PaymentsJournal

Despite technology’s move to the cloud over the past decade, many payment processors still use old, outdated platforms that are inflexible and costly. 

Payment processing companies such as PayiQ, a division of Quisitive, are creating new payment processing platforms that use cloud technology. These systems provide everything traditional payment services do but also leverage cloud-based architetcture to make transactions faster, more secure, and automated.  

During a recent PaymentsJournal podcast, Dan Devlin, Senior Vice President of Solutions & Strategy at PayiQ, Tom Byrnes, Senior Vice President of Marketing at PayiQ, and Daniel Keyes, Senior Analyst of Merchant Services at Javelin Strategy & Research, discussed the many benefits of cloud-enabled payments processing and how it better positions specific industries, including retail and food service, amid economic and demographic headwinds. 

Cloud-enabled payment processing has two main components. The first is processing payments quickly and reliably. Cloud technology helps with this by spreading servers out across multiple locations, so if there’s an issue in one geographic area, the system can still work without disruption. This also helps with response time because there are multiple routes that can be optimized in real time for the transaction data to travel.  

Cloud architecture is designed with the latest security protocols in mind, which help protect it from threats such as hacking and data breaches. In PayiQ’s architecture, its cloud-enabled platform also acts as an integrated order processor in addition to handling payments. This means the platform allows merchants to consolidate both payment and order information in one place, creating a single lens into both transaction and individual order data that makes it easier and more efficient for them to run their businesses. 

“In the past, if a merchant wanted a report of their transactions, it would be a time-consuming and custom project,” Devlin said. “Traditional payment processors had to create a special report to get access to that data, and downloading those reports was a difficult, frustrating, and often expensive process for merchants.”  

With modern cloud-enabled technology, accessing and downloading such reports is both much easier and faster. This is especially true for public clouds such as Azure, which can enable merchants to get reports far more quickly and efficiently. 

Payment processing technology is generally based on pre-Internet technology stacks that are just starting to move into the information age. This can be seen most clearly in the operations of independent sales organizations (ISOs), which are specialized third-party companies that partner with credit card processors and acquiring banks to sell payment processing services to merchants.  

ISOs have been slow to adopt new technologies—the industry has traditionally relied on paper-based processes, such as filling out applications and contracts, and using Excel spreadsheets for record-keeping.  

PayiQ recently commissioned an independent national survey of ISOs and found that the process of getting new merchants on board—vital for this sector—is slow and expensive, often requiring a lot of people. 

“For most ISOs, the average onboarding process alone takes three people, as much as three to 11 days, and anywhere from hundreds to thousands in overhead,” Byrnes said. “While every account is different, the longer boarding times can be attributed to incomplete applications, higher risk profiles, or issues that emerge during the underwriting process.”

To help improve this situation, PayiQ has designed a platform that can support a suite of automated tools that make the onboarding process, chargebacks, and residual management fully digital, faster, and less expensive. What’s more important, the platform allows merchants to see the behaviors and product preferences of every customer that pays with a card across all channels, including in-store transactions. This data can help merchants personalize their communication with customers to better align with their business goals and objectives. 

“Because we sit in the payment flow, when somebody pays for something, our platform sees whether that card has ever been presented in our system before,” Byrnes said. ‘If not, we grab it, do a mathematically secure one-way hash (cryptographic encryption), secure the card as an identifier in a cloud, and then pin all the transaction and order data to that card to create an individual-yet-anonymous profile for each customer.”  

The phrase “omnichannel payments” has become a buzzword, but most of the companies claiming to do it are not living up to the hype. 

What helps PayiQ be omnichannel, as opposed to other payments processors, is that it tracks payments and orders not just in digital or mobile channels but also across brick-and-mortar locations. The company provides real-time tracking of behaviors and purchase preferences of all card-paying customers across every channel, including online and offline, even for orders that are placed online but are for in-store pickup.  

“Despite the rush to online buying that we all made during the pandemic, roughly 86% of all goods and services are still sold in a brick-and-mortar location,” Byrnes said. “That is a massive blind spot for the current crop of “omnichannel” tracking systems that really only focus on digital transactions. With PayiQ, you can see online and offline in real time, even if an order comes in online for pickup, which is increasingly common now.” 

In today’s economy, processing payments is table stakes and PayiQ believes that innovation comes from  creating value-added products that harness the data from those transactions and makes it actionable. 

While the company offers data capture and analytics as a value-added product by providing a single view of the behavior of previously anonymous customerss across online and offline channels, security features are just as important. 

Cloud-enabled processing is secure because the system is designed to allow access only through payment transactions with specific credentials. At PayiQ, the sensitive payment data is instantly tokenized, or encrypted, to make it unusable to hackers. Merchants can access the data in a secure-but-anonymous form that doesn’t reveal sensitive customer or payment information.

“Handling changes in regulations is extremely important because they’re changing so rapidly,” Keyes said. “Data needs to be taken care of very carefully, and it’s difficult for merchants to do because they’re busy selling stuff. Having support with handling regulations can really help businesses thrive.” 

Having a cloud-enabled payments processor also carries additional industry-specific benefits, particularly for the retail and restaurant sectors. To understand these benefits, it’s first important to know that these industries are going through two seismic shifts.

The first is that the pandemic has changed how consumers shop. Many have turned to digital channels for their everyday needs, making it hard for businesses to make personal connections with their customers.  

“What I’ve seen is an explosion of what is known as the unattended space,” Byrnes said. “On a recent trip to Southern California, I saw automated kiosks selling sandwiches at the airport and a toiletries kiosk at my hotel. Also, the third-party delivery services for meals or shopping that have become so common keep the personal customer data and order information. That’s a domain that has always been with the merchant.” 

In both cases Byrnes cited, the customer is at an extra level of removal from the merchant. “That impacts their ability to engage and develop a meaningful, long-term relationship with that customer,” Byrnes said. “In the case of even a delivery system, the delivery company keeps the personal data, the order data, (and) not the restaurant—and that’s a huge problem for them because it reduces the frequency of direct touches or engagement with a brand that is critical to providing the kind of customer experience that builds lasting loyalty.” 

The second big shift lies in demographics. In the 2020s, the population movement will be profound. Baby Boomers are a large generation that is now retiring from the workforce in huge numbers.  It is being replaced by smaller generations, and that’s resulting in fewer workers to go around, according to Byrnes. What’s more, Millennials are not like their parents were. They are more technologically sophisticated, educated, and brand-centric, plus they are aware of the value of their personal information “All of a sudden, you’ve got merchants struggling to find employees and new ways of connecting with their customers to deliver a consistent brand experience. To fill the that gap, they are starting to put more technology between them and their customers,” he said. 

Ultimately, merchants are trying to navigate these changes while maintaining a strong connection with their customers. As demographic trends continue to change, new technologies  will likely be doing the same amount of work with fewer people. An advanced cloud-enabled payment processor designed to deliver customer insights with advanced security can help merchants move in that direction. 

Check deposits have been a constant focus for fraudsters, but during the pandemic we saw a significant decrease in check fraud as government stimulus programs were targeted. By the middle of 2021 however, check fraud was back with a vengeance and the water level has seemingly risen to historic heights. To mitigate risk and  losses, financial institutions should consider partnering with third-party companies, like Fiserv, to help manage and safeguard against rising fraud exposure.

A recent webinar from PaymentsJournal features industry leaders in check deposit solutions, who discuss how they can help financial institutions reduce fraud losses through new technology and insight. The webinar features Brian Riley, Director of Credit at Javelin Strategy and Research; Jeff Burton, VP of Deposit Solutions at Fiserv; and Rodney Drake, Chief Strategy Officer at Valid Systems.

The three speakers provided important insights into check fraud, which are summarized below.

With the increasing risk of check fraud and the migration of transactions to mobile channels, institutions must provide efficient and secure services to customers while managing risk.

“Clients are looking for less friction and faster availability of funds once they deposit a check,” Drake said. “Yet in providing that, the bank is obviously leaving itself exposed to more risk, particularly in mobile.”

