PaymentsJournal

It’s been about five years since real-time payments (RTP) became a reality in the U.S., and their popularity and adoption continue to skyrocket. According to a survey U.S. Bank  conducted among 1,000 financial executives across various industries in May and June of 2022, 56% said they will adopt real-time payments by 2024.

Furthermore, 41% of companies described as “RTP leaders” saw an increase in revenue compared with the previous year, while only 33% of “RTP laggards” reported the same. A further 39% of RTP leaders saw an increase in profits in the past year, while 44% said they saw their brand value increase.

To learn more about the importance of businesses adopting real-time payments and integrating them into their overall digital strategy, PaymentsJournal sat with Mike Jorgensen, Head of Emerging Solutions at U.S. Bank, Anuradha Somani, Head of Payments, Global Treasury Management at U.S. Bank, and Steve Murphy, Director of Commercial and Enterprise Payments Advisory Service at Mercator Advisory Group.

The growth of real-time payments continues to rise: In the second quarter of 2022, companies made more than 41 million real-time payments, totaling $18 billion — a 12% growth in volume from Q1, according to The Clearing House.

According to The Clearing House, roughly 62%of accounts in the U.S. can receive real-time payments “and if all the payments providers and banks had everything turned on, that figure could reach about 90%,” noted Murphy.

But real-time payments aren’t just about instant payments; they also mean that payments can be reconciled 24/7 and give businesses access to more and larger amounts of data related to payments, said Somani. She added that businesses shouldn’t just think of real-time payments as something to tack on as an afterthought, but rather using them to create “a fundamental change to your business model.”

“It gives you the ability to create a friction-free and seamless experience, so the payment moves to the back of the mind for the consumer,” she added.

Jorgensen noted some industry-specific examples, including broker-dealers enabling clients to fund their accounts instantly so they can immediately begin trading rather than having to wait the typical two to three days for an automated clearing house (ACH) transaction to clear. Or a car dealership buying a vehicle from a consumer being able to instantly transfer the funds. Jorgensen also referenced the gig economy, and workers being able to immediately get their pay at the end of their shift.

“Real-time payments offer companies the possibility of creating a differentiated experience,” Jorgensen added.

He cited the experiences of rideshare companies such as Uber and Lyft as examples of this seamless payments experience.

“In the old days, you would take a taxi and then pay them at the end of the ride,” Jorgensen said. With ride share companies, “the payment is invisible, real-time, and embedded in the experience.”

It’s not just business-to-consumer (B2C) businesses that benefit from RTP, but business-to-business (B2B) as well. Murphy noted that “there is an increasing demand from people in offices to get the same experiences [at work] that they get on their personal apps.”

Some B2B use cases include paying invoices instantly and funding payroll instantaneously, especially so that employees can receive instant earned wage access, Murphy added.

Businesses need to think about how real-time payments will be integrated into their overall digital transformation agenda, said Somani.

“It’s not just about changing a single ACH into RTP, but how does this integrate into my larger payments ecosystem, and how does it integrate with different business cases and use cases?” she added.

For example, there are a lot of back-office considerations when it comes to RTP, noted Jorgensen.

“You have to think about how RTP will affect your normal accounts receivable and accounts payable functions,” he said. What do you do if a payment comes in at 1 a.m.? Most businesses aren’t staffed to have accounts funded 24/7.”

Embracing real-time payments means “changing your entire payments system as part of a larger transformation agenda,” added Somani.

That is why it is critical for businesses to identify the right partners to work with as they embark on their digital transformation journey, including financial and technology partners.

“You are not trying to retrofit anything, but innovating and integrating into your existing systems,” she added. “This requires the right partners to help identify what pain points exist today, what is the ideal end state when it comes to payments, and how do we get there.”

Jorgensen observed that business that adopt and implement real-time payments will have a significant competitive advantage over those that don’t. He cited the U.S. Bank survey that showed that nearly 60% of those polled will implement real-time payments by 2024, meaning that “the other 40% are at risk.”

“If a company doesn’t adopt RTP and they can’t figure out how to integrate it into their front-end and back-end operations, they will lose competitive advantage, speed to market, and even the ability to scale quickly,” he added.

Faster payments and the user experience are the differentiators that will enable banks and credit unions to remain relevant and competitive.

We’ve seen this gradual shift during the past decade as modern payments have undergone a significant transformation based on consumer expectations. And in the past few years, in particular, the shift has accelerated as the pandemic changed the way many are paying for goods and services.

To put it simply, consumers want convenience — and that’s what’s driving this surge in digital payments. “Most people are looking for the iPhone experience,” said Jeff Bucher, Senior Product Manager at Alkami. “On your iPhone, you can click on the app and you can get things right away. You can order food immediately and have it delivered quickly.”

