PaymentsJournal

Consumer lending in the on-demand economy has created new opportunities for individuals and businesses with limited credit histories or financial data, commonly known as “thin files.” The rise of alternative credit scoring models, driven by technological advancements and changing consumer preferences, has allowed these individuals to participate in the economy based on their performance and reputation rather than solely relying on traditional credit scores. However, the use of thin files also presents challenges, particularly in terms of security and fraud prevention.

In a recent podcast, Sunil Madhu, Founder and CEO of Instnt, and John Buzzard, Lead Analyst in Fraud and Security at Javelin Strategy & Research, explored the opportunities and pitfalls in consumer lending within the on-demand economy and discussed the importance of balancing customer experience with fraud prevention measures. This article will provide the highlights. It will also discuss how businesses can streamline identity verification processes and reduce friction by adopting emerging standards like verifiable credentials.

Individuals or businesses that have limited or insufficient credit histories or financial data are said to have “thin files.” Traditionally, this lack of information made it difficult for them to access loans, credit, or other financial services. However, the rise of the on-demand economy has introduced new opportunities for thin-file individuals and businesses.

For example, the on-demand economy has seen the emergence of alternative credit scoring models, which rely on non-traditional data points to assess creditworthiness. Platforms like Uber and Airbnb consider user ratings and reviews, transaction history, and other data to evaluate participants. This approach allows thin-file individuals to participate in the economy based on their performance and reputation rather than solely relying on traditional credit scores.

Making use of thin-file consumers has played a role in shaping the on-demand economy, but it is also the result of technological advancements and changing consumer preferences. As on-demand apps become more common, they become increasingly sophisticated at mining customer behavior for insights, making credit reports unnecessary in certain cases. Thus, thin files have become normal files and businesses have become more sophisticated at using them.

As technology continues to evolve, the challenge lies in ensuring the security and protection of consumers as they engage in digital transactions and build relationships with businesses. Using thin files can lead to increased fraud, which companies need to take into account.

Different types of fraud have a significant impact on the cost of doing business today. For example, a portion of consumer loan receivables is lost due to credit defaults caused by fraud.

“Identity fraud and synthetic ID fraud, where fake identities are created, are growing problems that lead to billions of dollars in losses,” Madhu said. “Fraud affects a large portion of the global economy, around 74% of the global GDP.”

In the financial industry, even existing customers can fall victim to fraud within the institutions they do business with. However, balancing the client experience with fraud prevention can be challenging.

“We want the payments process to be smooth,” Buzzard said. “But at the same time through all this convenience, sometimes we really forget just how mission-critical it is to build the security infrastructure in there.”

As a result, customers can face significant friction when they sign up for various on-demand products, which can be an inconvenience.

“They often have to go through multiple identity verification and credit checks for different products, even within the same institution,” Madhu said. “This is due to fragmented infrastructure and independent business units operating separately, which leads to inconsistent treatment and loss of business, particularly with younger, impatient customers.”

According to Madhu, the ideal situation for consumers would be to have easy access to any product or service from any brand with just a click. But consumers also want control over their own identity and data, being able to share it as needed.

“We’re moving towards a future where governments may mandate businesses to separate ownership of customer data, allowing individuals to import their data where they choose,” Madhu said. “Privacy regulations are also coming into play, with stricter rules on how consumer identity can be used, as seen in California and other places.”

This is likely to lead to a decentralized model where individuals have ownership and control over their data, allowing them to access a wide range of services across different sectors, including digital identities issued by governments for things like passports and driver’s licenses.

“The goal is to have universal digital identities that can be used across different states or countries,” Buzzard said. “Currently, the United States is experimenting with state-specific digital identities, but it’s still in the early stages. There have been some challenges, like an account takeover resulting in the misuse of a digital driver’s license. However, these issues can be addressed with better requirements for device monitoring and other security measures.”

One promising development toward digital identities is the emergence of verifiable credentials, a secure document that includes validated identity and data information. Verifiable credentials are cryptographically protected and cannot be tampered with—and they include information about how the data was validated, ensuring its authenticity.

“By adopting standards like verifiable credentials and exploring levels of assurance for different risks, we can reduce friction and make interactions with businesses smoother using digital identities,” Madhu said.

According to Madhu, identity solutions will go beyond just big tech companies like Apple and Google.

“Identity solutions will be standardized and interoperable, allowing our consumer identity to be easily accepted by any merchant without revealing more information than necessary,” Madhu said.  

This will make it easier not just to accept customers but also to onboard employees, making HR functions way more efficient. It will also be easier for businesses with comparable risk to pool information, making ID recertification unnecessary.

“For example, if you have been accepted by one business at a certain level of risk, another business subscribing to the same level of risk should be able to accept you instantly without additional checks,” Madhu said.

Artificial intelligence and blockchain-powered technology will play a significant role in the movement toward improved identity solutions, according to Madhu.

“We recognize the importance of providing bridging technology that allows businesses to gradually transition from the current centralized infrastructure to a decentralized one,” Madhu said. “By offering this migration capability, businesses can onboard customers using familiar centralized methods and later switch to decentralized identity management.”

As the on-demand economy grows and evolves, consumer lending opportunities for thin-file individuals are expanding. The future of consumer lending lies in the development of portable digital identities, where individuals have control over their data and can access a wide range of services across sectors.

The adoption of ISO 20022 is well underway, especially within central banks and larger institutions. This International Organization for Standardization (ISO) format for electronic payment data interchange between FIs is heralded as the solution to boost efficiency, cut costs, and enhance transparency between organizations.

In a recent PaymentsJournal podcast, Laura Sullivan, Senior Product Manager at Form3, and Albert Bodine, Director of Commercial and Enterprise Payments at Javelin Strategy & Research, discussed how the implementation of ISO 20022 is affecting SWIFT, the benefits and barriers to adoption, and the state of organizational infrastructures that could inhibit the ISO standards from fully benefiting the organization.

