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Transcript

Doug King, Payments Risk Expert
Dave Lott, Payments Risk Expert
Retail Payments Risk Forum
Federal Reserve Bank of Atlanta

Ed English: Welcome to the Federal Reserve Bank of Atlanta’s ECONversations. We're glad you could join us. Today, we're going to be discussing the future of payments—specifically, noncash payments.

The Fed's role in monetary policy tends to get a lot of headlines, but our commitment to payments is equally important to us. One of the Fed's six strategic goals deals with fostering the integrity, the accessibility, and he efficiency of U.S. payment and settlement systems.

My name is Ed English. I'm going to be the moderator today, and I'm joined by two members of the Retail Payments Risk Forum: David Lott and Doug King. If you're familiar with the Risk Forum’s payments blog, which is called Take On Payments—which can be found on our website—you may have already read their work. So, we look forward to hearing your insights on payments.

Before we get started, I just want to mention we'll be accepting questions throughout the webcast. You can submit your questions by clicking the button on your screen. So let's get started.

The Fed just released the results of another noncash payment study. What can you tell us about that study and how mobile payments fit in?

Doug King: Before we talk about the future of payments, it probably makes sense to take a look at where we've been and where we are today. As you mentioned, the Fed's triennial payments study—whose numbers and data for 2015 were released in December—gives us a great opportunity to do that.

We have data that go back to as early as the year 2000. As you can see on the graph that we have there, checks back in 2000 actually made up more than all of the electronic payments that we were tracking combined; so the total number of checks as a payment were greater than debit cards, credit cards, ACH payments, and prepaid cards at that time. As you can see, there's been a dramatic shift.

Dave, why don't you talk a little about that dramatic shift?

David Lott: As you see in the dotted/dashed line, checks have continued to decline over the last decade—although over the last couple of years, it's kind of leveled out a little bit. But still, 17 billion checks are being written each year by consumers and businesses.

But if you look at the lines that are going up, debit card use continues to skyrocket. It surpassed credit card usage back in 2004. But credit card usage is increasing, as well as ACH and the other electronic payment needs.

Again, this doesn't show cash transactions. Doug, do you want to talk a little bit about that?

King: Certainly. From a consumer perspective, cash is still a vital part of the payments world—33 percent of consumer payments are cash. When you look at payments $10 and under, nearly 50 percent of those payments are made in cash. So, as we're going to get into the conversation about the future and mobile payments, there's still an enormous opportunity out there to continue to electronify payments, and mobile presents this great opportunity to do that.

And just by way of example. When you think of how, perhaps, your own check writing habits have changed. I can look at how we pay our babysitters at home. At one time, it was always writing a check—or perhaps the plumber who was coming to do a repair took a check. Well, today I could perhaps electronically pay my babysitter, either through my bank's mobile application or through a nonfinancial institution application, such as PayPal or Venmo. Vendors today might use a mobile card reader, so where previously they couldn't accept a credit card or a debit card payment, today they're able to.

So as you think about the future and the role mobile plays, we’ll continue to see this growth in these electronic channels, and primarily the credit cards and debit cards.

English: Well, I'm a big card user—use it at brick-and-mortar stores, use it online. Can you explain the difference between electronic commerce and mobile commerce for me?

Lott: Sure. Electronic commerce is the total set of basically any financial transaction that is conducted over the internet, no matter what type of device that it is—whether it be a desktop, a laptop, a mobile phone, tablet, what have you. But if you look at e-commerce in total, as shown in the graph here, the volume just continues to grow over the last couple of years (annual growth rate of 15 percent or more)—certainly a leveling out during the Great Recession period, there in 2008 to 2009, but it has been increasing more and more.

Then if you look at m-commerce, mobile commerce—that is, a subset of electronic transactions in that those are the transactions that are conducted with a wireless device such as a mobile phone or even a tablet. Again, as this graph shows, the share of mobile as a portion of electronic commerce, of the total electronic commerce, continues to grow—in the last [set of] data that we have—almost at 20 percent of that rate.

English: Okay, so in terms of comparing the sales volume—we've looked at that. How does mobile phone fit into the overall mix of m-commerce device usage?

King: When you talk mobile—mobile commerce, mobile payments—it is a wide swath there, from anything—as Dave mentioned, mobile commerce is a percentage of e-commerce—so, from using that mobile phone, using the web browser on your mobile phone to actually conduct the payment transaction, all the way to actually using your mobile phone as an access device, a replacement for your credit or debit card at the POS. Perhaps our viewers today have seen the commercials where the user taps the phone to the POS system, or maybe they've even performed one of those transactions.

