Navigating payments innovation amid changing regulations

A new wave of payments innovation is underway, tailoring banking services for gig workers, younger consumers and immigrants who have never seen the inside of a branch. But this time around, new products will need to clear higher regulatory hurdles while solving thorny financial inclusion problems and blocking fraud, according to Brian Tate, CEO of the Innovative Payments Association. From prepaid cards to Earned Wage Access and Buy now, pay later financing tools, Tate talks about the capabilities innovators will need to build into new payments products from the ground up to meet the demands of an increasingly challenging — but promising— environment. 

Transcription:

Kate Fitzgerald (00:09):
Welcome to this leader session. I'm Kate Fitzgerald, senior editor at American Banker. I'm here with Brian Tate, CEO of the Innovative Payments Association, which is a trade association in Washington DC that represents payments leaders in an area of constant evolving innovation.

Brian Tate (00:28):
That's correct. So Kate, thank you for having me this afternoon and I'm glad to be here.

Kate Fitzgerald (00:33):
Really interested in how as we cover payments, it is an ever-changing milieu of inventions, new technology, always balanced by consumer needs and regulation. So its heritage, and I think your organization's heritage goes back to how many years?

Brian Tate (00:57):
Gosh, over 15 years.

Kate Fitzgerald (00:58):
And I do remember that one of the very first innovations that we began to see in the payment card industry had to do with prepaid cards. That has now has turned into kind of a different sort of product. You want to talk a little bit about how the role of prepaid has changed over the last 10 years and what it's doing right now?

Brian Tate (01:18):
I think prepaid hasn't changed that much now. I think it's still in use; I still think it's in fashion. And I think that if you ran the numbers and talked to companies, there's a surprising number of companies that are still having prepaid or providing prepaid as an option for their customers. But as my colleague Ben Jackson, who you used to work with, he's a big fan and I'm a big fan of prepaid. I think prepaid has laid the backbone for a number of different products in our industry. If you were here 10 years ago, prepaid would've been a featured product, a featured option for many consumers and third parties out there. And I still think it has a relevant role. It's regulated by the CFPB now, but the CFPB has a larger presence and is regulating a lot more of the market. And I think as more and more people start to get a sense of where things are going, get an understanding of the different products out there, I still think prepaid is a viable option for many people.

Kate Fitzgerald (02:19):
Are prepaid cards more virtual now or is there still a big role for the physical plastic, what they used to call the, what they call it? The J hook.

Brian Tate (02:31):
That's right.

Kate Fitzgerald (02:32):
Sold at major retailers.

Brian Tate (02:35):
Major and small retailers. But I do think there is a role for the card and if you look at research, and we're still in this transition period where more and more people have phones, but still there are still a segment of people out there who still like to use their card and insert it to pay for things or tap to pay for things. So I do still think there is value in people having a card in their wallet. Yes, more products are virtual now. Yes, most of us are banking online now, and that's only going to continue to increase. Covid sped that up a little bit, but I think the key thing is there are so many different ways to pay for things. Now that's a good thing, whether you have a phone or don't have a phone, whether you're an older person is used to using a card or not, I think having more options rather than less is a very good thing. Now, a lot of the ideas that have came out of the prepaid sector, real-time updates, scanning your check into your direct deposit, and texting with your [financial services] company. I think all of those things are good things that have come out of the prepaid industry, or at least the prepaid industry championed and expanded on some of that to reach customers that normally would not have been in the banking system 10 years ago.

Kate Fitzgerald (03:54):
I think I remember that it was in the prepaid card industry that they developed some of the first savings options for consumers that were living paycheck to paycheck. That those were tools that created the role of a bank inside of a prepaid card.

Brian Tate (04:10):
That's true. And I think that some of those experimentations have worked, some didn't, but giving people more flexibility, I think that's what the industry is all about in being innovators, developing new ideas, using the old infrastructure to take advantage of that to bank people. The way I used to describe it when I first got here 10 years ago was that cable took advantage of kind of the telephone system, right? They took advantage of the lines and the poles that were already there and all they had to do was tap into it. Same thing here for a lot of non-traditional and traditional users, but non-traditional primarily. There was a store there, they sold products. Why can't we bring products to where people are if they don't know about them, bring these to them, you move them out to the [end user]. And I think that that's what the payments industry has been excellent at over the last couple of years.