In March, SWIFT began the migration of its cross-border payments functionality onto ISO 20022. Under the auspices of ISO 20022, financial institutions will be able to modify the payment messages they send and receive through SWIFT from the message type (MT), which is a legacy format, to the new message type XML (MX) format. This new format not only holds more data but also is expected to increase interoperability between financial institutions.

Many instant payment schemes have already adopted the ISO 20022 standard, including real-time payments. Wire payment networks such as Fedwire, SWIFT, and Lynx have announced their plans to adopt these standards fully by the end of 2025.

Newer schemes have an easier time adopting ISO standards, according to Sullivan. However, when it comes to Fedwire and SWIFT, converting from an already existing format can prove more challenging.

She recounted what she learned at a recent conference and how banks that had been sending ISO messages enabled their core processing systems to send additional address information, which led to additional exceptions on the receiving banks’ sanction systems.

“A payment might have been flowing through for years successfully. Now, it suddenly had another line of address which had something that would trigger sanctions review,” Sullivan said. “So that was really interesting.”

One of the many improvements to ISO 20022 will include having structured addresses to improve the sanctions scanning scenario. With this improvement, banks will be able to make a clear distinction between a street and a country.

“There is a massive spreadsheet that the BMPG has put together country by country, which indicates where to map the various elements of an address for each country,” Sullivan said. “It’s quite impressive. That is a big hope, a big advantage, that people believe will happen with ISO.”

Corporations will greatly benefit from implementing ISO 20022 when it comes to their accounts receivable and accounts payable departments. When a company pays another for a certain amount different from the invoiced amount, the explanation will be given and accessed easily.

Ultimately, to benefit the end user, Sullivan believes that fintechs and banks must work together.

“The banks and the fintechs have got to collaborate on providing tools both for customers to seamlessly provide that information when they’re initiating a payment and for the bank to be able to send that information back to them,” she said. “Because both of those channels are very oriented towards the existing SWIFT and Fedwire.”

The challenge, Sullivan pointed out, is for the banks and the fintechs to come up with the best solutions to make it easier on customers.

It’s also dependent on who’s ISO-ready and who isn’t.

“We’re all happy to report that most countries are going to be live with the ISO standard by 2024,” Bodine said. “Some countries, however, have reported that they don’t plan on adopting ISO 20022 at all. Are those countries going to be in OK shape or out of the game—and are they going to just have a harder time transacting with the countries that are on the standard?”

Sullivan noted that it’ll be the latter. They’re likely to have a harder time transacting. But it will also vary by situation. “If they’re members of SWIFT, for example, they have to be able to support receiving that data,” Sullivan said. “Whether they pass it on to their customer is a different question.”

As the financial industry moves forward with the implementation of ISO 20022, significant challenges must be addressed, including the current limitations posed by its legacy infrastructure.

These limitations can negatively affect the successful implementation of ISO 20022, leading to delays, inconsistencies, and a lack of interoperability.

“I saw one study that estimated that even at a medium-sized regional bank in the U.S., there were 200 different systems that could be impacted by ISO 20O22,” Sullivan said. “For banks to be able to leverage both a customer initiating and receiving all that data, there’s a lot of work to be done behind the scenes, and banks are going to be very creative. I don’t think many banks will attempt to tackle all 200 systems, but they will find ways to translate that and focus only on the most critical. That is going to be one of the challenges. You have all this data, but you’ve got to be able to ingest it, and you’ve got to be able to send it out.”

To stay competitive, banks must adopt an API-first approach. This enables banks to open their systems to other third-party developers, which means more collaboration and faster innovation.

When it comes to high volume, APIs are more efficient, producing more throughput per second.

APIs also work well in the cloud, and more banks want to transition their processing there. However, with any new system that’s implemented, constant iteration is key.

“As payment rails grow and expand, I’m sure there will be tweaks made as they get more mature and we realize some of the mistakes that we’ve made along the way,” Sullivan said. “Our belief is the API provides that layer between whatever channels you have at a bank initiating payments or receiving payments and the actual networks.”

Considering the current legacy infrastructure panorama, having an API-first approach would seem to be the perfect solution. 

“Rather than having to take all these different message formats being spit out from 100 different systems, you feed them into the API and then it handles whatever the variations are,” Sullivan said. “Those systems don’t have to be aware of the different payment schemes, the different rules, the different timing.”

With the financial industry always evolving, it is critical that fintechs, banks, and other organizations stay abreast of the latest developments, especially when it comes to faster payments.

By adopting ISO 20022, organizations can ensure that payments will be faster, safer, and more transparent than ever. For most smaller banks and organizations, the implementation will not be without hurdles, especially when it comes to dealing with legacy infrastructures. Luckily, with APIs this impediment to adoption has been eliminated.

As with any new system, there will always be room for improvement. But it is a worthwhile journey on the coveted road to interoperability.

Alternative payment methods have become increasingly popular among consumers due to their easy, efficient, and secure way to pay. Mobile payments, P2P payments, and digital wallets are just a few of the many alternative payment methods consumers are choosing aside from credit cards and cash.

In a recent PaymentsJournal podcast, Matt Nilles, Senior Director of Global Products and Solutions at Euronet Worldwide, and Brian Riley, Director of Credit/Co-Head of Payments at Javelin Strategy & Research, explore the groundbreaking shifts occurring within the banking industry, especially regarding alternative payment methods.

Banks, credit unions, and fintechs will greatly benefit from learning about the latest trends, such as the rise of contactless payments, peer-to-peer transfers (P2P), e-commerce transactions, and the importance of adopting these solutions to stay competitive. Finally, listeners will learn about Euronet’s Ren Payments platform, which can enable banks to integrate these alternative payment methods easily and securely.

Consumers are increasingly looking for ways to streamline their payments and transactions. Amid a more digital age, contactless payments, mobile payments, and digital wallets have certainly delivered on speed and security. These alternative payment methods are not only convenient but also eradicate the need to carry a wallet with credit cards or cash.

“We [consumers] are more concerned about convenience than ever,” Nilles said. “We’re more concerned about security and speed than ever, and that really bolstered the payment methods that have come around in the last couple of years. We’ve seen the rise in real-time payments around the world. It is a trend that is not going away anytime soon.

