While I don’t manage to attend every year, the Federal Reserve Bank of Chicago’s annual payment conference remains one of my favorites. The Chicago Fed has a great payments team that works hard at putting together a timely program, but I like this event because it really is what it purports to be – a conference. With only a few hundred attendees in the room and plenty of Q&A time in the agenda, there is always a spirited, two-way dialogue between the presenters and the audience.
I had the pleasure of moderating a panel on Transformative Technology (lots of focus on the mobile channel in payments), but I greatly enjoyed the other sessions and the opportunity to network with so many payments professionals at the breaks. Below I’ve tried to capture some of the most interesting points from each session.
Keynote, David Evans, Market Platform Dynamics
- A useful review of Evans’ theories on the importance of software platforms (“invisible engines”) and how they are helping to accelerate the pace of innovation in payments
- The presence of network effects means there will never be a lot of platforms in an industry and that will be true for payments
- The platform owner benefits from the network effects, while others can participate by running the rails. In mobile telecom, Apple owns a platform and AT&T runs the rails. In payments, PayPal is trying to build the platform (by exposing its system to developers through the X platform) while MasterCard and Visa may be left to run the rails.
Panel I – Consumer Choices
- This panel discussed the sometimes confusing and seemingly irrational ways that consumers make choices about financial products
- Victor Stango of UC Davis was the first of several speakers to cast doubt on the value and effectiveness of lengthy disclosure statements
- Attorney Furletti of Ballard Spahr noted that some of his retail bank clients are experiencing rather high (~80%) opt-in rates as they ask their customers if they want to continue to be able to overdraw their accounts in spite of the fees (at least among customers who were regular users of overdraft)
- Piyush Tantia of behavioral economics research firm, Ideas42 outlined several behavioral curiosities including subscription versus a la carte pricing for health clubs, the impact of credit card availability on price bids for basketball tickets, and the effect of the default setting (opt-in or opt-out) on organ donation rates.
Panel II – Innovative Business Strategies
- Dan Schatt of PayPal continued that company’s recent campaign to forge productive relationships with banks in areas like P2P payments and cross-border remittances. He noted that while PayPal is not at all targeting the physical point-of-sale, it is occasionally being brought their by novel applications that are bringing the Internet into the physical world
- Prepaid card pioneer Gary Palmer talked about prepaid cards have evolved from a niche business to a mainstream phenomenon since 1999. He highlighted the different value propositions at play in different segments of the prepaid business, from consumer cards (more convenient than cash and often cheaper than bank accounts) to corporate-issued cards (better branding, memorability, and customer retention than other tender types) to government assistance cards (cheaper than checks)
- Stephanie Swain of BestBuy shared research that indicates consumers are apathetic about their banking relationships which could turn to anger in the wake of the CARD act. BestBuy is enjoying early success with a set of “back to the future” financing innovations including lay-away plans, installment loans, and lease-to-own programs.
- Gray Taylor of the National Association of Convenience Stores articulated a long set of issues being encountered by his small merchant members. He was optimistic about private label ACH cards, which allow merchants to use their own loyalty programs rather than funding generic rewards programs run by open loop card issuers. He noted that PCI compliance has been a significant burden, costing an average of $20,000 for merchants that average only $32,000 in pretax profits; they will gravitate to solutions that reduce PCI scope (tokenization, point-to-point encryption, etc.).
Panel III – Transformation Technology
- This panel focused largely on the newest developments in mobile channel, which has enjoyed tremendous growth in spite of the recession and is playing a role in most every domain of payments
- Jeff Semenchuk of Citigroup Growth Ventures outlined the multiple attributes of the simple credit card (payment vehicle, short-term loan, network access tool, currency conversion instrument) and noted the success Citi had had in assembling a mobile payment trial in Bangalore with favorable economics for all the participants.
- John Brady of USAA chronicled the development of the mobile channel at USAA, highlighting its critical importance to his bank’s highly dispersed membership base. Its most recent and popular mobile application is a consumer remote check deposit function which utilizes the camera of a mobile smartphone.
- Wences Casares described how his company, BlingNation, is helping smaller banks return to a more central role in payments by enabling their consumers and merchants with a contactless payment solution targeted at small, local communities. He claims that his solution has superior economics compared to the global card networks for both small merchants and small bank issuers.
Panel IV – Security and Risk
- Moderator Peter Burns, an adviser to Heartland Payments, noted that the multi-channel payment environment we maintain is creating a growing set of opportunities for criminals and that a multi-pronged approach will be necessary to keep fraud under control.
- Mike Urban of FICO illustrated that message by detailing the range of solutions that are being deployed to detect and prevent financial crimes. These tools include traditional neural net models, self-calibrating profiles, adaptive models, outlier models and customer and compromise scores.
- Ellen Richey of Visa depicted the risk created by the very large number of diverse parties who handle sensitive credentials in our existing payments infrastructure. In spite of these risks, a focus on fraud has actually driven down fraud rates in recent years, though gaps remain across the global system (e.g., “Steal data in a non-PCI country and use it in a non-EMV country”). She sees a need for dynamic data to be used to authenticate both the device and the user and upon questioning, took a somewhat negative view of more widespread use of static PINs.
- NACHA CEO Jan Estep pointed out that unauthorized ACH debits have declined in absolute terms of late thanks to the introduction of fines for excess returned items and better identification of the party initiating these transactions. On the other hand, there is increasingly evidence of fraud in ACH credit transactions, which will require greater diligence, particularly by smaller organizations that are often not meeting best practice guidelines for security.
Panel V – Where We Are Headed
- The conference concluded with a freewheeling discussion of current regulation and future directions among a panel of law professors (Ronald Mann of Columbia and Omri Ben-Shahar and Richard Epstein of the University of Chicago) and a Wall Street stock analyst (Glenn Fodor of Morgan Stanley).
- Reviews of the current legislative and regulatory initiatives came in for significant criticism, with some active questioning of whether the concerns being addressed were mainly theoretical. Several of the panelists seemed to favor the notion of having consumers seek “buy side assistance” (i.e., independent advice) rather than having them depend on “sell side regulation”
- Panelists found it difficult to predict how all of the current regulatory activity would impact payment system participants, but the implications appear negative for many retail banks. As Professor Mann put it, “Buy stock in check cashers.”
Many thanks again to the Chicago Fed for putting on such an interesting conference. Try to get to the Windy City next May for a high quality event.