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On February 5, Federal Reserve Governor Lael Brainard spoke at the “Symposium on the Future of Payments” to discuss benefits and risks associated with the digitalization of payments and currency. Noting that some of the new players in this space are outside financial regulatory guardrails and offer new currencies that “could pose challenges in areas such as illicit finance, privacy, financial stability, and monetary policy transmission,” Brainard stressed the importance of assessing new approaches and redrawing existing parameters. Emphasizing, however, that no federal agency has broad authority over the payments systems, Brainard stated that Congress should review how retail payments are regulated in the U.S., given the growth in ways that money is able to move around without the need for a financial intermediary. Banking agencies may oversee nonbank payments “to the extent there is a bank nexus” or bank affiliation, Brainard noted, however, she cautioned that “this oversight will be quite limited to the extent that nonbank players reduce or eliminate the nexus to banks, such as when technology firms develop payments services connected to digital wallets rather than bank accounts and rely on digital currencies rather than sovereign currencies as the means of exchange.” According to Brainard, “a review of the nation’s oversight framework for retail payment systems could be helpful to identify important gaps.”
Among other topics, Brainard stated that the Fed is currently reviewing nearly 200 comment letters concerning the proposed FedNow Service announced last summer, which would “facilitate end-to-end faster payment services, increase competition, and ensure equitable and ubiquitous access to banks of all sizes nationwide.” (Covered by InfoBytes here.) Brainard also discussed the possibility of creating a central bank digital currency (CBDC). While noting that the “prospect for rapid adoption of global stablecoin payment systems has intensified calls for central banks to issue digital currencies in order to maintain the sovereign currency as the anchor of the nation’s payment systems,” Brainard stressed the importance of taking into account private sector innovations and considering whether adding a new form of central bank liability would improve the payment system and reduce operational vulnerabilities from a safety and resilience perspective. She noted that the Fed is “conducting research and experimentation related to distributed ledger technologies and their potential use case for digital currencies, including the potential for a CBDC.”
On August 5, the Federal Reserve Board (Board) announced that Federal Reserve Banks will develop a “round-the-clock real-time payment and settlement service” called the “FedNow℠ Service.” According to a notice and request for comment, “the service would support depository institutions’ provision of end-to-end faster payment services and would provide infrastructure to promote, ubiquitous, safe, and efficient faster payments in the United States.” The Board is requesting comments on how the service might be designed in order to support payment system stakeholders and the general functioning of the U.S. payment system. FedNow is anticipated to be available in 2023 or 2024. Comments on the notice will be due 90 days after publication in the Federal Register. The Board also released FAQs associated with faster payments.
In a speech announcing the service, Governor Brainard noted that FedNow will be accessible to all banks and “will permit banks of every size in every community across the country to provide real-time payments to their customers.” Brainard noted that the Board is “uniquely placed to deliver this outcome” given its “long-standing service connections with more than 10,000 banks across the country.”
As previously covered by InfoBytes, the Board issued a request for comments in October 2018 regarding potential actions the Board could take to facilitate real-time interbank settlement of faster payments. The Board reports that it received over 350 comments and over 90 percent supported the Board operating its own, round-the-clock payment service alongside services provided by the private sector.
On April 1, the Federal Reserve Board published a revised policy statement on payment system risk (PSR policy) in connection with procedures used to determine the “net debit cap and maximum daylight overdraft capacity” of U.S. branches and agencies of foreign banking organizations (FBO). Among other things, the amended PSR policy (i) removes references to the Strength of Support Assessment ranking, citing the ranking is an “inefficient use” of supervisory resources; (ii) removes references to a FBO’s financial holding company status, since that status has limited ability to measure the health of a FBO; and (iii) adopts alternative methods for determining a FBO’s “eligibility for a positive net debit cap, the size of its net debit cap, and its eligibility to request a streamlined procedure to obtain maximum daylight overdraft capacity.” The Board adopted the changes substantially as proposed, following a notice and request for comment period at the end of 2017. The revisions are effective April 1, 2020.
On March 21, the Federal Reserve Board announced the release of its biennial report on debit card transactions in 2017. The report is the fifth in a series published every two years pursuant to Section 920 of the Electronic Fund Transfer Act (EFTA). As in prior years, the 2017 report reflected that issuers’ costs of authorizing, clearing, and settling debit card transactions (excluding issuer fraud losses) varied significantly across respondents. Among other things, data compiled in the report estimates that (i) in 2017, payment card networks processed 68.5 billion debit and prepaid card transactions valued at $2.62 trillion in the U.S.; (ii) debit and prepaid card fraud losses to all parties increased to 11.2 basis points in 2017 from 10.3 basis points in 2015; and (iii) the median covered issuer had average fraud prevention and data security costs of 1.5 cents per transaction, down from 1.7 in 2015.
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.
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