“Banking is important and using banking in the same manner that you use other apps and other interfaces is what people expect,” he added. “At this point, people want digital banking at their fingertips. They want to be able to have a streamlined interface, and they expect robust capabilities — to pay their bills online, pay their friends and family, and pay their loans online as well.”

The growth of faster payments is starting to be reflected in new use cases, according to Mark Majeske, SVP of Faster Payments at Alacriti, especially when looking at real-time payments, which has been available in the U.S. for five years.

“2023 is going to be the year of use cases,” said Majeske. “How do you drive usage of these systems,  at the end of the day, adoption of these RTP [real-time payment] rails and FedNow — that’s coming up — really depends on us, with consumers and businesses using it. In the next couple of years, we’re going to see a huge emphasis on user expectations.

The FedNow Service is poised to go live next year, and it shares considerable similarities with The Clearing House’s RTP network, which launched in the U.S. five years ago.

“Both the RTP network and the FedNow Service are instant, real-time payments, and they’re final,” said Bucher. “This is key to understand — that once you send the payment, it’s done. The only way to get the money back is to request that the money is sent back.”

“It’s a push-only method,” he said. “They’re not batches like ACH [Automated Clearing House] — both use ISO 20022 messaging to communicate, and this is key because ISO 20022 is a messaging method that’s being adopted around the world [and] is becoming more of a standard ever year.”

According to Bucher, both the RTP network and the FedNow Service are similar to wires, but they can replace wires in a lot of different ways because they’re faster, cheaper, and easier. “Some differences between the two are that you have to be on one network or the other,” he said. “They’re not ubiquitous, they don’t crossover, so you can’t send something on the FedNow Service and it will show up on the RTP network. You’re either on the RTP network or you’re on the FedNow Service.”

Another significant difference is that the maximum transaction limits are different. The RTP network has a maximum transaction limit of $1 million, and the FedNow Service $500,000.

One important use case around faster payments is account-to-account (A2A) money transfers. “We are partnering with Alacriti to offer A2A within our native environment,” said Bucher. “I think it’s something that makes a whole lot of sense. If you want to send money to an external account, say you’re at one credit union and you want to send it to a bank…you want to be able to send it immediately where you [can] press the button and it shows up in your account.”

“It’s a great use case, and it’s very needed and very desired among financial institutions and their users,” he added.

There are also many use cases within the business-to-business (B2B) space that are leveraging real-time payments—to pay for invoices, request payments, and even request payments back on invoices.

For business to personal transactions, a growing number of companies have gig workers who need to be paid daily, so it makes sense to use the FedNow Service and the RTP network for payroll. In addition, insurance payments can also be paid out quickly after a disaster to help people receive funds for housing, food, and clothing.

“Payroll’s another use case,” said Bucher. “There’s a lot of companies that have gig workers or temp workers and you need to pay them on a daily basis—and it makes a whole lot of sense to use real-time payments for that. It could be cheaper and easier than ACH in some instances.”

According to Majeske, real estate and automotive are other industries benefiting from RTP. “Some of the high-level transactions I’m starting to see is basically a car purchase. Let’s say you’re at the car dealership and you go to your mobile phone and sign up or apply for a loan,” he said. “The loan is turned around very quickly and at the end of the day, you’ve got the funds going to the dealership and you’re walking out with a set of keys.”

In order for faster payments to work and for the consumer to take advantage of their offerings, they must be simple to use and fast. Ensuring that the front end of operations also has a user-friendly interface is crucial.

“Alkami takes care of all the back end,” said Bucher. “Alacriti has an engine that chooses the rail on the backside, whether the FedNow Service or RTP network, and we handle the interface to ensure they know we are executing their transactions and they can input what they need.”

“We picked Alacriti to partner with based on the fact that they were further along than a lot of the other potential partners that we talked to,” he added. “They really had an inside track on RTP and they were also in the pilot for the FedNow Service. Now they have strengths where we need them in payments, in particular, and they have a great track record of working with credit unions and banks.”

“It’s a win because at the end of the day, to be successful in faster payments you need the expertise on the payments side,” said Majeske. “Oftentimes, even more importantly, is that you [get] the user experience right, because without that, customers won’t easily use it or adopt it.”

The year 2022 was one of global financial uncertainty and risk, and 2023 may bring more of the same. For executives in payments risk management, planning for the year ahead should involve taking this geopolitical and financial uncertainty into account and planning accordingly.

In a recent PaymentsJournal podcast, Sudhir Jha, senior vice president and head of Brighterion, a Mastercard company, and Brian Riley, head of credit and co-head of Payments at Mercator Advisory Group, discussed how artificial intelligence (AI) is growing as a tool in payments risk management, and they also delved into the key trends they expect to see this year.

