The Role of Government in Payments Risk and Fraud - November 17-18, 2011

Federal Reserve Bank of Atlanta
Retail Payments Risk Forum
November 17–18, 2011

Conference Summary

NOTE: The speakers' and other participants' views described herein reflect their personal views presented in the context of a working forum and do not necessarily represent the official views of the agency/organization with which they are associated.

Retail Payments Risk Forum conference explores the role of government
In light of the many legislative and regulatory changes affecting the payments industry that are already underway, how and when does government intervene in today's highly dynamic marketplace? To answer this question and more, a mix of regulators, legal professionals, and law enforcement representatives participated in the Risk Forum's fifth annual conference, "The Role of Government in Payments Risk and Fraud," held November 17–18, 2011, at the Atlanta Fed.

Marie Gooding, first vice president of the Atlanta Fed kicked off the event with some opening remarks. Next up was Louise Roseman, director of reserve bank operations and payment systems at the Fed's Board of Governors, with the conference's keynote address. Roseman offered some historical perspective on the relevance of government in the nation's payments systems.

The conference continued with five key sessions relating to the governance of risk and fraud in retail payments. The highlights of each session follow. Additional presentation materials are available on the Atlanta Fed website.

Changes in regulatory oversight and self-governance crucial
Government oversight of the nation's retail payment system is delivered through different models at the federal and state levels. Complicating matters further, regulatory oversight depends on whether the payment service provider is a bank or a nonbank third party. As the payments environment grows more complex with new nonbank entrants in the payment system and many new alternative payment alternatives, it will be challenging for traditional governance to fully understand the emerging risks. Alongside regulatory oversight, self-governance in the form of compliance programs, rules, and standards can contribute to effective alternative models. This panel also explored the role and scope of the new Consumer Financial Protection Bureau and how it plans to fulfill its newly established mission.

Law enforcement challenges
Panelists discussed the importance of collaboration among law enforcement agencies as payment crimes become more sophisticated and proliferate across global geographies. Cross-border financial transactions will demand collaboration among international and domestic law enforcement organizations, as well as among the industry participants themselves and their respective regulators. The panel addressed the growing need for law enforcement to collaborate with regulators who have fragmented state-level authority and are not required to exercise prudential supervision.

The need for better fraud data
Panelists discussed the growing incidence of payment crimes, noting that the United States' efforts to address payments risk and fraud may be hindered by a lack of supporting data on the costs of prevention and the losses incurred. The United States is virtually the only country that does not keep comprehensive data on such losses and costs. The panel discussed how the industry could benefit from complete quantitative information. Armed with such information, the industry could more effectively allocate resources to payment mechanisms and channels posing the most significant risks. This knowledge will become increasingly necessary as payment providers and businesses plan future investments in payment fraud risk management programs.

Changes in the U.S. regulatory environment
2011 witnessed significant regulatory efforts such as the CARD Act, overdraft legislation, the Durbin amendment, and the effects of these initiatives on the behaviors of such stakeholders as the merchants, banks, and even consumers. Panelists engaged in a comprehensive discussion on the current state of these initiatives and what to expect. The audience participated in the dialogue on noteworthy issues such as payment authentication methods and fraud management systems resulting from the industry's response to the Durbin amendment, and the response from Congress to marketplace changes such as new bank fees.

Payment laws and regulations in a dynamic payment environment
Panelists in this session explored how a complex matrix of federal and state laws for retail payments in the United States poses challenges as the industry migrates to alternative payment mechanisms. At issue is the lack of a common playing field for banks and nonbanks regarding legal compliance and safety and soundness. Also at issue is the inapplicability of some laws and regulations to specific payment methods. While many panelists agreed that it is desirable to harmonize efforts under Dodd Frank, they noted that small changes in some payment systems can create significant complications in others. Finally, the panelists discussed the current need for commercially reasonable security methods to limit a financial institution's liability within the current legal and regulatory framework.