SRC Partner, Nancy Brooks, provides updates on Electronic Payments Issues

Executive Summary

We are living in an information age where consumers have come to expect access to instant information and data and “Venmo” is used as a verb.  At the first meeting of the U.S. Faster Payments Council meeting last week, an industry leader likened the current transformational changes in electronic payments to the advent of the Internet.  Wow!  Whether you agree with that statement or not, some things are abundantly clear:  consumers and businesses are looking for (and expecting) payment solutions are that frictionless, fast (think real-time or near real-time), address fraud, and are largely ubiquitous.  As we think of 21st Century payment systems, I believe a few of the key considerations are: solving for fraud in real-time; incorporating cashless solutions while still accommodating some cash; internal data mapping/operations to address privacy concerns; and thinking strategically about efficient, effective, cross-border electronic payment solutions.  This Electronic Payments Update provides my perspective on several of the current trends and issues in electronic payments that I am tracking. 

A.  “Faster Payments” and Real-Time Payments (“RTP”) Systems – Public debate continues on whether consumers need/want real-time payments and whether they understand the associated risks.  At the U.S. Faster Payments Council meeting last week, former CFPB Director Richard Cordray talked about prevailing consumer expectations for instant information and data leading to frustration with payment systems where finality of payment and data is delayed.  Delay in settlement also adds cost to commercial transactions.  Countervailing considerations include concerns over identifying and mitigating fraud in real time, lack of recourse for misdirected or inaccurate payments, and limited or no charge-back rights and dispute processes.  As Visa CEO Al Kelly highlighted at a recent investor conference, the current payment system providers of RTP typically do not provide the same charge-back rights and dispute resolution processes as the traditional payment card networks.  The legal framework applicable to p-to-p electronic payments and digital accounts also requires modernization to close the gap on consumer protection for misdirected payments authorized by the consumer and education about finality of RTP payments.  RTP systems are cropping up around the world and offer some distinct benefits, but it definitely is still a “buyer beware” situation where it is important to know and understand the rules of the system and recourse for fraud, misdirected payments, charge-backs, and disputes.       

B.    Cash vs Cashless - Driven by consumer preference for faster, more convenient, ways to pay, and merchant desire for secure transactions and increased data about customer preferences, digital/mobile payment transactions are on the rise.  “Cashless stores” – retails businesses and restaurants that no longer accept cash as a means of tender for payment - are cropping in the U.S. and abroad.  In the U.S., some cities are banning cashless stores because they may have a quasi-discriminatory effect, adversely impacting more immigrants and minorities who do not have the banking relationships necessary to effect an electronic payment transaction.  Yet, in some parts of the world, there may still be a need to facilitate acceptance of cash in local currency.  This raises interesting “build vs buy vs collaborate” operational, economic, and regulatory considerations.  For example, is there a local, in-market solution that can be leveraged to solve the local needs on a cost-effective basis?  If not, would it be more cost-effective to partner with a local FI and/or government to develop a solution that ultimately offers some of the same operational and security benefits as an electronic payment solution?  Imagine, for example, working with a local government to validate identity of a potential customer and then opening a digital wallet account to provide access to linked stored value payment products and other payment solutions.

C.  Data Privacy – Clearly, managing data from the very first encounter by a consumer with a business’ website throughout the data/consumer lifecycle, has to be a top priority.  The California Consumer Privacy Act of 2018 has implications beyond California and California consumers.  Even if the currently proposed amendments are adopted, the CCPA likely set the new standard for developing consumer privacy laws in the U.S.  So, mapping consumer data (broadly defined) and knowing where and how it is captured and what a business does with it, are critically important questions for system and policy design.

D.  Cross-Border Multi-Currency Settlements – The operational cost and complexity of cross-border, multi-currency settlements continue to be a challenge to industry players.  There are FinTechs working to solve challenges with managing transaction ledgers and accounting for transactions in this environment.  I also am aware of at least one FinTech offering a solution designed to dramatically reduce FX currency and conversion costs through multi-lateral netting arrangements established at settlement banks (conceptually similar to a central clearinghouse model).  The legal/regulatory environment for cross-border payments often is complicated by jurisdiction and local law questions.  Understanding the implications of local law should be factored into decisions on licensing and even whether a business chooses to do business directly in a jurisdiction or through a local partner.

E.  PSD2 Developments – Strong Customer Authentication protocols are set to go into effect in September 2019 in the EU.  The updated authentication protocols are intended to reduce card not present fraud by requiring additional identification authorization for online transactions.  (Additional authentication can be accomplished through a number of different means, including: inputting personally identifiable information, responding to calls or text alerts on mobile phones, responding to emails sent to submitted addresses, or providing biometrics like fingerprints or facial recognition.)  Public press is reporting a sizeable readiness gap, both among merchants and consumers in the EU.  The resulting concern, clearly, is loss of sales as consumers abandon their intended purchase when they encounter friction at checkout.

For Questions or to Share Your Perspective, Contact Nancy at:                                 




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