There is likely to be a heightened risk of geopolitical conflict, inflation, and resulting credit issues in 2023. “Unemployment has been low, but household budgets are not keeping up with the cost of living,” Riley said. “Interest rates are off the charts.”

In the past year, there has been an increase in scams associated with peer-to-peer (P2P) payment apps, such as Zelle, a trend that’s likely to continue.

As a result, many are looking to AI to help prevent such scams. “The developments in AI are not accessible to everybody,” Jha said. “The government hasn’t done the equal investment to make it available to everybody. In the ‘70s, ‘80s, and ‘90s, there was a lot of funding of fundamental research that could be made available to everybody to use. From a government perspective, the U.S. is not investing enough in AI to make sure that the research trickles down to everyone.”

Smaller players don’t necessarily have the capacity to develop their own AI solutions. As a result, they often form partnerships with larger companies, such as Mastercard, to make use of the larger firms’ increased computing power.

Brighterion is using AI to address P2P fraud across its network. “We are building solutions very similar to what we have done for the card side, on the account-to-account side, to provide solutions that work at the network level,” Jha said. “We can give you a solution that works across card payments, ATM transactions, and even crypto transactions. Fraudsters are aware that many financial institutions have silo applications for finding fraud in one channel, so they will have one card for account-to-account and one for crypto.

“We are trying to provide a multichannel solution for both fraud and money laundering to provide full visibility for all transactions, and helping to capture fraud across the network.”

As AI-powered fraud detection software has gotten more sophisticated, fraudsters have become less successful at creating synthetic identities that pass detection and have moved more toward scams. “They’re trying to make the person who actually owns the instrument—whether that’s a  cellphone or credit card—do something that is not in their best interest,” Jha said. “For example, if I were a fraudster, I could call you and tell you that you won $10,000, but for me to give you that prize money, you have to send me $200 for shipping.”

New machine-learning algorithms are being developed to give people warnings when they attempt to make a transaction that appears suspicious. “We have to figure out a way to flag it for them, and change their mind,” Jha said.

According to Riley, faster payments and P2P payments can make scams even trickier to combat, because payments can go directly between bank accounts instantaneously. “The payment transaction, unlike a credit card, is irrevocable,” he said. “To undo that whole mess takes a lot of work.”

In the coming year, scams on P2P platforms will accelerate because they are still very hard to catch. “There will continue to be payments risk in the entire market, whether it’s at the merchant level or the consumer level, and there will be a range of issues due to the impending economic slowdown,” Jha said. “And people already have spent some of the savings that they had. That creates a credit delinquency issue, which leads to even more fraudulent claims by the merchant or by the consumer, and more openings for scams. The only thing we can really do is suspect that this is not a transaction that you normally do and warn you that it could be a fraudulent transaction.”

As AI develops, it will get better at detecting scams, but that development remains in a nascent stage. Financial institutions can look forward to better tools in the future, as AI solutions spread throughout the economy and use cases multiply.

Cryptocurrencies have moved from a speculative asset to a practical one. One area in which crypto can serve and improve is the current business-to-business (B2B) payments space.

In a recent PaymentsJournal podcast, Daniel Artin, Vice President of Strategic Partnerships at Boost, and Elly Aiala, Chief Compliance Officer at Boost, joined Steve Murphy, Director of Commercial and Enterprise Payments Advisory Service at Mercator, to discuss how businesses should consider adopting blockchain technology, and specifically, stablecoins, to ensure transparency, traceability, and security in their B2B payments.

First, let’s set the current state of B2B payments. Even with all the innovation that the payments space has witnessed in the last few years, B2B payments are still fraught with problems.

“This niche of payments in the market is littered with pain points,” said Artin, “primarily due to costly fees, late payments, poor management of data, inaccurate data entries, and oftentimes lack of education in the marketplace around innovations to solve these problems. Buyers and suppliers are used to delayed payments [and] frequent disputes amongst one another, and there is a status quo of distrust that occurs amongst commercial trading partners. Since the B2B payments space is a trillion-dollar addressable market, we believe this a large ramp for digitization.”

Artin blamed inertia for the lag in adopting new ways of accepting B2B payments. Many businesses continue to use legacy systems implemented decades ago despite their inefficiencies.

And organization leaders are not keen on taking a leap into the unknown. “A lot of CFOs and treasurers looking to optimize payments are risk-averse and naturally so,” added Artin. “You’re taking systems, processes, and workflows that have worked for 60 to 70 years and now asking [business leaders] to migrate that to a new digital form that you may not fully understand or know.”

Cryptocurrencies are still shrouded in mystery, which is why they need to be unpacked to reveal how they actually work and to discuss successful use-cases.

