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Retail Payments Systems in the U.S.

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Title: Retail Payments Systems in the U.S.


1
Retail Payments Systems in the U.S.
International Workshop Retail Payments Câmara
Interbancária de Pagamentos São Paulo, Brazil
June 1, 2007 James McKee Federal Reserve Retail
Payments Office
2
Retail Payments in the United States
  • Current period is one of transition and
    fast-paced change toward electronic payments
  • Long promised check-less age arriving soon but
    not yet here
  • Consumer behavior and preferences are changing

3
Federal Reserve Retail Payments Research Studies
  • 2001 Study (2000 data)
  • 41.9 billion checks paid
  • 30.6 billion electronic payments
  • 2004 Study (2003 data)
  • 36.7 billion checks paid
  • value of checks paid - 39.3 trillion
  • 31.5 billion checks in 2005 (estimate)
  • 44.5 billion electronic payments
  • value of electronic payments - 27.4 trillion

New 2007 study in development
4
Distribution of Non-Cash Payments
5
Payments Markets Trends
Total Number of Consumer to Business Recurring
Payments by Instrument
12.00
ACH
10.00
Cash
Check
8.00
Money Order
Credit Card
(Billions)
PIN-Less Debit
6.00
Debit Card (Sig)
ACH
4.00
Check
2.00
0.00
2002
2003
2004
2005
2006
2007
2008
2009
2010
Source Celent and BearingPoint Analysis
6
Strategic Outlook
  • ACH projected to overtake check payments during
    2007
  • Focus on end-to-end electronics
  • Movement to full electronification will continue
    to evolve
  • Electronifying the check as early in the
    collection process as is possible
  • ACH offers several options for electronifying
    checks (ARC, POP, RCK, BOC)
  • As paper check volume continues to decline,
    increasing pressure on all participants to manage
    costs
  • Transition solutions to support the migration
    from check to electronic payments will be vital
  • Enable end-to-end electronics while allowing for
    paper where needed

7
  • Checks

8
Electronification of Paper Checks
  • Check electronification is necessary
  • Decline in paper check volume coupled with the
    fixed costs associated with transportation of
    paper checks
  • Yet more payments are made by check than any
    other medium
  • While in decline, checks are still at volumes
    impossible to shift from in the near future
  • Checks account for 46 of PCE (Personal
    Consumption Expenditures) in the US
  • Continued popularity of checks with consumers
    forces merchants to evaluate business case for
    check electronification as a way of continuing to
    accept checks profitably

9
Check 21
  • The Check Clearing for the 21st Century Act, or
    Check 21, was effective October 28, 2004.
  • To make check collection process more efficient,
    Check 21 authorized use of new negotiable
    instrument called a substitute check.
  • Provides for substitute check to be a paper
    reproduction of the original check and to be
    processed just like the original check
  • Improves payment process by reducing
  • Reliance on physical transportation of checks
  • Number of times physical checks must be handled
  • Costs through expedited handling within bank or
    customer operations and quicker collection and
    return of checks
  • Same legal standing as original paper check

10
Check Processing/Clearing Flow
Payor (Writes Check)
Payee Company/Individual (Receives Check)
Payment through a debit to payment account
Cancelled
Payment through a credit to payees account
account
Deposited
Federal Reserve Bank OR Correspondent Bank OR
Local Clearing House
Presented for Payment
Forwarded
Payment through a debit
Payment through a credit
Payees DFI
Payors DFI
FLOW Payor (Maker), Payee (Party due payment),
Payees DFI (Collecting bank), Clearing House,
Payors DFI
11
Check Collection The Future Environment
  • Where possible, originate all transactions
    electronically
  • Business Solutions ACH, Wire Transfer
  • Consumer Solutions Debit cards, credit cards,
    online bill payments, gift cards
  • If it starts as a check, capture and convert to
    electronics as early as possible corporation,
    branch, ATM, lockbox
  • Goal No movement of physical paper
  • By 2010, clearing paper will be expensive, slow,
    and with poor availability

12
Check 21 Statistics
13
Check 21 Statistics
14
  • ACH

15
ACH
  • Continued migration of a large number of cash and
    check transactions to electronic payments
  • ACH growth has shifted from recurring to one-time
    payments including debit (WEB, TEL)
    Check-to-ACH conversion payments (POP, ARC, RCK)
  • Acceleration of electronic check processing (via
    check image exchange and back-office conversion)
  • Non-bank service providers are riding ACH rails,
    largely to leverage its low cost (PayPal Pay By
    Touch Debitman Fastlane)

16
ACH
  • Banks will continue to wrestle with customers
    expectations for the privacy and security of
    their personal, account and transaction
    information
  • Continued emphasis on risk management
  • Wider use of ACH debit payments, especially
    one-time options with limited ability to know
    your customer, may increase risk of fraud
  • Other initiatives to look at credit push and EBPP
    services are being pursued but business case is
    unknown

