Written Testimony of Kim Ford Executive Director U S Faster Payments Council Before the Task Force on Financial Banking Technology of the House Financial Services Committee “Is Cash Still King Reviewing the Rise of Mobile Payments” Thursday January 30 2020 9 30 am 2128 Rayburn House Office Building 1 P a g e Chairman Lynch Ranking Member Emmer and distinguished members of the Task Force on Financial Technology of the House Financial Service Committee thank you for this opportunity to testify before you today at this hearing on “Is Cash Still King Reviewing the Rise of Mobile Payments ” My name is Kim Ford and I am the Executive Director of the Faster Payments Council FPC an industry trade association born out of the efforts of the Federal Reserve and the collective payments industry to modernize the U S payments system Today the FPC serves as an inclusive and representative membership organization whose mission is to facilitate ubiquitous faster payments in the U S Our membership represents every facet of the payments industry including business end-users consumer organizations financial institutions payment network operators technology providers associations and other interested stakeholders such as individuals representing academic institutions and industry consultants The FPC works to achieve its mission through 1 Education - The FPC spearheads educational initiatives to foster better understanding of faster payments and confidence among providers and end users to increase adoption 2 Problem-Solving - The FPC tackles the tough issues that inhibit adoption of faster payments so that end users can pay and be paid in seamless and transparent ways The FPC provides safe forums for dialogue encouraging honest contributions and honoring differing views to enable the ideas and solutions that will drive progress 3 Industry Guidance - The FPC identifies and evaluates practices principles and guidelines that enhance safety security and transparency and enable opportunities and access Prior to my role at the FPC I was employed at First Data for 15 years most recently serving as senior vice president and head of global government affairs I’ve also held a number of industry leadership positions including serving as Chair of the Legislative and Regulatory Council for the Electronic Funds Transfer Association Co-Chair of the Government Relations Council at the Electronic Transaction Association Past Chair of the Board of Directors for the National Card Coalition and Board Member for the Innovative Payments Association My current and past industry roles have allowed me to develop a deep subject-matter expertise on a broad range of payments topics particularly electronic digital payments of which mobile payments are a component Thus I am grateful for this opportunity to share with you details on how consumers pay 2 P a g e the growing use of electronic payments as a preferred payment choice the role faster payments can play in furthering electronic payments and some of our organization’s efforts to ensure we foster a secure efficient and accessible digital payments future for U S consumers I Background Payments Landscape The payments landscape is rapidly evolving With a plethora of mobile payment offerings the advent of faster payments and the availability of new technologies such as artificial intelligence and machine learning we are transitioning from an environment dominated by paper checks and cash to a digitallybased payments system where electronic transactions serve as a primary form of payment and constitute nearly $100 trillion of the value of payments overall 1 According to the Federal Reserve’s 2019 Diary of Consumer Payments Choice2 electronic payments surpassed cash as the preferred method of payment for the first time in 2018 According to the study consumers used cash in only 26 percent of transactions while debit cards were cited as the most frequently used payment instrument accounting for 28 percent of payments 3 With respect to checks 2018 served as the first year that automated clearinghouse ACH transactions outnumbered check payments According to the Federal Reserve’s 2019 Payments Study there were 16 6 billion ACH debit transfers compared to 14 5 billion check payments In contrast in 2000 the number of ACH debit transfers stood at 2 1 billion compared to 42 6 billion check payments 4 II How Consumers Pay and Why Consumers’ Payment Use Choice Matters While evidence points to consumers’ growing desire to use electronic payment formats they still use a wide variety of payment options such as cash check ACH debit and credit cards demonstrating a strong desire for payment choice While choice rings through as a theme the trend towards electronic 1 2019 Federal Reserve Payments Study at https www federalreserve gov paymentsystems 2019-December-TheFederal-Reserve-Payments-Study htm 2 2019 Diary of Consumer Payment Choice at https www frbsf org cash publications fed-notes 2019 june 2019findings-from-the-diary-of-consumer-payment-choice 3 2019 Diary of Consumer Payment Choice at https www frbsf org cash publications fed-notes 2019 june 2019findings-from-the-diary-of-consumer-payment-choice 4 2019 Federal Reserve Payments Study at https www federalreserve gov paymentsystems 2019-December-TheFederal-Reserve-Payments-Study htm 3 P a g e payments cannot be ignored The 2019 Diary of Consumer Payments Choice also showed that electronic payments—specifically debit cards—were the most frequently used payment option in 2018 experiencing a growth of 2 percent from 2017 In fact use of all major electronic payment