(05:01)

And when people started to adapt and use phones more and more as their kind of central computer or their personal computer, for not only banking but using the internet or talking to people, that kind of Swiss Army knife device, why can't we develop apps and bring those banking products directly to people? So I think the industry has been highly involved in developing kind of next-level technologies. When we talk about reaching more people and getting more people into the banking system, I think the payments community has played a large role in making sure that these products are easy to use. Adoption has grown and was already trending up before covid and it continues to grow. Young people especially seem to be gravitating to these new technologies in a way.

Kate Fitzgerald (05:51):
Are you talking about prepaid specifically?

Brian Tate (05:52):
Oh, but at this point I feel, no, I'm talking about the larger market, but I think prepaid led the way then it's been highly regulated. I think making sure that it's stable. So the CFPB'S prepaid account rule not only covers your traditional cards, but it covers your mobile wallets and peer-to-peer payments. I think there is stability there that we couldn't have anticipated 10 years ago. And I think because of that stability, adoption continues to climb and it still has a role to play in the marketplace.

Kate Fitzgerald (06:23):

Well, speaking of which, you talked about financial inclusion or I gather that's where prepaid had its biggest impact. What is the future of financial inclusion looking like, whether it's prepaid or banking or digital banking or something else?

Brian Tate (06:40):
Gosh, I think financial inclusion is on the top of everyone's mind. One, I think there is a role for prepaid too. I think what we're seeing, and hopefully this will be the case going forward, is that young people are using these products and so they're easy to use, they're easy to interact with. In the old days, you had to physically walk yourself to the bank. You had to learn probably from an encyclopedia or some kind of book at the bank about what a CD was, what a savings account is, how does that differ from a checking account? Now we have it in our hand. And so the goal here is to continue to get people to use these products on a regular basis. You're educating hopefully people at an earlier age about the importance of not only finding the right payment app for you, but having an idea of the differences between the different products, savings accounts, checking accounts, and I think there's different products out there that do that. Making sure that you have a sense of what you are spending and your spending habits are. In the old days, we didn't have that. You had to keep that in mind or check your checkbook to make sure, 'Hey, I'm writing a check for gas or I'm writing a check for groceries. Here's a healthcare bill. Here's my credit card bill.'

Kate Fitzgerald (07:50):
What exactly are we talking about there? A check. So it is said that many young people have never even seen one and fewer checks are rolling through the system, but they do still, the checking account still underlies a lot of our financial services infrastructure. I think that's probably going to be around for a long time. I don't know how to change the, we are talking about products that are changing, but the names and the underpinnings haven't changed that much.

Brian Tate (08:18):
No, I think at the end of the day there's still some basics there. And again, I think some of it is based off different demographics, based on age. If you are my mother, you are still used to writing checks. If you are my kids who are under 25, they may be aware what checks are, but they are not writing them. They have rarely seen me write them. They have probably never, I can't recall if I've ever taken my kids into a bank or a financial institution to conduct a transaction.

Kate Fitzgerald (08:49):
And there's no need for them to go into open an account.

Brian Tate (08:52):
No, at this point they can do it online or do it on their phone. And I just think the world has changed. Now, yes, there are some issues. You have to learn to adapt to the new world, but at the same time, we're talking about financial inclusion as well. You've moved the mountain and brought it to the person and made it a little bit easier for people to access the system. The next step is will they start to digest the rules that we've all grown up with that may not be the same anymore in terms of we're going to save to build credit, we're going to save to buy a car, we're going to save to buy a house. A lot of millennials, if you look at the data, aren't necessarily jumping at that next step that we would've died for in terms of getting a car, getting a credit card building.

Kate Fitzgerald (09:36):
They're living in the moment.

Brian Tate (09:38):
Living in the moment. A lot of them want to avoid debt, which is not necessarily a bad thing. A lot of them don't need to buy a car right away. They have Ubers now they [think], my friend has a car, so I'll borrow his car. And so there's different ways in terms of reaching people.