“We’re all using digital wallets more than ever. And then, certainly, during the pandemic and afterwards, contactless payments have become the norm. And all of this is driving us to that desire of faster to use, more secure payments.”

Clearly, the momentum of the shift to alternative payments comes directly from the customers themselves and not the companies.

“A lot of it has to do with consumer preference,” Riley said. “It’s not just payment card companies pushing, ‘This is what we have available.’ There’s a voice resonating from the consumer side that says we want to do more of these innovative transaction types.”

Traditional banks are still lagging when it comes to adopting alternative payment methods.  This can be traced to a number of reasons. According to Nilles, the issues confronting banks are three-fold: The first is legacy solutions and the difficulty to introduce new capabilities through them. The second is adhering to compliance and regulatory needs. The third is getting solutions to market without losing control of quality.

“What we like to help banks do is really pull together the right suite of products that they can introduce to their customers to not only create immediate value for their customer, but to also create a great experience for the customer,” Nilles said.

“It’s that balance of being quick and fast to meet the needs of the consumers, but also managing your product offering. And this is what we try to do with our solution called Ren, is to bridge that gap between the legacy solution in the future and current needs of the bank, as well as keeping the solution in regulatory compliance, no matter where it might land in the world.

“And then lastly, managing that offering to make it cohesive and seamless for the customer as they interact with merchants or the bank itself.”

Indeed, compliance is a major issue that has to be carefully navigated amid rapidly evolving regulations, especially in a reactionary manner toward certain events.

“That compliance issue is a really big deal,” Riley said. “Look at some of the things that happened recently in P2P payments where consumers weren’t really understanding that payments are irrevocable once they go through the process and the regulations that protect consumers were not keeping pace with what was going on. It caused many of the financial institutions to come up with their own rules on it.”

The innovation journey can be wrought with challenges for any organization ready to adopt the newest solutions in technology. Moreover, success is not guaranteed. However, the rewards can be immeasurable. The Ren Payments platform endeavors to overcome these hurdles.

“Ren was created not only to address our internal needs but the needs of our clients in the form of a microservices-based architecture,” Nilles said.

“This greatly simplifies the implementation process between us and our clients, but it also allows our clients to move at their own pace on that innovation journey. We’ve coined it the incremental innovation path, the way that our product is built.

“It gives you the control to determine how fast you move on your innovation journey, but also to pick and choose what pieces of the solution that you would like to use.”

An example of how that would work: Say a company wants to adopt FedNow within its organization. The next day, this same organization wants to launch a digital wallet for its current customer base. Ren can help, at the business’ own pace.

You can liken it to putting on the brakes as a new solution is introduced, so it’s not taken over by the rushing waters of the implementation. With the Ren Payments platform, organizations can introduce new solutions without negatively affecting their operations.

Moreover, the goal of the Ren Payments platform is to eliminate disruptions in the product road map and the day-to-day operations. It simplifies the innovation path and grants the organization full control of the pace.

Alternative payments are here to stay. These dramatic shifts have been driven primarily by consumer demands for speed, security, and convenience. The pandemic had a hand in bolstering contactless payments such as mobile wallets. With FedNow making its U.S. debut this month, more consumers will be introduced to faster payments.

With all this innovation, banks, fintechs, and credit unions must be ready to do the important work of modernizing their legacy systems, adhering to the constantly changing regulatory landscape, and deploying these solutions without hamstringing their operations. To do that, the right solution that can handle all of these challenges must be implemented, one that can successfully navigate the future payment ecosystem.

An increase in product returns and less patience from customers have made the returns process a nuisance. Many businesses feel that they are in a bind—returns chomp at their profits, but they fear driving customers away by charging for returns. That’s for good reason—most consumers now carefully check for a free and easy return policy before buying anything.

To make life simpler, many retailers contract out part of the returns process to third parties. One such company, Happy Returns, created software and a returns system that makes it convenient, cheap, and less wasteful to return items, one that doesn’t require printing or packaging, and refunds are almost instantaneous. This makes the return process a breeze for merchants, customers, and the environment.

In a recent podcast, David Sobie, Vice President of Happy Returns (a PayPal company), and Daniel Keyes, Senior Analyst of Merchant Services at Javelin Strategy & Research, discussed the state of how companies do returns and how the systems can be improved, especially with third-party help.

Typically, the process of returning items by mail is painful. The customer must print a shipping label, find a box, package the item, then deal with the uncertainty of whether the return will reach the retailer and when the refund or exchange will be received.

On the retailer side, returns are costly and complex.

“For businesses that sell shoes or apparel online, return rates can be as high as 30% to 40%,” Sobie said. “This means that a large portion of the items shipped out will eventually come back as returns. This results in increased costs for shipping, inspecting the returned items, refurbishing them if possible, and managing their resale.”

There is a third stakeholder to consider as well: the environment. The packaging used to return products often ends up in landfills.

“A beautiful return process is one that eliminates friction for shoppers, reduces costs for retailers, and minimizes environmental impact,” Sobie said. “That is what we are striving for.”

Happy Returns provides a convenient solution for shoppers, retailers, and the planet. From the customer’s perspective, the key advantage is being able to drop off the return at one of more than 9,000 partner stores.

“Just like returning an item to a physical store, our service allows shoppers to initiate their return online,” Sobie said.  “Instead of printing labels and packaging items, they receive a QR code and directions to nearby drop-off points. Shoppers can bring their item and QR code to these locations without the need for packaging, and the return process is initiated instantly.”

For retailers, combining multiple items from different shoppers and merchants into a single shipment reduces processing costs.

For example, Sobie said, “if you’re returning a shirt from Everlane at an Ulta Beauty drop-off point, your item will be sealed in a bag and placed in a reusable tote along with other items. Throughout the day, this tote gets filled with returns from different merchants. By shipping these aggregated totes instead of individual packages, the cost per item in shipping is significantly reduced.”

Another source of cost savings lies in cheaper shipping costs.

“We work with about 700 different merchants, and their returns are sorted by merchant at regional return hubs,” Sobie said. “Instead of using traditional parcel shipping, we switch to freight shipping on pallets, which is much cheaper.”

