Welcome to the May 2023 Innovating Payments Executive Summary. The bank failures have widened with news that regulators seized and closed First Republic Bank, selling its deposits and most of its assets to JPMorgan Chase. In other news, the Federal Reserve released its review of the supervision and regulation of Silicon Valley Bank, which failed on March 10 of this year. The Fed also released its initial findings from its 2022 Triennial Payments Study. Also in a key development, mega-retailers Kroger and Walmart have publicly expressed interest in harnessing the power of instant payments to provide customers with alternatives to card rails.
For these and other stories, read on.
Top News Stories
Bank Failures Widen
Regulators seized and closed First Republic Bank early on Monday, May 1, and immediately sold all of its deposits and most of its assets to JPMorgan Chase after scrambling for a deal over the weekend, reported journalist Harrison Miller for Investor’s Business Daily.
“It marks the second-largest U.S. bank failure ever, trailing only Washington Mutual from 2008,” the news source added. “Silicon Valley Bank was the second-biggest bank failure for just over a month after going under in March.”
JPMorgan sought a regulatory waiver to make the purchase because it already holds more than 10 percent of U.S. deposits.
“Our government invited us and others to step up, and we did,” said Jamie Dimon, Chairman and CEO of JPMorgan Chase, said in a May 1 news release. "Our financial strength, capabilities, and business model allowed us to develop a bid to execute the transaction in a way to minimize costs to the Deposit Insurance Fund."
Key components of the transaction, as noted in the release, include:
- Acquisition of the substantial majority of First Republic Bank's assets, including approximately $173 billion of loans and roughly $30 billion of securities
- Assumption of approximately $92 billion of deposits, including $30 billion of large bank deposits, which will be repaid post-close or eliminated in consolidation
- FDIC will provide loss share agreements covering acquired single-family residential mortgage loans and commercial loans, as well as $50 billion of five-year, fixed-rate term financing
- JPMorgan Chase is not assuming First Republic's corporate debt or preferred stock.
This is a developing story, so watch for updates as more information becomes available.
Federal Reserve Releases Review of the Silicon Valley Bank Failure
In other news, on Friday, April 28, the Federal Reserve Board announced the results from the review of the supervision and regulation of Silicon Valley Bank, led by Vice Chair for Supervision Michael S. Barr. As you may recall, the bank failed on March 10, 2023, making it the third-largest bank failure in U.S. history.
“Silicon Valley Bank (SVB) failed because of a textbook case of mismanagement by the bank," the report said. It pointed out: "Its senior leadership failed to manage basic interest rate and liquidity risk. Its board of directors failed to oversee senior leadership and hold them accountable. And Federal Reserve supervisors failed to take forceful enough action, as detailed in the report.”
“Following Silicon Valley Bank’s failure, we must strengthen the Federal Reserve’s supervision and regulation based on what we have learned,” said Vice Chair for Supervision Barr in a statement. “This review represents a first step in that process—a self-assessment that takes an unflinching look at the conditions that led to the bank’s failure, including the role of Federal Reserve supervision and regulation.”
The four key takeaways noted in the report include:
1. Silicon Valley Bank’s board of directors and management failed to manage their risks.
2. Supervisors did not fully appreciate the extent of the vulnerabilities as Silicon Valley Bank grew in size and complexity.
3. When supervisors did identify vulnerabilities, they did not take sufficient steps to ensure that Silicon Valley Bank fixed those problems quickly enough.
4. The Board’s tailoring approach in response to the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA) and a shift in the stance of supervisory policy impeded effective supervision by reducing standards, increasing complexity, and promoting a less assertive supervisory approach.
The report also details the bank's management and the supervisory and regulatory issues surrounding the bank’s failure. It goes through the recent supervisory history of Silicon Valley Bank. It includes more than two dozen documents containing the bank’s confidential supervisory information such as supervisory letters, examination results, and supervisory warnings.
“I welcome this thorough and self-critical report on Federal Reserve supervision from Vice Chair Barr,” Powell stated. “I agree with and support his recommendations to address our rules and supervisory practices, and I am confident they will lead to a stronger and more resilient banking system.”
Financial institutions and other interested parties can access the “Review of the Federal Reserve’s Supervision and Regulation of Silicon Valley Bank” here.
