermediary between banks, carriers & service providers Manage shared services: cryptographic key management, 40 applications, value added services Terminal manufacturer Merchant Acquirer FI(s) POS (online?) Merchants Card Networks Other transaction services providers and networks Oversee interoperability, security standards and business rules Manage/certify new hardware & software for handsets, terminals, chips Oversee account set-up & provisioning Coordinate customer service resolution (one face to customer)

41 41 Impact to Alternative Payment Providers Regulators showing more interest in alternative payment providers, especially those offering prepaid access and mobile Alternative payment providers should become familiar with current and potential ti regulatory Use requirements of mobile device to connect to a financial institution to conduct customer Introduction of mobile channel extends reach of these providers and access to consumers Although internet purchases via mobile are still very small, they are increasing as new alternative providers emerge and more consumers buy smart phones Impact may depend on CFPB direction with large non-banks

42 Impact to FIs 42 New alternative providers are much bigger, well-branded and have captive markets with their own customer base Newer alternative providers (mobile and social networks) are attracting different consumer segments (younger generations, underbanked) who aren t loyal to traditional payment methods Consumers will continue to adopt alternative providers, including mobile, if they meet requirements for convenience, security and incremental value when making purchases online and at POS Partnerships with alternative payment providers may provide new revenues for banks, help mitigate risks and provide better protection for consumers Use of mobile device to connect to a financial institution to conduct customer Security and fraud will continue to be issues, requiring ongoing and shared responsibility for monitoring, prevention and education of banks, carriers, vendors, merchants and consumers

43 Examiner Points of Focus for Mobile Banking & Payments 43 Nothing formal exists yet specific to examining risks and issues related to mobile payments so start with basics and what is done for online banking Identify Bank mobile payment touch points Customer makes mobile purchase funded by bank-issued credit card or debit card linked to checking account Customer makes mobile P2P money transfer from his bank to another bank or to PayPal via Bank relationship with third party (CashEdge, Fiserv ZashPay, PayPal, Obopay, etc.) Relationship with mobile carrier(s) and mobile software solution providers to offer m-banking services Use of mobile device to connect to a financial institution to conduct customer Make sure bank conducts due diligence with each mobile vendor or third party involved in process Agreements with 3 rd party mobile providers that explain provider s risk management plans Agreements with mobile carrier or 3 rd party provider for customer service responsibilities and liabilities Review bank s internal procedures for mobile payments and banking Mobile payments strategy with a risk plan for consumer protection, data and device security? Updated policies, procedures and agreements for mobile payments Staff expertise to handle business, technical and security concerns related to mobile payments Customer education programs; easy to understand agreements for customer responsibilities?

44 Conclusions Mobile banking is accelerating in the U.S. and creating the experience needed to build demand for mobile payments Mobile payments are forecast to reach significant scale over the next few years based on various payment consultants analyses Use of Mobile mobile payments device to connect will drive to a innovative financial institution products to and conduct services customer in financial services, but will continue to be fragmented until the market settles, and consumer demand is better understood Non-bank participants in the mobile ecosystem, both large and small, will continue to play strong roles in the innovation and implementation of mobile services, with and without bank partnerships; creating potential risk and consumer confusion as well as real and perceived threats 44

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