Kate Fitzgerald (09:54):
It seems like there's a bit of a conundrum in that digital life has made everything instant, but that has taken away any idea of future planning.

Brian Tate (10:04):
I don't know if it's taken away from future planning. I just think we have to put [ourselves] in the shoes of millennials.

Kate Fitzgerald (10:12):
What about Gen Z? Do you see a big difference in how Gen Z and millennials [are operating]?

Brian Tate (10:15):
Millennials and Gen Z, I think they're thinking about things differently. Like I said, the goal isn't so much to get a high paying job and buy a house and have a white picket fence. It is: I'm living for today. I'm only going to, in a lot of ways, use the money that I need to get by for today in terms of they have Ubers. You don't have to own a car if you live in a big city. That's true. If I want to just send my buddy money, I don't have to go to the ATM. I can just [use] P2P; send them a dollar or two.

Kate Fitzgerald (10:44):
However, we now have a growing threat of fraud in all channels. And we were talking today about how somebody said when a new system crops up like PayPal in the early days was a new way to send money, and relatively few people used it and fraud was relatively low. As soon as it developed any sort of scale, the fraudsters discovered it. We've seen the same cycle with other P2P networks. Fraud now is constantly on the heels of any new broadly adopted payments product. But at the same time, it feels like we're on the verge of potentially cracking through some of these fraudsters' biggest tools with biometrics, by eliminating passwords, potentially using AI to counter the AI that the fraudsters are using. What are your thoughts on how are we eventually going to get on top of or ahead of fraud? Or do you feel that it's going to be an increasing threat to a lot of the innovative payments that we're developing?

Brian Tate (11:48):
I think it takes a team, and I think the easy thing is to say the industry only is supposed to come up with solutions when in many ways it takes us, it takes consumers, it takes law enforcement.

Kate Fitzgerald (12:02):
And consumer education.

Brian Tate (12:03):
Consumer education. Don't pass along your sensitive information to somebody you don't know. And I know people get induced and tricked, and that's going to happen to a certain extent. But we're working with the FTC in terms of educating seniors about how to the red flags protect themselves against red flags, watch your red flags and being scammed and tricked, and that's going to hopefully carry on to younger people. I do think it takes a team, and I think you have to work with law enforcement, you have to work with the banks, you have to work with everyone that's in the value chain here. The unfortunate thing I think we all encounter is that if someone, a fraudster gets your name and the address ...

Kate Fitzgerald (12:48):
Account details of any kind...

Brian Tate (12:50):
I almost don't even need your account details. In some situations, I can freely go out the system. And in a lot of instances, financial institutions are required [to pay]. If you show up to the bank and you have all the proper ID, they can't deny you (necessarily) access to your account. Even if you're a fraudster, they have to give you that money. That is your account. You've come up with the right information. Now imagine you're online. I don't get a picture of Kate. I don't get a picture, a sense of who you are, especially if it's not a community bank or a local bank where they may know you. The financial institution in many ways has to respect those credentials. And so that's why it's important that there's data security that we communicate to each other that we understand what has to take place or who to contact.

Kate Fitzgerald (13:35):
Well, let's pivot to the role that the government may play there . In the UK beginning in October of this year, banks are going to be required to reimburse bank customers even when the customer authorized a fraud or scam. So this has caused a lot of pushback from those banks. And most recently, a couple of weeks ago, they said they're going to give banks three days to investigate, and they've put in a few more parameters. Do you think we're going to see something [like that here in the U.S.]? Are we going to need to see a bigger role from regulators to try to protect people from fraud? Or is it more of a cross industry solution?

Brian Tate (14:12):
I still think it takes the team, but we do have similar rules here. We have regulation E, which under perfect circumstances would allow institution to look into a fraud and limit access to a particular account. And if they do find something, it gives them extra time to look into it. So I think there is an opportunity that's 10 days --off the top of my head--in terms of if they are seeing some suspicious activity, and they can limit access to the account. If they find something, a red flag, they can extend that out of belief to about 45 days. So there is an opportunity here.

Kate Fitzgerald (14:44):
So we have a framework.