Traditionally, there was a significant period between when a check was deposited and the funds were made available. Customer expectations continue to grow around instant payments and availability. But shortening that period can drastically increase risk, making it easier for crooks to commit check fraud.

After the onset of the COVID-19 pandemic, the government injected an unprecedented amount of stimulus money into the economy, much of which was distributed through checks.

“Those checks became easy targets for fraudsters, who took advantage of the lack of investment in fraud prevention in the check business,” Burton said. “Additionally, with more people working from home, more checks were sitting in the mail, which led to an increase in check fraud.”

Checks are obviously not top of mind for many banks as the emphasis shifts toward digital payments. However, Despite the declining check usage, it remains an important payment method and therefore requires investment in fraud prevention to safeguard depositors.

“Organizations have historically invested more money on other payment types like Zelle, ACH, and P2P payments,” Drake said. “Check payments have been neglected due to the perception that it’s a declining business. This makes check payments an easy target for fraudsters since they know where the spending has historically been focused.”

Fiserv has partnered with Valid Systems to offer clients ’ machine learning solutions to detect anomalies in checks that can indicate fraud.

Here are a few ways artificial intelligence and machine learning can be applied:

By analyzing large datasets, identifying patterns and anomalies, and monitoring transactions in real time, banks can improve their fraud detection and protect their customers from financial losses.

The check processing industry is consolidating, and new technology is being incorporated to speed up check clearing to deliver a best of breed experience for both the institution and the consumer.

“If checks could be converted to instant payments, it would unlock a lot of value and improve the customer experience,” Drake said.

Instant check conversion would greatly benefit the customer experience and reduce costs and risks for banks. This includes improving back-office processing, reducing manual review queues, and minimizing expenses and waste for banks.

To improve the customer experience, banks need to broaden their focus beyond just managing customer deposits.

“Fraudsters are experts in understanding bank policies, so it is important to be proactive in managing risk across all transactions, not just at the point of presentment,” Burton said.

Furthermore, banks can more easily accomplish this by partnering with a third party like Fiserv.

“Fiserv helps smaller institutions compete with larger ones by democratizing the availability of these solutions,” Riley said. “The consortium approach to managing data creates a learning loop and helps all companies involved, regardless of their size.”

As check volumes decrease, the risk of fraud increases, so managing that risk market-wide and investing in technology to safeguard banks’ balance sheets is essential. By doing so, banks can improve the experience for customers and reduce their expenses and costs.

As the world increasingly becomes digital, digital wallets continue to grow in popularity. As a preferred method of payment for many customers, they offer a host of benefits. These include the ability to simply tap a smartphone to purchase goods and services, the capability to store numerous debit and credit cards, as well as to house loyalty program information. What’s not to like?

The PaymentsJournal podcast was joined by Damany Abernathy, Executive Director of Solution Engineering at CSG Forte, and Christopher Miller, Lead Analyst in Emerging Payments at Javelin Strategy & Research, to discuss the expanding popularity of digital wallets, as well as the security challenges and inherent risks of their growing use.

Amid widespread fear of contracting COVID-19 during the start of the pandemic, contactless payments became increasingly important for consumers. According to Abernathy, the pandemic contributed to the disruption of payments, bringing about a new normal. Paying with cash was no longer desired, and anything that provided a cashless environment reigned superior.  

“From a U.S. perspective, I don’t believe there was a singular event, but rather it seems there was a trifecta of sorts that aided in its surge—that being EMV (Europay, Mastercard and Visa, an embedded-chip technology designed to limit fraud), COVID-19, and Millennials, including those generations after,” Abernathy said.

“I do recognize that the weights of the aforementioned aren’t equal, but each played their respective part. EMV was the primer that forced the shift in tendering behavior.

“Then we moved from swiping to inserting and tapping. But it was the cost and complexity of integrating EMV that caused many merchants to seek alternative acceptance methods that aided in digital wallet normalization.”

On the merchant side, Abernathy added, digital wallets presented many benefits, including a faster checkout experience, a reduction in cart abandonment, and enhanced levels of security that nearly eradicate the risk of fraud.

“One thing that we have seen is a reemergence in some cases of cash transactions, at least even in younger generations,” Miller said.

“The notion of envelope budgeting as a way of controlling expenditures had, to a certain extent, grown out of control because of pandemic-era habits.”

As for the future of digital wallets, Miller asked whether we should expect “persistent, continual growth.”

Abernathy mentioned that the younger generations are the “final catalysts.”

“The younger generation really pushed the envelope regarding their finances, credit card ownership, and how they want to pay and be paid,” he said. “This is forcing wallet ubiquity, at least for peer-to-peer payments, as that is the easiest means of payment across social mediums.

“Businesses are recognizing the need to attract these younger buyers, and they’re helping to tip the culture shift of payment options.”

Although digital wallets are relatively safe, consumers will always be fixated on the security of their personal and financial information. Organizations must continue to take the necessary measures to ensure this security and ease the minds of their customers.

Abernathy said he believes that digital wallets deliver on the security angle and customers can rest assured that their data is well protected.

“Not to say that there aren’t ways to fraudulently use someone else’s credentials, but the security framework on the cryptography is very solid,” he said.

“The provisioning process alerts consumer banks and the associate networks to the wallet and payment credential that’s being married, and so you know ultimately what you’re obtaining in your application or this mobile app.”

Whereas losing cash can be an irrevocable loss, as there is no true ownership, and credit cards can be easily stolen and used, Abernathy explained that digital wallets have the “liability and security” baked within the technology, making it a more successful payment vehicle for customers, merchants, and even banks.

Any business that wants to remain relevant and profitable must keep a close ear on its customers’ needs and wants, especially in this rapidly evolving digital payment space. CSG Forte has determined that this is its secret sauce, developing and tailoring the solutions its customers want.  

“Ultimately, market listening is more than just a skill. I attribute it to a guiding truth,” Abernathy said. “We have a well-understood target market, and the solutions we bring need to meet the demands of our vertical focus.

“Much of our clients fall within the SMB (small and medium-sized business) space, and for them, there’s no appetite to develop huge amounts of code and logic supporting the request and decryption of wallet payloads for each wallet scheme they would like to support.

“Our focus is on solutions that enable frictionless integration and deployments that aid in enhancing the checkout experience for both the customer and merchants.”

Abernathy went on to say that it is important to continually assess the needs of clients. Based on the next trend, CSG Forte’s focus is to facilitate the adoption of that new technology.

He also emphasized the importance of partnering with a solution provider that can provide the best-tailored solution for a business based on the organization’s desired strategy for growth.

When asked about what he sees next on the horizon, Abernathy mentioned that cryptocurrency, although once hailed as a valid asset, will now be seen as a currency tool, especially in regions where there is a lack of banking infrastructure. It will be interesting to see how this new payment method unfolds, he said.

Traditional banks are struggling to make the pivots necessary to keep up with the latest technological trends while still delivering on customers’ needs. With many depending on legacy systems to conduct daily operations, it has been difficult for these long-established players to be nimble, and they often lose out to competitors that can launch the newest technology.

During the PaymentsJournal podcast, Tom Kleinsorge, Vice President of Global Software Sales at Euronet Worldwide, and Brian Riley, Director of Credit/Co-Head of Payments at Javelin Strategy & Research, explored the delicate balance traditional banks must strike to attract the new generation of banking consumers while keeping longtime loyal customers happy.

Neobanks have been disrupting the traditional banking system for some time. Without the time and costs allocated to staffing and maintaining physical branch offices, these new online banks are freed up to be agile and pour their efforts into delivering top-notch customer service, using the latest in innovation to enhance the overall consumer experience.

Where are traditional banks missing the mark?

“Banks are challenged with understanding who their customers are and how they can serve this wide variety of customers that they have to deal with,” Kleinsorge said. “Traditional financial institutions are in business to make money, and they need to provide the services that their customers are going to use.”

