MAG Insights

Announcements from the MAG & Featured Articles

An update on the Federal Reserve efforts in the payment space (MAG Quarterly- Volume Six, Issue Two)

John_Drechny_100x150
By John Drechny, MAG Board Chair & Senior director of Payments Services, Walmart

June 7, 2018

The Federal Reserve has endeavored to pull together all of the stakeholder groups in the payment industry to solve two issues; how to launch a faster payment system and what needs to be done to lower fraud risk in payments. While I think we all can agree lowering fraud in payments is imperative, many have asked me what is a faster payment system and why is it important to launch this system in the United States? My answer is simple, payments need to move at the speed of our customers and today they do not. Think about how many times you made a payment and it has been days before the charge showed up on your online banking app or funds have been frozen until the settlement finally clears. Also, how many checks are still used by your organization to pay invoices because the payment and transactional information do not flow together. Faster payment is an effort to remove this friction from the payment space.

An effort this large does not come without its challenges. Over the last couple of years, a group of stakeholders have worked together to identify the effectiveness criteria, review several solutions and set up a group to develop the governance framework which would oversee the rules between the different solutions. As discussions have progressed, so have the difficulties to reach consensus among the stakeholders. On the faster payment side, the group has been grappling with the make up of the governance board and financial contributions needed to fund the organization. In the recently released outline by the Federal Reserve, it suggests a board be created which is comprised of more banks and providers as compared to end users and consumer groups. Revenues have also been suggested as models for determining the financial contributions for all participants. This is problematic as a merchant’s revenue line is measured in sales while an issuer’s revenue is measured in profitability.

While giving merchants both a seat and a vote on a payment governance board has been a breakthrough, it is not utopia. In the current framework, issuers and networks would need to convince one another to vote to pass rules which may be disadvantageous to merchants. Meanwhile, merchants would have to convince all other groups to pass something which issuers and networks may not be in favor of passing. Also, the entrance fees being set on revenue are not a fair comparison metric between financial institutions and merchants. There are also concerns around which items are board decisions versus the total governance stakeholder group which may have many more issuers participate versus merchants.

On the payments security front, after publishing the Payment Lifecycles and Security Profiles document, the Federal Reserve has decided to adopt a more targeted approach to their efforts to bring the industry together to combat fraud. To that end, the Federal Reserve has dissolved the task force, hired a consultant group to do an extensive survey on fraud, and intends to spin up targeted working groups to address the areas of fraud identified through the survey. This survey will encompass interviews with all stakeholder groups and identify the fraud expenses of each party. While this can be a valuable outcome for the merchant efforts to reduce fraud in the industry, it must include all the expenses including the billions of dollars spent on fraud efforts like EMV and PCI. This should also include the potential profit merchants forego to implement mandated security measures to eliminate data that could be monetized by thieves who implement elaborate attacks on merchant systems. We must continue to push for the elimination of such data from the merchant’s infrastructure while still allowing merchants to understand how payments flow through their systems. We urge MAG members to join the Fed’s Payments Improvement Community and participate in the survey to ensure the merchant perspective is heard.

I applaud the Federal Reserve’s efforts to bring all the stakeholders into the discussion on payments instead of leaving it to network driven organizations like EMVco. If done right, faster payment can lead to innovation which drives security and lowers the societal cost of payments. Imagine the ability for customers to push payments to merchants using their phone numbers as the identifier. This change along with open APIs in banking could revolutionize payments and turn them into a truly frictionless experience. While the current revenue generated by certain parties in the payment system creates a barrier in reaching this ideal space, as merchants we must continue to push the industry down this path by understanding the capabilities and advocating for changes which will benefit our customers.

We must also continue to educate the regulators on how payments work and what can be done to create a fair and equitable market place. Both the MAG and you play a role in our voice being heard in the industry. If you would like to find out more about the current effort you can read more at https://fedpaymentsimprovement.org.