Investment in fraud detection can be a competitive advantage, especially as real-time payments initiatives create new opportunities—and threats—for financial institutions. Luis Rojas of Bottomline Technologies explains where and how to address gaps in fraud detection, and how bank boards should examine the true costs of fraud.
On July 9, 2015, the Consumer Financial Protection Bureau released its “vision” for faster payment systems, consisting of nine “consumer protection principles.” The principles build on concerns about payment systems raised by CFPB Director Richard Cordray in a speech last year. These well intentioned principles pose a number of practical problems and ignore the inherent interdependence of consumer and commercial benefits as payment systems evolve.
Background The CFPB’s nine principles stake out a bold policy stance aimed at ensuring that faster payment systems primarily benefit consumers. The principles are:
Consumer control over payments;
Data and privacy;
Fraud and error resolution protections;
Security and payment credential value; and
Strong accountability mechanisms that effectively curtail system misuse.
Release of these principles follows initiatives by the Federal Reserve System, The Clearing House, and most recently NACHA, through its same-day ACH rule approved in May, to promote the development of faster payment systems.
Practical Concerns with the CFPB’s Faster Payment Systems Principles The CFPB’s principles undoubtedly deserve consideration, and few industry participants would disagree with them at a high level. Though reasonable in theory, certain goals articulated by the CFPB may prove impractical, counterproductive, or unduly optimistic in practice. Here are four examples:
Data and Privacy The CFPB generally wants consumers to be “informed of how their data are being transferred through any new payment system, including what data are being transferred, who has access to them, how that data can be used, and potential risks[,]” and wants systems to “allow consumers to specify what data can be transferred and whether third parties can access that data.”
This amount of disclosure and degree of consumer control is unrealistic for routine payment transactions, unnecessary in light of current and evolving security measures and fraud and error resolution protections, and likely to thwart the goal of faster payment processing.
Transparency and Funds Availability The CFPB expects faster payments systems to provide “real-time access to information about the status of transactions, including confirmations of payment and receipt of funds” and to give consumers “faster guaranteed access to funds” to decrease the risk of overdrafts and non-sufficient funds (NSF) transactions.
Here and throughout its principles, the CFPB expresses its desire for faster payment systems to benefit consumers immediately. Implicit in this goal is a rejection of staged implementation of consumer protections, as in NACHA’s same-day ACH rule where same-day funds availability for consumers follows same-day settlement of debit and credit transactions. Additionally, real-time access to information about transaction status seems costly and unhelpful until consumers can act upon such information in real time.
Cost The CFPB envisions affordable payment systems with fees disclosed to allow consumers to compare costs of different payment options.
The CFPB’s vision of comparative cost disclosures across the ecosystem of available payment options is unrealistic given the existence of competing independent payment systems, multiple payment channels and devices, and varying degrees of intermediation. The total cost to consumers of using different payment systems depends upon many unpredictable variables, making comparative cost disclosures little more than rough, imprecise estimates.
Access The CFPB expects faster payment systems to be “broadly accessible to consumers,” including “through qualified intermediaries and other non-depositories.”
This principle focuses on unbanked and underbanked consumers. Although broad accessibility should be encouraged, it is difficult to imagine a safe and widely accepted payment system evolving in which banks would not be heavily involved in the origination and receipt of transactions. Indeed, payment systems that have evolved independent of banks—such as virtual currencies—pose substantial consumer protection concerns.
Implications of the CFPB’s Principles CFPB Director Cordray emphasized that “the primary beneficiaries” of faster payment systems should be consumers and the CFPB’s principles reflect this view. Creating faster payment systems is an enormously complicated industry-driven undertaking, the cost of which is borne by industry participants. As such, faster payment systems must offer tangible benefits to industry participants, not just to consumers, if they are to succeed. The CFPB’s principles would be more effective if they expressly recognized the need to balance consumer and commercial benefits.
Further, the CFPB may intend to use its principles as a chokepoint for policing consumer protection features in evolving payment systems. We hope the CFPB’s adherence to these principles does not become rigid and overzealous or threaten to derail useful payment system improvements before they get off the ground.
Here’s a topic almost assuredly off the radar for many bank boards: real time payments. Don’t fall asleep yet. This will be of increasing importance in the years ahead.
Commercial customers are definitely in need of such a solution. For business customers, getting paid quickly is far more important than for most consumers. For both business customers and their vendors, checks introduce unpredictable cash flow: slower payments for the vendor, and uncontrolled float for the payer. Businesses are constantly dealing with cash flow management. It often takes 60 or 90 days to get paid after sending an invoice. Some suppliers need to drop tens of thousands of dollars of equipment or supplies off at a customer’s doorstop. Why can’t they be paid right away, instead of waiting around with their valuable goods on someone else’s property? Why do businesses have to preload deposit accounts or prepaid cards to make sure their employees get paid in a timely manner, on payday?
Online bill pay is no solution, says Bob Roth, a managing director with Cornerstone Advisors, a consulting firm in Scottsdale, Arizona. Twenty percent of payments through online bill pay end up as checks anyway, because the bank has no electronic information on the receiver of the payment. That means a payment can take six days or more to arrive by mail. Eighty percent end up as ACH (Automated Clearing House) transfers, but that can take 12 to 36 hours as well, Roth says. MineralTree founder BC Krishna said he tried to open an ACH account at a bank once, but the bank charged $250 for the application, $50 per month for the account, $20 per ACH file transmitted to the bank, 15 cents per transaction and required him to fill out a credit application. Not surprisingly, this pricing and process is geared towards larger businesses with a higher payment volume. Prepaid credit cards are fast, but they’re also expensive.
If businesses can find something easier and cheaper, they probably will. Seventy-five percent of business owners told the Federal Reserve in a 2013 survey they would prefer their payments be made instantly or within one hour. With thousands of financial technology companies popping up on the landscape trying to reinvent the financial system, there could be a few disrupters in the bunch offering a quicker payment solution. Person-to-person payment networks such as Dwolla and bank-owned ClearXchange already are offering faster (and cheaper) solutions, but they are mostly concentrated on the consumer and small business side of the equation.
In bigger businesses, there are multiple people who have to sign off on an invoice, so emailed invoices often get printed out anyway and the entire payments process is fairly complex, says Rick Hall, an analyst at Mercator Advisory Group in Maynard, Massachusetts. “Businesses have really been looking for ways to not only streamline the process but find the best alternatives,’’ he says.
It may be years before a truly speedy and cheaper alternative exists for commercial businesses trying to make payments. Krishna is a member of the Remittance Coalition, a 240-member group of public and private interests, including members of the Federal Reserve, trying to address some of the obstacles that keep businesses from using electronic alternatives to paper checks. The Federal Reserve is pushing for faster payments, but there are so many different players and legacy systems communicating with each other that a unified set of strategies is hard to implement. The core processing companies FIS, Fiserv and ACI, which each have hundreds or thousands of bank customers that could communicate with each other, are all working on their own real time payment solutions as well, according to Hall. NACHA, The Electronic Payments Association, which administers ACH, also is working on its own solution called Same Day ACH, which was recently approved by its membership. Under NACHA’s plan, same day ACH transfers begin in phases starting in September of 2016.
But in the meantime, someone may come up with an even better, faster, cheaper and ubiquitous solution. Person-to-person payments are all very exciting, but the consumer side of the equation is a fraction of the payments being made between businesses every day. “The real opportunity is going to lay on the business side,” Hall says. And business customers really are the focus of a great many community banks’ business plans. It will be important not to lose sight of their needs.