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
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
2
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)
New 2007
study in
development
 44.5 billion electronic payments
 value of electronic payments - $27.4 trillion
3
Distribution of Non-Cash Payments
2000
72.5 billion transactions
Credit Card
22%
Check
57%
2003
81.2 billion transactions
ACH
9%
Credit Card
23%
Offline Debit
EBT
7%
1% Online Debit
4%
Check
45%
ACH
11%
Offline Debit
13%
EBT Online Debit
7%
1%
4
Payments Markets Trends
WHILE USE OF CHECKS IS ON THE DECLINE, USE OF ACH IS ON THE RISE
Total Number of Consumer to Business Recurring Payments by Instrument
12.00
ACH
10.00
Cash
Check
Money Order
Credit Card
PIN-Less Debit
Debit Card (Sig)
ACH
(Billions)
8.00
6.00
4.00
Check
2.00
0.00
2002
2003
2004
2005
2006
2007
2008
2009
2010
Source: Celent and BearingPoint Analysis
5
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
6
• Checks
7
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
8
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
9
Check Processing/Clearing Flow
Payor (Writes Check)
Payment
through a
debit to
payment
account
Payee Company/Individual
(Receives Check)
Cancelled
Payment
through a
credit to
payee’s
account
account
Deposited
Presented for Payment
Federal Reserve Bank OR
Correspondent Bank OR Local
Clearing House
Forwarded
Payment through a
debit
Payor’s DFI
Payment through a
credit
Payee’s DFI
FLOW: Payor (Maker), Payee (Party due payment), Payee’s DFI (Collecting bank), Clearing House, Payor’s DFI
10
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
11
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Millions
Check 21 Statistics
500
Check 21 Total Volume By Month
450
400
350
300
250
200
150
100
50
0
Month (Business Days)
Source - DASy
12
Check 21 Statistics
100.0%
Substitute Check Volume As % of Total Volume
2006-2007
97.5%
95.0%
92.5%
90.0%
87.5%
85.0%
82.5%
80.0%
77.5%
75.0%
December (20)
January (21)
February (19)
March (22)
Source - CORE and DASy
13
• ACH
14
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)
15
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
16
ACH Network Volume Growth
(Items Processed: Millions)
16000
14000
12000
10000
8000
6000
4000
2000
0
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
17
Present Day
Who Is Using ACH?
Consumers
143 Million
Corporations
4.8 Million
Federal Government Employees
99.8 Percent
Private Sector Employees
71.0 Percent
18
2006: 4th Quarter Statistics
Commercial Debits vs. Commercial Credits
Commercial Debits
1,925,318,112 (64.1%)
Commercial Credits
1,078,026,550 (35.9%)
19
2006: 4th Quarter Statistics
Commercial Volume vs. Government Volume
Commercial Volume
3,003,344,662 (92.5%)
Government Volume
242,766,839 (7.5%)
20
Total ACH Network Volume - 1992 to 2012
(Actual volume through 2006, projections 2007 – 2012)
Item volume (in millions). Network volume excludes on-us items
35,000
30,000
25,000
20,000
15,000
10,000
5,000
Total ACH
Network Volume
Commercial
12
20
10
20
08
20
06
20
04
20
02
20
00
20
98
19
96
19
94
19
19
92
0
Comm less on-us
21
Network Volume: eCheck
2001 to 2012
Item volume (in millions). Network volume excludes on-us items
5,000
4,500
4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
ARC
POP
RCK
TEL
WEB
BOC
22
Traditional ACH vs. eCheck
2001 to 2012
Item volume (in millions). Network volume excludes on-us items
12,000
10,000
8,000
6,000
4,000
2,000
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
CCD
PPD
eCheck
23
ACH Processing Flow
ACH Transaction Flow
(Picture shows five (5) participants)
Authorization
Customer (Receiver)
ORIGINATOR
Company/Individual (CIE)
ACH OPERATOR
Federal Reserve OR
Private Sector Operator
(PSO)
RDFI
(Receiving Depository Financial Institution)
ODFI
(Originating Depository Financial Institution)
24
• Electronic Bill Payment
25
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)
26
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)
27
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
28
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 (1946–1963) will be a smaller portion of the EBPP pie
Seniors (1900 – 1945) will supply a paltry portion of EBPP
adoption growth
29
EBPP Forecast: 2006 to 2011 Forrester Research, 01/27/2007
US online households that pay bills online
Actual
# of households (millions)
2001 2002
Gen Y
0.9
1.2
Gen X
3.7
4.8
Boomer
4.5
5.9
Senior
1.7
2.1
Total
10.9
14.0
2003
2.4
6.4
7.0
2.2
18.0
Forecast
2004
4.1
7.6
8.5
2.5
22.7
2005
6.2
10.1
10.7
3.5
30.5
2006
8.2
12.3
12.0
3.9
36.4
2007
10.6
14.3
13.1
4.2
42.2
2008
13.6
15.5
13.9
4.3
47.3
2009
16.5
15.8
14.5
4.1
51.0
2010
19.2
16.6
15.7
4.0
55.5
2011
21.2
17.4
16.8
4.1
59.4
5 year
growth rate
157%
42%
39%
3%
63%
30
• ATM & Cards
31
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 methods—e.g., on-line bill
payment, PayPal, etc.
• Growth has stimulated fierce debate on interchange fees
– Law suits ongoing & search for alternatives
32
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
33
ACH Debit Card Substitutes
• NACHA’s Online Payments Pilot
– Advantage: keeps the consumer’s account info between consumer and
bank
– Consumer’s 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
– Driver’s 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)
34
Trends in Cards
2010 Total = $543.1 Bil.
$87.9
2004 Total = $154.3 Bil.
$124.2
$20.1
$53.4
$20.4
$46.5
$32.0
$27.5
$30.1
$211.2
Online
Telecom
Gift
Prepaid Debit
Employment-related
Restricted Use
$68.2
$75.7
Sources: Pelorus Group, Mercator, Financial Insights, Tower;
BBD Projections
35
Card Processing Flow
Purchases Item
Card Issuer
Consumer (Card-Holder)
Merchant
Consumer’s Acct
Authorization
Sales
Draft Info
On-Line
Card-Issuing Bank
Authorization
Authorization
Sales Draft Info
Sales Draft Info
National Credit Card Network
Acquirer/Processor
(Merchant Bank)
36
• Payments
• Risk
37
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
38
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
39
• Looking
• Forward
40
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
41
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?
42
Contact Information
• Jim McKee
• Senior Vice President
• Federal Reserve Retail Payments Office
• E-mail:
• james.m.mckee@atl.frb.org
• Phone:
• 404-498-8894
43
• Additional Resources
44
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?subWeb=9
• Federal Reserve Bank of Chicago
– http://www.chicagofed.org/emerging_payments_and_policy/emerging_p
ayments_and_policy_index.cfm
45
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_patterns/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
Practices—Positive 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/
46
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
47
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
48
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
49