An extract from The Consumer Finance Law Review, Edition 5


i Overview

In the United States, the primary payment methods are cash, debit card, credit card, prepaid card, cheques and ACH transactions. The Federal Reserve estimates that in 2018 alone there were more than 174 billion non-cash retail payment transactions in the US, with a value in excess of US$97 trillion.6 According to the Federal Reserve, the most common payment methods are card-based (debit, credit and prepaid), while ACH transactions have the highest dollar value for non-cash retail payments.7

Although there is a great deal of industry interest and activity around online and mobile payments, to date, most online and mobile payments are processed using traditional payment infrastructures. Nevertheless, emerging payment solutions can leverage a number of enhancements over traditional payment methods, including improved customer interfaces, increased use of customer data, and integration with customer loyalty or reward programmes or other third-party services used by consumers. These enhancements have the potential to lessen friction and promote consumer conversion and usage rates. Many of the novel legal and regulatory issues surrounding emerging payments are related to these enhancements.

ii Recent developments

On 11 August 2020, the Federal Reserve published service details on the Federal Reserve Banks' new interbank faster payments system, called the 'FedNow' service, which has a targeted launch date in 2023 or 2024.8 FedNow will be a real-time gross settlement (RTGS) system that will allow payments to settle in a matter of seconds, under which settlement entries will be final and irrevocable after a transaction is processed. A private-sector RTGS is already in place in the United States; however, the Federal Reserve has indicated that the existence of a competing publicly provided RTGS may enhance efficiency and safety issues that could arise in a single-provider market, including by promoting competition, spurring innovation, lowering prices, and creating buffers against a single point of failure in the payment system.

Once operational, banks will be able to accept, transmit, and settle payments 24 hours a day, seven days a week, and 365 days per year. The FedNow service is expected to support credit transfer use cases, including peer-to-peer payments, bill payments, and low-value business-to-business payments. Initially, FedNow will process and settle payments up to $25,000. The FedNow service will be available to banks in the United States and permit customers to send and settle payments instantly through online banking platforms.9 Once the sender initiates the payment, the recipient will receive a notice from FedNow containing information about the payment and receive a prompt to accept or deny the payment. If the customer accepts the payment, FedNow will transfer the funds to the recipient's bank account and the bank will settle the transaction in the moment. While en route, funds will be held by the Federal Reserve accounts associated with each party's bank. Completed payments will be final.10

On 19 December 2019, the Federal Reserve issued its most recent triennial Federal Reserve Payments Study.11 The study shows that, between 2015 and 2018, US debit card and credit card payments increased by 8.9 per cent per year, ACH payments grew 6 per cent per year and cheque payments fell by more than 7 per cent per year. The study also found that in 2018 the value of remote general-purpose card payments nearly equalled the value of in-person card payments. Finally, the study found a significant shift in the usage of chip-based EMV cards, as the number of chip-authenticated payments for general-purpose cards increased from 2 per cent in 2015 to over 50 per cent in 2018.

On 25 June, 2020, the Acting Comptroller of the Currency announced an OCC plan to implement a national analogue to traditional state money transmission licences. Referred to as the Payments Charter (distinct from the OCC's FinTech Charter proposal currently being litigated before the US Court of Appeals for the Second Circuit),12 the platform would function as a national licensing body regulated by the OCC. Effectively, a money transmitter who wishes to do business nationwide would be able to apply for and maintain one national licence as opposed to the current list of more than 49 state licences required of national money transmitters. Despite the intended benefits of such a charter, the traditional payment regulators – state and local authorities – have expressed concerns about the programme, primarily that state regulations are often more thorough than those enforced at the national level.13

In 2020, policymakers have leveraged the payments system to make economic impact payments to consumers to counter the effects the covid-19 pandemic has had on the economy. Economic impact payments have been made directly to consumers via batch processing systems, including the automated clearinghouse, card-based payment systems, and check-based payments.