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On October 3, the Federal Reserve Board (Board) issued a request for comments on “potential actions the Federal Reserve could take to promote ubiquitous, safe, and efficient faster payments . . . by facilitating real-time interbank settlement of faster payments.” The Board indicated it would consider any alternative approaches to the specified potential actions that will achieve its goals. As previously covered in InfoBytes, the Board’s Faster Payments Task Force issued a report in 2017 making several recommendations, including the development of a round-the-clock settlement service to support faster payments. Among the potential actions that the Board is seeking feedback on is whether the Reserve Banks should consider developing such a 24/7/365 real-time gross settlement service, which would use banks’ balances in accounts at the Reserve Banks to facilitate interbank settlement of faster payments. The Board also seeks comments on the potential use of a liquidity management tool, which would support services for real-time interbank settlements by enabling transfers between Federal Reserve accounts on a 24/7/365 basis.
Comments must be received by December 14.
On June 7, the CFPB released the latest quarterly consumer credit trends report, which focuses on credit card borrowing patterns at the end of the year using data from the CFPB’s Consumer Credit Panel. The report notes that consumer spending peaks each year during the “holiday shopping season” in November and December, with retail sales more than $50 billion higher in December than any other month. The CFPB highlighted some key findings regarding credit card borrowing and repayment patterns around this time: (i) credit card and retail store card debt steadily rise before the end of the calendar year and then gradually fall through March; (ii) consumers with subprime credit scores do not experience the same “seasonality” in borrowing that consumers with superprime credit scores do—they are much more likely to have higher utilization rates of available credit before the holiday shopping season; and (iii) seasonal delinquency patterns may indicate financial distress at the end of the year for some credit card users.
On April 24, the Governance Framework Formation Team (GFFT), through the Federal Reserve Board’s Faster Payments Task Force, announced a proposed "Operating Vision" for a new organization known as the U.S. Faster Payments Council (FPC). According to the Operating Vision, “[t]he goal is a ubiquitous, world-class payment system in 2020 where Americans can safely and securely pay anyone, anywhere, at any time and with immediate funds availability.” To achieve this goal, the FPC will focus on (i) facilitating interoperability to enable payments and information to move seamlessly, and (ii) broad adoption of faster payment solutions. The FCP’s core functions will be consensus-driven problem solving, forums for dialogue, and education and advocacy.
Membership of the FPC will be open to all stakeholders. The GFFT is requesting comments on the proposal by June 22.
Federal Reserve Governor Calls for Collaboration Between Banks and Fintech Firms for Safe and Secure Payment System
On October 18, Federal Reserve Board Governor, Jerome H. Powell, spoke at the 41st Annual Central Banking Seminar regarding the impact of technology on retail banking and payment services. Powell noted that rapidly changing technology for more timely and convenient payment methods, “should not come at the cost of a safe and secure payment system. . .” In doing so, he encouraged banks, fintech companies, and all other stakeholders in the industry to collaborate to achieve a payment system that is reliable, secure, and convenient.
Powell went on to highlight the work of the Faster Payments Task Force (as previously covered by InfoBytes) and the Secure Payments Task Force. For secure payments, he discussed the Federal Reserve’s plan to launch a study analyzing payment security vulnerabilities in early 2018 and its plan to establish work groups focused on approaches for reducing the prevalence and cost of specific payment security vulnerabilities.
As covered by InfoBytes, the OCC Acting Comptroller of Currency, Keith A. Noreika, also recently spoke about the continuing innovation of banks and fintech companies within the financial technology sector.
On July 21, the Faster Payments Task Force, created by the Federal Reserve in 2015, announced the publication of its final report detailing strategic efforts to implement faster payment solutions (part one of the report was published in January of this year). The report outlines 16 proposed faster payments solutions and is the culmination of proposals and feedback from providers across the payments industry, including more than 300 representatives from financial institutions, consumer groups, payment service providers, financial technology firms, merchants, government agencies, and numerous other interested parties. The task force’s goal is to have a real-time payments network available to U.S. consumers and businesses by 2020. The report discusses various solutions and technologies for implementing faster payments and recommends a framework for ongoing collaboration, decision-making, and rule setting. The report also addresses security threats, advocates for infrastructure to support faster payments, recommends that the Fed collaborate with relevant regulators to evaluate current laws and make necessary rule changes.
“Our goal is to ensure that anyone, anywhere is able to pay and be paid quickly and securely,” said Sean Rodriguez, the Fed's faster payments strategy leader and chair of the Faster Payments Task Force. “In real terms, that means people will not have to wait hours or days to deliver and access their money. Businesses will have enhanced cash management and better information associated with their payments.”