So when you talk about mobile, mobile commerce and payments, it's a very wide variety of mobile payments. As I mentioned earlier, with the example of paying another person: if Dave were to take me out to lunch and, rather than writing him a check or handing him a $10 bill to pay for our lunch, I could go on my phone, open an app, and pay Dave through that app—so again, another form of a mobile payment.

What we're seeing as mobile payment evolves, as it’s grown to be 20 percent of e-commerce—the one thing we know is, individuals always have that mobile phone on them. Studies have shown that individuals are more likely to leave their wallet at home than their mobile phone at home when they head out to the office for the day.

Retailers understand that—that that mobile phone is always around—so through the web browser applications, they have actually made it easier and have created optimized sites for that mobile web. Because I don't know if the folks watching today, when mobile first came about, had ever tried to fill in fields or type in their card information in a mobile phone—it was rather clunky. Well, today that process is substantially easier and continues to improve.

So the whole swath of mobile payments, mobile commerce, is huge. I think a key takeaway is that it's getting easier for the consumer to perform mobile transactions every day.

Lott: And part of the shift over to the mobile devices…. As Doug mentioned, a lot of issues with regard to the smaller screen on a phone compared to a tablet or even a laptop—the retailers are addressing that.

But a lot of it also depends upon the type of item that the customer is purchasing. Some items, such as digital items—music, videos, games, things of that nature—they pretty much know what that product is. They don't need to examine a lot of features associated with it, so that lends itself to the mobile phone quite easily. On the other hand, things such as jewelry, or clothing/apparel—things of that nature—the research has shown that customers still kind of prefer that bigger screen so they get a better picture of it, see more details about the product.

But certainly, even within mobile commerce, the share of mobile phone versus tablet continues to increase as well.

King: An add-on to that point: there's an interesting—in the payment space we often talk about or hear the word "omnichannel," and touching on a day when there are certain items that people like to touch and see. But another omnichannel experience that some retailers are trying to execute is allowing the person to come into the store to touch and see. But ultimately, that individual might make that purchase using their mobile phone.

So, it's that true, touching-every-channel experience that the retailers are offering to their consumers.

English: Well, we've heard a lot about pay wallets since the introduction of Apple Pay in 2014. What's going on there with that now?

Lott: Well, certainly there have been a proliferation of wallets over the last several years, although the great attention has been on the big three pay wallets, if you will, even though usage has generally been anemic to this point, despite all of the marketing efforts. That's due to a number of reasons: points of acceptance—that is, where can I actually use my phone? Do I have that phone?

But Doug talked about that generally people, especially the millennials, have that phone with them at all times, whereas I'm still carrying that payment card as well—so I know that payment card can be used. I don't know for sure whether or not the mobile phone can be used there unless it's a retailer that I frequent.

So there's still some uncertainty there, but also the mobile phone provides the capability for retailers to incorporate other than just payment functionality—to incorporate coupons, to incent customers to come into the business, or loyalty programs that, once they make purchases, they get points or some sort of benefit from those programs as well. We've seen certain retailers exceed very successfully in some of those.

King: And piggybacking off of Dave's comments, I think a challenge with the usage is the convenience. Is the transaction easier for the consumer than what they're used to? We're creatures of habit, and we're very accustomed to swiping our cards or even dipping our cards now, if it's a chip-enabled EMV card. So you really have to create a much better experience to get the consumer away from that habit, and it's been challenging, to say the least.

But Dave did mention some retailers have done a good job of that, and the graph that we show you depicts one of those retailers—Starbucks—where you can look at [how] the growth of their mobile payments as a percentage of all their payments in their stores is approaching 30 percent today. But what I really would like to zone in on are the last two quarters where they've reported results. The blue section, which is the mobile order, where—that is individuals who, rather than using their mobile phone at the point of sale to order their coffee, are using the Starbucks mobile app to order their coffee ahead of time and avoid the queue at the cash register and go in, walk in, and pick up the coffee.

Again, as we talk about the future of mobile, the future of payments, it's truly making that experience better for the consumer, easier. I've never met a consumer who likes waiting in line for anything, be it coffee, be it a chicken sandwich, be it to pay for groceries.

Starbucks launched the mobile order-ahead in 2016. The first bit of data we had was two quarters prior, where it represented 3 percent of their store payments. In the latest quarter they reported it was already at 7 percent. So, we're seeing substantial growth in that order-ahead at Starbucks.

I think that speaks again to this whole convenience factor, in the future of payments. How can the future of payments make it easier for the consumer to conduct business?