Federal Reserve Issues Initial Findings from its 2022 Triennial Payments Study
On April 21, the Federal Reserve released its initial findings from its 2022 Triennial Payments Study, a review of payments data from 2018-2021.
“This initial release includes top-line figures for the core noncash payment methods used in the United States by consumers, businesses, and governments, including payments by general-purpose and private-label cards, automated clearinghouse (ACH) transfers, and checks,” according to the release. “This release also covers automated teller machine (ATM) cash withdrawals. Wire transfers, used primarily for large financial transactions, are excluded from these data.”
Here are a few of the key findings:
- The value of core noncash payments in the United States grew faster from 2018 to 2021 than in any previous FRPS measurement period since 2000.The 2018 to 2021 increase in value reflects, in part, increases in the average value of each component of core noncash payments (ACH, check, and card payments).
- The increase in the value of ACH transfers accounted for more than 90 percent of the rise in noncash payments value from 2018 to 2021.Since surpassing checks as the highest-value noncash payment method in 2009 (figure 1), ACH transfers have grown to $91.85 trillion, 72 percent of core noncash payments value in 2021.
- The increase in the number of card payments accounted for more than 84 percent of the growth in the number of noncash payments from 2018 to 2021. Despite a temporary drop in 2020 (figure 2), the number of card payments grew by 25.9 billion from 2018 to 2021. Nevertheless, the rate of increase in the number of card payments from 2018 to 2021, at 6.2 percent per year, was lower than the growth of approximately 9.9 percent per year recorded from 2000 to 2018. With 157.0 billion payments in 2021, card payments accounted for roughly 77 percent of noncash payments by number.
For additional findings, click here. More details will be made available in future releases.
Real-Time Payments
“PYMNTS research in the May report, “Real-Time Payments Tracker: Fighting Fraud in Real-Time Payments,” a collaboration with The Clearing House, found that the number of attempted fraud transactions skyrocketed by 92% between 2021 and 2022, with attempted fraud dollar amounts spiking by a massive 142%,” according to the report.
Additional findings from the report:
· The share of customers who have used P2P payments is 84%
· The portion of consumers who use P2P services at least once a week is 44%
· $90M P2P payment fraud losses were reported in 2020 compared to $255M in P2P reported payment fraud losses in 2022
· $8.8B consumer losses to fraud in 2022
· 2.4M consumers submitted fraud reports to the FTC in 2022
You can download the full report here to learn more about real-time payments fraud and how to fight it.
Miscellaneous
Walmart, Kroger Eye Instant Payments
Retailers Kroger and Walmart expressed interest in harnessing the coming power of the FedNow(SM) instant payments system to provide customers with alternatives to traditional card rails, reported Payments Dive. According to the publication, industry representatives heard Walmart’s Matt Howarter and Kroger’s Kathy Hanna speak on a panel at the Faster Payments Council spring meeting in March in Kansas City.
“Kroger and Walmart’s representatives appeared enthusiastic about the possibilities of real-time payments, not just FedNow, but also the RTP network services already offered by The Clearing House, said Reed Luhtanen, the FPC’s executive director who was at the meeting,” said Payments Dive.
Although Kroger and Walmart expressed enthusiasm around new opportunities to enable instant payments at the point of sale, “retailers have been scouring for alternatives to card rails for years,” Peter Tapling, an industry consultant and FPC board advisory group member in attendance at the spring meeting, told Payments Dive.
With FedNow launching in less than two months, interest among retailers and other market segments will likely grow.
NEACH
We invite you to check out our new Wrestling Payments podcast. The podcast is for professionals at banks, credit unions, and FinTechs responsible for managing ACH and payment operations. In each episode, members of NEACH guide conversations to help professionals examine the challenges of modernizing payment operations. Ultimately, the stories uncovered through guest interviews and solo episodes will highlight industry trends and identify how organizations can build their payment operations for the future.
If you still need to register for NEACH's Payments Management Conference, May 22-23, at the Foxwoods Resort Casino, there's still room! NEACH’s Payments Management Conference is the region's most established and respected payments conference. You can join countless payments professionals at every level, as they gather for a one-of-a-kind conference that gives you two days filled with education, networking, and opportunity. Attendees of the Payments Management Conference will include payments executives, strategists, managers, consultants, analysts, technologists, operations, and other payments professionals. Register today!
We hope to see you there!
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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.
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