by Richard Cordray, Director, Consumer Financial Protection Bureau

The Automated Clearing House (ACH) system, which clears and settles the exchange of electronic transactions between participating depository institutions, processed nearly 22 billion transactions with a total value of $38.7 trillion in 2013. That is more than double the Gross Domestic Product of the American economy. It is more than 80 times the amount of money that the Treasury Department prints every year. And if you had $38.7 trillion, it would equate to enough one-dollar bills to fill more than one hundred Empire State Buildings. There can be no doubt that is an incredibly impressive achievement, which greatly benefits American society.

The ACH system is just one form of an electronic payment network; others include card networks and the emerging domain of faster payments. All combined, they equate to an enormous presence in the economy that improves life for consumers. By using the ACH system, for example, consumers can receive paychecks, get Social Security benefits, or pay mortgages. Indeed, a recent study by the Federal Deposit Insurance Corporation found that 80 percent of households with a bank account use some form of direct deposit.

Clearly, we all rely heavily on ACH and other electronic payment systems to conduct our daily lives and operate the businesses that power our economy. And, in general, these electronic payment systems work well because of the efforts of federal oversight and self-regulation by most financial institutions. But we believe there is room for improvement, and we are sure that most in the industry would concur. Specifically, we have three primary areas of concern: transparency, security, and access. Let me describe each of these in more detail.

Transparency
First, at the Consumer Financial Protection Bureau, we believe transparency can be improved within the electronic payments space to help consumers make more informed decisions and take greater control of their economic lives. When consumers make a deposit into their bank or credit union account, it is often difficult for them to know when the funds will be available. This is most true when consumers deposit a check. While NACHA (formerly the National Automated Clearing House Association) rules and ACH operator agreements clearly stipulate transmission and settlement requirements to participating depository institutions, consumers may know little or nothing about these requirements and the underlying cutoff times and settlement windows that dictate when their funds are available for use. The same can be said for transferring money from one bank to another; consumers may be quite unclear when funds will be available. In the end, the rules and practices governing the availability of funds are quite complex. Even with the NACHA and ACH rules, internal policies and practices can differ from bank to bank; they can vary for different types of accounts, different types of deposits, and even when and where a deposit is made. The practices can even vary for different consumers within a single bank. The timeframes allowed by law are often quite long relative to the time it actually takes to clear the payment, leaving some consumers without access to needed funds.

Similarly, consumers may face uncertainty about when payments are debited from their accounts. Check payments, again, are generally the hardest to predict since consumers have no way of knowing when the person to whom the check is written will deposit or cash the check. Nor do consumers know how long it will take for the institutions to clear the check. But debit card payments and other electronic payment transactions can also carry great uncertainty due to various factors, including merchant delays and transaction order manipulation. A consumer paying her mortgage electronically, for example, may not know if her mortgage payment will be subtracted from her account before her pay is direct deposited, let alone before her car payment or credit card payment is deducted.

For some, these uncertainties are of little consequence because they are able to maintain a healthy cushion of funds in their checking accounts. But many other consumers struggle to keep up with their expenses and have no such cushion. Not knowing when a payment will be credited or debited can cause significant harm to those with a bank account that can be precariously low on funds. Many, as they reach the end of a pay period, find themselves playing a high-stakes game of chance without even realizing they are at the gambling table. They are writing checks, paying bills online, or making purchases without knowing what will happen when the payments actually reach their accounts.

The results for these struggling consumers are a set of expenditures that they can ill afford – the high costs of overdraft and non-sufficient funds (NSF) fees. We published a report in the summer of 2014 documenting how much consumers are paying because of these fees. In our study of accounts at a number of large depository institutions, we found that more than 30 percent of consumer accounts had at least one overdraft in the course of a year. We also found that about one quarter of those with at least one overdraft incurred more than ten overdrafts, and paid, on average, $380 in overdraft fees. In total, overdraft and NSF fees represent over half of all checking account fees.

