retail payments system

8/13/2019 Retail Payments System

1/49


2/49

2

Retail Payments in the United States

Current period is one of transition and fast-pacedchange toward electronic payments

Long promised check-less age arriving soon but not yethere

Consumer behavior and preferences are changing


3/49

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 2007study in

development


4/49

4

Distribution of Non-Cash Payments

2000

72.5 billion transactions

Check

57%

EBT

1%

Credit Card

22%

ACH

9%

Online Debit

4%

Off line Debit

7%

2003

81.2 billion transactions

Check

45%

Credit Card

23%

ACH

11%

Off line Debit

13%

Online Debit

7%

EBT

1%


5/49

5

Payments Markets Trends

WHILE USE OF CHECKS IS ON THE DECLINE, USE OF ACH IS ON THE RISE

0.00

2.00

4.00

6.00

8.00

10.00

12.00

2002 2003 2004 2005 2006 2007 2008 2009 2010

Cash

Check

Money Order

Credit Card

PIN-Less Debit

Debit Card (Sig)

ACH

Source: Celent and BearingPoint Analysis

Total Number of Consumer to Business Recurring Payments by Instrument

(Billions)

ACH

Check


6/49

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 toelectronic payments will be vital

Enable end-to-end electronics while allowing for paper where needed


7/497

Checks


8/498

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 shiftfrom in the near future

Checks account for 46% of PCE (Personal ConsumptionExpenditures) in the US

Continued popularity of checks with consumers forces merchants toevaluate business case for check electronification as a way ofcontinuing to accept checks profitably


9/499

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


10/4910

Check Processing/Clearing Flow

Payees DFIPayors DFI

FLOW: Payor (Maker),Payee (Party due payment),Payees DFI (Collecting bank),Clearing House, Payors DFI

Federal Reserve Bank OR

Correspondent Bank OR Local

Clearing House

Payee Company/Individual

(Receives Check)

Payor (Writes Check)

Deposited

Cancelled

Forwarded

Presented for Payment

Payment

through a

debit topayment

account

Payment through a

debitPayment through a

credit

Payment

through acredit to

payees

account

account
http://images.google.com/imgres?imgurl=http://www.computer.org/history/development/graphics/check.jpg&imgrefurl=http://www.computer.org/history/development/1959.htm&h=264&w=500&sz=66&tbnid=E1jSBHpjqcAJ:&tbnh=67&tbnw=126&start=2&prev=/images%3Fq%3Dcheck%26hl%3Den%26lr%3D%26sa%3DNhttp://images.google.com/imgres?imgurl=http://www.computer.org/history/development/graphics/check.jpg&imgrefurl=http://www.computer.org/history/development/1959.htm&h=264&w=500&sz=66&tbnid=E1jSBHpjqcAJ:&tbnh=67&tbnw=126&start=2&prev=/images%3Fq%3Dcheck%26hl%3Den%26lr%3D%26sa%3DNhttp://images.google.com/imgres?imgurl=http://www.computer.org/history/development/graphics/check.jpg&imgrefurl=http://www.computer.org/history/development/1959.htm&h=264&w=500&sz=66&tbnid=E1jSBHpjqcAJ:&tbnh=67&tbnw=126&start=2&prev=/images%3Fq%3Dcheck%26hl%3Den%26lr%3D%26sa%3DNhttp://images.google.com/imgres?imgurl=http://www.computer.org/history/development/graphics/check.jpg&imgrefurl=http://www.computer.org/history/development/1959.htm&h=264&w=500&sz=66&tbnid=E1jSBHpjqcAJ:&tbnh=67&tbnw=126&start=2&prev=/images%3Fq%3Dcheck%26hl%3Den%26lr%3D%26sa%3DNhttp://images.google.com/imgres?imgurl=http://www.computer.org/history/development/graphics/check.jpg&imgrefurl=http://www.computer.org/history/development/1959.htm&h=264&w=500&sz=66&tbnid=E1jSBHpjqcAJ:&tbnh=67&tbnw=126&start=2&prev=/images%3Fq%3Dcheck%26hl%3Den%26lr%3D%26sa%3DN


11/4911

Check Collection: The Future Environment

Where possible, originate all transactions electronically

Business SolutionsACH, Wire Transfer

Consumer SolutionsDebit cards, credit cards, online bill payments,

gift cards

If it starts as a check, capture and convert to electronics asearly as possiblecorporation, branch, ATM, lockbox

Goal: No movement of physical paper

By 2010, clearing paper will be expensive, slow, and with poor

availability


12/4912

Check 21 Statistics

Check 21 Total Volume By Month

0

50

100

150

200

250

300

350

400

450

500

May

(22)