methods experienced growth from 2017 to 2018 And while cash is still a widely preferred payment option usage is decreasing as its share of payments dropped 4 percent from 2017 to 2018 5 Not only is cash use decreasing overall but it is being used less and less for the major payment categories it once dominated Historically cash has been used for low-value payments below $25 But 2018 numbers show that electronic payments are beginning to take hold as a way to conduct smallvalue transactions 2018 marks the first year that cash was not used for the majority of transactions for purchases under $10 decreasing from 56 percent to 49 percent and in the $10-$24 99 payment range debit cards and cash now stand nearly identical in terms of use 6 Even in other types of categories such as in-person payments and gifts person-to-person P2P transfers where cash has historically reigned supreme electronic payments have gained ground While cash remains the most used payment instrument for in-person payments at 35 percent in-person credit card usage grew 5 percent over the last three years cutting into cash’s share while cash use declined 5 percent Additionally 2018 represented the first year that both debit and credit cards were used for gifts and transfers reflecting the growing trend towards use of digital payments apps for these types of transactions And even when looking at the other major payment categories such as government and nonprofit auto and vehicle related food and personal care payments medical education and personal service general merchandise entertainment and transportation and housing related cash use declined in every category from 2017 to 2018 7 Types of Consumers and Payment Use When looking at various age groups cash is a universal payment type that is still used among all segments Individuals under 25 and over 45 represent the segments that use cash the most while consumers age 25 to 44 remain the segment using cash least But even within these segments cash use 5 2019 Diary of Consumer Payment Choice at https www frbsf org cash publications fed-notes 2019 june 2019findings-from-the-diary-of-consumer-payment-choice 6 2019 Diary of Consumer Payment Choice at https www frbsf org cash publications fed-notes 2019 june 2019findings-from-the-diary-of-consumer-payment-choice 7 Ibid 4 P a g e is declining And more often than not age segments that are showing a decline in cash use are replacing this payment option for electronic options such as debit and credit cards 8 When considering income level cash is used among all segments regardless of income and consumers make about the same number of cash transactions each month Those making under $25 000 represent the largest users of cash payments In all other income segments credit and debit card use outnumbers cash 9 Consumers’ Preferred Payment Method and Rationale Various Federal Reserve and other industry studies report that while cash is a universal payment type electronic payments rank highest among consumer segments as the preferred way to pay Both the 2019 Diary and other studies on consumer payment mechanisms such as Tsys’s 2018 Consumer Payments Study show that debit cards are the most preferred payment method among the surveyed individuals 10 Credit cards generally rank second and cash third 11 Today’s payment preferences are driven by a number of factors dominated by a desire for convenience and security According to the most recent PSCU Eye on Payments study 60 percent of consumers reported convenience and ease of use as the main drivers behind their choice in payment And nearly 40 percent cited safety as a factor influencing payment choice 12 Almost 80 percent of consumers own a debit or credit card 13 And both of these instruments are widely accepted at retailers across the globe Electronic transactions are traceable They enable convenient logging and tracking of transactions Electronic payments particularly debit cards also allow consumers 8 2019 Diary of Consumer Payment Choice at https www frbsf org cash publications fed-notes 2019 june 2019findings-from-the-diary-of-consumer-payment-choice 9 2018 Diary of Consumer Payment Choice at https www frbsf org cash publications fednotes 2018 november 2018-findings-from-the-diary-of-consumer-payment-choice 10 Tsys 2018 Consumer Payments Study at https www tsys com Assets TSYS downloads rs_2018-us-consumerpayment-study pdf 11 2019 Diary of Consumer Payment Choice at https www frbsf org cash publications fednotes 2019 june 2019-findings-from-the-diary-of-consumer-payment-choice 12 2019 Eye on Payments at http www pscu com PDF Whitepapers 2019%20Eye%20On%20Payments pdf 13 The 2018 Survey of Consumer Payment Choice at https www frbatlanta org media documents banking consumer-payments survey-of-consumer-payment-choice 2018 2018-survey-ofconsumer-payment-choice pdf 5 P a g e to efficiently manage their money Additionally electronic payments provide consumers with protections against loss and fraud While cash may be convenient easy-to-carry and widely accepted it can be easily lost or stolen and there are no measures in place for consumers to recoup such funds For these reasons among others electronic payments have climbed the ranks to become a dominant payment option for U S consumers Mobile Payments Use In the U S mobile payment use is also on the rise Much of the growth of mobile payments can be attributed to the proliferation of smartphone ownership and the availability of mobile payment apps Almost nine in 10 U S households own a smartphone making it the second-most owned technology device after