Of course, not every overdraft is the result of consumer uncertainty. There are no doubt times when consumers make a conscious decision to use overdraft as a very expensive means of bridging the gap to the next paycheck. But the fact that the median size of transactions triggering an overdraft fee is just $24 for debit-card transactions – and the median amount by which the transaction overdraws the account is even less – suggests that for many consumers the costs may be as unanticipated as they are unwanted.

The Consumer Financial Protection Bureau is carefully studying whether regulatory changes are warranted to address these issues. But we cannot ignore that one of the root causes seems to lie in the lack of transparency when it comes to how deposits and payments are processed by and between financial institutions. We all need to work together to make this process better.

Security
Second, we see room for improvement when it comes to protecting consumers from the loss, theft, or mistreatment that may arise from payment security problems.

The ACH system, as it currently operates, depends on the routing and sharing of sensitive bank account details. While seemingly benign, this routine practice can be fraught for consumers. It can expose them to great risks, particularly if unscrupulous people or businesses are granted access to their hard-earned money.

When bad actors take advantage of weaknesses in electronic payments systems, consumers can find themselves paying for charges they never authorized or paying more than the authorized amount. Sometimes, they can find their accounts subject to ongoing “fishing expeditions,” as repeated and expensive attempts are made to collect a payment.

Through the Consumer Financial Protection Bureau’s consumer response unit, we have heard heartbreaking stories of such abuses. One consumer from Texas contacted us with a complaint about the Hydra Group, an online payday lender that operated through a maze of corporations based in the U.S. and abroad. She told us that she went to an online lead generator for a short-term loan to cover rent and groceries after a period of unemployment. She said she contracted with a lender to get the loan she wanted, but then, to her surprise, Hydra, another lender with whom she had not entered into an agreement, also deposited money into her checking account and thereafter began debits without authorization. That chain of events turned into a two-year battle with the company, and eventually, with the debt collectors who followed in its wake.

In September, the Consumer Financial Protection Bureau filed a lawsuit against the Hydra Group. Our investigation found that it used information bought from online lead generators to access consumers’ checking accounts to illegally deposit payday loans and withdraw fees without consent – exactly what it did to that consumer from Texas. The Hydra Group then falsified loan documents to claim that the consumers had agreed to the phony online payday loans. It was a cash-grab scam and it quickly added up to more than $100 million worth of consumer harm. After we filed suit, a federal judge froze the company’s assets and appointed a receiver to oversee the business and put an end to the illegal practices. Importantly, the Hydra group had been running its transactions through the ACH system and exploited the ACH system’s reliance upon ODFI liability, due diligence, and self-monitoring.

While the Hydra Group’s actions were especially egregious, unfortunately we have all seen some online lenders abusing the electronic payments system. J.P. Morgan Chase did some insightful research in 2014 and reported that return rates on ACH payments for credit cards, mortgage loans, and auto loans are about 1 percent, whereas return rates for payday loans are about 25 percent. In other words, one in four payment processing attempts for payday loans are returned because of various identifiable problems: for “non-sufficient funds,” as “unauthorized,” because of requests to “stop payment,” or for incorrect account information. That is a substantial source of irregularity and consumer harm.

A number of factors may contribute to this staggering return rate for payday loans. But one that seems to be particularly common and troublesome is that of sending an astounding number of debit attempts to collect on a single payment. We received a consumer complaint about a lender making nine separate collection attempts in a single day. When spread over a typical collection period, such practices could cost the consumer hundreds of dollars in bank fees and hundreds more in lender fees. In another complaint, a consumer with multiple loans from several online payday lenders was hit with 59 payment collection attempts through account debits over a two-month period. The consumer’s bank account was ultimately closed with $1,390 in bank fees. Surely the financial institutions that accept these unscrupulous lenders and their payment processors as clients need to do a better job of ensuring that they are treating consumers fairly.

