Technology-led advances in payments have made many daily transactions more convenient. However, the Federal Reserve Bank of Atlanta wants to make sure that consumers who rely on cash won’t be left out as the digital payments market continues to transform and enable new services.
Having access to financial products and services, or financial inclusion, is important to consumers' ability to improve their economic standing. Promoting safer payments innovation and advancing economic mobility and resilience are major strategic priorities of the Federal Reserve Bank of Atlanta.
Atlanta Fed president Raphael Bostic and four other Bank colleagues address the importance of financial inclusion in a recently published white paper that outlines a new way of thinking about how consumers who primarily use cash to manage their affairs can gain access to the innovative services that advances in digital payments make possible.
“Financial technology and innovation can create new pathways and channels to information and capital that allow people with few resources to become more mobile and resilient. It can thus help those who are crawling through the economy start to walk and even run,” Bostic said. “And once we get everybody running, there’s no telling how productive, innovative and strong our economy will become.”
Atlanta Fed president Raphael Bostic. Photo by David Fine
The Atlanta Fed plans to establish a committee on payments inclusion, which will create a forum for stakeholders to discuss ways to enable people who don’t use banks and rely heavily on cash to take advantage of safe and efficient payments. The Atlanta Fed is appropriately positioned to take on this initiative since 70 percent of payment card transactions take place in the Atlanta metropolitan area, which has the nickname of “Transaction Alley.” Additionally, the Federal Reserve’s Retail Payments Office (RPO), based at the Atlanta Fed headquarters, offers automated clearinghouse and check payments products and services to financial institutions.
“Collaboration between the public and private sectors is critical in guiding stakeholders during this time of rapid change,” said Jessica Washington, a payments risk expert in the Atlanta Fed’s Retail Payments Risk Forum who worked on the white paper. She said the committee is expected to include representatives from the financial technology and payments industries, consumer groups, and policymakers. She said the special committee will explore emerging issues in payments and monitor trends, make recommendations, and conduct research.
Financial inclusion’s importance has increased
While payment innovations can bring benefits such as convenience, cost savings, and efficiency, Bostic told the Atlanta Fed’s PeachPay forum in September that they can also hinder financial inclusion by excluding consumers who are less attached to mainstream financial services because they don’t have a bank account or use debit and credit cards. Financial inclusion has become even more important as the COVID-19 pandemic has raised demand for digital payments.
This new focus comes as the Federal Reserve increases its outreach to companies in the financial technology and payments sectors that are bringing new services to market. The Atlanta Fed is cultivating relationships with fintech entrepreneurs and banks that work with them to learn about emerging technologies and help ensure product development is safe and responsible.
Increasing outreach to the underbanked, unbanked
The Atlanta Fed paper points out the precarious situation facing consumers that are most economically vulnerable and reassesses the belief that financial inclusion can be achieved mainly by banking the unbanked. The research recognizes that fintech innovations could offer ways to connect these consumers to digital tools that can help manage their finances and improve their lives, even if they don’t have a traditional bank account.
“Payments are a gateway to other financial services,” said Shari Bower, an assistant vice president in the RPO who contributed to the research paper. “Digital inclusion gives people access to a lot of other services such as credit and fair lending.”
People who don’t have a credit or debit card and rely on cash represent just under 5 percent of the U.S. population, the paper states, citing research by Atlanta Fed economist Oz Shy. Drilling down on this consumer segment, an analysis of the Federal Reserve’s Survey and Diary of Consumer Payment Choice for recent years shows about 5.1 million households, or 4 percent of U.S. consumers, have no bank account and don’t use debit or credit cards. People at the lowest income levels represent the highest share of these consumers.
The paper discusses the pros and cons of three approaches that could give cash-based consumers the means to use digital services. These avenues include preserving the use of cash and requiring the payments system to maintain the infrastructure needed to do so, and providing access to digital payments while preserving the use of cash—offering a bridge between the two worlds. A third course of action involves moving to a fully digital payments system that is cashless.
Report’s findings are descriptive, not prescriptive
The report does not endorse any specific approach. “Our aim is to initiate a conversation with interested stakeholders and highlight potential opportunities for future collaboration,” it states.
The PeachPay conference addressed the risks consumers face when using new payments products and services and outlined ways the Fed’s regulation and oversight function looks to ensure the safety of payments and personal data. The Retail Payments Risk Forum established PeachPay, a consortium of companies from the payments processing industry, in June 2015.
The RPO, which provides thought leadership to the industry through research and information-sharing, actively works to identify and address risks in the retail payments system by reviewing market intelligence, seeking feedback from customers and other industry experts, hosting experimentation, and enhancing or implementing products or services.
“Fraudsters are leveraging emerging technologies, giving them the potential for additional scale and reach,” said Trish Supples, a subject matter expert on the RPO’s payments innovation team. Fortunately, “the retail payment space is doing the same,” using artificial intelligence and machine learning to detect abnormalities or systems that aren’t working as designed to monitor the fraud risk climate, she said.
Lali Shaffer, a senior financial specialist with the Atlanta Fed’s Supervision, Regulation, and Credit Division, said since there is currently no definitive regulatory authority for fintech firms in the United States, they are subject to multiple regulators. The Bank Service Company Act allows federal banking agencies to examine third-party service providers that perform certain services for supervised banks. The federal agencies also provide a coordinated oversight effort by including some larger fintech companies in the Significant Service Provider program.
“Typically these firms provide mission-critical, contracted services to a large number of financial institutions,” Shaffer said. “For the other fintechs out there, depending on the nature of the service or product, they can be subject to laws such as consumer protection regulations,” which include fair lending laws and rules that ban unfair or deceptive practices.
“Our job is to mitigate risks where we can,” Shaffer said. “We have teams that are well versed in consumer compliance regulations and third party risk management. They are making sure that all of the proper processes are in place at financial institutions when they contract with a fintech.” She added that the Atlanta Fed’s safer payments priority work gives bank examiners an opportunity to collaborate directly with fintech firms to help them understand regulatory concerns and requirements.
As payments advances accelerate, the Atlanta Fed will be continuing conversations with fintech innovators and other community stakeholders on how to expand financial inclusion. The Atlanta Fed’s Promoting Safer Payments Innovation page includes further discussion about the Bank’s efforts.
Karen Jacobs
Staff writer for Economy Matters