June

(22)

July

(20)

Augu

st(24)

Septembe

r(20)

Octobe

r(21)

Novembe

r(21)

Decembe

r(20)

Janu

ary(21)

Febr

uary

(19)

March(22)

April

(21)

Millions

Month (Business Days)

Source - DASy


13/4913

Check 21 Statistics

Substitute Check Volume As % of Total Volume

2006-2007

75.0%

77.5%

80.0%

82.5%

85.0%

87.5%

90.0%

92.5%

95.0%

97.5%

100.0%

December (20) January (21) February (19) March (22)

Source - CORE and DASy


14/4914

ACH


15/4915

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)


16/4916

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 arebeing pursued but business case is unknown


17/4917

ACH Network Volume Growth

0

2000

4000

6000

8000

10000

12000

14000

16000

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

(Items Processed: Millions)


18/4918

Present DayWho Is Using ACH?

Consumers143 Million

Corporations4.8 Million

Federal Government Employees99.8 Percent

Private Sector Employees

71.0 Percent


19/4919

2006: 4thQuarter StatisticsCommercial Debits vs. Commercial Credits

Commercial Debits

1,925,318,112 (64.1%)

Commercial Credits

1,078,026,550 (35.9%)


20/4920

2006: 4th Quarter StatisticsCommercial Volume vs. Government Volume

Commercial Volume

3,003,344,662 (92.5%)

Government Volume

242,766,839 (7.5%)


21/4921

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

Total ACH Network Volume Commercial Comm less on-us

Total ACH Network Volume - 1992 to 2012(Actual volume through 2006, projections 20072012)

Item volume (in millions). Network volume excludes on-us items


22/4922

Network Volume: eCheck2001 to 2012

-

500

1,000

1,500

2,000

2,5003,000

3,500

4,000

4,500

5,000

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

ARC POP RCK TEL WEB BOC



23/4923

-

2,000

4,000

6,000

8,000

10,000

12,000

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

CCD PPD eCheck

Traditional ACH vs. eCheck

2001 to 2012



24/4924

ACH Processing Flow

Customer (Receiver)

Authorization

ORIGINATORCompany/Individual (CIE)

ODFI(Originating Depository Financial Institution)

Federal Reserve OR

Private Sector OperatorPSO

ACH OPERATOR

RDFI(Receiving Depository Financial Institution)

ACH Transaction Flow

(Picture shows five (5) participants)


25/49

25

Electronic Bill Payment


26/49

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)


27/49

27

New Entrants Growing Fast

PayPal account growth continues (100 million+ accounts in 1Q06 & 40% annual transaction

volume growth) along with service offerings (PayPal MobileText to Buy) & international reach

(55 countries)


28/49

28

Trends in Electronic Bill Payment

Biller survey suggests the credit and debit card share of billerdirect payments will grow from 14% in 2004

Meanwhile, the share of biller direct payments processed bythe ACH will decline from 85% in 2004

Billers tend to be satisfied with the current level of adoption ofEBPP 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 billpayment via bank Web sites, nor bill presentment through bank

Web sites


29/49

29

EBPP Forecast: 2006 to 2011Forrester Research, 01/27/2007

The number of EBPP users will grow by 66% during thenext 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 (19761990) will propel EBPP adoption growth

Gen Xers (19641975) will provide sizable adoption growth

Boomers (19461963) will be a smaller portion of the EBPP pie

Seniors (19001945) will supply a paltry portion of EBPPadoption growth


30/49

30

EBPP Forecast: 2006 to 2011 Forrester Research, 01/27/2007

US online households that pay bills online

A c t u al Fo r ec as t

# of households (millions) 5 year2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 growth rate

Gen Y 0.9 1.2 2.4 4.1 6.2 8.2 10.6 13.6 16.5 19.2 21.2 157%Gen X 3.7 4.8 6.4 7.6 10.1 12.3 14.3 15.5 15.8 16.6 17.4 42%

Boomer 4.5 5.9 7.0 8.5 10.7 12.0 13.1 13.9 14.5 15.7 16.8 39%Senior 1.7 2.1 2.2 2.5 3.5 3.9 4.2 4.3 4.1 4.0 4.1 3%

Total 10.9 14.0 18.0 22.7 30.5 36.4 42.2 47.3 51.0 55.5 59.4 63%


31/49

31

ATM & Cards


32/49

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


33/49

33

ATMs, Debit Cards and ACHFRB 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 PINdebit

Both types of debit face strong challenge from ACH, which is

developing numerous payment options as debit card substitutes


34/49

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)