But before diving in, let’s tackle the challenges surrounding cryptocurrencies today.

You cannot begin a conversation about cryptocurrency without mentioning regulation. Regulation has been ever-present since the popularization and growing adoption of cryptocurrency began.

“Our [U.S.] approach to cryptocurrencies and other technologies in this space has been picking up speed,” said Aiala. “But it is very much in development and exists primarily as a combination of both enforcement and draft legislation and frameworks. This impacts institutional adoption. In order to know why the U.S. regulation is where it is today, you need to know what cryptocurrency and blockchain technology is doing to the existing financial infrastructure.”

Aiala used the analogy of gathering the world’s best soccer players to play a game without rules or compliance. The result is that the game will not function safely or efficiently. The current referees, or two regulatory parties, competing to earn the position of top regulator for cryptocurrencies are the Commodity Futures Trading Commission (CFTC) and the U.S. Securities and Exchange Commission (SEC).

Aiala asserted that without historical knowledge and experience using crypto and blockchain technologies, it is difficult for policy makers to create regulations that will endure the test of time. Technology, as well as its use cases, is never static but always changing.

The way around all the fear, mistrust, and misinformation is for leaders in the crypto space to stay diligent in educating policy makers, informing them so that the appropriate regulatory frameworks can be developed. It’s not only about growth and innovation in the crypto space, it is also about ensuring that end users are safe in using this technology.

Although change is coming and more policy makers and consumers are being introduced to this new financial technology, the current lack of official rules keeps many institutions from adopting crypto.

There are many benefits for companies to incorporate and replace their current infrastructures with blockchain technology. These include transparency and traceability, consensus mechanisms, security and audit, and smart contracts.

With transparency and traceability, businesses would have the advantage of having all participants within the network see the data as they are updated in real time.

Also known as consensus protocols, consensus mechanisms would allow businesses to verify transactions and ensure the security of the blockchain or protocol.

Blockchain is incredibly secure, making accounting and auditing a breeze and eliminating human error. Blockchain also ensures the integrity of its records. Another important factor is that the ledger is immutable. No one can change a transaction after it has been submitted. This includes record owners.

Smart contracts are programmatic rules that can be carried out automatically within the blockchain after certain rules are met.

“We live in a world where buyers and suppliers have established pre-negotiated commercial trading terms,” added Artin. “Aside from contract penalties, early-pay discounts, [or] trade financing, there’s no way to enforce these rules blindly by buyers and suppliers. Hence the disputes. But with smart contracts, these conditions and terms can be programmed, and automatically fulfill those obligations across both parties on their behalf automatically. It’s touchless, it’s automatic, and it instills a newfound level of trust among parties that otherwise [was] not there.”

One significant use case concerns Walmart Canada, whose shipping fleet of 2,500 produces a whopping seven billion invoice permutations annually, and of which 70% of freight contracts resulted in disputes. When Walmart Canada implemented blockchain, invoice disputes dropped to below 2%.

“Our research goes back five to six years, and one of the earliest use-cases we identified for blockchain was international and domestic trade,” Murphy said. “It’s [blockchains] really getting rolled out quickly. International trade and the use of smart contracts is a bright use-case.”

The use and adoption of cryptocurrency are still at an early stage. And businesses are certainly not clamoring for adoption either. What we do know is that blockchain has the mechanics and infrastructure necessary for businesses to vastly improve the current state of B2B payments.

To sustain their operations, businesses have more than their fair share of challenges to confront. With a recession imminent, climbing interest rates, supply chain disruptions, and a turbulent global climate, business executives have many AR issues to address, along with just keeping enough cash on hand.

To get an in-depth look at what executives are struggling with, Versapay surveyed 1,000 C-level executives to uncover their biggest concerns on the current economic climate as well as how the customer experience directly affects the bottom line. Here are the findings.

“We did a survey of a thousand C-suite executives from medium to large-sized companies,” said Nancy Sansom, Chief Commercial Officer at Versapay. “The number one concern across the board was supply chain disruption. The top concern for CFOs is inflation. Second to that is rising interest rates, and then labor shortages.”

Sansom added, “We put out two reports, one is the state of digitization in B2B [business-to-business] finance, and the other is the impact of customer experience on B2B payments. For inflation, finance teams are under pressure to increase cash flow and speed up the invoice-to-cash cycle. AR [accounts receivable] teams haven’t been prioritized from a technological perspective. So the digitization of finance and AR teams are the last priority in the organization, yet they have an impact on customer experience.”

Without the proper tools, such as the latest technology that can automate these processes, outdated systems are sure to cause an interruption in cash flow, thereby impacting the customer experience.