This system not only benefits retailers financially but also improves customer service. When shoppers drop off their items in person and receive an immediate refund, there is no need for customer service calls regarding an order’s status or refund inquiries.

For the environment, Happy Returns adopts reusable shipping totes, which replace cardboard boxes.  

“The totes we use are made from recycled plastic and can be used approximately 100 to 150 times before being recycled into new totes,” Sobie said. “So, it’s an environmentally friendly solution that reduces waste and promotes sustainability.”

Providing customers with an immediate refund when they make a return is also a crucial part of Happy Return’s process.

“If you can give them their money back right when they drop off the item, it greatly improves their experience,” Keyes said. “By partnering with a service like Happy Returns, merchants can enhance the return process, create a positive customer experience, and potentially increase customer loyalty.”

It may seem counterintuitive, but making returns easy for customers is actually beneficial for retailers. When returns are hassle-free, shoppers are more likely to purchase from a retailer and become loyal customers.

“Eighty-plus percent of people will read a retailer’s return policy before they check out,” Sobie said. “If the return process is difficult, it can deter shoppers from completing their purchase. So, by making returns easy, retailers can improve their conversion rates and increase customer loyalty.”

Although there has been discussion about the end of free returns, research shows that shoppers prioritize free returns when they choose a merchant. However, not every return method needs to be free.

To address the cost of returns, some retailers are starting to charge for returns by mail because shipping items back individually is costly and inefficient. At the same time, they offer free return options to their stores or through cost-effective services like Happy Returns.

“The goal is to guide customer behavior while managing costs and maintaining customer satisfaction,” Sobie said. “An example of this approach is seen in the return policy of Steve Madden, where returning to their stores is free, but there’s a small fee for returns through Happy Returns and a larger fee for returns by mail.”

This effectively guides customers toward a free (or inexpensive) return option, which they want.

“It is still important for merchants to provide some form of free returns, whether it’s free mailing returns or other convenient options like Happy Returns,” Keyes said. “Giving consumers the choice to return items for free is crucial because not everyone can or wants to mail in their returns and pay the associated costs.”

There are other pluses to having customers return products in-store.

“Instead of immediately offering a refund, retailers are engaging with customers to understand why they want to return the item and explore alternative options,” Sobie said. “This could include exchanges for different sizes or colors, or even suggesting other products the customer might be interested in.” Personalized support during the return process can turn a refund into a continued relationship with the customer.

With the rise of e-commerce, customers are strategically changing not just where they shop but also how they shop.

“Online shoppers often buy multiple sizes or colors with the intention of returning what doesn’t work for them, a practice known as bracketing,” Sobie said.

Returns by mail are becoming less popular. Customers and merchants find it inconvenient and costly. Instead, merchants are offering alternatives like drop-off points at their stores or through third-party networks like Happy Returns.

“These networks have expanded, and now almost 90% of U.S. households are within a 10-mile radius of a drop-off point,” Sobie said,

Merchants are still figuring out the best policies and methods to charge for returns without frustrating customers. It may take a few years for merchants to refine their processes and offer more cost-effective and consumer-friendly return options. But Happy Returns’ approach is clearly a step in the right direction.

The aggregation of items and use of efficient shipping methods make this method of returns a win-win-win situation. It provides a hassle-free experience for shoppers and cost savings for retailers, and it contributes to a more sustainable future.

Having an outstanding and forward-looking loyalty program is a must for businesses in this highly competitive environment. Turning customers into fans is the ultimate goal for those seeking to secure a significant market share while delivering the “wow!” factor for their customers.

Today’s conversation features Mladen Vladic, VP of Loyalty Operations at FIS, and Daniel Keyes, Senior Analyst of Merchant Services at Javelin Strategy & Research, as they explore the post-pandemic trends of the payments landscape, the implications, and how loyalty programs can evolve and continue to deliver first-rate service for their customers.

If the pandemic has taught us anything, it’s that customers demand more contactless and seamless payments solutions. During the pandemic, consumers were rightly concerned about their health and were disinclined to engage in payment forms that they believed could expose them to the virus on contaminated surfaces. Safety and cleanliness were at the forefront of consumers’ minds, and contactless payment methods surged as a result.

Aside from the surge in contactless payment solutions, other shifts took place, such as the demand for faster payments. This new era, beyond the onset of the COVID-19 pandemic,  ushered in a growing interest in digital currencies.

“The pandemic was a true catalyst to shift to the truly holistic digital approach that most of the brands out there today are embracing,” Vladic said. “The other big trend that I would say is the focus on real-time payments and the acceleration of that trend once to better service customers. The fact that the central banks around the globe are getting more serious about digital currency is another trend that is going to further accelerate.”

Vladic also noted that by 2025 80% of the world’s population will have access to smartphones, providing a growth opportunity for the payments and banking industries. This will be especially profound for the unbanked and underbanked by expanding financial inclusion.

“Acceleration is the keyword,” Keyes said. “The pandemic packed years and years of changes and developments into a very short period of time. Every trend you mentioned was already happening before the pandemic, but it was going to take seven, eight, 10, 15 years to get to where we are now.

“Now that things are slowing down pandemic-wise, we’re left to pick up the pieces and see what happens when you skip seven years in the process of contactless payments and RTP digitization. It’s never going to slow down. We must keep going with where we are.”

When it comes to integrating new solutions, nothing is more cost-effective and convenient than having various solutions on one platform. With the loyalty division and the FIS PaymentsEdge marketing solutions working together, clients get the best of both worlds and then some.

“There’s a tremendous opportunity of two businesses within the loyalty within the FIS payments division, in terms of synergistic potential when it comes to the value that we can bring for our clients,” Vladic said.  “I truly believe on the highest level, on the macro level, that they complement each other.

“I think about loyalty as a long-term engagement value-add tool that is there for the customer on an ongoing basis. It’s really a long-term basis, three to five years. And then I think about PaymentsEdge as a series of this well-packaged, well-executed mini-campaigns that are truly focusing on optimizing card portfolio performance for the issuer.

