Innovation & Globalization In Retail Payments Systems: Legal & Compliance Issues Richard M. Fraher...
-
Upload
arabella-reed -
Category
Documents
-
view
219 -
download
0
Transcript of Innovation & Globalization In Retail Payments Systems: Legal & Compliance Issues Richard M. Fraher...
Innovation & Globalization In Retail Payments Systems: Legal & Compliance Issues
Richard M. FraherFederal Reserve Bank of Atlanta
Technology Drives; Law Reacts
• Technical innovation drives the new frontiers in payments– Completely new mechanisms—web, M-banking– Transformation of old mechanisms—e-checks
• Law reacts by balancing competing goals– Promote efficiency, certainty, predictability
• Allocate risks of loss– Prevent abuses
• Fraud• Money laundering/terrorist financing
– Regulate without stifling innovation
• Online • Check Images• ACH• Cards• Emerging
– M-banking
Electronic Payments
Paper to Electronics
U.S. Noncash Retail PaymentsBillions of payments
0
10
20
30
40
50
60
70
80
90
1979 1995 2000 2003
Electronic
Check
Number of non-cash electronic payments exceeded checks for first time in 2003; trend is accelerating
Source: Federal Reserve, 2004
Transformations of Check Processing
• Paper instruments sorted/posted by hand
• Electronic processing—1960-1990– MICR—paper check as “IBM card”– Electronic presentment under UCC 4-110
• Attempted escapes from paper– Image exchange agreements; “e-checks”
• Low adoption rates
The Check 21 Act
• Effective 10/28/2004
• Creates Substitute Check to facilitate image exchange
• Does not define, regulate, or protect image exchange
The Substitute Check
Paper Check Collection/ReturnBank to Bank—UCC 4
Bank of
First Deposit
CHECK
Intermediary Paying Bank
CHECK
CHECK
Bank to Bank Check Collection and Return After C21
CHECK
PAPER
Intermediary Paying BankIMAGE
PAPER
Bank of
First DepositIMAGE
or or
New Deposit Side Services
CHECK
BOFD backroom process
Intermediary or Paying
Bank
IMAGE IMAGEPayee
Remote Deposit
Presentment Side Services
PAPER
Paying BankIMAGE• cash letter
• bulk delivery
or, by agreement:
PAPER
Intermediary IMAGE• cash letter
• bulk delivery
Drawer
Rapid Electronification
• Explosion of image based check collection, 2004-2007 and beyond…
Adoption of Image Exchange
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2004 2005 2006 2007 2008 2009 2010
Two Forecasts:Image Exchange as % of Check Volume
FinancialInsightsCelent
Legal Lessons Learned
• Public lawmaking may be useful to spur adoption of new technologies
• Adapting old laws to new technology led to unanticipated results– Business outcome: remote deposit capture– New legal issues: duplicates; “rejects”– Evolving technical standards developing in
private sector were incorporated in public law
Globalization
• Creating the FedACH international service
FedACH International
Goal: Make international retail payments faster, cheaper– 1990s – “NAFTA ACH” and “WATCH” Discussions – 1998 – Rivlin Committee—Fed support for international
ACH– 2000-2003 Fed discussions with European postal banks
Goal: Support U.S. Treasury move away from paperPractice: Building new channels, one border at a time
– 1999 – Canadian ACH Pilot– 2003 – FedACHi Transatlantic to Five Nations– 2004 – FedACHi to Mexico– 2004 – FedACHi to Panama
FedACH International® Services
• Guiding Principles– Provide services to banks and to Treasury– Develop safe, efficient, inexpensive solutions for government
and commercial payments– Compliance with all laws/regulations– Leverage Fed’s existing ACH network, formats, & application to
create a channel for small value cross-border payments– Develop automated, STP solutions– Support bi-directional flows– Offer end-to-end certainty of clearing & settlement times– Offer competitive FX rate– No fees deducted from principal amount of transaction
Legal Structure
• NACHA Cross-Border Rules + FRB OC4• “Gateway Operator” Agreement for:
– Settlements—a series of bank to bank steps– Editing, format translation, and forwarding into destination
payment system– Establishing exchange/processing timetables to fix date
for receipt of funds
• Payment Rules of Destination Country• DI must have adequate compliance program—BSA,
AML, USA Patriot Act• OFAC compliance regime
US Bank FedACH
Gateway OperatorForeign Bank
Originator
Receiver
FedACH International Process Flow
Lessons Learned• Efficiencies Produced by FedACHi
– Treasury payments moved away from paper– Consumer benefits—safety, reduced costs
• Compliance can be elusive and expensive• Linking payments networks is:
– Complex, technically and legally, to begin– Time consuming and expensive to maintain
• Where are the payments?– US Treasury; remittances; what else?
Conclusions
• In creating a framework of rules for emerging retail payments systems– Public law is difficult to enact quickly enough
• The more detailed and prescriptive the public law is, the harder it is to keep up with change
• Should public law state general principles and leave the specifics to the private sector?
– Private sector agreements creating new payments mechanisms may or may not adequately protect consumers
Conclusions…
• Compliance has become crucial in retail payments– Concentrations of dirty money are a threat– “Everything changed after 9/11”– As retail payments go global, combating
fraud, money laundering, & terrorist financing in retail payments is a global concern
– Non banking mechanisms may be hard to police
Conclusions…
• Legal and technical differences from country to country hamper internationalization of bank based retail payments– This sustains a market for non-bank based, non-
regulated retail payments mechanisms
• Regional or global efforts to break down legal and technical barriers may help to create safe, efficient bank based cross border retail payments systems