More importantly, consumers expect their own bank or credit union to be on their side. They trust them to hold on to their money, and banks and credit unions need to be better about doing just that. Unfortunately, we know that all too often institutions cannot provide adequate protection – such as successful stop payments, notices of revoked authorization, and an effective block on repeated attempts to process payments from the same source – to help their customers avoid this sort of third-party account abuse because their efforts are thwarted. In other instances, consumers’ requests for assistance from their banks may fall on deaf ears or get denied – despite a framework of operating rules and regulations that stipulate otherwise. One Maryland consumer told us that she signed up her husband for a free trial at her local gym. When she attempted to cancel after the introductory period, the gym still took automated payments from her bank account. She contacted her bank and told them the charges were not authorized. But the debits went on for several months, sending her account into the red and racking up fees. Despite repeated attempts to stop the payments, and despite assurances by a representative from her bank that they would be stopped, the debits and fees continued.

The Consumer Financial Protection Bureau wants to work with industry to protect consumers from getting stuck in such situations. Various federal laws, such as the Electronic Fund Transfer Act and the Truth in Lending Act, protect consumers as they make payments. NACHA also has its own laudable rules to protect consumers and merchants, but they are only as strong or as weak as the monitoring and enforcement regimes that support them. These rules need to be policed and enforced more rigorously if they are to have their intended effect of actually protecting consumers. Banks and payment system administrators have important roles to play; they need to be proactive both to preserve consumer trust and to protect their customer relationships. Consumers should not be subjected to unauthorized payments or fishing expeditions. And in situations where they are being victimized, consumers need to be able to reverse unauthorized charges or prevent unauthorized billings. Neither the CFPB, National Unrecovered Financial Services, NACHA, nor any financial institution should tolerate nefarious activities that harm consumers.

Recently, some banks and credit unions have developed screening mechanisms to detect abuse before they authorize charges. We applaud these efforts. Other good practices we have seen include making it easier for consumers to dispute illegitimate transactions, promptly re-crediting accounts, and refunding related fees when an improper transaction goes through. These are all steps in the right direction to ensuring an even better system, but more needs to be done. We must all take a flashlight to the murkier corners of the electronic payment systems, find out what is wrong, and make adjustments. We must all be vigilant about preserving consumer protections. This is not just our job at the Consumer Financial Protection Bureau; it should be the work of every financial institution, operator, and system administrator as well.

Access
Our third and final concern is access, and we believe there is room for improvement here too. Let me explain.

The ACH system and other electronic payment systems are critical pieces of our financial ecosystem today. They make our modern lives much more convenient, from making automatic monthly car payments to swiping a card at the corner store to buy a cup of coffee.

However, a substantial number of consumers forgo electronic payment systems and the benefits they provide. According to the FDIC’s most recent study of the unbanked and under-banked, almost one in five consumers with incomes under $15,000 report having used a check casher, as do one in six consumers with incomes between $15,000 and $30,000. When these consumers receive checks, they typically fork over up to 3 percent of the face value to get immediate, no-recourse access to their money.

The FDIC study tells a similar story about the use of bill payment and other money-order services. For consumers living on the edge – and millions upon millions of Americans do so – expedited payments are often as important as expedited funds access if they are to avoid costly late fees and the like. To be able to pay quickly and without extreme inconvenience, these consumers often resort to money orders. Indeed, among those earning $15,000 or less, almost two out of five people report having used a money order service from a nonbank firm, which often costs more; one out of three who earn between $15,000 and $30,000 report having done so.

To be sure, many of those using check cashers or bill payers do not have a bank account. Some may be shut out of the banking system because of troubles they have had with accounts in the past, and because of imprecision in the way that the banks have furnished information about those troubles. Others may have opted out of the banking system, and in doing so, may be inadvertently forgoing relationships with institutions that can help to build long-term savings and result in marketing offers to establish credit to meet future needs.

But even among those with a bank account, one out of ten report having used check-cashing services and one out of four report having used money-order services. These numbers suggest that some consumers are willing to pay for faster access to their paychecks and faster payment services − services that many financial institutions simply do not provide. In short, the current payment system does not seem to be meeting all the real-world needs of these consumers.