17
ACH Network Volume Growth
(Items Processed Millions)
18
Present DayWho Is Using ACH?
Consumers
143 Million
Corporations
4.8 Million
Federal Government Employees
99.8 Percent
Private Sector Employees
71.0 Percent
19
2006 4th Quarter StatisticsCommercial Debits
vs. Commercial Credits
Commercial Debits 1,925,318,112 (64.1)
Commercial Credits 1,078,026,550 (35.9)
20
2006 4th Quarter StatisticsCommercial Volume
vs. Government Volume
Commercial Volume 3,003,344,662 (92.5)
Government Volume 242,766,839 (7.5)
21
Total ACH Network Volume - 1992 to 2012 (Actual
volume through 2006, projections 2007 2012)
Item volume (in millions). Network volume
excludes on-us items
22
Network Volume eCheck2001 to 2012
Item volume (in millions). Network volume
excludes on-us items
23
Traditional ACH vs. eCheck2001 to 2012
Item volume (in millions). Network volume
excludes on-us items
24
ACH Processing Flow
25
  • Electronic Bill Payment

26
Key Trends On-Line
  • Internet initiated consumer payments
  • Three broad categories
  • Bill-payments
  • Ad hoc purchases
  • Account to account person to person (A2A P2P)
  • Four types of payment methods
  • Signature-based payment cards
  • PIN-based network settlement of ATM/debit cards
    (PIN-less debit)
  • Intermediaries such as PayPal, Bill Me Later
  • Direct DDA transactions via ACH (e-checks)
    checks (demand drafts)

27
New Entrants Growing Fast
PayPal account growth continues (100 million
accounts in 1Q06 40 annual transaction volume
growth) along with service offerings (PayPal
Mobile Text to Buy) international reach (55
countries)
28
Trends in Electronic Bill Payment
  • Biller survey suggests the credit and debit card
    share of biller direct payments will grow from
    14 in 2004
  • Meanwhile, the share of biller direct payments
    processed by the ACH will decline from 85 in
    2004
  • Billers tend to be satisfied with the current
    level of adoption of EBPP
  • However, there is a gap between the goals billers
    have set and their current level of success
  • Particularly paper and postage savings
  • Call center deflection
  • Customer satisfaction and retention
  • Still a number of major billers that do not
    support online bill payment via bank Web sites,
    nor bill presentment through bank Web sites

29
EBPP Forecast 2006 to 2011 Forrester Research,
01/27/2007
  • The number of EBPP users will grow by 66 during
    the next 6 years
  • In 2005, 38 of online households paid bills
    online
  • By 2011, 63 of online households will pay bills
    online
  • Households paying bills online will grow to more
    than 59 million
  • Growth NOT spread evenly across generations
  • Gen Yers (1976 1990) will propel EBPP adoption
    growth
  • Gen Xers (1964 1975) will provide sizable
    adoption growth
  • Boomers (19461963) will be a smaller portion of
    the EBPP pie
  • Seniors (1900 1945) will supply a paltry
    portion of EBPP adoption growth

30
EBPP Forecast 2006 to 2011 Forrester Research,
01/27/2007
31
  • ATM Cards

32
Cards
  • Fastest growing U.S. payment method
  • Debit card volumes have eclipsed credit cards
  • Stored value is fastest growing type of debit
    card
  • P-Card growing in B2B
  • Significant innovation in features functions
  • Supports other front-end payment methodse.g.,
    on-line bill payment, PayPal, etc.
  • Growth has stimulated fierce debate on
    interchange fees
  • Law suits ongoing search for alternatives

33
ATMs, Debit Cards and ACH FRB Kansas 2006
updated Guide to the ATM and Debit Card Industry
  • ATM use is declining and key players retrenching
  • Debit card use is rapidly expanding, with new
    players, products and markets
  • Debit will become battleground between signature
    debit and PIN debit
  • Both types of debit face strong challenge from
    ACH, which is developing numerous payment options
    as debit card substitutes

34
ACH Debit Card Substitutes
  • NACHAs Online Payments Pilot
  • Advantage keeps the consumers account info
    between consumer and bank
  • Consumers bank authenticates customer and
    guarantees payment to merchant
  • Applications to initiate ACH at the Point of Sale
    (POS)
  • Debitman (Tempo) agreements with retailers
    (WalMart, Burger King, Best Buy, Shell,
    Walgreens)
  • Retail private label credit cards issuing cards
    on behalf of merchants
  • First Data testing ACH debit card with Stop and
    Shop grocery chain
  • Drivers licenses to initiate POS payments
    settled on the ACH system
  • Online retailers using e-check to allow consumers
    to make an ACH payment (including Amazon.com)