He added: “What FIs around the world are grappling with: How do they provide this, maintain the stability, and offer the services their clients need? The next challenge is: How do they expand for the next generation of customers coming in? They’re challenged with this in a lot of different ways. They need to be able to adapt quickly.”

A banking customer’s lifecycle, Riley said, is the key to unlocking what a customer needs.

“People go through cycles,” Riley said. “You have different needs as you go through financing. That’s why it’s important to capture this segment because it’s like your first date. You always remember it. And you remember that first relationship you have with a bank. And people go through this lifecycle, they start coming out with college loans, which was not something that was prevalent a few decades ago to the extent that it is now.”

The cycle continues after that, Riley said.

“They start getting their first job, finding a partner or a spouse or whatever that means. And then moving into a spending mode,” he said. “Then they start maturing and it’s time to shift from spending to saving and investing. They’re going to ultimately get into financial service products, like shelter products, mortgages, and so forth.

“So it’s so important to address this universe of people that are aging through the process.”

Adopting new technology is not without associated issues. Traditional banks can still rely on being the stalwarts of stability.

“New innovation brings its own challenges with compliance, regulation, and security,” Kleinsorge said. “The traditional FI has always been the bank. It was a trusting place to do financial transactions of financial activity.

“New entrants and new emerging technologies are coming out with PSPs (payment service providers), wallets, and alternative channels and new providers. The fintechs are coming out with all kinds of really cool technologies that challenge the banks and the traditional way they do the business. They (banks) are trying to find the balance of how they can support the new emerging customer requirements and needs that are coming out so fast, as well as providing the stability and the legacy capabilities that they’re known for and the world depends on.”

Critics continue to focus on the reasons traditional banks should modernize their legacy systems. Not doing so will pose a significant hindrance to their ability to compete with more nimble competitors, they say.

“The legacy technology is real because it’s reliable, it’s stable, it does what it does,” Kleinsorge said. “It’s been around for a long, long time. But there’s also emerging technologies that are coming out that these legacy applications just have a hard time adapting to.

“Euronet has been working in international and emerging markets for the last 30 years. And we keep seeing this leapfrog where you’re seeing the smaller economies, the smaller banks, some of the new entrants like the new digital banks, they’re leapfrogging some of the established providers and players in the market because they don’t have that legacy infrastructure.

“So they’re able to use some of the newer (technologies) that are coming out quicker. We have some customers that are jumping right into contactless and cardless technologies.”

Although new technology is always welcome, the two features that should be table stakes involve security and the user experience. Younger consumers want speed and convenience. The older folks don’t mind waiting but also certainly like to have the “wow factor.”

“There’s a different expectation, but that security theme goes throughout, and that’s where the process can blow up,” Riley said. “The nimbleness of these systems is important. A lot of this stuff has to be real time, and that’s how you keep a competitive edge.”

Even with all the innovations in the fintech industry, something about the bank as an institution gives off an air of stability. Kleinsorge agrees that banks still have robust stabilizers in place to protect them, by harnessing consumer trust.

“I think you still have the stability of what the financial institutions do and the regulation, the insurance and the FDIC in the U.S. and just the stability of the economy,” he said. “The economy relies on the banking and the financial services industry to maintain that level of requirements compliance (and) structure that that’s out there.”

With innovative new products coming to market, consumers will still have to face potential risk. As a result, financial institutions will always have a key role to play in the financial space.

“There will always be a requirement for the financial institutions to do the money management, the regulation, the compliance, and everything that the stability that is still out there,” Kleinsorge said. “But there will be new entrants that are going to offer new services that are going to be different. So, some of this is going to come down to an individual decision about what level of risk they want to take and what they want to tolerate and see where that goes.”

Amid all the rapid changes, technological innovation, and new entrants disrupting the financial industry with new solutions, what can traditional FIs do to stay relevant and competitive? Kleinsorge said it’s about knowing customers and their needs and delivering those things fast. It’s also about making an abrupt change from current legacy systems, especially if those systems are in-house.

“It’s important that FI’s and the banks know that they can move forward with new technologies without destroying what they’ve already done, because a rip-and-replace technology is terrifying, it’s scary, it’s expensive, it’s risky,” he said. “So being able to move forward with some of the newer capabilities and work with companies that can provide those new services (is the answer).”.

This may go against what is typically advised in the financial space, but it provides FIs with a middle-of-the-road solution that can be more cost-effective and less risky.

For businesses, regardless of size, not all payments partners are equal. Finding the right partner to manage payments can be a key to improving cash flow and simplifying the payments experience, as well as making cross-border payment a piece of cake.

In a PaymentsJournal podcast, Rupert French, Product Lead at Worldpay from FIS, and Daniel Keyes, Head of Merchant Services at Javelin Strategy & Research, discussed what businesses can expect from a high-quality payments partner and how they can differentiate the best from the rest.

Businesses barely have enough time to manage the core functions of providing products and services, so partnering with a third party to manage and optimize their payments is a wise move. It’s an opportunity to outsource a level of complexity to a third party and make sure that there’s as little friction as possible in payments.

“Your payments partner should be specializing in fund flow and simplifying the payments experience,” French said. “And there’s a huge amount of trust that business offloads to their payments partner, which has to be respected. We’re empowered with managing the primary revenue source in most cases for a lot of small, large, and medium businesses.”

A payments partner, such as Worldpay from FIS, can help with transaction data and cash liquidity in a bank account. As French notes, those two are key drivers behind the success or failure of businesses, particularly smaller ones.

In particular, improved transaction data enables a high percentage of payment acceptance with lower risk.

Gig workers often have to wait to get paid, sometimes as long as weeks after they’ve completed their work. The ability to pay gig workers any time, particularly on the weekend, is an important differentiator small businesses should look for in a payments partner.

“The possible competitive advantage presented by being able to pay those gig economy workers on non-business days with funds from online commerce could be enough of a competitive advantage to help keep that business above the waterline,” French said. “For example, consider competition for takeaway drivers on a Friday night. If you’re able to guarantee that you’ve got cash in your bank account to be able to pay that delivery right driver on the Saturday morning or on Sunday morning, that could help you keep that driver.”

Another important piece is the accuracy of data. “Being able to trust your payments partner to provide you not only the funds but also the data—which you need to be able to reconcile your prior days’ activity services requested or services provided—is absolutely critical,” French said.  

For small businesses that are international and use international gig workers, moving funds across borders at the lowest possible cost and at the highest possible speed can be crucial.

But cross-border payments can be complex and a headache to deal with.

“The rails operated by the banks invariably have cut-off times, depending on the geographies in which you operate,” French said. “There can be significant layers of regulatory control which can further complicate payment movement. What your acquirer should be aspiring to do is operating on the best possible domestic schedules on clearing card payments.”

For many small to medium-sized businesses, expanding into new markets abroad can be daunting, and not just because of learning the new market environment. Sorting out the currency conversions and payments infrastructure can be devilishly complex, and this causes many businesses to shy away. But this can be ameliorated by the right payments partner.

“By leveraging the power of your acquirer to access markets that would otherwise be fabulously complex to access, small to medium-sized business can try out explorative initiatives abroad,” French said. “So with a great payments partner, you can trial product sales within a market that you don’t want to enter fully, to engage real-world market appetite. Based on that, you can then better inform the level of investment you want to put to move into that new market.”

All of this falls under the rubric of value-added services, which Keyes said is important in differentiating payments providers.

“A lot of providers can offer other varying interfaces and so on,” Keyes said. “But when you add more value-added services, you better meet the needs of a merchant and you can really stand out from other payment providers. These value-added services are increasingly necessary for businesses and merchants to survive and succeed.

“As alternative payments became more popular, these value-added services become less of a value added (and) more of a requirement.”

French noted that just figuring out the payments aspect can be a huge task for cross-border businesses. This can distract business owners from focusing on the core aspects of their business.

“Removing the complexity of cross-border funds transfer and the regulations associated with it, to just enable our customers to really focus on what they care about, is really a motivating aspect of my own role,” French said.

In general, reach and breadth of services distinguish the haves from the have-nots among payments providers.