Lott: And it's not just retailers that are taking advantage of the functionality of mobile phones with mobile payments. We're seeing now over in the ATM channel—Doug mentioned omnichannel—well, financial institutions have that same philosophy. They want to provide a good customer experience, whether or not they're doing online banking, whether they're interacting with a retailer, whether they're using an ATM, in that now, some of the larger financial institutions are using the mobile phone to pre-stage a transaction—the cardless ATM transaction, whereby they use the bank application, enter in the information, and when they go to the ATM, they just scan a code or something on the screen without having to enter their card or PIN.

Again, increasing security and the hope of increasing convenience. [But it] remains to be seen with regard to customer adoption. Again, if I'm already carrying that card, am I so used to putting [transactions on] that card? What is it going to take to change that out to the mobile phone? But it's a very interesting concept.

English: Well, another aspect of mobile is security. How would you compare the security of mobile transactions versus others?

Lott: Well, we often get that question asked to us: are mobile transactions more secure than card transactions or other transactions? And our response is, "It all depends."

As the graph shows, there are a lot of different players, different parts of the puzzle, with regard to conducting a mobile transaction, and each one of those pieces represents a point of attack by the criminals. Criminals are always looking for the weaker link within that puzzle, and by the fact that you have more, it increases their probability of attack.

On the same venue, the consumer is a critical aspect of that. If the consumer adopts poor security practices, in the sense they don't lock their phone, so if it's lost or stolen, somebody can just grab it and open up the applications and do transactions. Or they root or jailbreak their phone, which is they compromise the operating system (which contains a lot of security features) so that they can download that illegal copy or free copy of some of the more popular games. Things of that nature can also introduce malware or viruses into the phone that can capture information that the criminals can then use.

But on the other hand, the mobile phone provides some additional security factors.

King: And I think—and as Dave touched on—it depends. There are a whole host of ways to execute a mobile payment at the point of sale. The mobile phone has attributes that financial institutions and retailers could use to ensure that transactions are safer—perhaps location services. When I use my card, there's nothing on that card to tell anyone where that card should be, where mobile phones have that capability.

But when you talk about the actual transaction, it's interesting, because what we're seeing in a lot of the pay wallets that were mentioned earlier, the [pay wallet] transactions actually are safer than the card transactions that we have today. What's great about the payments industry is, security is vital. And as you've seen, as payments evolve over time, security generally stays paramount with the folks in the payments industry—whether it's going from our cards, which were only mag stripe, to now having a chip on them, to going to the mobile payments, where perhaps the interception of the data is more difficult or the hacking of that data on the phone is more difficult.

So we truly believe that many of these mobile payments are actually safer than the payments we’re making today without the phone. But the challenge that the industry has faced is getting that message across to the consumer, because time and time again, research shows that another barrier to adoption for consumers and mobile payments is the security aspect.

Lott: And that's one aspect that we are going to be working on this year in the Risk Forum, is trying to improve that educational information out to consumers as well as financial institutions in order to overcome some of that consumer misunderstanding (or lack of understanding) with regard to that improved security.

English: OK. We're going to pause now and take some questions from some of our viewers today. First thing is about the "internet of things," which—I have to explain that term—is ordering laundry detergent through your washing machine, groceries through your refrigerator. What light can you shed on the future of the internet of things?

King: As a payments geek, I'm fascinated by and love talking about the internet of things because, again, we’ve harped on several times about making life easier for consumers, and wow! The internet of things can definitely do that.

And so, Ed, when we talk about the internet of things, it is truly connected devices to the internet, and then performing commerce from those connected devices. So, for instance, my wife and I always end up with an empty thing of milk, and it never fails that it's before school—kids are getting ready to go off to school, we would want cereal for breakfast, but we don't have enough milk. So imagine your refrigerator could actually see that your milk is getting low and automatically order milk that would be brought to your house—truly could make life easier.

You know, today, before coming on, I read about a major gas brand out there, a gas company, who has partnered with two car manufacturers, and they are now live with a car being able to speak to the gas pump. It is all done from the dash of your car, in terms of making the payment, how much gas you want to fill your car up with. We still haven't figured out how to get the nozzle into the car yet—that would be a great step for the future. But again, it's making that payment transaction almost invisible or seamless, and making lives for the consumer so much easier. And when you talk internet of things— whether it's a refrigerator, whether it's your car, or whether it's a smart box in your house where you can order pizza from—the opportunities are limitless.

Lott: But it also—again, you have to look at that balance between convenience and security, in that some of these devices are very simple devices—like the Dash button to order detergent, things of that nature—and they don't have really any security in them, in that anybody punches that button. But because it's connected to a home network, it's connected through the internet or Wi-Fi—does the criminal have the ability to access other devices that are connected to that same network?