35/49

35

Trends in Cards

2010 Total = $543.1 Bil.

$124.2

$46

$68.2

$75.7

$211.2

$87.9

OnlineTelecom

Gift

Prepaid Debit

Employment-related

Restricted Use Sources: Pelorus Group, Mercator, Financial Insights, Tower;BBD Projections

2004 Total = $154.3 Bil.$20.1

$20.4

$32.0

$30.1

$27.5

$53.4


36/49

36

Card Processing Flow

Consumer (Card-Holder)

National Credit Card Network

Merchant

Acquirer/Processor

(Merchant Bank)

Card-Issuing Bank

Card IssuerConsumers Acct

On-Line

Purchases Item

Sales Draft InfoSales Draft Info

Sales

Draft Info

Authorization Authorization

Authorization


37/49

37

Payments

Risk


38/49

38

Trends in Risk

Internet & other new technologies have enabled new types ofpayments fraud & other illicit activities:

Counterfeiting cash & checks

Cyber crimephishing, pharming, kiting, etc.

ID theft

Malicious hackingdenial 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


39/49

39

Fraud and Risk in Retail Payments

ACH Returns reporting gives Originating Depository Financial

Institutions (ODFIs) a way to identify potential ACH fraud orproblem accounts

Risk origination monitoring service provides ODFIs withenhanced control, flexibility and automation in monitoring therisks associated with originating ACH payments

Check 21

FedReceipt/PlusSMreduces return risk by expediting items (forBOFD)

FedReturnSMimproves fraud mitigation through expeditedreturn item clearing


40/49

40

Looking

Forward


41/49

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--vis other alternatives

Managing across silos


42/49

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?


43/49

43

Contact Information

Jim McKee

Senior Vice President

Federal Reserve Retail Payments Office

E-mail:

[email protected]

Phone:

404-498-8894
mailto:[email protected]:[email protected]


44/49

44

Additional Resources


45/49

45

Payments Information On-Line

Federal Reserve Boardstudies 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
http://www.federalreserve.gov/paymentsys.htmhttp://www.kansascityfed.org/home/subwebs.cfm?subWeb=9http://www.chicagofed.org/emerging_payments_and_policy/emerging_payments_and_policy_index.cfmhttp://www.chicagofed.org/emerging_payments_and_policy/emerging_payments_and_policy_index.cfmhttp://www.chicagofed.org/emerging_payments_and_policy/emerging_payments_and_policy_index.cfmhttp://www.chicagofed.org/emerging_payments_and_policy/emerging_payments_and_policy_index.cfmhttp://www.kansascityfed.org/home/subwebs.cfm?subWeb=9http://www.federalreserve.gov/paymentsys.htm


46/49

46


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 ElectronicPayments 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/
http://www.frbservices.org/http://www.ustreas.gov/http://www.clickz.com/stats/sectors/traffic_patterns/article.php/3446641http://www.afponline.org/http://www.grantthornton.com/http://www.phoenixhecht.com/Publications.htmlhttp://www.icba.org/http://www.icba.org/http://www.phoenixhecht.com/Publications.htmlhttp://www.grantthornton.com/http://www.afponline.org/http://www.clickz.com/stats/sectors/traffic_patterns/article.php/3446641http://www.ustreas.gov/http://www.frbservices.org/


47/49

47


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
http://www.visa.com/http://www.mastercard.com/http://www.cardforum.com/http://www.cardweb.com/http://www.cardtechnology.com/http://www.epnn.com/http://www.digitaltransactions.net/http://www.nacha.org/http://www.nacha.org/http://www.digitaltransactions.net/http://www.epnn.com/http://www.cardtechnology.com/http://www.cardweb.com/http://www.cardforum.com/http://www.mastercard.com/http://www.visa.com/


48/49

48

Federal Reserve Value-Added ServicesCheck

Check 21 Product Suite FedForwardSMsupports electronic clearing process

FedReceiptSMenables straight-through electronic check processingfor a portion of inclearings or returns

FedReceipt PlusSMpresents all eligible items in an image cash letter

in lieu of a paper cash letter presentment FedReturnSMhelps customers transform their outbound returns

processing operations

Fore more information:

http://www.frbservices.org/Retail/Check21.html


49/49

Federal Reserve Value-Added ServicesACH

Risk Management Services: FedACH Risk Origination Monitoring Service

FedACH Risk Returns Reporting Service

FedACH International Services:

Canada ConnectionSM

Directo a MxicoSM

Transatlantic Service

New EDI conversion facility in development

For more information: http://www.frbservices.org/Retail/fedach.html

retail payments system

Documents