For reach, businesses should look at where the provider has customers or partners and how those align with the customers the business is interested in serving.

Depth refers to the depth of features offered by the provider. This could involve cross-border payments, as previously mentioned. Another popular one is the ability to advance funds based on a forecasted receivable due the following morning.

Overall, the outlook is bright for companies looking to expand abroad. By finding the right provider, they can lean on that payments expertise to get all of the infrastructure in line and have it ready to deploy when the company is ready to try out a new market.

Gen Z, Millennials, and Gen X prefer frictionless experiences in all areas of their lives and have embraced contactless payments. Baby Boomers also prefer this payment method in many circumstances, but are often bamboozled by a lack of standardization in contactless payment technology.

Unlike credit card terminals, contactless payment experiences are not as standardized, which creates friction and confusion. And as merchants continue to elevate the consumer experience, and meet their customers where and how they want, they’ll need to prioritize accepting payment methods such as Apple Pay and Google Pay—ensuring their use in-store is as frictionless as possible.

During a recent PaymentsJournal podcast, Suresh Dakshina, Co-Founder of Chargeback Gurus, and Daniel Keyes, Senior Analyst of Merchant Services at Javelin Strategy & Research, discussed how the pandemic pushed more consumers to try contactless payments, as well as the security benefits they present for consumers and merchants.

Contactless payments are a popular way to make purchases without physically touching a card or exchanging cash. There are several ways to make a contactless payment, among them tapping a card, scanning a QR code, and using a mobile device to access digital wallets, such as Apple Pay or Google Pay.

Although contactless payments have been around for a while, the pandemic accelerated adoption as many consumers avoided touching payment terminals. “Contactless payments became even more prevalent during the pandemic and transactions really skyrocketed,” Dakshina said. “Now, it’s become a way of life.”

Keyes agreed that the pandemic sped up the inevitable.

“Just before the pandemic, contactless payments were starting to gain a little bit of steam in the U.S., but they were not as popular as overseas,” Keyes said. “People didn’t want to change how they were paying because they were very set in their ways. I remember thinking and writing at the time that something significant would need to happen to drive adoption. The pandemic did that because it forced people to consider this option that’s convenient.”

As with any payment method, security is of the most importance. With contactless payments—unlike swiping a card or entering a card number at a payment terminal—merchants don’t see a credit card number, and the transaction details are encrypted. This reduces fraud significantly in retail stores, especially from practices like card skimming.

“Contactless payments are truly secure because the data on the credit card is transmitted through encryption,” Dakshina said. “And that is the maximum protection you can have. It’s very challenging to hack a contactless payment.”

Although merchants are aware of how secure contactless payments are, there may still be some uncertainty among consumers. “People feel like someone could hack into your phone if you’re using a mobile wallet,” Keyes said. “But it’s still extremely safe. There’s room for education there.”

Among younger consumers, mobile wallet adoption is reaching a point where a significant percentage are using digital wallets exclusively and refuse to carry credit cards.

“I saw a person who walked into a smoothie shop asking the store owner if they accept Apple Pay. The owner said no, and the customer said, ‘I don’t have a credit card. If you don’t accept Apple Pay, then I cannot do business with you.’ There’s a large volume of consumers who do not want to carry credit cards and want to use a digital wallet to pay for their transactions. Businesses, especially retail stores, can capitalize on this younger generation who embrace cardless payments,” Dakshina said.

What’s more, merchants have an additional financial incentive to accept contactless payments.  

“Contactless payments are considered a card-present transaction and provide security to the merchant as the liability falls on the issuer in the case of fraud disputes,” Dakshina said.  

Keyes noted older consumers may be intimidated by the inconsistency of contactless payment experiences across various physical stores.

“If you swipe your credit card, it’s pretty much the same experience every time, even if you use a chip,” Keyes said. “But when you’re tapping [to pay], there are a lot of different terminals, which have different readers, and you’re not sure what you’re tapping especially if it’s a phone vs. a card.”

But, as older consumers consistently pay this way, any intimidation they may have initially felt with contactless payments will decrease.

Younger consumers flock to frictionless experiences, where they have fewer steps to get what they want, Dakshina noted. And they want seamless experiences in all facets of their life.

“I have seen apartment complexes that target younger consumers. Their apartments are accessible exclusively by keypads instead of traditional keys,” Dakshina said. “The younger generation doesn’t want keys because they might lose the key and it [creates] friction. The world is starting to adapt to the needs of the younger crowd, which oftentimes goes untapped.”

Traditionally, merchants don’t target younger consumers—at least not right away. But this group has a great deal of spending power, and those in it expect merchants to meet them where they are and accept the payment methods they prefer.

“Merchants [need] to adapt to these technologies, because this is the crowd they want to attract, the ones going into the workforce,” Dakshina said. “They’re the ones who are very open to spending money on things they like.”

According to Keyes, merchants should prioritize mobile wallet acceptance. “Accepting Apple Pay and Google Pay is a good baseline,” he said. “The next step is making it clear that you accept those payment types and making it easy to use them in-store.”  

The adoption of contactless payments is increasing worldwide, though use cases vary depending on where you look. For example, China and Europe have advanced in simplifying the checkout process by using mobile wallets that allow users to add items to their cart and pay through their phones before leaving the store.

India is also moving toward a cashless society, with more people using mobile payment apps instead of credit cards or cash.

“In India, more people are sending payments through peer-to-peer apps,” Dakshina said. “In our office, the younger crowd does not carry credit cards since they use mobile wallets for their transactions. They don’t carry cash anymore. Even a street vendor accepts contactless payments.”

The United States, by contrast, has been slower to adapt—though that’s changing.

Keyes noted that more sophisticated point-of-sale technology will ease the transition.

“Eventually every merchant in the U.S. will accept contactless payments soon,” he said. “For small businesses that don’t want to invest in any large terminal product, this will keep costs low.”

“Contactless is only going to get more popular. It may become the default and even the exclusive option at certain merchants, just like how some places used to only accept cash and not credit cards.”

Dakshina agreed and said contactless payments will see continued growth in the U.S.

“Payments are the lifeline for any merchant, and you have to make it seamless for your customers to do business with you,” he said. “Less friction in your customer experience always leads to more revenue.”

Real-time payments adoption has become widespread, and as a result, financial services companies need to be better equipped to overcome any operational challenges that may come up.

During a recent PaymentsJournal podcast, Reed Luhtanen, Executive Director of the U.S. Faster Payments Council, Tony Cook, EVP of Payment Operations & Real-Time Payments at FirstBank, and Cheryl Fitzgarrald, Program Director at BHMI, delve into what is needed to get an organization up and ready to support real-time payments.

Payments have undergone a massive shift in just a few years, with real-time, remote, and digital forms of payments becoming the norm. “Lots of folks are getting engaged through the Fed, The Clearing House, and the Faster Payments Council to learn about what faster payments are and how it might affect them,” said Luhtanen.

“We recently conducted a Faster Payments Barometer survey and about 90% of our respondents said that they are either in the process of implementing [real-time payments], they’ve already implemented, or they’ll be implementing in the next two years.”

According to Luhtanen, businesses are looking to leverage this new technology for payroll, funding loans in real-time, and to pay bills.

The main benefit of real-time payments, according to Cook, is to get funds into customers’ hands faster. “At FirstBank, we’re starting with the ability to receive real-time payments only, but we see enormous benefit just from starting at that point alone.”

“If you think about all the great opportunities, especially in areas like payroll or the gig economy—as well as the ability to defund wallets—we’re excited about the opportunities there and for our customers to get paid faster. Some of the other core benefits that we get really excited about is just the overall 24/7 availability,” he said.

“Most of BHMI’s clients are large processors and financial institutions that are processing on behalf of banks, credit unions, and merchants, said Fitzgarrald.  “Over the last five years, we have seen the use of real-time payments grow dramatically.  Our clients are offering a wide range of new real-time payment services to their retail, business, and corporate customers.  This has ranged from simple account-to-account payments to more complex business payments.”