“There’s a consulting layer on top of that. That makes the FIS payments solutions suite even more compelling for the issuers because it has all of the different products and services that can help with issues with the lifecycle from the acquisition to activation, usage, and retention.”

Said Keyes: “There’s plenty of value in offering the number of solutions that address different areas that are ideally integrated on the same page. That can really benefit various clients in a lot of ways.”

For a loyalty program to hold relevancy for consumers, certain consumer pain points must be addressed. Among these are the ease of redeeming points and the receipt of targeted, personalized communication recommending specific, relevant products and services.

Anything that impedes customers is something to be rooted out, Vladic said.

 “I believe removing the friction is the number one objective for any loyalty scheme,” he said. “We were able to identify the way to make that redemption experience for cardholders that much cleaner, intuitive, real time, and compelling. The traditional redemption experience is comprised of sending cardholders the marketing, content, marketing message to either website or the app.

“We developed the network of merchants, where cardholders by simply paying with their payments card are presented with an offer in real time to redeem their loyalty currency in real time for discount at the point of sale.”

Too many steps in taking advantage of a loyalty program hurt customers’ relationship with a brand, Vladic said. By including offers at the point of sale, consumers are given the choice to take full advantage of the company’s offer without having to sign up with a password on a website or app.

“I just want to hit home how important removing friction is for loyalty,” Keyes said. “You know when a consumer is making a first purchase at a merchant and there’s friction on the way to the end of the purchase, that’s frustrating. But the consumer wants to complete that purchase. They already picked out an item. They might power through for loyalty.

“It’s very easy for consumers to bounce off. Having no friction or having as little friction as possible is really important for loyalty because otherwise nothing you do will work if it’s a choppy process.”

With advancing technology, opportunities abound to evolve and improve loyalty programs.

“These are very exciting times to be in the loyalty marketing space because there’s so much dynamic (changes) and disruption taking place,” Vladic said. “Logically, the consideration is how does the existing program evolve so that we stay relevant to the consumer and the changing expectations by the consumer in cases where the brand doesn’t have any type of engagement or the loyalty program.”

Vladic said more brands are carefully looking at their engagement and loyalty strategy, finding ways to remain top of mind with their customers.

“I’m very excited to see just making redemption of any kind of rewards or value-add easier,” Keyes said. “As far as getting it to the consumer, them accessing it, then cashing it in, with greater speed and greater ease, a lot of loyalty programs can be more effective as things become more instantaneous. I think it really benefits merchants in the end.”

Real-time payments are changing the way money moves within the U.S. With payments processed securely, efficiently, and instantly, this can be a game-changer for both consumers and businesses. However, to implement real-time payments on a national scale, there are challenges that must be overcome, such as the need for a solid infrastructure.

During a recent PaymentsJournal podcast, Nick Botha, Global Payments Sales Manager/Sales Lead at AutoRek and Albert Bodine, Director of Commercial and Enterprise Payments at Javelin Strategy & Research, discussed the benefits of adopting real-time payments, operational considerations, and what we can learn from the UK’s implementation.

One of the biggest benefits of FedNow’s upcoming launch is that it will offer an instant payment option for both consumers and businesses. No longer will users have to wait – transfers  and settlements can take place within seconds. With other traditional payment options still experiencing delays and higher costs, FedNow will provide an innovative solution, helping the US modernize the payment environment.

“Having a government organization running real-time payments is going to be a bit of a game-changer in such a big market,” said Botha. “And with the number of benefits which FedNow has expressly defined, it eradicates the delay experienced by more traditional digital rails such as ACH transfers. One that’s more interesting to me and where we fit into the picture is that it creates new product offerings, encourages innovation, and creates competition.”

Botha explains that there will be an effect on the U.S. market. However, how much of an effect will be based on the level of adoption. Adoption of real-time payments has been considerably lower in the U.S. than it has in India, Brazil, and the UK.

In the US, Botha believes that organizations and regulators will be testing and monitoring regularly to determine where this new solution will be adding the most value.

Although many organizations are eager and ready to adopt FedNow for its numerous benefits, including adding a competitive edge in the global marketplace, Botha says there are a few operational considerations to keep in mind.

 “The most obvious one on the surface is: how is this going to affect existing infrastructure and technology that these organizations have?” Botha asked.

“We must remember that these organizations have built or bought the existing infrastructure and technologies to accommodate certain payment flows, and with something new coming in, how flexible can your organization be?”

Botha also mentions that there are considerable costs involved with adopting both FedNow and instant payments, especially if this is a completely new experience for certain businesses.

Compliance and regulations are other considerations. It is yet to be determined what the Federal Reserve will include as part of their requirements. Organizations must remain flexible  to accommodate these regulations and change strategies accordingly.

Key questions to ask while pouring time and effort into the implementation of real-time payments are: How will this affect revenue? What if the demand is not there?

He also mentions training. How will it work? What benefits will customers be receiving? What will that mean for your internal stakeholders?

Bodine asks, “I think we touched a little bit in our previous conversation on the door that it opens up for fraud. Training is very important. Occupational fraud being a big component of any security or fraud program.”

New avenues for payments can quickly become the next target for fraudsters, yet Botha assures us that this might not be as much of a concern.

“Being run by a regulator does have an effect,” said Botha. “We’ve seen the FCA in the UK and how they’ve managed to partner up with industry players to make sure that fraud is not something that that’s been swept under the carpet. It’s brought to the forefront. It’s well understood. And that way the industry is able to combat some of these fraudsters and the potential for increased levels of fraudulent activity.”

Botha points out that, although the UK has successfully implemented real-time payments for some time, the FCA did not launch it from day one. Its implementation took more of a phased approach, something that the U.S. can consider emulating.

He believes that education is key, and communicating the benefits for users of real-time payments in the US would be critical to nationwide adoption.

“India has more than 5, 10, or 15 times the volume of transactions passing through their real-time payments schemes than the UK does, and likewise in China and Brazil,” said Botha. “So there definitely have been some success stories around real-time payments launched by regulators that the US could benefit from.”

Bodine adds, “I’m hoping that our institutions do have open ears as we move forward.”

