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From Banking and Finance Law Daily, October 9, 2015

Improvements needed in payment systems, Cordray seeks advice from council

By Stephanie K. Mann, J.D.

The “greatest economy in the history of the world” should have an electronic payment system that Americans can all be proud of, said Consumer Financial Protection Bureau Director Richard Cordray at a meeting of the Credit Union Advisory Council to discuss consumer challenges in payment systems. This system would be one where people can get access to their hard-earned money in real time, their transactions are completely transparent, they know their money is secure, and they can get their money back if a payment is erroneous or unauthorized.

Cordray began by highlighting the important role that the advisory council plays in providing additional insight into the daily operations of credit unions. Over the past few years, said Cordray, the bureau has come to rely on it as a key source of information, analysis, and recommendations to better inform its work. Therefore, the CFPB would like the council’s view on electronic payment systems and the “faster payment systems that seem to be imminent in the financial system.”

Payment systems. Today, when consumers are making payments, they have multiple options, from paying in cash, writing a check, swiping a credit or debit card, and entering information online for an electronic payment. In general, non-cash payments are processed through one or a combination of payment systems, including the automated clearing house, PIN debit, the credit card network, wire network, or check services. For these non-cash payments, there can be a delay of anywhere from several hours to several days between the time when the consumer initiates a transaction and the time when the other party actually receives the money. It is also important to note, said Cordray, that all existing payment systems expose consumers to some risk of loss or to the security of their information, including risks of unauthorized or fraudulent debits.

Payment system participants—including payers, payees, providers, institutions, and operators—are subject to regulations that were adopted to ensure more consistency and predictability to all of the parties involved. While generally effective, the CFPB believes that there is room for improvement, namely in transparency, security, and access.

Transparency. The bureau believes that transparency can be improved within the electronic payments space to help consumers make more informed decisions and take greater control of their economic lives. When consumers make a deposit into their credit union account, it is often difficult for them to know when the funds will be available, Cordray said. Not knowing when a payment will be credited or debited can cause significant confusion and anxiety for those whose credit union accounts can be precariously low on funds. This can lead to the high costs of overdraft and non-sufficient funds fees. Consumers deserve better, demanded Cordray.

Security. The bureau also sees room for improvement when it comes to protecting consumers from loss, theft, or mistreatment that may arise from payment security problems. The ACH system, as it currently operates, depends on the routing and sharing of sensitive account details. This process can expose consumers to great risks, particularly if unscrupulous people or businesses are granted access to their hard-earned money. When bad actors take advantage, said Cordray, consumers can find themselves paying for charges they never authorized.

When this happens, consumers expect their credit union to be on their side. Unfortunately, the CFPB has found that institutions cannot always provide them with adequate protection—such as successful stop payments, notices of revoked authorization, and an effective block on repeated attempts to process payments from the same source. The bureau wants to make sure that consumers are protected from getting stuck in such situations. And in situations where they are being victimized, consumers need to be able to reverse the unauthorized charges or prevent the unauthorized billings.

Access. According to Cordray, a substantial number of consumers do not have access to electronic payment systems and the benefits they provide. According to a recent FDIC study of the unbanked and under-banked, almost one in five consumers with incomes under $15,000 report having used a check casher, as do one in six consumers with incomes between $15,000 and $30,000, said Cordray. When these consumers receive checks, they typically “fork over” up to 3 percent of the face value to get immediate, no-recourse access to their money.

For other consumers “living on the edge,” using check cashers or money order services is their primary way to avoid costly late fees on their phone bills or rent checks. Because they lack an account that permits them to make their payments electronically, these consumers forgo many federal protections and can spend more time and money paying their bills than other consumers who have bank or credit union accounts.

What are you doing? Cordray specifically asked to hear from the advisory council about how credit unions are experiencing issues in the payments space, namely by answering the following questions:

  • What are small financial institutions doing to accommodate and improve consumer needs?

  • What new developments are your institutions currently involved in?

  • If your institution is not involved, what are the barriers to entry and how can you bring your perspective to the table?

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