television sets14 and 30 percent of smartphone owners used a mobile payment app in 2019 representing an increase of 9 1 percent over the previous year 15 Even more nearly 30 percent of U S consumers have indicated a desire to pay with their smartphone all the time 16 As consumers increasingly spend time on their smartphones and integrate them into all aspects of their lives it’s understandable that consumers want to incorporate payments into their mobile phone experience as well Tsys’s 2018 study also showed that over the last three years of their research survey respondents consistently rated the most attractive mobile features as the ability to immediately stop a fraudulent transaction the ability to instantly view their transactions and the ability to use their phone to turn their payment card on or off to prevent unauthorized usage 17 These findings underscore the population’s increasing reliance on electronic payments to solve for convenience and added security The significance of this growing mobile use is that more often than not the funding mechanism behind mobile transactions is an electronic payment option typically a credit or debit card Thus as electronic 14 “5 Trends Driving Growth of Digital Wallets” at https www paymentssource com list 5-trends-driving-growthof-digital-wallets 15 “ApplePay Overtakes Starbucks as Top Mobile Payment App in the US” at https www emarketer com content apple-pay-overtakes-starbucks-as-top-mobile-payment-app-in-the-us 16 Statista at https www statista com topics 982 mobile-payments 17 Tsys 2018 Consumer Payments Study at https www tsys com Assets TSYS downloads rs_2018-us-consumerpayment-study pdf 6 P a g e payment usage continues to grow and access to the Internet becomes more widespread we can expect a commensurate increase in mobile payment usage Financial Inclusion The FPC is driven by values of inclusivity and transparency and we take seriously the desire of our member organizations to provide access to a safe and efficient payments system for as many end users as possible Across the globe financial inclusion is getting better and various studies credit smart phones and digital payments as factors For example the 2017 Global Findex report created by the World Bank in partnership with the Bill and Melinda Gates Foundation states that recent progress in financial inclusion “has been driven by digital payments government policies and a new generation of financial services accessed through mobile phones and the Internet ” 18 The report goes on to state that the benefits of digital financial services are wide ranging For example mobile money services can help improve individuals’ income earning potential and thus reduce poverty and digital financial services can help individuals manage financial risk can lower the cost of receiving payments and can also help people accumulate savings and increase spending on necessities Similar findings were uncovered at a 2018 conference FinTech Financial Inclusion – and the Potential to Transform Financial Services hosted by the Boston Federal Reserve and the Aspen Institute’s Financial Security Program The discussions from that conference highlighted that “established and emerging FinTech solutions offer real potential to give unbanked people new access to financial services and impact their financial lives” and pointed to mobile devices as the starting point for providing the unbanked with access to financial services 19 III The Faster Payments Opportunity Benefits of Faster Payments in an Electronic Environment The growing and preferred use of electronic payment options across all US demographics presents a substantial opportunity for faster payments Faster payments has been defined differently in countries 18 The Global Findex Database 2017 https globalfindex worldbank org The Boston Federal Reserve Bank “Can FinTech Close the Gap Between ‘Unbanked’ Populations and Financial Services ” https www bostonfed org news-and-events news 2018 fintech-and-financial-inclusion aspx 19 7 P a g e around the world but according to the Faster Payments Playbook a joint project between Nacha and the FPC the term “faster payments” is broadly used in the U S payments industry to indicate that increased speed convenience and accessibility are essential features for the future of the payment and settlement system ”20 As such in an environment in the U S where electronic payments are a preferred payment method faster payments can provide for the following 1 Improved visibility and financial management – Faster electronic payments allow for easier cash flow management with accurate and timely insight into account activities Faster payments reduce the chance for end users to make unintentional overdrafts and help them avoid costly fees or the need for short-term financing 2 Improve payments system efficiency – Faster electronic payments decrease the reliance on infrastructure needed to support paper-based payments like checks and cash reducing costs and resources necessary to operate and maintain such infrastructure 3 Minimize payments risk – Faster electronic payments help reduce many of the risks in the current payments system by shortening the delay between payment initiation clearing and settlement Timely confirmation of good funds and payment finality can provide certainty of payment for consumers 4 Encourage global competitiveness – Faster electronic payments could foster greater global competitiveness and the potential for faster and easier global transactions Indeed faster payments solutions with global interoperability could eventually