FedNow is poised to revolutionize the payments industry and will position the U.S. to further modernize its payments systems to remain competitive. In order to ensure successful adoption of instant payments through FedNow, organizations must count the costs, take a phased approach, and look to other regions to inform their adoption strategy.

For merchants, the customer payment experience is paramount to boosting conversions and avoiding involuntary churn. By taking a more proactive approach, merchants can leverage network payment tokens and account updaters—eliminating customer friction in the process.

During a recent PaymentsJournal podcast, Jason Harding, Product Director of Optimization at Worldpay from FIS, and Daniel Keyes, Senior Analyst of Merchant Services at Javelin Strategy & Research, delved into how organizations can improve their payment strategy to cut costs and refine the customer experience.

Many merchants that Worldpay from FIS works with are looking for ways to save on operational costs and are also eyeing key areas to foster growth.

But it really comes down to what their payment strategy is. Because marketing spending may be subject to budget cuts, having a profitable payment strategy can ensure a higher percentage of conversions for first-time shoppers. Although it’s important to focus marketing spending on effective acquisition strategies to attract as many customers as possible, it doesn’t end there. Figuring out how to retain customers is just as crucial.

“Increasing the lifetime value of the customer that you have can be done within an effective approach to payments to ensure that those who are coming through the funnel have the best possible chance to convert,” Harding said.

Often, merchants may not be as comfortable taking a new approach or experimenting beyond what they have traditionally done. But Keyes notes, it’s important to find creative ways to boost conversions amid powerful economic forces.

“It’s about getting creative and trying new things with payments in order to increase your conversions when you really need it,” Keyes said. “There’s an opportunity to improve your operations so you can break even or even improve during these periods of time rather than just trying to wait it out.”

When it comes to having a robust payments strategy, merchants also need access to the right data. Many solutions can be leveraged to ensure they have the latest customer information to process timely payments and enhance the customer experience. “Part of it is understanding what’s actionable insight versus what is the noise,” Harding said. “What is the data that we have access to? What data can we use to benefit an organization?”

To ensure that customer credentials are up to date, Harding recommends using network payment tokens, which are unique digital identifiers that provide a tokenized value in place of a primary account number that is used throughout the payment chain. Payment tokens reduce checkout friction without compromising security. There’s also an account updater—another important tool—which automatically updates subscription customer card credentials.

Catching that sale, even when customer credentials change, means staying ahead of the curve through actionable steps. “It’s taking the information we have and finding those actionable pieces of what we can do to get to the end result, if the result is higher conversions,” Harding said.  

Merchants must also take the initiative to convert transactions by using the data that is made available and not waiting until the next billing cycle.

“Proactive is the keyword, where having this data gives a merchant more opportunities to know if an account is closed,” Keyes said. “To try to convert that transaction when it comes up a few weeks later because you bought extra time to figure that out as opposed to waiting until the billing cycle comes up. Using data to create more opportunities to convert including convert transactions that you thought you had in the bag.”

Harding posed a series of questions: “Is there a time of week that I should retry that transaction? What time of day am I typically seeing success? How do I use that information to effectively make the most of my strategy? That comes from experimentation learning and then applying that and re-experimenting.”

According to Keyes, simply initiating a transaction and expecting it to automatically go through doesn’t consider the real complexities surrounding these transactions. Again, data can be leveraged to determine the best strategy.

“There are so many more ebbs and flows where the time of day can matter,” he said. “The day of the week can matter. But these things, depending on the business, depending on the customer base, can increase or decrease conversion.”

As merchants look to effectively implement a routing strategy, the right approach greatly depends on the types of solutions they’re already using.

“There’s many variables at play, such as card issuer, type, brand, the authorization mode—whether we’re using a CV2 verification, whether you’re using 3DS, you know geolocation, there’s tons of different payment credentials,” Harding said.

Ultimately, a merchant must focus on which solution delivers the best customer experience.

“I think a lot of these solutions are incredibly important,” Keyes said. “Account updater is a great example of one that really affects the customer experience. If I get a new credit card and I go to a merchant, I’ve shopped before and suddenly I need to input my credit card information when I haven’t the last 30 times I’ve purchased there, that’s really frustrating and it sours the experience.”

An effective payments strategy ensures that first-time and ongoing customers have a reason to continue doing business with the merchant. Amid increasingly tighter budgets, merchants must have high conversion rates top of mind, and this begins with leveraging relevant customer data.

With this data, merchants will be armed with the information necessary to avoid missed payments as they deliver exceptional customer experience.

In the rapidly expanding world of buy now, pay later (BNPL) services, credit unions are finding ways to compete and thrive using Credit Union Service Organizations (CUSOs). CUSOs are formed by credit unions to collaborate and pool their resources to offer efficient and cost-effective payment solutions for members.

By partnering with a CUSO, credit unions gain access to economies of scale, advanced payment technologies, risk management expertise, regulatory compliance support, and improved member services. It also allows them to compete with larger financial institutions by providing modern payment solutions to their members.

During a recent PaymentsJournal podcast, Cody Banks, managing vice president of Payments and Fraud Strategy at PSCU, and Brian Riley, Co-head of Payments at Javelin Strategy & Research, explored the unique BNPL options that credit unions can offer and how those can enhance members’ financial wellness.

With the ubiquity of BNPL options at point-of-sale checkouts, as well as the capacity to budget for purchases retrospectively, consumers have embraced the payment model. The ease of use, checkout process, and straightforward terms—and the fact that many services offer zero-interest or low-interest rates—add to the appeal.

Although BNPL can serve as a helpful budgeting tool if used correctly, it also carries the risk that consumers could exceed their means if the method is not managed carefully. To mitigate this risk, credit unions must strike a balance between embracing BNPL as a budgeting tool and ensuring responsible lending practices.

“Packaging BNPL services in a way that promotes responsible use and aligns with the credit union’s vision is crucial,” Banks said.

By leveraging existing credit lines and working within consumers’ approved credit limits, credit unions can help members better budget their purchases. To make this possible for their members, credit unions have teamed up to offer these services with CUSOs, such as PSCU, to offer BNPL and other products.