With any introduction to a new technological advancement, there will be inevitable kinks that will need to be ironed out. While there will always be early adopters eager to try out the latest innovation right around the corner, bad actors will be nearby, just as eager.

“Anytime a new payment technology comes about, some of the earliest adopters are going to be the folks who are going to try to steal money from other people,” Luhtanen said. “There’s going to be a lot of work to be done to figure out where the best lines of defense are, where the layers need to be put into place. Working collaboratively is going to be critical on that front.”

So, what are the steps that financial institutions can take to ensure they can implement real-time payments effectively? It all depends on where your organization currently stands.

In terms of the operational changes that FirstBank has implemented to support its foray into real-time payments, Cook said, “From a receive-only perspective, there’s definitely a lot that must be put in place operationally and it’s maybe not as complicated as you think. We haven’t found the need to make any wholesale or major operational changes or upgrades like bringing in a large amount of staff for 24/7 support. It’s really an expansion and extension of what we’re doing to support other payment rails.”

According to Cook, liquidity management, fraud prevention, compliance—in addition to both customer and employee education—are crucial factors to implement real-time payments successfully. But while many companies would like to jump on board and implement real-time payments, there are significant hurdles to overcome first. And many are already finding themselves in front of some of these hurdles.

“One of the biggest challenges we see companies facing is how to overcome their dependencies on legacy systems that were designed decades ago and not designed for real time payments,” said Fitzgarrald. “This is primarily the case with back-office systems that cannot match the real time capabilities of payment front ends.”

Real-time payments adoption will only continue to accelerate on a global scale, but as noted, before real-time payments are deployed, a strategic plan is imperative.

“What is it you’re trying to do with your business? How could faster payments really affect you and provide advantages to you? There’s lots of folks out there who can help you connect the dots both on the solution provider side, but also on the intellectual service provider side,” said Luhtanen.

“Identifying those trusted resources to bring in as partners is going to be critical to building that strategy and figure out how you put it all together from a financial institution perspective,” he said.

According to Cook, aside from implementing the software solutions and other technological tools necessary, we must not forget about one of the most important resources in the faster payments puzzle: the people.

“Something that’s important to the adoption and onboarding of real-time payments is education and awareness for your employees,” he said. “Internal employees are used to how ACH wires and checks work and it’s hard to understand some of those fundamental differences.”

“Focusing on those fundamental differences and making sure there’s a broad understanding, as well as painting a picture of what the future holds with real-time payments and all the possibilities with innovation, those are really important pieces to make sure your teams understand.”

But it’s also important not to forget the role that software plays in the implementation of real-time payments.

“Software is at the core of every payment and it’s the heart of every company’s payment operation. So, software plays a huge part in the modernization of payment operations for real- time payments,” Fitzgarrald said.

Getting onboard with real-time payments will certainly open many opportunities for businesses, banks, and customers. What remains to be seen is what the implications for real-time payments will look like. As an example, retail businesses, according to Luhtanen, may be used to operating 24/7, but are not necessarily used to receiving constant settlement payments throughout the day. Luhtanen recommended having guidelines and best practices in place.

Economic conditions have a way of shaking up the marketplace and the ability of e-commerce to produce goods and services for end customers. Factors such as inflation, interest rates, and layoffs are powerful economic forces to be reckoned with. In a recent discussion, Sunny Thakkar, Director, Head of Merchant Fraud Solutions at Worldpay from FIS, and Daniel Keyes, Senior Analyst for Merchant Services at Javelin Strategy & Research, discussed another economic force that needs to be confronted, the increased incidence of fraud. They expound upon some concerning stats, explore why fraud tends to increase during a macroeconomic impact, and examine the solutions to mitigate fraud.

As today’s world becomes increasingly interconnected, the macroeconomic impact of events, which deal with the economy at a global level, can be felt down to everyday merchants and their businesses.

Instability within the economy seems to create the perfect breeding ground for fraud, and bad actors stand ready, willing, and able to target the weakest links and take advantage by using the latest technology and sophisticated fraudulent tactics.

“I apologize for leading with all these scary stats,” Thakkar said, “but I wanted to highlight the current macroeconomic state because it not only plays a role in impacting merchant sales and growth, but as we’ve found from history, macroeconomic factors are also known to amplify fraudulent activity. Recession or not, when it comes to the current global macroeconomic climate, things are looking far from ideal.

“The UK right now is experiencing very high inflation. Their customer price index is at over 10% right now. Many of us know that two U.S. banks were recently shut down by regulators. That created two of the largest bank failures in modern history, and the only one larger than that was in 2008. That was at the height of the financial crisis.”

All these looming microeconomic factors are also requiring businesses to make difficult cost-cutting decisions such as mass reduction in forces. And that’s evidenced by the large number of layoffs already reported by corporations. A website called Layoffs.FYI that tracks layoffs has reported over 150,000 layoffs in 2023 alone. That almost surpasses all of 2022 combined.

“All this is leading to impacts on the overall global economic growth, and that’s already forecasted to slow by 1.7% in 2023. That’s the third-weakest pace of growth in nearly three decades,” Thakkar said.

“As far as general impacts to the businesses, the drive to e-commerce has obviously been a good thing. It’s allowed businesses to thrive during a global pandemic. But industries such as retail and grocers have also experienced a major added cost because of the drive to e-commerce. Things like logistic fees, that’s from sales but also from returns,” he added.

“You think about digital advertising expenses, managing a website with all your products and goods and service. It’s a lot of expense that goes into that. “Then there’s the increase in chargebacks costs that merchants are facing today. That’s due to the increase in fraud that merchants are seeing through channels in e-commerce. As you may know, e-commerce merchants bear more of the burden of the liability of chargebacks that result due to fraud.”

Then there’s the traditional pain points that are now being amplified for merchants, including payment friction, which can lead to cart abandonment. “That’s resulted in over $260 billion and impacted sales from merchants already that we found in a report in 2023,” Thakkar said.

Although the growth of e-commerce has been on everyone’s radar, it comes with its own challenges that businesses must be prepared to deal with.

“You laid it out very nicely,” Keyes said. “E-commerce sales are great. The increase in e-commerce is beneficial to a lot of merchants, but it opens a whole other can of worms, as far as their challenges, problems, and costs that a lot of merchants aren’t prepared to handle. At least not prepared to handle efficiently, and they need to really consider their strategy to go forward as e-commerce grows more and more popular.”

“It’s not slowing down, either,” Thakkar said. “We just released our Worldpay Global Payments Report, and we found that the growth in e-commerce is continuing to rise.”

“Global e-commerce transaction value grew by a healthy 10% YoY from 2021-2022. We project global e-commerce transaction value will rise from roughly $6 trillion in 2022 to over $8.5 trillion in 2026,” he added.

Ease of returns makes or breaks an e-commerce business these days. Free and easy returns and shipping are also the cherry on top and a key differentiator as customers determine where to do their shopping. Not offering these features as table stakes will take businesses out of the e-commerce game in no time.

What is not readily talked about is just how much it costs a business to accept returns. It is not cheap.

“A study done in 2021 estimated that the cost of a return to a retailer was 66% of the price of the item itself,” Thakkar said. “A $50 item cost over $33 for that retailer to fully process and then return it for resale. It’s a very expensive process. But it’s also a great customer experience, which is very important today, and it’s one of the things that online shoppers have become accustomed to.”

“Research shows that retailers are adopting this, as 45% of the top 1,000 retailers are offering free shipping today,” he said. “Not having that as an option can lead to loyal shoppers shifting their business elsewhere. It’s very easy to do in an e-commerce situation. Just type in a new URL and I can start finding goods where free shipping is offered now.”

Economic factors are squeezing the bottom line for businesses as they navigate a tougher economic environment, one that’s difficult for consumers and companies alike.

“Now the tough challenge for companies will be combining all these added expenses, especially with recent cost-cutting pressures and then just the general looming economic hardship that’s being faced by consumers,” Thakkar said. “This is all going to require merchants to capitalize on every genuine transaction as possible. Now the keyword here is ‘genuine,’ and that’s because as I mentioned a little while earlier, there’s numerous data points showing that an increase in fraudulent activity occurs during financial crises.”

