By Ben Jackson, IPA COO

​Individual considerations lie at the heart of many of the large trends shaping the payments industry.

That was the underlying theme of the presentations at the Travel Tags Educational Forum held in Minnesota this May.
I was asked to present on the big picture of payments and discussed many of the standard subjects, including artificial intelligence, open banking, fraud, and faster payments. Since the audience included closed-loop issuers, I also discussed how these topics intersected with gift cards.

My fellow presenters included both payments experts and people outside the industry, which provided a wide view of factors shaping the industry.

For instance, spending on gift cards provides insights into the larger economy. Gabriel Resendez, Darden Restaurants, and Steve Bradbery of Savvy, a stored value processing and analytics company, presented the trends in gift cards, and noted the U.S. retail gift card market was $226 billion in 2023, according to Javelin. Of those purchases, many are skewing toward basic categories like gas and grocery stores. This could be a sign that people are buying gift cards to help others or buying the cards to help themselves budget.

The forum also covered the ever-troubling topic of fraud. Homeland Security and the FBI both presented cases they have investigated, which showed some of the progress that has been made in fighting crime.  

In addition, the forum went a deeper into fraud with an interesting presentation on the psychology of people who commit fraud by Eric Grube, a professor at Concordia University, and Marcia Hagen, a professor at Metro State University. Many fraudsters are motivated by outside pressure like financial hardships, but others are motivated by a desire to learn how to manipulate the world around them. The professors noted that arrogance is common among fraudsters but is less predictive than correlative.

When it comes to preventing fraud, oversight is the most effective tool. Another effective tool is paying employees well and offering them opportunities for development. This way, employees won’t rationalize stealing from the company because they feel underappreciated.

A third big trend from the forum is that companies must pay attention to environmental concerns. Jack Peck of Blackhawk discussed how investors and business partners are increasingly factoring environmental considerations into their criteria for choosing which companies to invest in or hire.  Addressing those concerns will likely become part of every company’s strategy going forward. He shared the stage with Kim Shannon of Neenah Paper to show how it worked in practice with one of Blackhawk’s suppliers.

Looking forward, strategists will need to consider the ways that personal and global factors play into the big trends shaping the industry. Understanding that confluence will be key to building successful products and business models in a rapidly changing world.
 
 
 

When companies think about cybersecurity, their first instinct is to think about what technology they have in place to stop hackers.

But technology is only half the picture, and it may not even be the most important half.

I have been attending the FBI Citizens Academy at the Bureau’s Cleveland Field Office. It is a program the FBI runs every year to explain its mission to the public. At a recent session, we heard from a cyber-squad leader who shared some of his experiences with responding to crimes.

He said that the companies that respond the best to attacks by hackers are those that have developed a good security culture within their organization. The reason is that will all of the devices, systems, and software that companies and their partners use, there is likely a technical exploit in the system. Additionally, cybercriminals have gotten increasingly sophisticated with their approaches to employees. While no one likes to think they can be tricked, the reality is everyone is susceptible.

So, what should companies do? Here are some high-level takeaways from the presentation that deal with both technical and cultural aspects.  While they are not a panacea, they can help companies think about how to improve their defenses.

Technical Defenses

• Identify your most important digital assets and wrap them in layers of security. This offers the possibility of detecting an attack before it does severe damage.
• Keep software up to date. Apply patches as soon as possible. (If you can’t update software immediately or need to run tests, then increase monitoring of the exposed areas.)
• You are a risk to everyone you deal with, and they are a risk to you, so make security standards part of your contracting process with vendors.

Cultural Defenses

• Train Your Employees – Let them know what phishing e-mails look like and create ways for them to verify requests that don’t rely on a potentially hacked system.
• Eliminate Blame and Shame – Time is of the essence when a cyber attack occurs, you want to encourage people to report problems early, even if they were the one who clicked on a link they shouldn’t have.
• Have a Plan – Know what you are going to do and who is responsible for what part of the response. Hacks are not just an IT problem, you will need to communicate and take action with customers, vendors, law enforcement, and internally. Are you ready for all the implications of the attack.
  • Practice – Run tabletop exercises so that people are ready when and if something happens. This can also help you find things you may have missed in initial planning.
  • Build Resiliency – Learn from your plan and practices and make adjustments.
• Share Knowledge in Your Industry – Sharing knowledge and intelligence helps everyone defend themselves. We know that criminals work together, so the industry needs to as well. Sometimes this means working with your competitors, but it is better to help a legitimate competitor by talking than a cybercriminal by staying quiet. The IPA hosts regular calls with fraud prevention teams to encourage intelligence sharing.
  