“The other theme of these reports is that customer experience is top of mind,” said Sansom, “because we all know that it is easier and cheaper to keep a customer than to acquire a new one. In a downturn, you really want to be keeping your customers happy so that you can retain them.”

Accounts receivable seem to have fallen into an obscure, back-office category, with not much in the way of optimizing its processes, an out-of-sight, out-of-mind, hidden operation.

“Companies think of accounts receivable as back office,” Sansom said. “But every customer interaction is important and AR teams really do touch the customer, especially when something goes wrong, and that’s when tensions can be heightened.”

She continued, “A couple of interesting stats … 73% of all C-suite executives that we surveyed said that the invoice-to-cash process can negatively impact customer experience. Nearly nine in ten CEOs said the organization lost revenue due to confusion or conflicts, and 85% said their company got paid less than owed due to a miscommunication in the invoice-to-cash process. There’s a loss of money, opportunity cost, time spent, and it frustrates customers. It’s important that we don’t just think of it [accounts receivable] as back office and think about how we can improve that experience so that customers will be happy and pay faster.”

B2B customers are not much different from business-to-consumer (B2C) customers, as they also desire a fast, safe, and seamless payments experience.

“What we find in our research is that happy customers are kept happy by reducing friction in these processes,” said Steve Murphy, Director of Commercial and Enterprise Payments Advisory Service at Mercator Advisory Group.

The solution is not only to implement the latest technological tools, but to also incorporate the human element of collaboration.

“Some [companies] think about the customer experience side but most don’t,” said Sansom. “Most come to us and are just thinking about automation. They end up shooting themselves in the foot, because as they automate the process, they remove the human element. What we show our prospects is that there is a better way. You can automate, but you can also improve the customer experience by collaborating. Why wouldn’t we collaborate on an invoice issue, or goods that are damaged? They haven’t connected the dots on what’s possible with technology to automate while improving the customer experience.”

“Most people don’t want to think of one or two days of DSO [days sales outstanding] as being a positive experience,” said Murphy. “Given the competitive nature of and the importance of cash flow these days, the ability to reduce DSO by one day, two days, three days is important.”

“A lot of times the customer or the buyer needs to trust you,” said Sansom. “If you provide full visibility into all of your statements versus statements that are outdated, you have no visibility real-time. That doesn’t create trust with your customer, but if you create trust by having full visibility and giving them great tools to pay the way they want to pay, they might be more willing to set it up on autopay. Think about what that does to your DSO if you get some nice percentage of your customers just auto-paying and then it’s predictable and can really speed up that payment process. But first you need the trust, the transparency, and visibility into their account.”

Executives should seek out holistic solutions to enhance and optimize their current payment processes.

“They come to us looking for efficiency,” said Sansom. “One of the terms we use at Versapay is something called the AR disconnect. That’s the gap between buyers and suppliers or AR teams and AP [accounts payable] teams. We try to solve that gap. If they’re just thinking about themselves and their own processes, they’re going to do the opposite of what they’re trying to do. It’s about adopting collaboration tools.”

“As you digitize these processes and receivables, you’ve got a lot more data to play with,” said Murphy. “You can utilize machine learning to improve the algorithms and improve processes and further reduce DSL, or at least have flexibility to make better decisions. It’s an important part that people tend to discount.”

“Our cash application solution can take all these checks from lockboxes and the machine learning can figure out where to apply it to,” said Sansom. “When it can’t, it can let a human come in and give it some guidance. Then it can remember it from that point forward. With that kind of automation, you can get to 95% automated. For the 5% that you can’t figure out, that’s where you have the collaboration. If you don’t have the collaboration, then that 5% can really take up your whole team’s time. The combination of the two is where the magic happens.”

“Customers are not only happier, but they can take some resources and apply them to more profitable ends of the business,” said Murphy.

“Either our customers say, ‘I was able to eliminate contractors, I was able to let my call center focus on other customer service issues and not invoice issues,’ that’s been a really great experience that our customers have had,” said Sansom.

Collaboration, along with automation, is the best solution to ensure that your business can deliver the best customer experience.

“At Versapay, we have AR automation, which is a relatively new category so we can talk about initial efforts,” said Sansom. “We have AR automation, collaboration tools like Slack and Salesforce, plus a B2B-optimized payment network. You put those three together and now you can deliver a great customer experience while getting those automation benefits. Companies are ready to digitize in their finance area. They’re now realizing how important that is, especially with cash being so critical right now. Also speeding up payments and improving DSL.”

Sansom added, “Our software is called Versapay Collaborative AR. It’s a platform that brings together the buyers and sellers. It has great tools for the actual customer. You can let one buyer manage multiple supplier relationships with that one tool. It’s a network that brings more value to them, the more suppliers they use it for.”