Brian Tate (14:45):
However, we all live in a world, as you mentioned, we want things today. And sometimes it's not that easy to fix. I want it now, [we need to] fix issues. And I know if you need that money, because I've been in that position, we've all been in that position [of needing money immediately]. At some point, you're frustrated that that [a delay] is taking place. But at the same time, I think that's what should be leading all of us to be working together instead of pointing fingers and saying, you're the problem. I always tell people, fraudsters are working full-time just like you. This isn't a part-time job for many of them.

Kate Fitzgerald (15:16):
That is an excellent point. We find they're getting more and more sophisticated and they're using generative AI here to create scripts that sound like humans. So, speaking of developing products in innovative payments, what is the role of...What would you advise anybody who's devising new products, whether they're at an existing bank or a startup or a fintech, on the role of compliance in designing new products?

Brian Tate (15:40):
I think if compliance is not part of your business model, it needs to be. And that is something we share with our members, and we are big on compliance. We have a compliance event we do every year just to do the basics. And people go, why are you just doing the basics? Because sometimes it's the easy things that we overlook. As I mentioned, Reg E is there as part of compliance, making sure that your AML and anti-fraud measures are in place, making sure that you have your workforce educated on these rules. Too many times over the years where I may talk to a prospect and they have a great idea and then I ask them a question about compliance and they'll go, we'll figure it out later. Those days are gone. The regulators are now catching up to the industry. They have a better sense of how these products work, and they are starting to ask the right questions.

(16:29)

And I think in the old days as well, you would have one person at a fintech who is the fraud person, the lawyer, the compliance person. Those are three different jobs now. And not only are those three different jobs, there are three different parts of the financial institution or bank. And you need to have teams under those three different jobs. If you are scaling rapidly and some of these companies do, you need to make sure that you are doing so with the right people in place to have the right checks and balances there. Because I think where there's being, I won't get into specific companies, but we're starting to see more compliance issues, more enforcement actions taking place. And I think some of that could be as a result of companies are growing too fast and they're not bringing in the right people or staffing those jobs up. And in many cases, you're seeing one person have multiple jobs at a time when these are increasingly sophisticated operations. As you said, just doing fraud is a full-time job in and of itself. And you need experts with experience there. And so our words would be to anybody, compliance should be part of your business model

Kate Fitzgerald (17:35):
Before, even...

Brian Tate (17:37):
Before you get started. This is all public information. Go to the OCC, go to the FDIC, go to the CFPB: What product are you putting out of the market? What are the requirements? And also we live in an environment where things may shift. You mentioned open banking or over the last couple of months [in development].

Kate Fitzgerald (17:55):
And generative AI.

Brian Tate (17:56):
Generative AI. The CFPB has weighed in generally on principles for AI. They did similar [things] with algorithms. About a year and a half, two years ago, there have been proposals again on larger participants, open banking. We're seeing discussions about overdraft. And so there has been a lot of activity. So once you learn the rules, you have to understand that the process sometimes may change.

Kate Fitzgerald (18:19):
So it's constantly changing.

Brian Tate (18:20):
Change. Yes.

Kate Fitzgerald (18:21):
Does it feel like things are changing faster than they were 10 years ago?

Brian Tate (18:27):
I think so. I think the industry is at a place where, again, more people have access to online tools or they're using their phone to conduct their banking. And I think it took a minute for the regulators to catch up. It always kind of does, but then they catch up and I think they're asking very good questions. They have a better sense of how these products work. Well,

Kate Fitzgerald (18:46):
The pace of innovation too. Yes. What do you see there?

Brian Tate (18:48):
You're seeing things move quickly over the last 10 years. When I first got here, as I mentioned, prepaid was a featured primary product out on the marketplace. Now you've got mobile wallets, now you've got P2P. There's many more companies...buy now, pay later...

Kate Fitzgerald (19:06):
Digital [tools are driving] buy now, pay later...?

Brian Tate (19:08):
Correct. And EWA. There's just a lot more features and functions, and I think that's a good thing. And we all need to educate ourselves on how they work. And it's always on the industry. I always say to our members, the burden is on the industry to explain how our products work. You cannot assume that people understand how these products work. And so part of what we try to do is help our members articulate the features and functions so people can understand and make sure that they're disclosing these things. I think the people who are on the other side, especially regulators, think we don't want regulation. No, no. We need regulation. We just need to make sure that we're developing regulations around these unique products and not necessarily applying old rules or putting them in old buckets because these are new products. These are new things that didn't exist necessarily in the way they do today 10 years ago.

