Why the U.S. Must Adopt EMVFed's Oliver: Globalization, Fraud Make Time Right for Chip & PIN
In this first part of a two-part interview with Oliver, the Fed Reserve veteran discusses:
- Defining card risk and fraud;
- The best innovations in payments and the five outdated technologies that need to go; and
- Why a move to EMV chip and PIN in the United States is inevitable.
Oliver is an executive vice president with the Federal Reserve Bank of Atlanta and has been with the Bank since 1973. He is currently the director of the Retail Payments Risk Forum, working collaboratively with organizations across the payments industry to research and mitigate payments risk.
From 1998 to 2009, he was the payments product manager for the Federal Reserve System. In this capacity, he had responsibility for managing the Fed's check and ACH businesses nationwide. Earlier in his career, Oliver served as planning analyst, administrator of the Automated Clearing House, chairman of the Federal Reserve's Electronic Payments Implementation Task Force, manager and officer in charge of business development and check software, and staff director for the Federal Reserve System's Policy Committee for Financial Services. He also serves on the Federal Reserve Bank of Atlanta's Management Committee.
Oliver holds a bachelor's degree in math from the University of Nevada, a master's degree in information and computer sciences from the Georgia Institute of Technology, and an MBA in management from Georgia State University. He also has completed executive development programs at Harvard University and the University of Tennessee.
ACH and The Paper ConversionTRACY KITTEN: Payment technologies is rapidly changing and in the United States discussions and debates are increasingly heating as regulators, innovators, and industry analysis search for more security and convenient ways for consumers to conduct financial transactions. Richard Oliver, a Federal Reserve executive, says it's time for the U.S. to embrace a more advanced and secure payment technology, also known as EMV Chip and PIN.
RICHARD OLIVER: Until January of this year, I had spent the past twelve years as the Retail Payments Product Manager for the Federal Reserve System, which means that I've had overall responsibility for the Fed's checking ACH services nationwide. In January of this year, I handed that role over to somebody else as part of a long term succession plan and have taken over responsibility for running a small research group here at the bank called the Retail Payments Risk Forum. Something that we formed two or three years ago that reported to me that I now have direct responsibility for and this group is designed to work with regulators, law enforcement, and the banking industry that tried to create and be a catalyst for collaboration. I ran the detection and mitigation of retail payment's risk and fraud.
KITTEN: Now the Federal Reserve Bank of Atlanta has in the past set the stage for a number of innovative payment initiatives. Could you please give our audience a little background about the role the Federal Reserve Bank of Atlanta has played in moving certain payment initiatives forward and the direction you see the bank taking as it relates to some of the currently proposed payment innovations?
OLIVER: You know, when I first came to the bank in 1973 I guess, the bank had already for some reason become an organization who was deeply interested in payments and payment technology. From the time I can remember we've always been one of the system leaders in the area of check and ACH services, and that role has continued over time. During the past 15 years, for example, through the leadership of the retail payments office, we've done such things as facilitate the conversion of paper checks to check 21 nationally, led the effort to consolidate 45 paper-check-processing sites to one over about a four-year period. We've sponsored a tri-annual market research study that is available to the whole industry that tries to help people understand what the volume value and trends are in retail payments, and along the way we've developed a wide range of new products in both the check side and particularly the ACH side where we've been able to create cross boarder international ACH products, launching to even in the past month the same day ACH product, and a wide variety of risk management and EDI services built around the ACH system.
Top 5 Tech Advances in PaymentsKITTEN: Richard you joined the Federal Reserve Bank of Atlanta in 1973, as you just mentioned, and over the course of the last 37 years the payments landscape in the U.S. has dramatically changed in some ways, and then it has remained relatively stagnant in others. Can you list the top five technological advances or changes you've seen in the payments space as well as the five lingering technologies you think need to be changed?
OLIVER: That is a dangerous question, because having been around that long, I'm going to list some things that people think are ancient history, but, unfortunately, they are during my lifespan at the work. In thinking about this, I think two or three things certainly jump to mind almost immediately, and one of them is the advent of the Automated Clearing House or ACH. This whole process was actually started in 1972 in California and came to Georgia in '73. I got a chance to be the manager over the first evolution of it here in Georgia, and, ultimately, was able to get involved in the first-direct deposit programs from the U.S. Treasury Department that became the catalyst for growing the ACH.
Another one that comes to mind is the evolution of the ATM and point-of-sale networks. In the early '70s, ATMs were in the process of being deployed and they were basically bribing college students with food, trying to get them to use them. Now we see this full evolution to card-based technology, ATMs and point of sale, and a wide variety of things happening around that. It has pretty much changed the way that we conduct business at retail locations.
I mentioned earlier this conversion of paper checks to electronic checks through the realities of the check truncation act (Check Clearing for the 21st Century Act). It was implemented in 2004, and over the past five years, we've seen 100 percent paper deposits that the Federal Reserve moved to only about 2 percent paper, and we're almost through a full conversion to the electrification of the check in the clearing and settlement process.
I think probably the biggest technology innovation is one that everyone would probably jump on and that's the Internet. It's totally changed the way we do banking. I think it's totally changed the way that people interact with retailers and bankers, and has facilitated significant improvements in the payment process by driving so many things to electronic.
Then, finally, I think the one that I would add to the list that is happening now, and I'm not sure it's easy to crystallize what the technological basis of this is quite yet, but it's globalization. With the globalization of commerce, there comes a necessity to globalize the payment systems that support that commerce, and that is something that isn't done very well right now. So, there are many groups working on standards and technology and other aspects of globalization of payments that can make this more of a reality than it is today.