“Something that PSCU has done nicely is integrating BNPL into a platform where the credit union can offer the similar product that’s been done by big banks for a couple years now,” Riley said.

One significant difference between PSCU’s Installment Payment solution and programs put forth by major players like Affirm, Klarna, and Afterpay lies in the consumer-centric approach. Whereas the fintech model often prioritizes merchant partnerships, PSCU’s post-transaction world focuses on putting the consumer at the center of the experience. This shift allows credit unions to maintain strong connections with their members and prioritize their financial well-being.

“PSCU’s solution populates three different options for installments—it could be four, six, or ten installments depending on the size of the loan,” Banks said.

Consumers can pick whichever structure works for them. And education is key in ensuring that members understand how to use BNPL as a beneficial budgeting tool without falling into the pitfalls of overextension.

“With PSCU’s BNPL offerings, you’re staying within your line of credit,” Banks said. “You’re able to better budget those purchases and focus on financial health. Other BNPL providers are not checking to see how your ability to repay is, and that is leading to overextension. Their loan approvals are done with the intention of getting the consumer through the turnstile.”

Credit unions are continually looking to reach younger consumers, and BNPL can draw them in.  

“In dozens of conversations that I’ve had with our FIs, they are always shocked at how many cardholders are already using this form of payment,” Banks said.

“Appealing to younger age cohorts is really important for credit unions, and that’s a challenge that the industry has had for years,” he said. “The population is aging, and when you look at where you want to grow, it’s not necessarily with people in their 50s and 60s. You want to snag customers when they are early in their careers. Innovations like BNPL allows you to address that age cohort.”

By partnering with PSCU, credit unions can provide their members with a modern and user-friendly BNPL experience. This resonates with digital natives who value convenience and transparency in their financial transactions.

PSCU’s BNPL services allow individuals to budget their purchases effectively without being enticed by lenders that may extend credit beyond their realistic repayment capabilities. In a financial landscape where predatory lending practices are prevalent, credit unions that align themselves with responsible BNPL offerings can gain a competitive edge.

According to Stripe’s latest Insights Report, businesses are treating the impending slowdown with a motto: The best defense is a strong offense. Businesses are using this as an opportunity to improve their online operations by offering better payment experiences and removing friction from checkout.

In a recent podcast, Nicole Paglia, product marketing lead for Stripe, and Daniel Keyes, head of merchant services at Javelin Strategy & Research, discussed the latest trends in consumer payments from Stripe’s Insights Report and how companies can build a payments experience that increases revenue and drives brand loyalty. Here are the highlights from their conversation.

The Stripe Insights Report found that many business leaders are focused on finding new ways to make money and not just cutting costs during the economic slowdown.

“Going into our research, we were actually expecting to find businesses to be laser-focused on cost cutting, given everything happening in the economy. But surprisingly, the survey said that companies aren’t really playing defense as much as you might think. They’re really focused on top-line growth as well as costs,” Paglia said.

To optimize revenue, businesses are looking to give customers more payment options and make checkout more convenient.

“Seventy-one percent of businesses we surveyed are planning to offer more payment methods and more affordable payment options,” Paglia said. “Also, 65% of businesses said that they think their customers would prefer to pay with one-click versus manually entering payment details, and are planning on adjusting accordingly.”

To find new revenue streams, many businesses are planning to offer financial services like charge cards and bank accounts embedded in their products or platforms.

“A stunning 75% are planning to embed payments or financial services like a charge card or bank account, right into their platform,” Paglia said. “Businesses can earn money when a cardholder makes a purchase, because they’re ultimately able to keep a portion of that interchange fee. So they’re building an entire new business just from payments.”

Keyes agreed that embedding payments on native platforms can be a moneymaker, but he also identified other benefits.

“It also allows platforms to have a deeper relationship with the merchants they work with, by offering additional services,” Keyes said. “This can lead to more revenue and value for both parties involved.”

Consumers want more convenience, speed, and security when they buy things online. If the checkout process requires more than two minutes, most people won’t do it. So businesses need to make it as easy as possible to pay.

“For businesses, this means if you’re not removing every single piece of friction from your checkout, you’re leaving money on the table,” Paglia said.

Optimizing conversion begins even before you get to checkout.

“Integrating financing offers like BNPL (buy now, pay later) throughout the consumer journey, from awareness to purchase, can increase conversion up to two or three times,” Paglia said. “Consumers are more likely to purchase if one-click checkout options like Apple Pay and Google Pay are offered, and these mobile wallets are three times faster than manually entering card information.”

It’s also important to offer the payment methods that people in various countries prefer. For example, US consumers like to pay with cards, but in the Netherlands, people prefer a method called iDEAL, and in Brazil, people like to pay with a voucher payment called Boleto.

“We found that 85% of consumers will frequently abandon their carts if their preferred payment method isn’t offered,” Paglia said.

Companies like Stripe can help businesses accept many payment methods and choose the ones that are most likely to convert customers, based on where they are and which device they’re using, for example. All of this can have a substantial payoff.

“We did a study and found that businesses who use Stripe’s optimized checkout suite earn 10.5% more revenue on average than businesses who haven’t upgraded,” Paglia said.

Over the past 10 years, consumer expectations around online checkout have changed a lot.

“People used to be OK with entering information and clicking through multiple pages to check out, but now they expect fast and easy checkout options like digital wallets, such as Apple Pay and Google Pay,” Keyes said. “It’s important for businesses to consider creating a frictionless experience for their consumers, starting before the checkout page and maybe rethinking the traditional checkout process altogether. This will help create a positive experience for consumers and keep up with their changing expectations.”

Customers now expect fast and seamless experiences online and during in-person shopping. Even though 80% of commerce still happens in person, many businesses haven’t adapted to the new demand for in-person experiences such as curbside checkout and contactless payments.

“Businesses that offer unified commerce may see a 20% uplift in total revenue within the next two years, according to a Gartner prediction,” Paglia said.