On July 7, the Office of the Comptroller of the Currency (OCC) announced the release of its Semiannual Risk Perspective for Spring 2017 indicating key risk areas for national banks and federal savings associations. Acting Comptroller of the Currency Keith Noreika pointed out in his remarks that, “[w]hile these are risks that the system faces as a whole, we note that the risks differ from bank to bank based on size, region, and business model. Compliance, governance, and operational risk issues remain leading risk issues for large banks while strategic, credit, and compliance risks remain the leading issues for midsize and community banks.”
The report details the four top risk areas:
- Elevated strategic risk—banks are expanding into new products and services as a result of fintech competition. According to the report, this competition is increasing potential risks. The OCC hopes to finish developing a special purpose banking charter for fintech companies soon.
- Increased compliance risk—banks must comply with anti-money laundering rules and the Bank Secrecy Act in addition to addressing increased cybersecurity challenges and new consumer protection laws.
- Upswing in credit risk—underwriting standards for commercial and retail loans have been relaxed as banks exhibit greater enthusiasm for risk and attempt to maintain loan market share as competition increases.
- Rise in operational risk—banks face increasingly complex cyber threats while relying on third-party service providers, which may be targets for hackers.
The report used data for the 12 months ending December 31, 2016.
On June 30, the Board of Governors of the Federal Reserve issued its sixth payments study entitled The Federal Reserve Payments Study 2016: Recent Developments in Consumer and Business Payment Choices. The study includes data on business and consumer noncash payments made in the United States in 2015. Among other things, the study details the differences between business and consumer payments in 2015 compared to those from 2000, general-purpose payment card use in 2015, and increases in use of alternative payment methods.
According to the report, the most popular noncash payment types among consumers were, in descending order: non-prepaid debit cards, general-purpose credit cards, checks, and finally, ACH debit transfers. For businesses, however, ACH credit transfers were the most popular, then checks, general-purpose credit cards, and non-prepaid debit cards. Consumers wrote fewer than half the number of checks in 2015 than they did in 2000 but almost doubled the number of noncash payments that they made. Businesses also cut check-writing by more than half but differed from consumers by more than doubling the number of ACH transfers that they initiated during the same period.
General-purpose or “network-branded” cards accounted for more than 65 percent of noncash payments in 2015. The data showed that 60 percent of these card accounts carried revolving debt, while 40 percent of accounts were paid in full each month.
Information on fraudulent payments also was collected and should be available in the third quarter of this year.
BAFT Announces 2017 Global Payments Symposium; Will Highlight Advances in Payments Innovation, Blockchain, and Artificial Intelligence
On July 19 and 20, the Bankers Association for Finance and Trade (BAFT) will host its 2017 Global Payments Symposium in New York City. The symposium will help bankers and payments professionals understand the latest innovation trends affecting compliance, payments, blockchain, fintech, cybercrime, and artificial intelligence, among others. BAFT will also discuss methods to integrate innovations into the business lines and how global challenges and best practices impact the U.S.
On May 31, the Board of Governors of the Federal Reserve System (Board) announced final amendments to the check collection and return provisions in Regulation CC, Availability of Funds and Collection of Checks, which implements the Expedited Funds Availability Act of 1987, the Check Clearing for the 21st Century Act of 2003 and the official staff commentary of the regulation. The amendments update Regulation CC “to reflect the evolution of the nation's check collection system from one that is largely paper-based to one that is virtually all electronic.” The Board (i) retained the current same-day settlement rule for paper checks; (ii) applied Regulation CC’s existing check warranties to check that are collected electronically; and (iii) adopted new warranties and indemnities related to checks collected and returned electronically and to electronically-created items.
In addition to the final rule, the Board also requested comments on proposed language amending Regulation CC's existing liability provisions to include a presumption that a substitute or electronic check was altered instead of forged in the event of a dispute under federal or state law in the absence of evidence such as the original check. Comments on the proposed amendments are requested within 60 days of publication in the Federal Register.
On April 26, West Virginia Governor Jim Justice approved new legislation (H.B 2585) that defines cryptocurrency in the context of money laundering. Specifically, “cryptocurrency” is defined as “digital currency in which encryption techniques are used to regulate the generation of units of currency and verify the transfer of funds, and which operate independently of a central bank.” Furthermore, the term “monetary instruments”—traditionally defined, for example, as coin, currency, checks, gift and prepaid credit cards—would now include cryptocurrency. With respect to the anti-money laundering clause, the legislation makes it unlawful to “conduct or attempt to conduct a financial transaction,” which would include cryptocurrency transactions, “involving the proceeds of criminal activity knowing that the property involved in the financial transaction represents the proceeds of, or is derived directly or indirectly from the proceeds of, criminal activity.” H.B. 2585 also outlines penalty structures for violations of the legislation—misdemeanor or felony charges depending on the severity of the crime—and allows for forfeiture or disgorgement of cryptocurrency.
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