“Everything from insurance fraud, identity theft to payments fraud, all have seen increases in fraudulent behavior in the past. So having fraud mitigation at the time of checkout is going to be critical for these merchants.”

That’s a product of e-commerce’s rising viability, Keyes noted.

“As e-commerce gets more popular, it just enters new challenges with fraud and new opportunities,” he said. “It shifts the focus from in-store fraud to online fraud. And it’s not going away anytime soon.  Merchants need to figure out how they want to deal with it and deal with it efficiently.”

It’s clear that most fraud is incited by outside economic pressures that create desperate financial situations, which is the perfect storm for fraudulent activity to spike. Further encouraging individuals to commit fraud is the perceived anonymity, as they are not physically stealing from a store but instead are doing so privately, in their own home, which seemingly lessens the guilt.

“Macroeconomic factors create the ideal environment to enable fraudsters,” Thakkar said. “There are anti-fraud researchers that have studied model conditions that lead to higher risk of fraud and have coined this term called the ‘Fraud Triangle.’ This is where individuals are motivated to commit fraud. When three elements all come together, those three elements are motivation or some type of pressure. It’s an opportunity, and then there’s rationalization.”

According to Thakkar, the pressure or motivation to commit fraud, that’s the one that is most influenced by economic hardships. It’s because individuals are experiencing a financial burden. They’re losing a job or there’s increased cost due to inflation. This is leading to desperate measures to provide for themselves and their families.

“The second piece is that of the perceived opportunity,” Thakkar said. “Looking at fraud and e-commerce as an example, the anonymity and the ease of deception that’s present in the online shopping world can tempt an individual to commit fraud. It’s not like I’m going to a store and shoplifting and have that risk of being caught. This e-commerce environment has allowed someone to be in a safe environment within their own home and be able to commit this fraud with relative ease.”

“Finally, there’s the way to rationalize fraud and that’s not being consistent with one’s values. An example would be there’s a rationalization that credit card fraud is a victimless fraud and that billion-dollar companies and banks can afford it. You’re rationalizing why this is OK,” he added.

Another reason that we see fraud increase during macroeconomic impacts is that people are more vulnerable due to the general anxiety of the current economic situation. This is where fraudsters take advantage of emotions and use it against the victim to successfully carry out deceptive practices.

“The COVID-19 pandemic was our last microeconomic event. We’ve seen that cost of data breaches during this time reached a 17-year high in 2020,” Thakkar said. “And the FTC also cited that the pandemic was responsible for a 70% increase in consumer-reported fraud in 2021. These are direct data points relating to macroeconomic factors creating higher fraudulent events.”

With technology growing more sophisticated, fraudsters will benefit from the accessibility and ease of committing fraud. Therefore, the incidents will simply increase.

“There’s just so many ways to commit this kind of fraud with the rise of e-commerce that were more difficult or just different with in-store shopping,” Keyes said.

“And they’re going to only grow this. Fraudsters always find a way to take advantage of people and companies. There’s a lot of room to run for them online, and it’s going to be an ongoing problem.”

The structure of businesses themselves is another factor, Thakkar noted.

“Another reason that fraud increases during this time is because there’s a reduction in workforces,” Thakkar said. “That often creates resource gaps in fraud and risk organizations.  That allows these bad actors to exploit unanticipated vulnerabilities by the companies, and fraudsters are constantly testing the waters. They’re slowly pushing the boundaries until they finally find the perfect gap or loophole.”

“Once they find that, it’s often too late to mitigate and fraudsters may have already fully exploited that long before any mitigation steps can be put into place,” he said. “If you’re in a situation where staff is light, ensuring there’s some right automated tools and processes put in place—that’s going to be critical for successful protection of your business.”

“Further cost-cutting measures beyond just reduction in forces that companies are taking is cutting the expense of technology. Fraud technology is one area that we’ve seen be an expense that’s being cut. That’s where it can get really tricky. If you already have staff shortages and gaps, now there’s the potential for wide-scale attacks that can become even more severe.”

Hitting the mark on two ideals—managing fraud and providing a seamless, frictionless customer experience—is a constant and ongoing challenge for businesses. If businesses do not have the right anti-fraud tools in place, they can lose money and consumers. But they also stand to lose money and customers if they don’t offer a hassle-free payment experience.

“It’s certainly not easy to manage this balance,” Thakkar said. “It’s going to be tough, especially since every impact to a genuine transaction, even if it’s just an impact due to added friction at checkout, can lead to decreasing sales—not only for a single transaction, but you can risk losing that entire customer’s lifetime value. We call that insulting or customer insult. If I decline a customer at checkout, someone who’s valuable, it’s easy to type in another website and find another good on another competing business. Making sure that the experience stays seamless and frictionless for those good customers is incredibly important.”

“That’s why maximizing conversions, while not losing focus on an effective fraud strategy for e-commerce sales, is going to be critical for merchants,” he said. “If you don’t have the right fraud strategies in place, then you’re opening yourself up to another situation. Traditional fraud management, especially ones that operate with a strictly rules-based technology, is not going to be the best option.”

“We must consider fraud management as payment optimization. If you think about what traditional fraud management focuses on, it’s mitigating fraud. The buck stops there. When you look at fraud management with a payment optimization lens, the focus should be on preventing the riskiest of transactions while maximizing genuine authorization approvals, while involving the least amount of friction to the payments experience as possible. That means real-time decisions using sophisticated artificial intelligence and machine learning.”

The most important piece of the puzzle in making accurate determinations and approving transactions is data.

“The data piece is important here,” Thakkar said. “Think about a jigsaw puzzle. Every transaction is essentially a jigsaw puzzle that you have milliseconds to solve. The more data I have, the better I can put this puzzle together. If you don’t have enough pieces, you risk getting that decision wrong. Sometimes you might not have the right pieces and you can’t put that puzzle together. And either way, you don’t have enough information to make an informed decision of ‘do I approve or decline this transaction?’”

“Data is incredibly important. It needs to be coupled with a limited to no step-up authentication, which introduces an opportunity for cart abandonment and lost sales,” he said. “If I’m at checkout and I’m about to make a payment and all of a sudden, I get a pop-up window that wants me to confirm details about myself, that’s introducing friction and can cause someone to get concerned and leave that sale, and they’re out the revenue in that situation.”

“For merchants who are shipping physical goods—a lot of those merchants are doing manual reviews before shipping those goods out to check one more time for fraud and ensure that as they ship that good, they’re making sure it’s going out to a genuine customer so they don’t get a chargeback on the back end of that. The problem with that is it creates more friction and a bad experience for the consumer, so (it’s necessary to have) the ability to execute the fulfillment of goods instantly as soon as I hit checkout.”

The challenges for e-commerce businesses can seem insurmountable, but luckily, there are plenty of ways to tackle these problems and improve your current strategy. A key is choosing the right fraud protection provider.

“There are several things to consider here,” Thakkar said. “The first one, consider what KPIs are a priority for the fraud provider. A provider who only focuses on fraud, chargeback reduction, or reduction of fraud can be harmful to overall sales. Providers should be transparent about the value that they can provide in terms of the overall approvals. So that should be approvals due to fraud.

“The second piece is ensuring that the provider doesn’t operate in a black-box method. That’s where fraud decisions are being made in this funnel without any real clarity back to you on what or why these decisions are being made to protect your businesses,” he said.

“I’ve worked with a lot of businesses over the years, helping merchants find the right solution for them. And every merchant that I’ve worked with has some difference in their operating model. If a business operates in a black-box method, the business doesn’t have an opportunity to add input on why they need to operate differently in their business. Ensuring that businesses see why decisions are being made offers businesses the opportunity to provide feedback on changes for a successful fraud management strategy. Then look at solutions that create a strong ROI, a return on investment, for your business.”