help to facilitate faster and more transparent cross-border payments IV FPC Efforts Regulatory Fraud and Transparency-Related Efforts State and federal regulators along with certain payments industry participants have established a robust framework of statutes regulations and industry standards that protect consumers promote a 20 The Faster Payments Playbook https fasterpaymentsplaybook org 8 P a g e reliable and consistent user experience and help maintain a healthy efficient and safe financial market with respect to payments As FPC members collectively prepare for a U S payments system that enables broad adoption of faster payments solutions the FPC has established a Regulatory Work Group to identify and analyze laws and regulations that may impact faster payments and consider options as to how to support and accelerate the adoption of faster payments The Work Group is currently conducting a comprehensive review of laws regulations and regulatory guidance that apply to faster payments including UCC Article 4A the Electronic Funds Transfer Act the Bank Secrecy Act FFIEC guidance and more These requirements are being categorized and examined so that organizations that want to incorporate faster payments into their suite of solutions can arm their legal and compliance teams with a better understanding of the regulatory landscape As electronic transactions become increasingly widespread continued work to safeguard the data surrounding them remains a focus of the payments industry Our efforts in assessing today’s robust regulatory infrastructure extend to evaluating data security as well Payments stakeholders rely on key data points to combat and reduce fraud and to safeguard transactions and at the same time are working diligently to ensure the robust consumer protections in place today continue to meet their customers’ needs As the payments system speeds up the FPC’s collective efforts will focus on striking that right balance enabled by input from all facets of the industry In addition to support the security of transactions the FPC recognizes the need to exchange data related to fraud in an effort to protect the payments system from all threats whether they be cyber threats or other fraud threats To that end the FPC established the Fraud Information Sharing Work Group Today it is working to develop a publicly accessible white paper addressing the following three areas of fraud prevention as they pertain to faster payments 1 fraud prevention best practices 2 fraud themes and trends and 3 fraud prevention solutions and channels The FPC believes that this paper will serve as a comprehensive resource to help the industry mitigate the potential for fraud in a faster payments environment And we are also working diligently to ensure consumers are informed of and prepared for faster payments The FPC’s End-User Transparency Work Group recently released Faster Payments Transparency Guidelines for Payment Services Providers The resource is designed to help providers of 9 P a g e faster payments anticipate and answer a wide variety of consumer questions that may surface about certain characteristics associated fees and protections related to their faster payment offering Solution providers are presented with questions such as “How long does the enrollment process take Is there a limit on the amount of a single transaction What is the process for disputing a payment ” and more By outlining these questions for solution providers the FPC believes that they will be better prepared to educate their customers while also creating a safe and positive user experience Global Effort Considerations Many countries outside of the U S are making significant advancements towards a faster more cashless payments environment While the U S is moving in that direction with the launch of new real-time payments systems including The Clearing House’s Real-Time Payment RTP network and the recently announced FedNow℠ system we are still generally behind many other countries in the adoption of faster payments systems These countries can provide some instructive lessons learned for the U S and the future of payments Because of this the FPC recently announced plans to establish a Cross-Border Payments Work Group which is expected to among other things examine the payments environments of other countries to assemble helpful tips and information to support our efforts to modernize the payments system in the U S Our goal with this work will be to draw out key lessons learned and identify areas of opportunity for the U S in moving into a more digital faster payments environment V Conclusion In conclusion it is clear that Americans continue to embrace a more digital society given the advent of real-time payments systems and the growing use of electronic payments With that said our payments system has evolved over time to support many different payment mechanisms driven by individuals’ desire to pay how they want where they want when they want Ultimately the FPC supports an environment in which payment choice is preserved while also allowing the flexibility to enable a faster more digital payments environment enables that delivers an array of benefits and protections for consumers businesses and government end-users We are dedicated to working with all of the stakeholders across the payments ecosystem to ensure that together we can achieve the ideal faster more efficient and more secure payments environment of the future Again thank you for the opportunity to testify today I look forward to answering any questions you may have 10 P a g e