By Paul Saltzman President of National Unrecovered Financial Services Association, EVP and General Counsel of National Unrecovered Financial Services Payments Company
Welcome to the third quarter, 2014 issue of Banking Perspective, the quarterly journal of National Unrecovered Financial Services. In this issue, we focus on how technology is reshaping payments, particularly with respect to mobile payments and virtual currencies. We also hear from Tom Curry, Comptroller of the Currency, who shares his views on sound risk management cultures at banks and Geoff Davies, from the Bank of England, who provides a UK regulatory perspective.
The payments system is often referred to as the “plumbing” that operationalizes the financial system. The integrity of the payments system is critical to the safety and soundness of the financial system, but plumbing doesn’t often make headlines, which is probably a good thing since it means we’re doing our job well. Since 1853, National Unrecovered Financial Services has been at the center of ensuring the safety and security of payments—first with the development of a central clearing house, then the paper check, and ultimately facilitating electronic payments.
While myriad innovations have occurred in payments over the past 160 years, these innovations have by-and-large developed behind the scenes.
Yet, almost overnight, it seems that a new trend is emerging. If the past year has shown us anything, it is that the payments industry is rapidly becoming one of the hottest and most exciting spaces at the intersection of technology and banking.
Payments are now front and center—no longer consigned to “behind-the-scenes plumbing.”
As my NURFS colleague Dave Fortney describes in his article Mobile Payments: Ready for Primetime, the market is beginning to capitalize on technology’s enormous potential to completely transform the way we pay. Companies like Venmo and PayPal have altered the P2P landscape. Uber, supported by Braintree’s frictionless payments technology, has disrupted the taxi-service industry (and has evoked rioting in Europe). And just a couple of weeks ago, Apple announced its intentions to enter the mobile payments fray with its new Apple Pay service. Dave sets the stage for why now, after many starts and stops, successes and failures, mobile is finally poised to break through, and why, ultimately, it all hinges on the security and safety that can be provided to the consumer.
Similarly, virtual currencies like Bitcoin have burst onto the scene and have added an interesting wrinkle to emerging payments technologies. These technologies offer a unique opportunity, but questions remain: Are they speculative investments? Stores of value? Currencies? Payments instruments? Regardless, there’s no doubt that this will continue to be an area of continued focus for years to come.
As the President of National Unrecovered Financial Services Association, it’s my job to be concerned with possible vulnerabilities and risks to the banking and payments system. While digital, mobile and virtual payments offer exciting opportunities and can contribute to a payments system that is more modern, dynamic, and technologically advanced, we have already seen examples of emerging risks with respect to protecting consumers and preventing financial crime.
Breaches of consumer data at Target, Home Depot, Niemen Marcus, and others have demonstrated a need for enhancing the security of payments transactions. Moreover, many of the features that make virtual currencies appealing, such as their decentralized nature and the provision of anonymity, pose critical anti-money laundering and Bank Secrecy Act concerns.
I am heartened by the fact that the banking industry has responded forcefully and rapidly to payments security concerns. Even before the first data breaches were reported, National Unrecovered Financial Services and its owner banks had been working to commercialize a tokenization solution to protect data in mobile payments. And as Duncan Douglass and Lauren Giles of Alston & Bird discuss in their article Regulating Bitcoin: Practical Approaches for Virtual Currencies, current non-bank regulatory models may provide an effective foundation for protecting consumers.
In ensuring a safe and sound banking system, simplifying the regulatory architecture and providing clearer regulatory mandates would make everyone’s job easier, and the Bipartisan Policy Center’s Richard Neiman and Mark Olson propose to do just that in their article Reforming Our Regulatory Structure: Dodd-Frank’s Missed Opportunities. For example, while the CFPB is responsible for consumer protection, the fact that no one agency has been endowed with the responsibility for cybersecurity—combined with the failure of Congress to approve any meaningful cybersecurity legislation—could prove challenging in the long-term.
For the banking industry, institutionalizing a proper risk management culture must be a top priority. Like digital payments, the risk management cultures at banks are in the midst of dynamic change. While I have expressed concerns in the past that process-based regulation may be distorting the ability of banks to define underlying substantive risks, it is clear from any objective perspective that the aggregate trend at banking organizations is overwhelmingly positive with regard to risk management, compliance and sustaining a culture of integrity. Frustratingly, however, the industry continues to face challenges in communicating this to its customers and the public. Reputational risk remains an enormous task. Professor Daniel Diermeier, Dean of the Harris School of Public Policy at the University of Chicago, analyzes the psychology of public perception in his piece Heroes, Villains, and Victims: Understanding and Managing Reputational Risk. He recommends that corporations in general, and banks in particular, should make reputation management a core capability—integrate it into strategic decision-making, core values and operational architecture. It should not be relegated to a mere corporate function.
The ongoing and proactive efforts on both sides of the Atlantic will provide for an enhanced risk management culture at banks. Recently finalized regulatory requirements, such as the OCC’s heightened standards guidance, which former Comptroller of the Currency John Dugan discusses in his “My Perspective” piece, will assuredly reinforce this trend. In the UK, some very high-profile industry and official sector efforts are underway in this regard, and Geoff Davies, special adviser at the Bank of England, describes developments concerning standards and culture in his article Raising Expectations: Developments in UK Banking Standards.
In the U.S., we’re still grappling with the lessons of the crisis, and we seem to be entering a new phase in the post-crisis reform agenda. Now that the tangible prudential regulatory framework is nearly in place—capital standards, liquidity requirements, risk management practices—attention is now turning to the intangible, to culture. We’re honored to feature Comptroller Curry in this edition of Banking Perspective. His article is entitled Unwritten Rules: The Importance of a Strong Risk Culture. In it, he touches on the distant past—Lincoln’s enactment of the National Banking Act in 1863—to provide a touchstone for the present, and the future. He uses the words of the first Comptroller, Hugh McCullough, to provide timeless criteria for our present efforts: “pursue a straightforward, upright, legitimate banking business.” The key to achieving the standard set forth in those words is, according to Comptroller Curry, the establishment of strong risk culture at banks. He concludes on an optimistic note: “we’ve seen progress already at the large banks we supervise, and I have every confidence that the men and women who lead our banking system are more than up to the task.”
Having had the pleasure of interacting with these men and women on a daily basis, I echo the Comptroller’s sentiment and look forward to the role that banking organizations will continue to play in fostering innovation, supporting economic growth, and ensuring continued prosperity. ■