The bottom-five list, the lingering-problems list is interesting, too, because I think it is always interesting in an industry to see the kinds of stuff that doesn't happen and wonder why, and at the top of that list is probably electronic-data interchange or EDI. I remember going to conferences over 20 years ago where everybody was getting worked into a froth and everybody was excited that we were going to eliminate the exchange of paper documentation around the whole purchase-and-order cycle and payment cycle; and, frankly, it hasn't happened. The latest data shows that about 80 percent of all of the business-to-business payments today are still made by check, which means that all the related documentation about the purchase sale order and what have you is still being transacted separate from the payment and in many cases in paper form. So, I think that one is a big frustration.
I think I mentioned the advent of the ACH and its growth, and it's done a lot of wonderful things, but one thing it hasn't done is change its availability schedules. In other words, most ACH payments are still on a two-day cycle. You deposit one day and you can clear the next, at the earliest, and I think the needs of our country have gone beyond that. So, we need to be driving the system now to provide more of a same-day service that would facilitate the movement of even more payments into the ACH. A big example here is hourly payrolls, which are on in the ACH today because the current cycle doesn't allow them to be cut in time to be deposited at the bank in time. Cross-border payments are another big issue. Fundamentally, other than in card systems, there is no simple, easy, inexpensive way to handle small-value payments across borders. We are experimenting with that with cross-border ACH systems. Europe is moving in that direction, but it isn't here yet. In the card world, somehow the standards of the cards being issued in various countries has gotten out of whack, so that we're about to approach a period where universal use of our cards is going to be impossible, particularly if the U.S. stays with the old mag-stripe standard; and we can talk more about that later in this conversation, but that is a big one.
Then, finally, the lack of a focus on the risks associated with payments and the lack of investments in managing those risks, particularly at large financial institutions, is something that I think is a lingering problem that is going to have to be addressed in the future.
EMV and The Outdated Mag-Stripe: KITTEN: Can you talk a little bit more about this mag-stripe issue that you mentioned. You voiced criticism over the U.S.'s continuous use of the magnetic stripe. You propose that the U.S. initiate a move to chip and PIN or EMV, but that proposed move has been met with much resistance over the last five to 10 years. Given the controversy over EMV, what kinds of reactions have you gotten from the industry in response to your public support of a move toward EMV in the United States, and are you a minority voice among bankers?
OLIVER: As I became more and more aware of this issue and wrote some blogs on it that eventually got published in various places and started a huge exchange of articles and other things, I guess I actually didn't realize how toxic the issue was to begin with. I don't know that I'm a small voice in the wind or not. The more people I talk to, the more people I hear intellectually agreeing that this needs to be done. I think across the board almost all players in the industry believe that we need to move to chip and PIN, but I think they also believe that the obstacles to getting there are pretty imposing, and, as a result, it seems to me they are somewhat paralyzed in moving forward. It's almost like we're concerned about the things that we have to do, so we're not going to get started. I think that is really the kind of trap we're in right now, and it certainly was aggravated by the financial crisis, which I think has slowed and stopped many, many projects in the payment's area due to lack of investment dollars.
EMV: The Time is Right?KITTEN: So what do you think makes the timing right for EMV? Do you think that U.S. bankers intellectually agree it's time to make this move? And if we continue to wait, as you say, we're only going to be digging a deeper hole. So what makes the timing right now? How can we move forward?
OLIVER: I think the thing that makes the timing right is the fact that the rest of the world is making commitments; and seeing our closest neighbors, including Canada, for example, which is on a five-year plan to eliminate the mag-stripe, make the move is going to force us to think about doing something in this area. The problems of being incapable are going to become more magnified. For example, today if you go to Europe and you've got your mag-stripe card with you and you try to use it in an unattended location as a debit card, whether it's a parking lot or transit or something like that, chances are you won't be able to use it. I was just on an airplane with somebody this week who said that he tried to use his mag-stripe card an ATM in Germany and had a lot of difficulty finding an ATM to use. Sooner or later, the inconveniences of this and the problems with this, with respect to consumers and their utilization of cards and businesses and their utilization of cards, across the globe are going to be a defining factor, and it's going to cause action to be crystallized.
Having said that, there's another factor, too, and that is the issue related to fraud. I think there has been a lot of documentation of the significantly reduced fraud curve that we are seeing in the U.K. and across Europe as they move to chip and PIN. One has to assume that as those numbers go down, they are going to go up some place else, because everything I've learned about fraud and risk management is the bad guys just go to some place else where it is easier. There seems to be pretty strong thinking within the U.S. payments industry that the fraud could migrate here to the United States. Secondly, a lot of concern is being expressed now from foreign-issuing banks that are issuing cards that are both mag-stripe and chip-and-PIN-capable. They are worried that people are going to come to the United States and use the mag-stripe aspects of those foreign cards to commit fraud, and, therefore, we would be exporting fraud. These things are going to crystallize; it just seems inevitable to me. But we have some pretty big issues in the way, and, in particular, we have this whole thing about building out the infrastructure to handle chip and PIN. I think that is the one that you hear the most about.
There are other issues involved here that have to be resolved, too; but the fact of the matter is that the estimates I've seen from various industry pundits range anywhere from $8 to $13 billion to build out the chip and PIN infrastructure across the country. The reported fraud-loss numbers and other things that would potentially fund that through savings haven't seemed to be big enough to create a business case.