Welcome to the September 2023 Innovating Payments Executive Summary. In this issue, the Federal Reserve issued warnings to Citizens Financial Group, Inc., Fifth Third Bancorp, and M&T Bank Corp, covering liquidity, to technology and compliance, and more. The Fed has also warned Goldman Sachs over risk and compliance oversight of its transaction banking businesses. In addition, Zelle® announced its 2Q earnings, enhanced safety standards, and educational initiative.
In other news, Chief Product Officer for PayPal John Kim addressed how the company is using artificial intelligence in its businesses in an interview with the Associated Press. Meanwhile, Elon Musk pushes for X (formerly Twitter) to become a payments company, securing approvals in various states to custody, transfer, and exchange digital currencies.
Read on to learn more.
Regulators Seek to Tighten Supervision Following Bank Failures
“The Federal Reserve has issued a slew of private warnings to lenders with assets of $100 billion to $250 billion, including Citizens Financial Group, Inc., Fifth Third Bancorp and M&T Bank Corp., according to people with knowledge of the matter,” reported Bloomberg. “The wide-ranging notices have touched on everything from lenders’ capital and liquidity to their technology and compliance, the people said, asking not to be identified discussing confidential supervisory information.”
The action is part of a broader increase in scrutiny impacting financial institutions of all sizes after Fed Vice Chair for Supervision Michael Barr vowed to "improve the speed, force and agility" of oversight following the failure of three banks (First Republic of San Francisco, Signature Bank of New York, and Silicon Valley Bank of Santa Clara) earlier this year.
Financial institutions should ensure they are compliant and respond swiftly to matters requiring attention (MRA) and matters requiring immediate attention (MRIA) issued by examiners. In addition, financial institutions should pay particular attention to FinTech partners and third-party senders to ensure they remain compliant and have a risk appetite that is acceptable to the financial institution.
Fed Raises Concerns over Goldman Sachs Oversight
“The Federal Reserve has also released an official warning to US-based investment banking firm Goldman Sachs over risk and compliance oversight at its TxB FinTech unit,” according to The Paypers.
The news outlet continues:
The US-based banking regulators have raised risk and compliance warnings and concerns over Goldman Sachs's partnerships with multiple financial technology companies. According to the Financial Times, a division of the financial institutions’ transaction banking businesses (TxB) has announced its plan to stop signing on riskier fintech clients and customers, following the warning released by the Federal Reserve earlier this year. The issues and problems raised by the Fed included insufficient due diligence, as well as monitoring processes for the procedure of accepting high-risk non-bank clients.
This latest warning by the Federal Reserve underscores the importance of due diligence when onboarding clients and customers.
With the FedNow launch on July 20, many financial institutions remain on the fence about whether they will adopt the service. “According to IntraFi’s Q2 2023 Bank Executive Business Outlook Survey, only about a quarter of bank executives surveyed said their financial institution definitely plans to offer FedNow in the future, while 48% are mulling it over, and nearly 30% don’t expect to do so at all,” reported CCG Insight.”
While it is impossible to predict where those numbers will be a year from now, Tina Giorgio, President and CEO of ICBA Bancard®, calls instant payment adoption, including FedNow, a “requirement” in an Aug. 24 blog post, stating:
“Community banks need to view instant payments participation as a requirement to keep pace with changing times and customer expectations. Volume may not climb exponentially right away, but it is important to plan now so you don’t fall behind and miss this timely opportunity.”
While Giorgio specifically addresses community banks, her message transcends financial institution type and size. Giorgio sums it up well, “At this stage, moving forward with a strategy and a plan for how and when you are going to participate (in FedNow and other forms of instant payments) is just as important, if not more so, than being live today.”
To learn more about the FedNow Service, visit the FedNow Explorer website.
The RTP® network, the instant payments system operated by The Clearing House, surpassed the one million daily payment milestone on September 1 as more financial institutions and their customers realize the benefits of real-time payments, a company news release stated.
"As more banks and credit unions join the RTP network, their customers and members are experiencing the benefits of real-time payments," Rusiru Gunasena, Senior Vice President of RTP Product Management at The Clearing House, said in the release. "Surpassing one million RTP payments on a single day signifies the accelerating growth and demand for real-time payments on the RTP network in the United States."
