The U.S. Payments System: Retail Payments Office Perspective

© Retail Payments Office, Federal Reserve Bank of Atlanta. Materials are not to be used without permission

Richard FraherVP & Counsel to the

Retail Payments OfficeFederal Reserve Bank of Atlanta

Utility Payment Conference

Agenda

• From paper to electronic• The Federal Reserve’s role• Emerging payments and adaptation• Future vision• Issues to watch out for

2

How things have changed: the transition from paper to electronic

3

Non-cash payment volume on the rise

Source: Federal Reserve Payments Studies *Does not include wire payments

4

Rise of electronic (Check 21)

“It is only the modern that ever becomes old fashioned.” -- Oscar Wilde

5

6

2002 Federal Reserve check processing infrastructure

7

2012 Federal Reserve check processing infrastructure

Site consolidation and electronification

8

Source: Federal Reserve

Checks continue to play important role

Source: 2010 Federal Reserve Payments Study

9

Technology shift: persistence of paper

10

“The reports of my death have been greatly exaggerated.” – Mark Twain

“Within a generation, checks are likely to be a rarity, used only by a few stubborn oldsters or in special situations, such as giving a nephew money as a graduation gift.”

-- USNews.com, 2004

The Check 21 Story

• Board drafted “C21” legislation• Statute enacted, 2003• Board updated Regulation CC, 2004• Reserve Banks rolled out image services, 2004• Industry moved fast to follow• Reg CC cleanup

11

1212

Regulatory changes - Regulation CC• Reg CC changes were issued for public comment on March 3, 2011 • Proposed Reg CC changes are intended to:

– Encourage electronic check clearing & electronic returns• Expeditious returns requirements, notice of non-payment, same-day

settlement rule– Address electronic items—derived or not derived from checks– Revise funds-availability provisions

• Eliminate reference to non-local checks, shorten safe harbor for exception holds, revise model funds-availability disclosure & notices

• Reg CC changes are NOT intended to:– Answer all questions about electronically created items – Address payments law broadly; addresses only domestic checks payable at a

bank• Reg CC may go back out for comment before going final• Reg J & Federal Reserve Operating Circular 3 will be revised to conform to final Reg

CC

Characterizing the Moment

• A revolution in checks, 2004-2012– From 100% paper end to end– To >99% electronic, with residual paper as “noise”

• Next up--inflection point, or pause, or what?

13

The Federal Reserve’s role in the payments system

14

Ensure integrity, reliability, & accessibility of U.S. payment system

•Provide payments services to financial institutions– Check– ACH– Wire– Securities settlement– Cash

Mission

15

Federal Reserve payments presence

Service Avg Daily Volume Avg Daily Value

Fedwire Funds 496,550 $2.4 trillion

Fedwire Securities 78,490 $1.3 trillion

FedACH 45.4 million $84.8 billion

Check 32.1 million $45.7 billion

National Settlement 2,069 $57.9 billion

Source: Federal Reserve Board of Governors

16

Annual average daily volume and value for 2010

“In 2010, the average daily value of transactions processed by Federal Reserve Financial Services was $3.884 trillion, which is roughly $45 million per second.”

A catalyst for change

• Provide robust and efficient financial services• Source of payments expertise and research for

the industry and policymakers• Serve as an objective party• Convene a broad range of private and public

payments stakeholders• Develop robust standards for payments

interoperability and risk management globally

17

The Federal Reserve Board’s Role

• Payments Regulations– Reg CC– Reg II—Interchange

• Supervisory oversight of banks in payments– FFIEC Guidance on Authentication in an Internet

Banking Environment updated May 2011

• Consumer protection

18

How things are changing: emerging payments and adaptation

19

20

The changing environment

Technology User demand

Global-ization

New entrants

Risk & regulation

Risk/Regulation Is A Driver of Cost

• For the next ten years, consumer protection is going to be as important a driver as technology—see next slides on CFPB

• Compliance is cropping up everywhere– FinCEN’s growing empire: AML, CTF, PEP, SARs