There’s also reduction and staffing. According to Thakkar, if you’re not able to hire more staff during peak seasons, you can’t slow down your fulfillment for goods—you still have to keep up with that demand. It’s important to find a solution that can offer automated fulfillment opportunities. That reduces the need for manual intervention that can be key in using technology to accomplish your operational goals. The problem is fraud providers are not using the right technology, and they’re not applying the right data to accomplish this.

“Ensure that providers have a strong artificial intelligence or AI and machine learning also known as ML-based fraud detection, and that can generate all the data that we can collect and come up with real-time and accurate decisions,” Thakkar said. “Adding as much data as possible at the time of checkout can lead to a better outcome at the end of the day. That’s an outcome that can get you to the right decisions and reduce the amount of false positives (I.e. insults to your customer), but also ensure that you’re not increasing fraud as well.”

Navigating all the ways to prevent fraud and providing the best customer service experience can be complicated, to say the least.

“It’s a tightrope that merchants and their service providers need to walk in preventing fraud,” Keyes said. “Which can be extremely costly, also ruining the experience for customers. There are many different facets of the customer experience where you would like to check for fraud but where it could cause a customer to bounce off at the same time. You can’t allow fraud. So you need all these different types of solutions.

“All these are potential ways to check but that ideally don’t disrupt the experience for the customer. It’s complicated telling merchants and their service providers that they always need to keep in mind,” he said.

As a way to circumvent all the aforementioned challenges businesses face in today’s macroeconomic environment, FIS has created Guaranteed Payments. It offers real-time, seamless fraud decisions.

“We recently launched Guaranteed Payments, which uses exactly the framework of payment optimization, focused fraud protection,” Thakkar said. “It focuses on overall sales conversions and approval rates. That’s our primary KPI guarantee. Payments offer real-time, frictionless fraud decisions, and it’s all backed with a 100% financial liability shift on fraudulent chargebacks.

“Chargeback guarantee orders can also be instantly fulfilled without the need for manual reviews to achieve things like expedited or same-day shipping and that meets the demands of today’s e-commerce shopping experience that we’ve all become accustomed to, without the fear of liability of losses that come to that business,” he said.

As we enter further into this next macroeconomic event, staying vigilant towards fraudulent activity will be critical, but being too restrictive can also be detrimental. The focus behind every set of KPIs for fraud management needs to be not just to focus on reducing chargeback rates or the count of fraud prevented, but the percent of transactions that are being approved as a result of your intelligent fraud management. As the competition in today’s market is far too great, we risk the loss of not only a single transaction but the loss of loyal, returning customers. You may only have one chance to really get this right.

It’s a high-stakes proposition, Keyes said.

“If you know if you get this wrong, you disenfranchise your customers,” he said. “You lose sales. If you get this wrong, it’s very costly. It’s something that every merchant needs to take seriously and take the time to make sure they’re doing what’s right for their particular business.”

Help is on the way for merchants that are swamped with friendly-fraud chargebacks. Friendly fraud occurs when a customer makes a legitimate purchase, then requests a refund, often because the consumer has forgotten the transaction took place.

Visa is introducing its Compelling Evidence 3.0 rule set, which allows merchants to submit historical purchase evidence to prove a legitimate cardholder was behind an order. The rules are based on the assumption that if a cardholder has engaged in previous transactions with a business and those transactions were not disputed, then the current transaction is not fraudulent.

The new rules require the same data elements to match across undisputed and disputed transactions, with transactions using the same payment method and settled at least 120 days prior to the dispute. Importantly, the new system allows evidence to be submitted before a chargeback is filed. If certain elements are decisively proved, the fraud claim will be denied.

For merchants, this is all good news that is likely to reduce their chargebacks dramatically, but it also means they must get their data collection in tip-top shape to meet the standards of Visa’s new rules.

In a recent podcast, Navin Sequeira, VP Global Chargeback Operations at Chargeback Gurus, and Brian Riley, Head of Credit at Javelin Strategy & Research, discussed the size of the friendly fraud problem for merchants, how VISA CE 3.0 rules are going to change the lives of merchants, and how merchants can best prepare. This article provides some of the key highlights.

Friendly fraud is a growing issue for merchants, causing significant financial losses and reputational damage. This occurs when a cardholder disputes a legitimate transaction, often because of confusion or forgetfulness, but such disputes can also result from deliberate misuse of the chargeback system.

From the merchant’s perspective, if the same cardholder has made similar purchases in the past without disputing them, there is a good chance that the transaction in question is also legitimate. However, current Visa regulations don’t require banks to consider this evidence, making it easier for customers to commit friendly fraud.

“Estimates suggest that friendly fraud accounts for 60 to 80% of all chargebacks, which cost merchants approximately $40 billion annually,” Sequeira said.

The impact of friendly fraud is far-reaching, with costs including the value of the disputed sale, chargeback fees, administrative expenses, and lost revenue. Reputations can also suffer, particularly if chargebacks result from misunderstandings or mistakes, thus leading to increased scrutiny from payment processors and financial institutions.

“Focusing on that largest population (friendly fraud) really makes a big difference when you’re managing the fraud process and looking where the vulnerabilities are,” Riley said.

On April 15, Visa will introduce Compelling Evidence 3.0 (CE 3.0), the latest version of its CE process, which includes enhancements designed to help prevent friendly fraud chargebacks and remedy card-not-present fraud disputes.

To prove a dispute is associated with two previously undisputed transactions, sellers will need to provide three classes of evidence:

Sequeira notes that using multiple data elements about the device used for payment is crucial in preventing chargebacks, as sometimes one data element is not enough to make a case.

“I could make the first order at home, and tomorrow I could make a second order at the beach with a different IP address,” Sequeira said. “If there is a chargeback, and the only device data element that is submitted is the IP address, Visa will say that’s not a match. But if device ID is also submitted, the picture becomes clearer.

While the exact impact of this new regimen is difficult to predict, it is reasonable to assume that the new rules will reduce chargebacks.

However, merchants need to put in considerable IT work to collect and store the required data for CE 3.0, then retrieve and pass on the data in less than two seconds to respective channels. With cost-cutting, layoffs, and macroeconomic factors, many merchants may not have the budgets to make these changes. As a result, many will partner with third parties to implement the system.

“Bringing in experts on this to deal with this important function within payments is really important,” Riley said. “It’s just like with taxes—do you want to do your own taxes, or do you want to deal with the IRS directly? The same thing applies here: Bringing in an expert makes a lot of sense, just as a normal course of business.”

To prepare for CE 3.0, merchants should determine if they have the necessary data elements to implement it, then work with their chargeback management company and IT teams to ensure compliance. Although the pre-dispute stage will not be more time-consuming with CE 3.0, the post-dispute stage could be if merchants do not upgrade their systems.

“If merchants do not have the ability to record all of these data elements and retrieve it when a chargeback comes in, it’s really essential for them to really strengthen what they’re doing,” Sequeira said.

CE 3.0 is designed to fight specific types of fraud, and not all merchants fit the bill. Furthermore, merchants can choose how much effort and money make sense to put in based on how many 10.4 (card not present) chargebacks they have.

“Merchants have to look at how many 10.4 transactions they have when compared to the rest of the results,” Sequeira said. “If it’s a small subset, if the dollar value is not very high, then they may want to continue with what they’re doing. But if they have a very large population of 10.4 transactions and the dollar value is high as well, they should evaluate with their IT and finance team putting into place a chargeback strategy.”

In any case, Visa is offering more tools for businesses to dispute certain kinds of chargebacks. So even if a merchant is not in a place right now where this solution is needed, it could be helpful in the future.

With exceptional customer experiences they have derived from giants such as Apple and Amazon, consumers expect choice, speed, and control in the methods they use to pay. And they’re looking for these very features from their financial institutions.

FIs, steeped in legacy systems, are simply not geared up to offer these features, which should be table stakes. Not offering these features could mean a loss of customers and an impaired ability to attract new ones. This discussion—between Marcell King, Product Innovation Officer of Banking and Fintech Solutions at Paymentus, and Brian Riley, Director of Credit and Co-Director of Payments at Javelin Strategy & Research—delves deeper into what FIs can do to give customers more convenience and control with a modern loan experience for customers.

