Trends & Tactics

P2P Books a Fast Ride on EFT Rails

Thanks to new agreements involving two major electronic funds transfer networks, person-to-person (P2P) electronic payments are poised to get a whole lot faster.

Under a deal announced in February, NYCE Payments Network LLC will offer CashEdge Inc.’s Popmoney person-to-person payments service to its financial-institution clients. At about the same time, Fiserv Inc. confirmed that transactions for the processor’s ZashPay P2P service would be able to go over its Accel/Exchange EFT network subsidiary later this year.

Most P2P payments today are automated clearing house debits that can take up to two days to settle. But a Popmoney payment through NYCE would happen in real time, a feature some experts say will make the service much more attractive to users.

“Certainly it’s a great leveraging of the power of the EFT network, which is to authorize and settle in real time,” says Patricia Hewitt, director of the Debit Advisory Service at Mercator Advisory Group Inc. “It begins to change the paradigm around it.”

The routing of P2P transactions through EFT networks puts pressure on other industry providers to match the new, higher speeds, including alternative-payments leader PayPal Inc., which has been trumpeting its own person-to-person payment service.

“Because they are kind of the one to beat, they’re the ones people are going to be looking to gain market share from,” says Hewitt. A PayPal spokesperson declined comment.

Outside research would indicate consumer demand for electronic P2P services. The Federal Reserve’s latest payments study, released in December, shows that while overall check use continued its long-term decline in the 2006-09 study period, consumers wrote more than 2 billion checks to each other each year and such check-writing actually grew at a compounded annual rate of 3%. Three other major categories declined.

Enabling real-time P2P payments for its 3,600 financial-institution members was the reason NYCE struck the agreement with CashEdge, according to network president Neil Marcous.

“NYCE is embarking on a program to introduce a variety of solutions that an institution can pick from,” says Marcous, who is also executive vice president of network solutions at NYCE’s parent company, Jacksonville, Fla.-based processor Fidelity National Information Services Inc. (FIS). Regarding P2P specifically, he says, “A number of institutions indicated that would make a lot of sense.”

None of NYCE’s client banks or credit unions has yet committed to offering Popmoney to its customers, but Marcous is confident the investment will pay off. “I can’t tell you we have a huge amount of pull demand at this moment, but it is growing,” he says. “I think the offline environment did not get much pull demand.”

Popmoney will be available through NYCE members’ online and mobile-banking sites, and NYCE says the rapid growth of smart phones will lend further impetus to P2P payments. If the recipient’s bank or credit union doesn’t belong to NYCE, the payment would revert to the ACH. Marcous, however, says reciprocal agreements between NYCE and other EFT networks are one solution to keep the transactions flowing in real time. He won’t say if NYCE has any such deals pending, but he adds, “We are always actively looking for ways to expand product offerings for our customers.”

For New York City-based CashEdge, the NYCE agreement with its real-time settlement adds momentum to the Popmoney product that launched in December 2009 and is offered by 170 banks. The three largest are Citibank, U.S. Bank, and PNC.

“That’s what we’re excited about,” says Neil Platt, CashEdge’s senior vice president and general manager of U.S. banking. “Our medium-term aspiration is to achieve P2P payments that are real-time and low-cost … this is a beginning of a departure for us, from ACH.”

Last October, CashEdge and wire-transfer provider MoneyGram International Inc. announced they had signed a letter of intent to integrate their services so that Popmoney recipients could direct their funds to any of MoneyGram’s 200,000 retail agent locations in 190-plus countries.

 

 

ID Fraud Takes  Less of a Bite

Identity fraud, long the scourge of electronic payments, showed at bit less prowess in 2010. ID fraud by some measures dipped to lower levels in 2010 than it has in the preceding seven years, according to Javelin Strategy & Research’s latest annual fraud study.

Javelin found that 3.5% of U.S. adults claimed to be ID-fraud victims last year, down from 4.8% in 2009 and the lowest percentage since the study began in 2003. That means ID fraud affected an estimated 8.1 million Americans in 2010 compared with 11.1 million in 2009, the year of both the highest percentage and total number of victims since the Federal Trade Commission started the study. Estimated total losses were $37 billion, the study’s lowest ever..

Fraud on existing credit and debit card accounts led the decrease, reported by 2.8% of respondents in 2009 but only 1.9% in 2010. New-account fraud affected 1.3% of respondents in 2009 and 1.1% last year. Some 0.7% of respondents reported fraud on existing non-card accounts in 2009; the corresponding figure for 2010 was 0.5%.

Javelin’s 2011 survey was based on telephone interviews with 5,004 randomly selected consumers, some of whom reported they were victims of more than one type of fraud. Identity fraud, a fairly loose term, can cover a broad range of new and old crimes, everything from card theft to takeovers of existing accounts to creation by a criminal of a new account in another person’s name.

The modestly improving economy, one indication of which is retail sales, is a major reason for the improvements. James Van Dyke, president and founder of Pleasanton, Calif.-based Javelin, notes that retail sales improved last year.

“As retail sales go up, levels of fraud go down, and vice versa,” he says. “Our speculation on that is the less money criminals have to buy things at retail, the more motivated they are to get involved in identity fraud.”

A second big reason, according to Javelin: fewer consumers reporting they’d been notified of a data breach affecting their records. Seven percent of respondents reported receiving such notifications in 2010 against 11% from 2006 to 2008. Those findings also reflect research by the non-profit Identify Theft Resource Center.

The mean amount of fraud per victim from all types of ID fraud fell 8% to $4,607 from $4,991 in 2009.

