NYBF 2014 - Payments Industry Perspectives

George Doolittle, Wells

Fargo Bank

Steve Mott, Better Buy

Design

Ken Isaacson, Federal Reserve

Bank of New York

Improving Profitability and Managing Risk

Global Payment Issues & Trends February 2014

Industry Issues

Transparency

Global Regulatory Activism

Platform Efficiencies

Sanctions Management as a

Critical and Competitive Advantage

The Battle for Liquidity

Flight to FX Payments

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Application Promotion

Management

The Value of Data

Discretionary v. Non- Discretionary Development

Correspondent Banking or Vendor

Management

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Some of the Detail…

Industry Initiatives:

•eInvoicing

•Payment Reference Data

•Data Repositories

•LEI-Legal Entity Identifier

•Off-shore Clearing Sites

•CNY-CNH

•Character Sets

•ISO 20022 Migration

•Settlement? PvP, CLS, RTGS, Netting, CCP

AML/T &TE:

•FATF.. Beneficial Ownership

•Sanctions Management

•FinCEN…Reporting

•Trade Products

•Extensions …Human Slavery, Tax Evasion, Corruption, Gambling

Competition:

•Market Infrastructures

•Money Remitters

•Non-Banks: e.g. Telecoms, Web Players, Retailers

•Central Banks

•Cyber-currencies

Regulation:

•DFA e.g. 1073

•OCC on TPP

•FATCA

•Basel III

•BIS-CPSS

•Living Wills-Resolution

•FSA-CP 09/16

•PSD II

•Internationalisation of RMB

•Account Portability

•Faster Payments

Payment

SWIFT Business Forum—NY 2014 Payments Industry Perspectives

Work Session Steve Mott, Principal—BetterBuyDesign

4 March 2014

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Payments Industry Perspectives

1. Fraud problem no longer swept under the rug

2. The politics of payments complicates investment decisions

3. Technology confusion and disruption abounds

4. Bank-based payment structure/infrastructure faces digital transformation

5. Crypto-currencies (e.g., bitcoin) emerge as ‘secure pipes’(?)

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Target: A Game-Changer?

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Rescator.la: For Your Everyday Fraud Needs!

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Is an ROI Motivation Lacking?

$0.00

$10.00

$20.00

$30.00

$40.00

$50.00

$60.00

$70.00

U.S. Counter. Global U.S. U.S.-Banks U.S.-Merch Other Merch Interchange Charge-offs

$ Billion

$ Billion

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EMV Cost

Sources; Nilson Reports, Moebs, Payments Source, industry reports

PCI: Misbegotten Effort?

• MAG survey: PCI costs from 2004-2009 were $20B (Tier 1 extrapolated to all)

• US card fraud in same period was $13.9B (45% of global)

• Fraud soaring again (2011-2013)

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And Total Fraud is Rising Again (oops…)

11 Source: UK Payments Council

Too Many (Uncertain) Technology Choices

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Mobile Prepaid

P2

P

Re

al-t

ime

D

eb

it

Digital Payments

Digital: Converging Payment Families

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Big Digital Players Loom Large

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Future Role in Faster/Near-Real-Time Payments

• Fed: Apply to faster, near-real-time payments initiative?

• Leverage open source code to modernize ACH system – “ACHCoin”?

• Upgrade EMV to real digital payment form?

Crypto-Currencies Emerge

• Miners

• Exchangers

• Wallet Providers

• Payment Processors

• Merchants

• Others

Implications for Banking Industry

• Merchants and corporate customers will soon be asking for support—what do you do then?

• If the ‘pipe’ of the future for transferring value is based on mathematical cryptography rendered in software, who provides the layers of necessary supporting infrastructure?

• If regulated financial institution accounts will comprise the vast bulk of digital funding transactions, which network is best suited to ‘insulate’ the pipe while providing ubiquitous access?

Applications for FIs/Treasury Departments

• International transfers?

• Intra-company transfers?

• Tax ‘protection’ events and activities?

• Avoidance of repatriation complications?

• Procurement in ‘sensitive’ countries?

• Foreign exchange arbitration/protection?

• Hedging (including against central banks)?

• Secure, ubiquitous pipe for ISO20022?

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Steve Mott’s Contact Coordinates

dba CSI Management Services, Inc.

1386 Long Ridge Road

Stamford, CT 06903

and 1214 Querida Drive

Colorado Springs, CO 80909

(o) 203.968.1967

(c) 203-536.0588

email: stevemottusa@yahoo.com

website:www.betterbuydesign.com

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Steve Mott BetterBuyDesign

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© 2014 Federal Reserve System. Materials are not to be used without consent.

Advancing the Federal Reserve

Financial Services Strategic Direction

Payment System Improvement

Consultation Paper Responses

and Additional Research

Presented to: SWIFT New York Business Forum, March 4, 2014 Presented by: Ken Isaacson, Senior Vice President, Federal Reserve Bank of NY

© 2014 Federal Reserve System. Materials are not to be used without consent.

Discussion Agenda

• Federal Reserve Overview and Strategic Focus

• Consultation Paper and Responses

• Additional Research Activities

• Staying Connected

• Questions

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© 2014 Federal Reserve System. Materials are not to be used without consent.

