Evolving Payments in 2011

Mobile, EMV and P2P Will Affect Landscape
Don Rhodes, senior director of risk management policy for the American Bankers Association, says a number of emerging technologies, such as the EMV chip standard, mobile payments and peer-to-peer or person-to-person payments, will soon change the way U.S. financial institutions and merchants connect and transact. And it could all happen in 2011, much sooner than most industry experts expect.

Making significant moves payments technology will require discussion and collaboration, among banking institutions, merchants and regulators, to name a few.

"The discussion about EMV will move forward rapidly," Rhodes says. But it will have many caveats. "I think the U.S. may, in fact, move to adopt EMV, and may move relatively soon," he says. "I think it may be a unique version of EMV, which would, of course, have to be compatible with EMV, globally."

What about social networks? They, too, are expected to have a big impact in 2011, Rhodes says. "We have seen some social networks begin offering payment facilities," he says. "These may offer consumers some convenience and certainly familiarity, but they also open them up to the fraudsters, so I think this is something that banks are going to have to watch."

Beyond EMV and other emerging technologies, the U.S. financial industry will be faced with several payments-security challenges in 2011, including those relate to cross-border payments. "I think cross-border payments are increasingly becoming an issue for all banks, not just the largest banks," Rhodes says. "There are different law enforcement and regulatory structures that govern payments in the U.S., compared with other countries, and there are emerging technologies that are enabling new cross-border payment channels, some of which may fall outside of existing regulatory structures, both here and abroad. I think this is going to continue to be a challenge for mid-sized and community banks, because more and more of them are, in fact, conducting cross-border payments and will be challenged to increase those."

In this exclusive interview, Rhodes, who recently returned from the Federal Reserve Bank of Atlanta's Retail Payments Risk Forum, discusses:

  • Mobile and other payments trends for 2011;
  • An EMV-like technology and the impact it could have on global payments; and
  • The role banks will play in securing future payments transactions, even those facilitated via social networking sites such as Facebook.

Rhodes is the senior director of risk management policy for the American Bankers Association. Rhodes joined the ABA in 2001 and is responsible for keeping the banking industry informed about trends in payment system technology and electronic banking. Don manages the ABA's interests in combating online fraud and in implementing stronger online authentication. He also is responsible for issues regarding credit and debit card operations and operational risk management policy issues, including critical infrastructure protection. Prior to joining the ABA, Rhodes was president and chief executive of a financial institution and has held positions with the Ninth District Federal Home Loan Bank and Hibernia National Bank of New Orleans, as well as experience with another Washington-based banking trade association. He has published articles in banking trade publications and appears regularly in print and broadcast media. He is a graduate of the University of Central Arkansas, the U. S. Marine Corps Command and Staff College, the Savings and Loan Institute of the South, the Visa Business School and the Arkansas Institute of Politics and Government.

Mobile Payments in 2011

TRACY KITTEN: Mobile payments, EMV and emerging authentication technologies - what will financial institutions make investments in in 2011? Don Rhodes, senior director of risk management policy for the American Bankers Association who recently returned from the Emerging Retail Payments Risk Issues Conference hosted by the Federal Reserve Bank of Atlanta, shares his insights about the future of payments in 2011.

Don, from your perspective, how grounded or informed is the industry about innovations in mobile payments?

DON RHODES: I honestly think that the financial-services industry has been, and continues to be, at the forefront of innovations in mobile payments. As you know, with the emergence of smart phones over the past five or six years, mobile banking has already become a delivery channel of choice for many consumers. Consumers are already initiating payments using a smart phone. I think the next logical step is moving to using smart phones for contactless point-of-sale transactions, and possibly even to a mobile wallet.

EMV, Tokenization and Authentication

KITTEN: Beyond mobile, what other types of emerging technologies do you feel the industry has a handle on, such EMV, tokenization, authentication and encryption? How informed is the financial industry, overall?

RHODES: The industry has been following many of these issues and advances very closely and has continued to work closely with technology providers, really to determine if there is a real business case to implement some of these. Now, you mentioned EMV, for example. EMV or chip technology has emerged as a technology of choice in many nations around the world, in those nations it was a response to a need for better card security, especially in areas of the world where the high cost of telecom prohibited real-time transaction authorization. In those areas, implementing EMV has appeared to have reduced card-present fraud.

In the U.S., conversely, we have a robust and reasonably priced, real-time authorization capability, so that has never really been a driver for implementation for EMV here. I think the U.S. may, in fact, move to adopt EMV, and may move relatively soon; but it will be for different reasons, and I think it may be a unique version of EMV, which would, of course, have to be compatible with EMV, globally.

On the other issues, I think banks continue to perform risk management assessments on their online banking authentication methods and update those as necessary, and they continue to evaluate and update any of these online banking authentication methods and look at new ones. I think encryption and tokenization continue to be evaluated, but honestly, banks have to continue to analyze the real delivered security and convenience, versus the cost.

Institutions and Merchants: Aligning Payments Security

KITTEN: Don, where do you see merchants falling into this fold? How do financial institutions communicate or work with merchants to align payment security strategies as well as innovation?

RHODES: Of course merchants have to be a part of the whole payments discussion, as the cost of implementing any new technology is certainly shared with them. We have to be sure that the concerns of small merchants, as well, are taken into consideration. I think it is one thing for a major big-box retailer to be able to absorb the cost of changing POS devices to accept contactless or EMV, but to a small merchant, that cost can be a real challenge. I do know that -- through the card brands, through industry associations and through direct discussions -- some large merchants, issuers and the brands have been talking about these options for quite some time. We have to remember that the brands and many card issuers, as well as some of these large merchants, operate globally and they already use EMV and chip, for example, around the world. As I said, there has to be a business case for everyone involved when you talk about such a major, possible change in the payment system; but I do know that those discussions have been ongoing for some time.