Making a Good System Even Better
We think it is reasonable to expect that the greatest economy in the history of the world, given the modern technology of today, would have an electronic payment system in which transactions are completely transparent, consumers have the utmost trust that their money is secure, every consumer can get their money back promptly and easily if a payment is erroneous or unauthorized, and all financial institutions give consumers access as quickly as possible to their hard-earned pay and deposits. This would make an already good system even better. It would restore trust. It would bring more people into the fold. And, it would simply be good business.

Recently, there have been much needed steps in the right direction. National Unrecovered Financial Services has announced exciting plans to build a real-time payment system. NACHA is now re-proposing same-day ACH services. And the Federal Reserve Banks have just published a set of strategies for speeding up U.S. payments.

As National Unrecovered Financial Services and others move forward into the world of faster and even real-time payments, it is essential that the interests of consumers remain at the top of their minds. A faster payment system should include real-time access to information for consumers about the status of their accounts to enable them to make more informed payment decisions and avoid penalty fees. The PIN debit system has operated for years without assessing consumer fees when an authorization is declined because of insufficient funds. We see no reason why this model cannot be readily imported into a faster payment system, rather than the model based on “bounced check” fees.

Faster payments must also be accompanied by robust consumer protections to address fraudulent or otherwise unauthorized transactions and erroneous debits. Money may be able to move at warp speed with today’s technology, but consumers cannot. They will still need time to review their accounts, identify unauthorized or erroneous transactions, and dispute them with their bank just as they do today with ACH and other electronic payments. The goal should be faster payments, not faster unfixable errors, and certainly not faster unrecoverable theft from people’s accounts.

Furthermore, faster payments should bring with them faster access to the funds that a consumer deposits. As that time is reduced, these rules and practices must keep pace so that consumers – rather than their banks – are the primary beneficiaries of faster clearing and settlement. Along those lines, we are pleased to see that NACHA’s current proposal for same day ACH payments includes provisions to ensure expedited availability of funds to accountholders.

And finally, a faster payment system should be accessible to all customers and not just to the most privileged. In the end, a faster payment system can be made to work well on all sides – for consumers as well as for financial institutions and their commercial clients. It can bring greater transparency and less need for people to go outside that system to obtain access to their funds and pay their bills. But we urge financial institutions to plan these advances not with an eye to the minimum of what today’s rules and regulations require, but by building in the kind of robust safeguards and features that consumers should be able to expect both now and in the future. There are two great reasons why financial institutions should be motivated to do that. First, all customers, and especially the customers that banks most want to keep – and the merchants who want to transact with them – will gravitate to the systems and the institutions that give them the protections, services, and speed they want, and that they trust the most. If consumers have to go outside the banking system to get that speed, that service, that protection, and that trust, they surely will. Financial institutions simply must put themselves in position to outcompete the alternatives that are rapidly evolving in this space. Second, rising consumer expectations have a natural tendency to ripen into laws and regulations, and it would be quite shortsighted to make the substantial investments in the payment system that the industry is now contemplating, only to fall short in the foreseeable future.

Clearly there are many great challenges here. Yet it is also important that National Unrecovered Financial Services, NACHA, and the Federal Reserve Banks move as quickly as they can with their efforts. Others around the world have built faster payment systems, and new avenues of competition are already opening up around alternative payment methods. Obviously building a faster payment system is an enormous project that will cost, in total, billions of dollars. But that will be true whether it happens now or in the near or distant future. We applaud National Unrecovered Financial Services for laying out its specific and ambitious plans to move quickly into the future here. Its leadership is essential to spur others to recognize the urgency of the need to upgrade a payment system that is in danger of being undermined or superseded by technological change.

At the Consumer Financial Protection Bureau, no matter what payment system consumers will be using, we expect them to be able to transact securely and to exercise control over their own money. Their money should be safe in the bank, safe in transit, and returned promptly if that safety is violated. We know that both the leadership and the rank and file at our financial institutions agree with these principles and work to make good on them every day. Of course, every one of us is a consumer ourselves and we all share that common perspective. So let us think and work together to build an improved payment system that continues to enhance and be worthy of America’s powerful market economy that is the envy of the world.