As the RTP network matures, TCH continues to roll out new functionality to increase the capabilities for financial institutions and their customers.
Zelle Announces 2Q Customer Growth and New Safety Measures
Early Warning Services, LLC, the network operator of Zelle, announced on Aug. 31 its Q2 2023 results, reporting in a company news release that total Zelle transaction volume was 705 million with a value of $197 billion, 10% and 9% quarter-on-quarter growth, respectively. More than 50% of Minority Depository Institutions in the U.S. now offer Zelle.
"At a time when technology is integral to bolstering customer growth, the National Bankers Association prioritizes partnerships with tech providers that strengthen banking services to small businesses and consumers," said Nicole Elam, President and CEO of National Bankers Association, in the release. "We support the minority banks utilizing the payment platform Zelle because of their unique role in providing financial services to communities."
Zelle also announced enhanced standards: “All banks and credit unions on the Zelle Network must implement Risk Insights for Zelle. This free service gives institutions recipient risk attributes to assess potentially high-risk transactions and ultimately reduce fraud and scams.”
In addition, Early Warning has partnered with the Better Business Bureau Institute, their Corporate Trust Council, and the National Council on Aging to develop and publish educational content on avoiding payment scams.
John Kim, Chief Product Officer for PayPal, recently addressed how the company is using “artificial intelligence technologies in its business, as well as PayPal’s future in payments when there’s so much competition,” in an interview with the Associated Press.
Asked how PayPal is integrating AI into the work it is doing, Kim responded:
We’re planning on launching three new products with ties to AI in the next 120 days. For example, we have a checkout feature we are rolling out that uses AI to keep track of all the permutations of your addresses and personal information that you might use, and use AI to predict the right one to use with the right merchant. We currently try to detect unusual patterns — for example, patterns where fraudsters are trying to test your stolen card out to see if it’s good or not — and alert you through the PayPal wallet so you can get that card shut down with your bank quickly. But detecting these patterns can get really complicated, and the patterns can change on the fly, so AI we believe will help us anticipate these changes and keep us ahead.
Later in the interview, Kim added, “PayPal really was a one-of-a-kind company for much of the early part of its life. So back then it was really about just getting scale. You didn’t really have to sell the value proposition. But now we really have to focus on the value proposition.”
Elon Musk’s X Pushes to Become Payments Company
In other news, “Rhode Island’s regulators have granted X (Twitter) a currency transmitter license, marking a step forward for the company’s foray into the financial services sector,” according to Cointelegraph. “The license is legally required for companies conducting financial activities on behalf of users related to sending and receiving money—a definition that includes both fiat and crypto assets. The approval will allow for X to custody, transfer and exchange digital currencies.”
The news outlet further reported:
While sources have suggested that X’s upcoming payments feature will initially only offer support for fiat currencies, Musk has reportedly instructed developers at X to build the platform’s payments system in such a way that crypto functionality can be added in the future.
The approval comes nearly two months after X secured money transmitter licenses in Michigan, Missouri and New Hampshire, which all were approved on July 5. X's latest license marks a total of seven American states it's secured transmitter licenses in.
NEACH will follow this story closely and provide updates as they become available.
With fraud an ongoing payments industry concern, NEACH is again partnering with PaymentsFirst and Southern Financial Exchange to bring you the 2023 End-User Payments Fraud Symposium on Oct. 16, 2023, from 9:30 a.m. to 5 p.m. ET.
This one-day virtual event combines leading industry experts to discuss trends in payments fraud and ways to manage and mitigate fraud risk. We have expanded the agenda to include general business-focused sessions. Thus, financial institutions and businesses can gain a deeper understanding of standard forms of payment fraud that any organization may encounter and how to manage the threats.
Financial institutions: You can use this opportunity to educate and engage your business clients. Your registration includes an option to register your business clients at no additional cost. Once registered, complete this form to enroll your business clients only.
To view the full agenda and register for the event, click here.
AUTHOR: Joe Casali, AAP, NCP
Executive Vice President
As the EVP of Payments Innovation for NEACH, Joe focuses on exploring innovative solutions and technologies that will help position members for success, both now and in the future. Connect with Joe to read more of his blogs, articles, and posts.