“Fifty percent of invoice disputes are actually caused by human errors in the payment process,” said Sansom. “Forty-one percent of the execs that we surveyed said human communication breakdowns and relationship issues are top causes for disputes. This is where people need to collaborate. Sometimes you need to pull in [the] salesperson who sold the product. Maybe there was a misunderstanding or an expectation about what was sold. In a collaborative environment, you can pull in whoever you need, keep a record of all that. That’s where that disconnect can get resolved by communicating and fixing those issues.”

Most of the narrative within the fintech and crypto space revolves around the decline of cash. But is cash really declining? Countries that have attempted to go cashless, such as Sweden, have backtracked these efforts to ensure that consumers still have access to cash when the occasion calls for it.

“Cash is on the increase,” said Joe Myers, Executive Vice President of Global Banking at Diebold Nixdorf. “If you look at global cash in the economy since 2012, there’s a compound annual growth rate of about 7.5%. So cash is growing. That was one of the things that struck me as an ‘aha’ moment. Consumers need access to cash. And that has a direct correlation on how that all plays through in the ecosystem, including access to technology like ATMs.”

Diebold Nixdorf, a multinational company that specializes in self-service transaction systems such as automated teller machines (ATMs), has supported this need for cash for consumers. There is a need for more ATMs now more than ever as more bank branch networks are beginning to shrink.

Myers added, “Diebold Nixdorf sits in a very interesting place, connecting the physical to the digital and still allowing access to cash for those that need it. The ATM market is in good shape. We have tremendously strong products and global market share.”

“You can’t argue with cash, that’s for sure,” said Brian Riley, Director of Credit Advisory Service at Mercator Advisory Group. “The ATM has become more than a money machine. There are other functionalities to it. Even as electronic payments start growing, there’s definitely a use case for these machines to displace the operational expenses associated with the branch.

Although it is not a worrisome rate, banks are beginning to close more branches, something that should remain top of mind. As banks aim to reduce costs, the increased use of technology will be critical to continue to deliver a top customer experience.

“Functionality and technology are playing a bigger role,” said Myers. “The rate of decline is there for banks, at about 1% per annum. It’s not huge but certainly happening. The functionality that technology is putting forward so that people still have access to services is critical.”

Every industry struggles to remain competitive and solvent, and the banking industry is no different. Myers has taken the time to get on the ground to hear firsthand what banks are struggling with.

 “The one thing that is common across all is there isn’t a CEO at any of these banks that isn’t looking to improve their efficiency ratio,” said Myers. “Improving their efficiency ratio means attracting new customers and generating new income and new fees from those customers. Number two is retaining those customers that they have and enabling cross-sell and upsell into those customers — again, driving additional revenue sources from those customers. Thirdly, reducing the cost at which they do it. Reducing the amount of staff in branch and relying more heavily on technology.”

Fintechs are winning over consumers with fast, secure, and affordable ways to get access to financial services. The winning edge these fintechs have is that they don’t have the operational costs of branches, allowing these companies to be nimbler with their solutions.

Consumers are also looking for a streamlined, seamless customer journey. “When we think about the journeys that are being created and how the app and the web, and the physical assets like the ATM, branch, and advisory services are all having to work very closely together to create a seamless experience,” said Myers, “that’s how banks are differentiating themselves from each other, and how they’re looking to win market share in what is a very competitive marketplace. That is what we are picking up from our markets and where we currently stand in terms of how we are positioned to help support them and create those journeys that best enable them to attract and retain new customers in a cost-effective way.”

“This kind of symbiotic relationship between ATMs and branches and payments, it creates an ecosystem where you know that the card must have wide acceptance,” said Riley. “The financial institution has their own branding that can be done with that. They can tie it into the branch, they can tie it into the card. There’s a whole continuous loop that I see.”

On another note, despite the push toward digital currency and transactions, banks need to remember that in parts of the world, cash is still king. “Sweden declared that they would be a cashless society 15 years ago,” said Myers. “They’ve had to reverse that and reposition [to] what is a cash-light society. There’s regulation that’s coming to place that every single member of the Swedish population has to be within 25 kilometers of an access point to cash. That’s a great proof point for the rest of the world to start to think about as they think about this migration to a cash-light society. It’s critical that availability to cash is maintained across the entire ecosystem to allow that resiliency, should disaster occur.”

There is no doubt that in order for banks to continually deliver a seamless customer journey, their current systems must be modernized. Legacy systems can be cumbersome to deal with when it comes to making quick changes or to develop on. It is also much more costly.

“At Diebold, we’ve created a set of micro services that we have deployed across a number of key banks that enable them to quickly make the changes required to comply with whatever regulatory changes take place,” said Myers. “To capture the data they need, store it, and create a customer journey to attract and retain more customers. This is all in a cost-effective way. We have a consulting team ready to talk to bankers to showcase what Diebold Nixdorf can do.”