35
Trends in Cards
Sources Pelorus Group, Mercator, Financial
Insights, Tower BBD Projections
36
Card Processing Flow
Purchases Item
Consumer (Card-Holder)
Card Issuer
Merchant
Consumers Acct
Sales Draft Info
Authorization
On-Line
Authorization
Authorization
Sales Draft Info
Sales Draft Info
Acquirer/Processor (Merchant Bank)
National Credit Card Network
Card-Issuing Bank
37
  • Payments
  • Risk

38
Trends in Risk
  • Internet other new technologies have enabled
    new types of payments fraud other illicit
    activities
  • Counterfeiting cash checks
  • Cyber crime phishing, pharming, kiting, etc.
  • ID theft
  • Malicious hacking denial of service
  • Global terrorism other international crimes
    have led to new laws regulations affecting
    payments
  • OFAC, AML, USA Patriot Act
  • Risk characteristics of emerging payment methods
    must be assessed to ensure controls are effective
    efficient

39
Fraud and Risk in Retail Payments
  • ACH
  • Returns reporting gives Originating Depository
    Financial Institutions (ODFIs) a way to identify
    potential ACH fraud or problem accounts
  • Risk origination monitoring service provides
    ODFIs with enhanced control, flexibility and
    automation in monitoring the risks associated
    with originating ACH payments
  • Check 21
  • FedReceipt/PlusSM reduces return risk by
    expediting items (for BOFD)
  • FedReturnSM improves fraud mitigation through
    expedited return item clearing

40
  • Looking
  • Forward

41
Convergence Business Issues
  • Which rule set will dominate? check law or ACH
    rules?
  • How will business payments be integrated
    electronically?
  • Which emerging payments will prevail?
  • Are consumer needs and expectations being met?
  • Other variables
  • Inter-bank fees and services
  • Ultimate cost benefit vis-à-vis other
    alternatives
  • Managing across silos

42
Payment Types that Meet Criteria will Dominate
  • Productivity
  • Efficiency, cost reduction, STP/fewer exceptions
  • Value
  • Mix of pricing, timing, settlement, high/low
    value will determine which payment types prevail
  • Risk Mitigation
  • Are the appropriate tools in place? Is the price
    right?

43
Contact Information
  • Jim McKee
  • Senior Vice President
  • Federal Reserve Retail Payments Office
  • E-mail
  • james.m.mckee_at_atl.frb.org
  • Phone
  • 404-498-8894

44
  • Additional Resources

45
Payments Information On-Line
  • Federal Reserve Board studies and regulations
  • http//www.federalreserve.gov/paymentsys.htm
  • Federal Reserve Bank of Kansas
  • http//www.kansascityfed.org/home/subwebs.cfm?subW
    eb9
  • Federal Reserve Bank of Chicago
  • http//www.chicagofed.org/emerging_payments_and_po
    licy/emerging_payments_and_policy_index.cfm

46
Payments Information On-Line
  • Noncash Payments Trends in United States
    2000-2003
  • Federal Reserve System, www.frbservices.org
  • Barriers to Acceptance of Electronic Benefits
    Payments
  • U.S. Treasury, www.ustreas.gov
  • CyberAtlas
  • http//www.clickz.com/stats/sectors/traffic_patter
    ns/article.php/3446641
  • Business to Business Payments 2004 Survey of
    Members and Electronic Payments Study 2006
    Survey on Payments Risk
  • Association for Financial Professionals (AFP),
    www.afponline.org
  • Grant-Thornton 2005 Survey of U.S. Community
    Banks
  • http//www.grantthornton.com/
  • 2005 Cash Management Middle Market Monitor and
    Fraud and Disbursement PracticesPositive Pay
    Pays
  • http//www.phoenixhecht.com/Publications.html
  • ICBA 2005 Community Bank Technology survey
    results
  • ICBA 2006 Community Bank Payments survey results
  • http//www.icba.org/

47
Payments Information On-Line
  • Card-based Payment
  • www.visa.com
  • www.mastercard.com
  • www.cardforum.com
  • www.cardweb.com
  • www.CardTechnology.com
  • Electronic Payments
  • www.epnn.com
  • www.digitaltransactions.net
  • www.nacha.org

48
Federal Reserve Value-Added Services Check
  • Check 21 Product Suite
  • FedForwardSM supports electronic clearing
    process
  • FedReceiptSM enables straight-through
    electronic check processing for a portion of
    inclearings or returns
  • FedReceipt PlusSM presents all eligible items
    in an image cash letter in lieu of a paper cash
    letter presentment
  • FedReturnSM helps customers transform their
    outbound returns processing operations
  • Fore more information
  • http//www.frbservices.org/Retail/Check21.html

49
Federal Reserve Value-Added Services ACH
  • Risk Management Services
  • FedACH Risk Origination Monitoring Service
  • FedACH Risk Returns Reporting Service
  • FedACH International Services
  • Canada ConnectionSM
  • Directo a MéxicoSM
  • Transatlantic Service
  • New EDI conversion facility in development
  • For more information
  • http//www.frbservices.org/Retail/fedach.html
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