Kate Fitzgerald (19:57):
So I think there's another area of interest to people who are in the innovation realm...Is there still a lot of room for new products and innovation? It's an area where we saw fintechs saw a huge amount of development beginning around 2012. And I feel like it has had, it's a little bit of a slowdown that comes with economic cycles. At times there's more or less venture capital [available]. What do you think is happening right now? Are we entering a time of a new cycle of innovation? And if so, what would be some of the guiding ideas, what need to be addressed still, that innovative payments can fill?

Brian Tate (20:47):
I think yes, there are still a lot of smart people who have a lot of great ideas. I think there's a number of things that need to happen for a good idea to come to market. Like you mentioned, I think there needs to be investment from large companies or investors to have an understanding of how these products work and what the potential is. I think we're all kind of going through economic headwinds right now. So that has slowed down a little bit. But I think that will pick back up again too. Is there a need in the marketplace? And I think of the great things that the payments community has done is identify those needs. And one of those needs is access to credit. I think for low- and moderate-income people, that is the key issue. I think the conversation should expand beyond the industry to include regulators.

(21:38)

I wrote a blog a couple of weeks ago where I said, I think it's critically important not just to say what the industry can't do. I think what the [payments] industry and the regulators need to work on here are products that might be helpful to a particular person. But if all the regulators do is say no, and we take away access to credit for low- and moderate-income people, and we take away options like Buy now/pay later [loans], or [if we ] take away options such as [earned wage access] and don't fill that void...

Kate Fitzgerald (22:09):
People are using Buy now/pay later, which emerged over the last five years, and it has created another opportunity for some people who have no credit to get through a rough patch.

Brian Tate (22:24):
We're all a step away from a rough patch. Right? That's true. That's the theory behind a lot of these products. EWA, for instance, Earned Wage Access.

Kate Fitzgerald (22:31):
Is that another form of credit?

Brian Tate (22:33):
No, it's not credit at all. It is not loan. It is your earned [wages]. It is going into your earned wages, but just what you've already earned. You've already earned it, but you just haven't been paid them yet. And I think that's critically important . When I talk about [where] the industry needs to do a better job and we can always do a better job explaining our products. I think that is a good example of a product that I think is popular that I think it has potential to grow. If you look at certain reports from, there's one from the Financial Health Network that talks about 55 million Americans are using [EWA]. That's from two years ago. So what I assume that number is bigger now.

Kate Fitzgerald (23:08):
And you can't generalize to say who's using it. Anyone may use it at the higher end and the lower end.

Brian Tate (23:15):
If you look at those reports and others, you're looking at income levels of people over $100,000 and people under [that level]. And I think obviously if you're under, and even if you're over [$100,000 household income] in this day and age with the cost of living and inflation, things are becoming more and more expensive. And I've been there. I know how I can speak for myself. I testified in Congress on this issue, which is if you are working your way up and you get a flat tire or somebody gets sick unexpectedly, or my refrigerator breaks, what are you supposed to do if you don't have credit? Many Americans don't have it.

Kate Fitzgerald (23:48):
Or you're at a point, for some reason, where you don't have access to the credit you might've had at another time.

Brian Tate (23:54):
Correct. And many Americans, if you look at the FDIC reports that do a study every two years about savings and access to banking, many Americans don't have $400 in their savings account. I've been one of those people at one point in my life. What do you do?

Kate Fitzgerald (24:10):
Innovative payments are constantly evolving and a lot of these things, the existing and the new products are going to help solve these issues.

Brian Tate (24:18):
I think we all have a role to play. I think the industry does, and I think regulators do. I think consumers, consumers have ideas. The feedback and the data we collect from people that plays a role. What is the need out there that needs to be solved?

Kate Fitzgerald (24:30):
Love it. Thank you so much, Brian.

Brian Tate (24:32):
Thank you for having me.