Banks can be sure that a partnership with Diebold Nixdorf can put them on the right path to delivering a top-notch customer experience.

 “We have service techs across the world ensuring that those systems are up and running as close to 100% of the time as possible, “said Myers. “With our software, we are making sure that we are validating transactions along with security. With marketing, banks can present offers via technology as opposed to in-person. We’re moving customers into a more personalized area, where bankers can advise and create additional value for their customers, leading to additional fee income as banks are able to sell more complex solutions.

“When I think of Diebold Nixdorf, I think of ATMs, but an ATM is a commodity piece for a financial institution,” said Riley. “The special sauce is being able to customize it to that financial institution.”

Another technology that’s generating a lot of interest, especially in the U.S., is the interactive video teller (IVT), or having a video teller at an ATM or a remote branch.

“There’s a massive runway to get into video,” said Myers. “Video via teller at the ATM, via a remote-type branch. Video is a big thing and something we have the capability to share.”

“I’ve seen it with two big money center banks,” said Riley. “And I recently had to open a credit union account for a client and it was actually a good experience because I’m used to top banks. I was surprised how they had integrated the IVT into the whole transaction. With the push of a button, I can be dealing with a rep, I choose the denomination of funds, I’ve also seen it with a couple of big banks using it to displace closed branches.”

“That technology is being deployed to maintain the personal touch and ensure that the customer journey and the support required by that customer is available at the push of a button,” said Myers. “That results in major efficiency for the bank because they are not having to staff multiple banks, especially those that seldom get foot traffic.”

Finally, all banks must make it a priority to stay solvent and competitive by ensuring the safety and accessibility of cash for their customers.

“Security is a major part,” added Myers. “Securing the ATM, securing the cash within the ATM. The other key bit here is availability. Making sure their solution is available to customers. Our services and our services techs ensure that our fleet of ATMs are continuously up, striving to get to 100%. This technology is really forward-thinking and AI-driven. What it tells us and tells our techs is that when one of the systems are about to go down, so we can perform preventative maintenance to ensure the uptime remains.”

For financial institutions, focusing on digital transformation has become extremely important. The shift to digitization accelerated during the pandemic when many people weren’t stepping foot into physical bank locations, keeping most of their interactions with banks virtual.

PaymentsJournal recently sat with Whitney Stewart Russell, President of Digital Solutions at Fiserv, and Steve Murphy, Director of Commercial Payments at Mercator Advisory Group to discuss Fiserv’s recent study and the key findings from it, as well as the advantages that financial institutions may have, and why trust is crucial to their success.

Financial Institutions have historically enjoyed a high degree of consumer trust, but during the pandemic more consumers were drawn to the convenience that fintechs provided when it came to digital banking.

“It’s interesting,” said Russell. “One stat that I often share with customers as we’re talking about this change is from a study. Millennials were asked who they would feel most comfortable banking with, and it actually swung to fintechs and big tech because of the convenience those organizations can provide.”

“Maybe I don’t trust them as much, but I’m willing to migrate to them because of the convenience factor,” she said.

Now the pendulum is swinging back, largely because banks are following the lead of fintechs and upping their digital capabilities. “We’ve actually seen that swing back in our most recent research, where the trust factor associated with banks and credit unions is outweighing what was perceived as a competitive advantage from a convenience factor,” said Russell. “And we’ve also seen banks and credit unions make digital investment a top priority. So they’re starting to even the playing field. When you have an even playing field, you’ve got the advantage of trust.”

Financial Institutions are also adding new features to help extend the banking experience, with real-time payments and financial planning tools. By having all those tools in-house, integrated in a smooth digital banking experience, there is no need for customers to go elsewhere.

Financial planning tools offered by financial institutions can help customers “develop good habits around money management and card management,” Russell said. “They can also help them track how much they’re spending, where they’re spending, and what controls they have in place to keep track of their budgets with this challenging economy.” Having a digital banking suite for customers to actively manage their spending can help banks keep their customers.

As real-time payments become more mainstream, financial institutions will need to include them in their digital banking offerings. Having that service can help drive engagement elsewhere. “You have to have real-time payments, regardless if it’s a money-maker,” Murphy said. “If you don’t, you might not have the opportunity to get all that additional revenue through all this engagement. It’s one of those services that consumers are expecting for free, but it’s driving other businesses [as well]. And you might lose customers if you don’t have it.” Overall, the more digital engagement, the more likely customers are to stay, and the more valuable those relationships become.

To better understand the correlation between a consumer’s digital and payments usage and the value to the financial institution in terms of net profit, product holding, and relationship primacy, Fiserv conducted a recent study leveraging a combination of Fiserv payments data and internal financial data from a large regional financial institution. Fiserv examined how the level of digital engagement among customers correlated with other behaviors.