• Data security, data privacy, and intellectual property issues permeate payments services

21

2222

• Established by Title X of the Dodd-Frank Act as an independent bureau to “regulate the offering and provision of consumer financial products or services under the Federal consumer financial laws”

• Three routes to accomplish its goal: education,

enforcement, and research (study)

• The first director, Richard Cordray, was appointed in January of 2012

2323

• Initiatives:– Educational products for various financial

services and demographics (including youth, seniors, veterans, banking, credit, and loans)

– Online submission of mortgage and credit card complaints

– Non-bank supervision program– Enforcement/revision powers for numerous

consumer protection laws– 1073 remittance regulation• See next slide

24

Category Requirements Exceptions

Disclosures Exchange rateFees and taxes (Local and Foreign)Date of availabilityAmount to be paid to the beneficiary

Temporary exception for insured institutions• Sent from account and exact amounts cannot be determined

Permanent exception• Laws do not permit or the method in the recipient country does not permit determination of exact amounts

Error resolution 180 days to notify of error90 days to investigateRemedy through:

•Refund or payout

Status inquiryInformation request

Cancelation 30 minute right of cancelation•Refund of principal and fees

Funds paid to designated recipient

Dodd-Frank section 1073

The Dodd-Frank legislation mandated the regulation of remittances•Remittance: A consumer initiated electronic funds transfer over $15

Some selected provisions:

Aside From Risk/Compliance…

• All payments consist of transferring value• If it’s not cash or barter, then value gets

transferred by– Payment instructions (messaging) and – Accounting entries (settlement)

• Change in payments consists almost entirely of doing messaging or settlement better, faster, and cheaper

25

26

How payment systems change

Access device/ form factor

Interoperation of applications

AuthorizationAnd

Acceptance

Network/ channel

27

Resulting industry initiatives

28

Resulting industry initiatives

Rise of emerging payments

“Conformity is the jailer of freedom and the enemy of growth.“ -- John F. Kennedy

29

Who’s Next?

30

Portals and Rails

Payments As Web

31

Federal Reserve Payment Systems: Future Vision

32

FRB role in new payments systems

• Industry leadership– Integrity • Network strength

– Efficiency• Expedited processing, efficient settlement

– Accessibility• Transparency and certainty

• Collaborative innovation– Standards groups; IPFA

33

34

Existing and future focus

Our business objectives• Develop and deploy new and

enhanced value added services– Information, analytics

– Risk offerings

• Improve clearing and settlement– Expedited processing and

settlement

– End-to-end electronification

– Remittance initiatives

• Broaden reach of payments footprint– Cross-border service expansion

• Maintain a secure payments network– Enhanced technology platforms

– Common infrastructures

• Leverage cross-business/multi-service offerings– Retail/Wholesale

– Check/ACH

– Electronic access/network

35

In early 2011, the Federal Reserve Banks surveyed a sample of financial institutions and conference attendees to help better understand areas of customer interest in cross-border payments and gauge industry plans for timing and adoption in this growing area. This survey was a follow-up to a similar effort conducted in 2009.

Participation (2011) – – >2000 Invitations (Processors of IATs, NACHA Conference

Participants, and Prior Survey Respondents)– 204 Responses (10% Response Rate)

Federal Reserve international survey

36

Senders/receivers

37

Payment methods

38

Payment choice

39

Destination interest

40

*

*The IAT SEC Code was implemented partway through Q3 2009

Trends

41

Keep an Eye on These Issues

• Watch for possible expansion of “UDAAP” as applied to payments practices

• Data security threats• If you provide online payments services, look

at the FFIEC’s Guidance on Authentication in an Internet Banking Environment

• The “government program” attack on RTNs, and how you can help to stop it

42

“Nothing has come along that can beat the horse and buggy.”

-- Chauncey Depew, lawyer, politician and businessman, advising his nephew to not invest in Henry Ford's automobile

43

Richard FraherVP & Counsel to the Retail Payments Office

Federal Reserve Bank of Atlantarichard.fraher@atl.frb.org

44