  

Work with Law Enforcement

• Report Attacks – If you have been hacked, let the FBI know. In some cases, they can help companies mitigate attacks and recover stolen funds.
• Preserve Evidence – If you have intrusion and access logs or other data, use that. It can help identify and catch criminals.
• Understand the FBI’s Role – They will not share data, publicize the breach, or seize your servers.

 
The only thing that can eliminate all cyber threats is going completely off the grid. Since that is not an option in our modern society, we all need to develop best practices to increase our security. Following the above steps can give any company a good state.

More resources can be found at:

• Cybersecurity and Infrastructure Security Agency: Resources and Tools
  
• FBI Cyber Crime 
• Internet Crime Complaint Center

The Center for Responsible Lending’s recent report “Not Free: The Large Hidden Costs of Small-Dollar Loans Made Through Cash Advance Apps” portrays earned wage access providers as payday lenders while practically ignoring half the industry.

The report acknowledges that there are two models for earned wage access – the direct-to-consumer model and the employer-based model. The report “includes five direct-to-consumer companies in the analysis,” but “[e]mployer-integrated companies were visible in the transactions data but were not reflected in the analysis because repayment was done through payroll.”

From this admittedly limited analysis, they conclude that “the frequent use of advance products combined with their high cost make earned wage advance harmful for consumers.”

They say their data shows users of direct-to-consumer EWA products saw a 56% increase in overdrafts on their checking accounts.

But only looking at the direct-to-consumer model misses how much EWA helps consumers, especially those facing income volatility.

In gathering information from its EWA members, which focus on the employer-based model, the Innovative Payments Association has collated research that shows that on average 63% of EWA users say that it allows them to reduce their use of payday loans, and 55% say they overdraft their bank accounts less often.

But don’t take our word for it.

The Financial Health Network has done research on EWA products as well. A quote from one participant in its focus groups probably does the best job of summing up the possibilities of earned wage access:

“I have tried payday loans, having a credit card, car title loans, gotten loans on my jewelry at a pawn shop. All of these charge fees at an insane interest rate and the fees are almost as much as the money borrowed if you have to pay over time. And it’s a temporary fix. Getting advanced wages I have earned through my employer is actually the safer alternative.”

Vulnerable consumers face risks from incomplete analysis. They may lose an important liquidity tool if the legislation and regulation called for in the report treats all EWA products the same. Consumers may also suffer if they get the impression that all earned wage access products are bad and choose to avoid those that could help them weather income volatility without needing expensive credit.
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In any analysis it is important to carefully define what is being investigated. While every report wants to grab readers’ attention, it is worth being a little pedantic to avoid creating collateral damage. 

Innovation has been the driving force behind the tremendous strides our country has made toward financial inclusion and the democratization of the consumer financial product marketplace.  Product innovation, however, is a process that requires some experimentation and market feedback.  After all, developing new products to serve Americans who have been left behind is not an exact science. Critique and feedback from all stakeholders, including the perspective of regulators, is a necessary part of the process.

I am not here to criticize the seemingly more aggressive approach the Consumer Financial Protection Bureau (CFPB) has taken during the last year, nor will I use this opportunity to question the substance of the myriad proposals the CFPB has released during the past six months.  Nonetheless, taken together, these proposals would suggest that the CFPB views its mission as purely to oppose the development of financial products that could be helpful to many working Americans as they struggle to manage their financial health.  Moreover, by appearing to restrict innovation and thus discouraging new financial product development, ultimately harms consumers because, often, it reduces the number and types of viable options available to them, especially low-to-moderate-income consumers who may need access to money in emergency situations.

CFPB Director Rohit Chopra has been true to his word.  He has made it clear through his words and his actions that he believes that his predecessors did not use all the agency’s authorities to regulate the financial services marketplace with the goal of protecting consumers.

During the past twelve months, Director Chopra has taken affirmative steps to expand the agency’s authority to regulate non-bank companies with assets over $10 billion dollars, and has released proposals to regulate open banking, overdraft, and credit cards. The CFPB has also indicated that it is likely to act on earned wage access (EWA) and “buy now pay later” practice in the near future.

As President and Chief Executive Officer of the Innovative Payments Association (IPA), I can state explicitly that our members are not opposed to regulation.  In fact, we share the CFPB’s goal of protecting consumers and we regularly engage directly with regulators at the state and federal level to ensure that policymakers have all the facts before making decisions that may impact how consumers protect their financial futures.

Many Americans take for granted that we can access savings or credit when an unexpected financial situation arises, but millions of us do not enjoy that same access to liquidity when hit with an unexpected emergency. Where can these people go when they cannot access credit, tap into their earned wages, or use new technologies that allow them to buy food or gas when they need it?  The CFPB does not offer a solution for people who are caught in these kinds of situations.