More and more, we’re seeing from a home security system that those internet video doorbells, where you can see who's coming at your door, things of that nature—a couple of months ago, there was an issue associated with some of the surveillance cameras that home security systems use, and routers were hacked into and shown how they could be compromised.

So, again, it goes back to the security versus the convenience, and that balancing. But the industry is just wild about the capabilities, and we're going to see, as this graph shows here, just millions and billions of devices continue to be connecting.

King: So, just to talk about how wild the industry is, [during] the Super Bowl—which unfortunately is still fresh on our minds in Atlanta—three of the commercials were completely focused and related to connected devices to make consumers’ lives easier.

English: Interesting. Well, we have a question here from Steve Taddie. In considering mobile payments as a part of e-commerce, do the mobile transactions still go through the same merchant service companies (such as Global Payments) to find its way into the retailers’ bank account?

Lott: The processing is essentially the same as a card transaction. Certainly the terminals are using a different technology than a swipe, or, in the case of a chip card, where the card is inserted and there's a physical read—this is being done through radio frequency transmission there. But from that terminal forward, it generally is the same.

Now, if you're using one of the wallets—Doug mentioned about tokenization, whereby the primary account number of the payment card (the card number) in a mobile wallet is no longer in that wallet. It's a token; it's a representative value. So in order to go to the issuer for authorization, they have to know what that original account number is, and so that goes through a conversion process by what's called a token service provider. And then, when it gets returned back to the merchant, it's still the token.

So the merchant never sees the account number. The account number is not stored in the phone itself, so that makes it a more secure transaction. But that is a little different step of that detokenization/tokenization that isn't normal in a card transaction.

King: And it's, I think, important to note—to date, when we talk mobile payments, there really haven't been so-called "new payment rails" created with these mobile payments. So while the consumer is making the payment with the phone, what's going on on the back end—you still have the card networks involved. You still have the ACH network involved.

So it's really the same players behind the transactions, though the consumer experience could be different and who the consumer believes they're interacting with could potentially be different.

English: OK. We’ll try to get another couple of questions in. This is from Robert Leonardi. Card-not-present transactions pushed the liability onto the financial institutions instead of the retailers. What do you see as a potential improvement to hold retailers more accountable for liability?

Lott: Well, let me just clarify. Generally in the card-not-present space, the merchants are liable for fraudulent transactions there, and the industry, the private sector, has developed a number of tools to help merchants in that regard of taking risk management approaches, using those tools in order to evaluate a transaction. Is it an anomaly for that customer? Does it fit certain characteristics that experience has shown could lead itself to fraudulent transactions, such as the type of merchandise being purchased, the location of the so-called purchaser. If it, in fact, is that person?

Now, over on the POS side, on the retailer side—if the chip card is used at a chip terminal, then the issuer does accept liability for counterfeit card fraud. That was the whole purpose of the EMV or the chip cards being put on—

King: And that card-not-present fraud—I mean, it's front and center with the industry today. There are a lot of solutions being deployed, new solutions being developed, to get at that very problem.

Lott: One of the key issues that the merchants are dealing with—again, it's like on the consumer side, convenience versus security. Same thing on the merchant side. They certainly don't want to incur fraudulent transactions. But on the other hand, they are concerned that if they put too much friction with the customer, with the security tools, the consumer is going to go away, and they're going to abandon their shopping cart and not do the transaction at all. So again it's that—

King: Or perhaps reject a good transaction.

English: We have just under a minute left, so one more question. This is from Vinay [Viralam]. What are reasons, legitimate or not, that retailers will prefer to not use mobile payments?

King: That's a great question. I think today there remains a lot of confusion with mobile payments. I know, being a payments geek and a payments guru, I've attempted to use mobile payments in some situations and it hasn't worked. We've all been behind the person who's writing a check at the grocery store. And if all of a sudden you're in line trying to make a payment and it doesn't work, it gets very awkward—not only for me as the consumer, but for the person there working at the retailer. The last thing a retailer wants is to create a bottleneck at the register.

English: Right. OK. Well, I was going to say, looks like we're just about out of time. So, sorry, Dave—

Lott: No worries.

English: —but we have the rest of your answer for that, as well as answers to other questions that have been submitted that we didn't get to today. We'll be posting those on our website, and you can find those under Webcasts, that Doug will provide for us.

I also want to encourage you—if you've not read, or if you have already read, the Take on Payments blog by the Risk Forum—to visit that. It's a great resource for the future of payments. Also, if at any time you're looking for economic information, check out our website.

But until next time, when we have our next ECONversation in May, thanks for joining us.