Provide financial

services to depository

institutions and U.S. government

Establish and execute U.S.

monetary policy

Supervise and regulate financial

institutions

Federal Reserve Banks Overview

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Mission

•To foster integrity, efficiency and accessibility of the U.S. payment system

Vision

•Payments are safe and efficient

•End users can select payment options with attributes (e.g., speed, convenience, cost, security) that meet their needs

• Incentives promote efficient selection and use of these options

Role

•Act as a major service provider to the interbank market

•Collaborate with industry and emphasize innovations in electronic payment systems

…to maintain a stable financial system and contain systemic risk

© 2014 Federal Reserve System. Materials are not to be used without consent.

• Maintain and enhance FRB network security

• Enhance understanding of end-to-end security

• Collaborate and promote industry best practices

Safety and

Security

• Develop solutions to enhance payment speed

• Understand market demand for faster payments

• Continue migration of paper to electronic Speed

• Develop solutions to promote efficiency

• Understand needs and barriers

• Promote standards adoption to improve efficiency Efficiency

End-to-End Strategic Focus

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© 2014 Federal Reserve System. Materials are not to be used without consent.

Payment System Improvement –

Public Consultation Paper

• The paper sought the input of payment system providers

and end users on:

– Payment system gaps, opportunities and desired outcomes

– Potential strategies and tactics to shape the future of the U.S.

payment system

– The Federal Reserve Banks’ role in implementing these

strategies and tactics

In late 2013, Federal Reserve Banks solicited comments on a Payment System Improvement – Public Consultation Paper.

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© 2014 Federal Reserve System. Materials are not to be used without consent.

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Payment System Improvement – Public

Consultation Paper Industry Response

• ~200 written responses • Review responses at:

FedPaymentsImprovement.org/user-submissions/

© 2014 Federal Reserve System. Materials are not to be used without consent.

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Additional Research Activities

End-User Research on Demand for Select Payment Attributes

Real-Time Alternatives Assessment

Payments Security Landscape Study

Electronic Payment Order (EPO) Exploration

© 2014 Federal Reserve System. Materials are not to be used without consent.

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Additional Research Activities

End-User Demand for Select Payment Attributes

• Usage and awareness of various payment instruments

• Importance/meaning of speed to end users; differences by use case

• Importance of other key features (e.g., ubiquity, account masking)

• Appeal of faster payments and willingness to pay fees

Objective: To further explore end-user demand for select payment attributes

• Focus Groups

• Discrete Choice Testing

• Concept Testing

Qualitative and quantitative research

© 2014 Federal Reserve System. Materials are not to be used without consent.

• Define the features and functionality required in an enhanced system

• Identify feasible alternatives for achieving the desired features and functionality

Objective: Assess alternatives to improve the speed of U.S. payments, including the exploration of a near real-time retail payment system

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Additional Research Activities

Real-time Alternatives Assessment

© 2014 Federal Reserve System. Materials are not to be used without consent.

• Enhance understanding of end-to-end security

• Collaborate and promote industry best practices

Objective

• Secondary research review to provide insight into potential gaps or opportunities

• Case studies to analyze payment networks in relation to control structure components such as network governance, payments data storage, incentives and standards

• Review of current industry activities focused on enhancing payment security

Study Components

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Additional Research Activities

Payments Security Landscape Study

© 2014 Federal Reserve System. Materials are not to be used without consent.

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• Identify barriers and risks preventing the evolution of an EPO and identify use cases that would drive design of a potential industry EPO solution

Objective

• Drafting use-case specific work flows that contain details of the key elements that would drive EPO solution design

• Defining parties involved in creation and transfer of EPOs and defining responsibilities and relationships between parties

Activities

Additional Research Activities

EPO Exploration

© 2014 Federal Reserve System. Materials are not to be used without consent.

Additional Sources of Information

Retail Payments Study

• Collected the number and value of noncash payments, cash withdrawals and deposits, and unauthorized transactions

• Estimated the distribution of checks by counterparty and purpose to better understand payment trends

ISO 20022 Business Case Assessment

• Engaged a consultant to evaluate the business case for or against adopting ISO 20022 payment messages in the United States

• Sponsored the assessment with X9, NACHA and The Clearing House

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© 2014 Federal Reserve System. Materials are not to be used without consent.

Next Steps

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• Continue payment industry collaboration efforts to encourage and document interactive dialogue on the U.S. payment system gaps and opportunities, desired outcomes and possible solutions that improve speed, efficiency and security.

• Use Consultation Paper industry input and additional research insight to inform FRFS future plans and actions and identify areas where collaboration with industry or independent industry action would be useful in the implementation of U.S. payment system improvements.

• Define and prioritize U.S. payment system improvement initiatives that advance the speed, efficiency and security of payments and communicate these plans in a white paper expected to be published in the second half of 2014.

© 2014 Federal Reserve System. Materials are not to be used without consent.

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Staying Connected

Visit FedPaymentsImprovement.org

Visit us at Fed and industry forums • E.g., NACHA Payments 2014, Sibos 2014, the Chicago

Payments Symposium, Money2020 and the AFP annual conference

Subscribe to receive strategic direction updates from the Fed • FedPaymentImprovements.org/subscribe