But not all of Javelin’s 2010 findings pointed in the desired direction. The mean cost of fraud borne by consumers was $631, up from $387 in 2009 and $511 in 2008. Van Dyke blames that on a relative shift in fraud from existing to new accounts, with consumers paying more in such cases.

The median fraud amount per victim stayed even with the earlier studies at $750. And the median consumer cost remained at $0, mainly because of payment-card networks’ and banks’ zero-liability policies for holders of credit and signature-debit cards.

Such policies often don’t cover transactions requiring a PIN, however. In a query by Javelin of 27 major banks, only 44% reported having zero-liability for cardholders on PIN-debit purchases, and just 33% offer similar protection on ATM withdrawals, according to Van Dyke, who predicts those percentages will increase.

“What we generally see is we’ll uncover a trend like this and consumer advocates will raise awareness,” he says.

The mean detection time for all types of fraud was 68 days in 2010, up from 59 in 2009, and the mean misuse time was 95 days, up from 84. The mean resolution time in hours was 33, up from 21 in 2009 and 30 in 2008. The reason for 2010’s increase is a cutback in the number of financial institutions providing 24-hour/seven-days-a-week resolution services, Javelin says.

Javelin took over the study from the FTC after the first year because the commission encountered budgetary problems, Van Dyke says. Javelin recruits sponsors to help defray costs; this year’s were Wells Fargo & Co., processor Fiserv Inc., and fraud and risk-management technology provider Intersections Inc. The sponsors were not involved in the survey’s data gathering, analysis or reporting, Javelin says.

 

 

What’s a Network?  The Fed Wants to Know

How do you define a payment card network? The Federal Reserve is wrestling with that very question, and on its answer could hang some pretty important consequences for alternative-payments providers. That includes major players like PayPal Inc. and a raft of smaller, newer arrivals.

 “It’s a huge issue,” says Conrad Sheehan, chief executive of mPayy Inc., a Chicago-based mobile-payments startup that, like many alternative-payment players, relies on the automated clearing house for settlement.

How the Fed defines a network carries significance because the regulator is in the midst of working out rules that will implement the Durbin Amendment to the Dodd Frank Act. The rules, which are expected by April 21 and will apply to debit cards, will drastically chop interchange income for banks with more than $10 billion in assets and will rewrite existing network-routing and brand-exclusivity arrangements.

While most observers have construed Durbin to affect financial institutions that use Visa Inc., MasterCard Inc., and a handful of electronic funds transfer networks, it turns out the Fed may be thinking more expansively.

In a set of proposals it released in December, it asks for comment on “whether other non-traditional or emerging payment systems would be covered by the statutory definition of a ‘payment card network.’”

The passage then goes on to cite, as examples, mobile-payment systems and, by name, PayPal. It also asks for comment on how it might distinguish “non-traditional” systems from established networks, if the former should not be covered. “They’re feeling their way, looking for thoughts,” notes Eric Grover, principal at Carson Valley, Nev.-based Intrepid Ventures and a former Visa executive. “Their interest is genuine. Where do you draw the line?”

This is no mere philosophical rumination. How the Fed defines a network, how it regulates networks under Dodd-Frank, and the mere fact it’s asking for input on these question have all provoked concerned speculation. At parent company eBay Inc.’s earnings call in January, for example, PayPal officials felt obliged to tell analysts they did not believe the e-commerce processor would be covered by the debit rules, arguing the company doesn’t set interchange and indeed relies on the major card systems for anywhere from 55% to 60% of its volume.

But that may not be how the Fed is looking at the matter. In its December proposal, it points to whether payments systems set and enforce rules or standards for issuers and acquirers in the system as the distinguishing characteristic of a network.

Some alternative players at least could benefit from the new regulations. To implement Durbin, the Fed proposes two scenarios: that all cards carry at least two unaffiliated network brands, or that they carry at least two unaffiliated signature-debit and at least two unaffiliated PIN-debit brands.

Companies like Atlanta-based online PIN-debit processor Acculynk Inc., with its links to nine EFT networks, see that as a big plus. “In any scenario, we win,” says Ashish Bahl, Acculynk’s chief executive.

Indeed, if alternative systems were considered networks by the Fed, some observers say the new routing and non-exclusivity rules could get their brands onto more cards. This could be especially true if the alternatives can arrange to handle signature debit, adding authentication routines on top of ACH settlement, for example.

In part this is because the Fed may not see Visa and MasterCard, though unaffiliated, as distinct enough to present a real choice. “The Fed has a problem [in that] there’s not much competition [in signature debit] besides MasterCard and Visa,” says Steve Mott, principal at BetterBuyDesign, a Stamford, Conn.-based consultancy.

Sheehan of mPayy agrees. “It’s always been an unofficial duopoly,” he says. “The Visa and MasterCard prices are within a thousandth of a basis point of each other.”

That problem could lead the Fed to define certain networks as eligible under its new rules to be included on debit cards as signature-debit alternatives, says Mott. “There’s got to be something other than Visa or MasterCard or their affiliates or you’re not meeting the requirements,” he says.

In part, the Fed’s network question is driven by the fact that the payments industry has itself never rigorously defined the term. “It’s not a clear-cut definition,” says Mott.

But for the burgeoning ranks of alternative-payment systems, the answer could have seismic ramifications. Even if they don’t set interchange, being defined as a network could be more a curse than a blessing if the Fed imposes its cap, currently no higher than 12 cents per transaction in the Fed’s proposal. “That’s Armageddon,” says Mott.