Top Trends in Mobile Payments

KITTEN: What do you see as being the top trends in payments in mobile payments in 2011?

RHODES: I think, potentially, you will see the use of mobile payments using so-called near-field communications or contactless being moved from pilot or beta into production sometime in the coming year. Some of the largest American banks have been very active in testing, and I think you will actually see this soon. And, I think once those do roll out into widespread availability, I think you will see major U.S. vendors that support community and regional banks move very rapidly to offer this service for them, as well. I think the discussion about EMV will move forward significantly, because everyone involved -- merchants, issuers and consumers know that payments fraud, particularly card fraud, costs us all, and it's to everyone's advantage to use technology to combat that fraud. Chip technology is one that has gained a great deal of global acceptance.

An EMV Variant?

KITTEN: You mentioned earlier that you thought the U.S. may move to some form of EMV or chip-based technology, but it may be a little bit different than what is used in other parts of the world. Do you think the difference here would be the connection to mobile?

RHODES: I don't know that the connection to mobile combined with EMV would be that critical. I don't know that there is a lot of connection there. I think the mobile development is going to move in a different direction, because the chip technology, the EMV technology, is really a card-present technology -- you actually slide the chip into a reader. The ability to conduct contactless transactions requires a little different technology, so there is a little bit of a difference there.

KITTEN: We noted earlier that you recently attended this conference that was hosted by the Retail Payments Risk Forum, where mobile payments and emerging payment-card standards such as EMV were discussed. What were the top five takeaways, from your perspective, as they relate to that discussion specifically?

RHODES: Five takeaways? To be honest, I have already mentioned two, and those would be the move from pilot programs to widespread adoption of mobile payments, particularly using near-field communications, and that the EMV and chip technology may be closer to adoption in the U.S. and will probably happen soon. The third, I think, would have to be that person-to-person payments or P2P will continue to evolve. I am talking about electronic P2P here. P2P really isn't new; we do that with cash and checks and some electronic alternatives now; but consumers can today initiate direct money transfers to another person, through a bank, non-bank or a credit card, and there are different benefits and risk profiles to each of these. Banks, quite frankly, have been late to the game here. I think banks are taking a very close look at electronic P2P services and many may decide this is a service that they should consider offering.

I think the fourth takeaway from the conference that really impressed me related to cross-border payments. I think cross-border payments are increasingly becoming an issue for all banks, not just the largest banks. There are some challenges here, as there are different law enforcement and regulatory structures that govern payments in the U.S., compared with other countries, and there are emerging technologies that are enabling new cross-border payment channels, some of which may fall outside of existing regulatory structures, both here and abroad. I think this is going to continue to be a challenge for mid-sized and community banks, because more and more of them are, in fact, conducting cross-border payments and will be challenged to increase those. And I think the fifth is the use of social networks to transact payments. The popularity of social networking sites has opened a lot of new channels for criminals to target phishing and malware attacks, but I think we have seen some social networks begin offering payment facilities. These may offer consumers some convenience and certainly familiarity, but they also open them up to the fraudsters, so I think this is something that banks are going to have to watch.

EMV, Interchange and a Move in the U.S.

KITTEN: If a move to EMV were adopted in the United States, what would the priorities or first considerations be? How might a move to chip-based debit transactions impact interchange, if at all?

RHODES: Well, obviously, all participants in the payments scene would have to agree to adopt chip and PIN or EMV. Certainly, there are costs involved to do this, for the merchants of all sizes to upgrade their POS devices. There are costs to the issuing banks to issue the EMV cards. And, certainly, there would have to be a transition period to accomplish this, which has been done in other countries, but it wouldn't be an overnight transition. I think consumer education would also be a factor. While EMV cards may offer greater anti-fraud protection than a magnetic stripe, they are not completely failsafe. Criminals may find it harder to commit fraud with a chip card, but it is possible. And we have to look at the challenge of card-not-present fraud, online fraud, which EMV currently cannot address, unless you have some sort of a device that will allow you to utilize that card in an online environment; so it is an incremental step toward greater security and there are a lot of parts here.

Regarding interchange, I have to tell you, I really don't know. I don't think we can automatically look to other countries as a guide here, as our payments system has developed differently with the adoption of Dodd-Frank and with the Federal Reserve having new powers regarding debit interchange. I think it is just too early to know. I think how the Fed establishes debit interchange limits will certainly impact banks' revenue streams from debit cards, and certainly EMV will cost banks a lot to implement, so there is no doubt that a banks' revenue stream will have an impact on whether or not they can afford to change to a new technology. If they do make a change, will that cost be passed on to the consumer in some way?

KITTEN: And are there any final thoughts before we close, Don, that you would like to share about payments?

RHODES: I have been around this business a long time, and for a pretty simple business of being a financial intermediary, we have become a pretty sophisticated, complex industry, and payments are obviously a big part of our industry. If there is anything for sure, it's that the payments business will continue to evolve and will evolve faster than we may imagine. Banks are challenged to provide safe, convenient and accessible payment options, both to their consumer and business customers; and with increasing regulatory burdens, increased costs and criminals continuing to attack our banks and our customers, I think the challenge of providing payment services gets harder and harder. But I have no doubt that the industry in this country will continue to be a viable part of our economy and continue to provide safe and convenient payment options for everyone involved.




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