Unified commerce, also known as omnichannel commerce, refers to the seamless integration of online and offline commerce channels into a single, unified experience. With unified commerce, businesses can offer customers more flexible and convenient options for shopping, such as buy online and pick up in-store, or returning online purchases to physical stores. By integrating all channels into one cohesive system, businesses can gain a better understanding of their customers and provide a more personalized shopping experience, ultimately increasing revenue and customer loyalty.

Although some companies will choose to do this in-house, it may be easier to turn to a third-party payments provider to implement this. For example, Stripe offers a solution that meets customers wherever they are, with a single integration. Stripe Terminal offers two types of payment acceptance, including Stripe-designed hardware and contactless Tap to Pay on iPhone or Android. Plus, businesses can get unified views of their customers across online and offline purchases.

After a customer clicks to purchase, a lot is happening behind the scenes that could cause a payment to fail. Issuing banks make a final decision on whether to accept or decline a payment, based on such factors as available funds and suspicion of fraud, but they often decline many nonfraudulent transactions.

Paglia noted that “industry experts estimate that 75% of declines are actually legitimate customers.”

To prevent customers’ purchasing attempts from being declined, businesses should keep fraud rates low using fraud-prevention tools like Stripe Radar, which reduces disputes by 41% on average, Paglia said. Businesses can also enable network tokens and card account updater products to automatically update customers’ payment information when their cards are reissued.

“By optimizing checkout and meeting customers where they are, you can turn payments into a competitive advantage for your business that ultimately helps you build more brand loyalty and create successful repeat customers,” Paglia said.

Real-time payment systems are becoming more common around the world, and the United States is about to hit its stride in that domain when FedNow debuts. This will have significant implications for all sectors of payments, including the business-to-business (B2B) sector.

In a recent PaymentsJournal podcast, Mike Kresse, Head of B2B and Money Movement at FIS, and Brian Riley, Co-Head of Payments at Javelin Strategy & Research, discussed how real-time payments will play out in the B2B sector, and how the U.S. rollout will differ from how it played in other countries. They also delved into how interoperability, simplicity, and reduced cost will drive rapid adoption of real-time payments, even though that adoption does not have a direct mandate from the federal government. It’s similar to how movie streaming rapidly gained dominance over broadcast television.

Although some countries have mandated the use of real-time payment systems for incoming and outgoing payments, the United States has not (yet) done so, reflecting its decentralized, market-driven approach.

“Adoption in the U.S. around real-time payments is going to be more focused around the use cases in specific industries,” Kresse said.

One such use case that is ripe for development is the automation of back-office processes, including collections management and accounts receivable and payable. Such automation is becoming more prevalent as companies seek to streamline their operations through technology.

As FedNow accelerates the adoption of real-time payments, a wider range of banks will seek to plug into its system. This brings opportunities but also certain risks.

“There’s a dark side to real-time payments—many of them become irrevocable, and that’s the problem we’ve seen in the industry as this starts,” Riley said.

As more people become accustomed to using peer-to-peer (P2P) apps to send money to friends and family, they will also naturally become more comfortable with the idea of using these apps for business transactions. As more businesses move online and embrace digital tools, they are also looking for ways to streamline their payment processes and make transactions more efficient. P2P payment apps have paved the way for this shift, and businesses are beginning to see the potential benefits of using these tools for B2B payments.

“It typically starts from a consumer-to-consumer standpoint, where consumers are looking to give other consumers money in real time,” Kresse said. “And ultimately that ends up being manifested in an app that’s typically sitting on a smartphone that’s really simple to use.”

The shift to incorporating the technology in the business world must take into account the different kinds of common transactions. “The consumer world has high volume of low-value transactions,” Riley said. “B2B is a world of low-volume, high-value transactions.” This demands a shift in fraud detection techniques and risk profiling.

As part of the shift toward real-time payments, there will be a move from accrual accounting to real-time ledgers. In accrual accounting, revenues and expenses are recognized and recorded when earned or incurred, regardless of when the actual cash transactions occur. As real-time payments take hold, companies will naturally move away from this.

The biggest drag on real-time payments adoption is the lack of interoperability between payments systems, particularly real-time systems. Globally, it will be important to craft a real-time payments system so hops between distinct systems are minimal.

“Even though The Clearing House and FedNow use the ISO 20022 message format, those systems are not interoperable. You cannot send a message directly on RTP and have it just transfer over to FedNow,” Kresse said

Another potential drag on adoption is that people don’t necessarily know why real-time payments are necessary or even a significant improvement on existing technologies. Given that there will not be a U.S. mandate for adoption of real-time payments, companies will have to actively market their solutions to address these concerns.

Use cases ideally should benefit payers and payees. A good example is the request-for-payment feature, in which customers can see their bill balance change in real time once they’ve made a payment. In that scenario, customers can pay their bills closer to the wire and have a more user-friendly interface, while the biller can receive the funds quicker.

Technology companies should also make the transaction process as simple and efficient as possible by minimizing the number of steps or intermediaries involved. Solutions should be intuitive and easy to learn.

“My 20-year-old should be able to pick it up and start using a B2B app immediately like they would be able to use an app on their phone even though it’s a business-facing application,” Kresse said.

Riley also added that real-time payments should have the simplicity and elegance to make them a no-brainer, like other payments technology. “When you look at the elegance of a credit card transaction, people swipe and they just assume it goes into it down the process,” he said. “But there’s a lot that goes on beyond that velvet curtain. And when you’re dealing with money movement cross-jurisdictions in a business-to-business environment, it’s much more complex, but it still has to have that same elegance.”

Over the next decade, expect to see a few key developments play out worldwide, including interoperability, as well as a continued push to immediacy.

“If we think back to 20 years ago, the concept of me being able to automatically stream any movie from my phone anywhere in the world, through any of the number of streaming services, was not something that we saw materializing really quickly,” Kresse said. “Yet within 10 years, we were absolutely there.”

The same will be true of payments.

Furthermore, as the real-time payments systems become more interconnected, costs will decline.  

“Ten years from now, we’ll be on our path to being able to send anyone money anywhere in the world at a very low cost, in a way that is safe and simple,” Kresse said.