Payment innovation and consumer demand drive the need for choice, speed, and efficiency of payments. Businesses and FIs alike must continually keep their finger on the pulse of what is happening within the payment landscape. This will ensure that banks offer what consumers want when it comes to payments.

Millennials, for example, expect more when it comes to their digital experiences. They’re less patient with organizations that don’t give them the control, convenience, and autonomy to make their own decisions.

“It is about giving consumers control over how, when, and what they pay with,” King said. “Millennials are entering their prime spending and borrowing years. The demographic studies show they’re less patient. They want more convenience. They want more control, and so they have different expectations than an older demographic.

“It’s about how do you give them what they want. They’re really looking for the payment options that they prefer, whether that’s their debit card, their PayPal account, or paying it through a retail store. It’s about giving consumers more human optionality and the ability to pay through whatever channel they choose, giving them the convenience to control that experience as much as possible.”

Payment options should match what everyday consumers deal with, such as when they get paid and when their bill payments are actually due. Therefore, flexibility is a key.

“When you think about how pay periods come, people get paid once every two weeks, and that doesn’t always stack up if I have a recurring payment to pay, like a car payment on the third of every month,” Riley said.

“That doesn’t always perfectly align with how the consumer’s budget goes. Rather than just setting it and forgetting it, it’s the ability to allow people to navigate that. If I’m a consumer, I can make that on the paycheck that precedes it, or I could make it really close to the end. That flexibility is an interesting opportunity.”

“As you think about how workers are traditionally paid, the payroll tends to be weekly, biweekly, semi-monthly or monthly. But with the on-demand economy, gig workers don’t have that same recurring frequency or predictability in terms of how they’re earning their income,” King said. “You want to be flexible enough to allow those consumers who have much more variance in their payment cycles to pay when they want and as quickly as they want.

“An Uber driver with earnings going to their PayPay account might work for 12 hours for the next couple of days to make their car payments. You want them to be able to pay with their PayPal account as quickly as possible. Give them the opportunity to receive a payment or text and pay immediately with that text. Or go right into their mobile app in between rides and pay it from their mobile app. Giving them the flexibility to pay whenever they need to and where their income flows support their expenses.”  

As the highly anticipated FedNow launch approaches, faster, real-time payments will become more mainstream. FIs must prepare for the implications.

“You’ve got real-time payments coming to fruition,” Riley said. “You already have The Clearing House RTP network online version. FedNow is coming up on July 1. So, this really bolts into having faster funds in your account and then being able to deal with them effectively. That’s something that’s really needed.”

Neobanks and fintech companies have long filled the gap for banking customers by offering more affordable and personalized financial services. These organizations have done much to disrupt the traditional banking system as their focus has been on delivering what customers really want from services.

“Think about consumer expectations today, whether it’s Amazon or Apple, everything is very convenient,” King said. “It’s all about low friction, and these companies give consumers the ability to execute on whatever they want as quickly as possible so that they can get on to other things.

“When you think about the competition from a banking perspective, of all the non-traditional banks that are providing services to consumers for payments, whether it’s a mortgage or auto loans, there’s the expectation of convenience, of control, and of speed.”

“Traditionally, legacy technologies don’t support all those components. You may be limited to only the website because there’s no mobile app, or you may only offer an ACH payment to your loan from a checking account when you know a lot of consumers may not have checking accounts. I think that’s where the FIs are falling short.

“Giving the consumers those three things that are most important to consumers; together, not one or the other, but all three consistently.”

It’s not only about giving customers convenience, control, and speed. FIs must also fine-tune their offerings, providing innovative services that customers actually need and differentiating themselves from the competition.

“It boils down to account retention,” Riley said. “At the end of the day, that’s an expensive thing to manage. In the credit card business, you lose about 15% of your volume, and in the retail banking world that’s a consistent number also. It’s not just keeping the customers you have; it’s creating an offer that’s compelling to new customers that you bring in.”

With the wealth of innovative payment methods and the growing gig economy, FIs should put flexibility and choice of payments at the forefront. Payments must be fast and from customers’ preferred methods.

“Going back to the three buckets: Number one, it’s convenience,” King said. “How do you make it as easy as possible for consumers to pay their loans through any channel they want, as quickly as possible? You may have a consumer who banks with you but has an external account that they want to make their payments from.

“You may have a consumer whose primary income is from driving Uber or Lyft. How do you make it convenient for them to make payments from their mobile phone quickly? How do you give them the ability to pay with whatever payment method they want, where they’re keeping their dollars? It may not be at your institution; it may be at another institution.”

“It could be PayPal, Apple Pay, or Google Pay. They may want to pay with one of their digital wallets. They may want to pay with cash. Maybe they’re a service worker and use their tips to pay their car loan. We want to be able to give them the choice of how they want to pay. And then … control. How do you give them the ability to control where they’re paying from? It ties back to convenience. It comes down to giving them as many payment options as possible to pay their loans. And giving them the channels that they want to pay from.”

“The third one is around speed.  Consumers expect real-time (payments) now. How do you make it real time so that when you make that payment, it is being posted immediately, not two or three days later and now I’ve got a late fee?”

With all these critical needs from consumers, how will FIs deliver? It will be a tricky hurdle to overcome.

“Orchestrating all this gets interesting,” Riley said. “You have installment-type loans that have set amounts every month. Or you have bills to pay like your electric company, water company, and those vary every month. So, it’s not one-size-fits-all. Do you want to push in the payment? Do you want to pull out the payment? Orchestrating that really takes a very strong solution to make this all fit into the ecosystem.”

“That’s the challenge,” King said. “There’s a lot of legacy payment technology infrastructure that’s been in place for 10 to 15 years based on legacy payment methods like ACH when there are so many more payment options. Now you must deploy newer technology, more modernized technology that allows you to take advantage of all the new payment capabilities that the market has created and built over the last 20 to 25 years.”

Customer satisfaction scores reveal that fintech companies are doing something right for their customers, and banks should take notice.

“Number one is customer satisfaction,” King said. “There’s data out there that shows that banking NPS and customer satisfaction scores for making repayments are lower than some of the newer nontraditional bank fintechs, whether it’s Rocket Mortgage or other organizations that are deploying modernized technology and interactions with consumers.”

“Customer satisfaction and NPS scores is one way to think of it. If you have strong NPS scores, that means that your customers or members are willing to refer other customers to your institution. Reducing late payments and delinquencies create economic impacts on the business model. The cost to serve. Consumers want to do things themselves, and therefore providing as many self-service channels to those consumers to make their payments has a strong economic value from an operational efficiency.”

“So being able to reduce your cost to serve those customers with information that they need and that they can access over their mobile phone or their desktop drives ROI as well. Reducing PCI exposure, that’s another value that can be brought when you’re modernizing technology for payments.

“We have a product called Secure Service and instead of a member or customer providing their debit card number to a customer service representative over the phone, we can send a text message link to the consumer. They open the link and there’s a secure page that allows them to enter their card information directly into that page, which mitigates and eliminates the PCI requirements that you’ll need to maintain internally, reducing the number of vendors. We talked to many institutions and they’re running multiple systems to support loan payments. There are some capabilities at the core, but then there’s third parties that offer silo solutions like just web or just IVR or just collections.”

“Some institutions have three or four systems that they’re operating to manage collection of repayment on loans. Being able to consolidate into one platform, creates operational efficiency.”

“There’s a cross-sell opportunity. That’s a big area of focus for institutions who provide indirect auto lending. The customer may not have a banking relationship with you, but they have a loan with you because they bought a car at a local car dealership. If you provide great service interactions, and you give that consumer the convenience, choice, control, and speed, there’s opportunity to upsell and cross-sell.”

“You look at those buckets and you start holistically looking at the ROI. It becomes very strong when you’re providing things that the customer needs to manage and repay their loans.”