At one point in its history, the CFPB inspired financial innovation, which was encouraged though a “sandbox” for the private sector to experiment with new products designed to help improve personal financial stability.  Lately, however, the CFPB does not seem as interested in exploring new technologies to help consumers. This was made clear in 2022 when the CFPB rescinded its policy supporting the sandbox.

The CFPB’s message to consumers is crystal clear: if you find yourself in the unfortunate situation where $100 might put the emergency you are encountering to rest and, payday is a week or more away, the CFPB is unwilling or unable to offer solutions.  We have all heard the old saying, “people should pull themselves up by their bootstraps.”  But what happens if you don’t have any boots? [The CFPB appears to agree with this sentiment, even where the consumer in question doesn’t have any boots.]

Last summer, the bureau issued a statement  appearing to discourage consumers from the use of payment apps and suggesting that consumers withdraw funds from those accounts because they lacked FDIC protection.  The headline-grabbing statement seemed inconsistent with the statement’s content.  Those reading past the headline, or reading the CFPB mandated disclosures they received in connection with their payment app account, or doing their own research would know that many of these same products were actually insured by the FDIC’s via pass through insurance, or its state-level equivalent(s). By the way, these are the same payment apps that millions of Americans relied on to manage their money and share money with loved ones during the worst pandemic in our lifetimes.

Regulators who are supposed to oversee the payments marketplace, and specifically Americans encountering financial emergencies, should not only articulate what companies should not do, they have a responsibility to articulate which products can be helpful.  Moreover, they should follow former CFPB Director Cordray’s lead and clearly identify products or technologies they believe could be beneficial to consumers. 
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For instance, in 2017, Director Cordray called on fintech companies to develop EWA products as an alternative to payday loans.  The payments community responded and millions of Americans benefited.  This constructive example should be replicated so that regulators and the private sector can work towards our mutually shared goals of protecting consumers and encouraging responsible innovation.

As artificial intelligence worms its way into more aspects of our lives, laws and regulations governing its use will become necessary.

We can’t uninvent technology, so the only thing that protects us from the worst aspects of it are the agreements that we make as a society – namely laws and regulations.

What will those laws look like? Bills in states like Tennessee, Hawaii, and Florida seek to address focused problems like the use of AI in political campaigns and deep fakes. Other states, such as Illinois, are looking at AI more generally, and these may provide some clues for what is to come in the future.

Bills in the Maryland House and Senate offer a starting point for thinking through how artificial intelligence might be evaluated regardless of the purpose of any particular AI tool.

The bills would require that State agencies not use AI for anything that could be considered “high-risk,” which is defined as programs or services that could lead to unlawful discrimination, a disparate impact against a group of people based on some characteristic, or “have a negative impact on the health, safety, or well-being of an individual.”
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That last clause could cover a lot of territory. It could easily be taken to mean that Maryland cannot use AI for making medical decisions or using AI databases for law enforcement, for example. While we might agree that AI should not be used for some purposes, there are others where AI might be both useful and acceptable.  For example, this bill could cover using AI to identify unemployment or tax fraud which can be difficult for humans to identify just because of the sheer volume of data. Could it be interpreted broadly enough that the state could never operate self-driving snowplows?

On top those provisions, Maryland agencies would also need to evaluate any current AI tools in use, conduct regular reviews of AI in government, and notify any people or groups of people who may have been hurt by decisions made by AI tools.

This is a recognition that AI is already a part of our lives and is being used to make decisions that affect us. As it begins to advance, it makes to evaluate how it has performed so far and start repairing any damage done.

It’s not hard to imagine that bills like Maryland’s at the state level will eventually lead to a national discussion around what parameters should be set on AI. The industry should stay abreast of these conversations and think proactively about what boundaries they have out in place around their own use of new technologies. 

When a paycheck arrives can be just as important as its size. A mismatch between the timing of paychecks and bills can have huge affect on household finances.  

In the latest episode of the IPA Payments Pod, Matt Pierce, the founder and CEO of Immediate, an earned wage access provider discusses what led him to found Immediate, how earned wage access contributes to financial health, and how EWA stacks up against payday loans.   

This podcast was recorded on January 11, 2024. Things may have changed by the time you hear it. 

The new year is off to a fast start built on the momentum of the regulatory proposals of 2023. 

In the latest episode of the IPA Payments Pod, the IPA’s CEO Brian Tate, and its COO, Ben Jackson, discuss the current state of regulation and what is coming in 2024.  

They talk about how payments companies should plan in light of the regulatory proposals from 2023 that are still active. They cover on-going court cases that could shape the industry. They also discuss how the election might affect the regulators’ plans for the rest of the year. 
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This podcast was recorded on January 11, 2024. Things may have changed by the time you hear it.