“The consumers that we consider highly digitally engaged were 29% more profitable than those that were not, which is a huge number. That same group had 48% higher balances,” said Russell.

Part of the increased profitability is that those customers didn’t go to bank branches often, which minimizes costs for the banks. Digitally engaged customers also differed in regard to the amount of loans they took on. This is important because loans are very lucrative for banks.

According to Russell, “the highly digitally engaged customers were aggregating more deposits with those financial institutions and were 11% more likely to have a loan. Their loan balances were almost 40% higher than those that were not digitally engaged.”

According to Murphy, one of the early drivers for moving to online and mobile was the need for cost reduction including reducing the number of branches. But he notes that there has been a shift from conserving cash to generating new revenue. “If banks can get a bit more nifty in the way they can engage with customers, they’ll see increased profits,” he said.

Russell agreed. “We’ve been talking a lot to banks and credit unions just about this pivot in the industry, and really using the digital channel to grow relationships.”

In summary, to succeed in a digital world, banks need to focus on developing world class digital solutions, which match the features and convenience provided by the fintech competition. The most digitally engaged customers are some of the most valuable. To retain those customers, banks need to focus on making payments as seamless as possible on their apps, and include solutions such as real-time payments and financial planning tools. Fiserv has taken a leadership role in helping banks make these digital transitions.

Part of the transition is strategic. Transacting payments isn’t enough anymore as a business model. Financial Institutions have to provide value-added solutions for customers to retain them. These solutions, combined with the trust that people traditionally have banks, will help financial institutions thrive in the years to come.

As the holiday season approaches, merchants should be aware that as overall sales increase, so will fraud. In fact, the holiday season is an opportune time for fraudsters to strike. And merchants need to plan accordingly so that they are not overwhelmed. Fortunately, certain strategies and tools can help merchants adjust their fraud procedures. They can adjust in ways that avoid the need to hire additional staff to process holiday season fraud claims.

This fall Kount conducted a survey about anticipated consumer behavior this holiday season. It is to better understand how merchants should focus their fraud strategy. To learn more about the survey and how merchants and acquirers can optimize their fraud management this holiday season, PaymentsJournal sat with Casey Zenner, Vice President of Global Sales at Kount, Brady Harrison, Director of Customer Analytics Solution Delivery at Kount, and Daniel Keyes, Senior Research Analyst at Mercator Advisory Group.

According to Kount, holiday fraud tends to peak during the year-end consumer buying season. And it continues to persist after the big holiday rush with returns, refunds, and charge-backs. Many fraudsters tend to target this period in the hopes that a merchant’s fraud defenses are overwhelmed. And it’s critical that merchants are prepared and fully equipped to respond to any potential attacks.

“It’s such a double-edged sword for many businesses working to try and capture revenue during their busiest time of the year — because the holiday season, for many merchants, can really make or break their business,” said Zenner.

“During the holiday season, levels of fraud do peak, just because we have more transaction volume in terms of dollars lost,” added Harrison. “But you really need to sift through those events where it makes sense and not overwhelm your existing operational footprint — that’s what we hear a lot from the fraud space.”

“The other option is to dial down your fraud strategy and just say, ‘Hey, we’re just going to take this on the chin, minimize the level of friction for all customers, and then deal with the holiday hangover in January of charge-backs,” he added.

With a reactive approach to fraud, businesses gather information about customers after they make a purchase. But merchants that prepare well will move some of that identification process further upstream. “This creates a better customer experience for 99% of your good customers,” Zenner said. “The idea is to leverage data to put up adaptive friction where necessary.”

“Adaptive friction is the idea of not really setting a line in the sand for all customers, but rather setting that line in the sand for approve or decline or approve based on a variety of data, such as customer information, physical location, and season of the year,” added Harrison.

But adaptive friction can’t come at the expense of customer service. “There’s a huge loyalty opportunity with each customer,” Keyes said. “It’s important that their experience with returns, refunds, and chargebacks is positive because it could lead to a continuing relationship and more sales beyond the holidays.”

In a recent survey, Kount polled 2,000 people living in the U.S., the UK, Canada, Australia, and Mexico. They were surveyed about their online shopping plans for the upcoming holiday season. By and large, Kount anticipates strong holiday sales and consumers starting their shopping earlier than usual. “Some of this is a reaction to what they’re hearing about supply chain issues. Some of it is just the extreme attention to the holiday season as a whole,” said Harrison.

Traditionally, Christmas shopping took place in December, but with the proliferation of big shopping days including Black Friday and Cyber Monday, consumers haven’t been waiting till the last minute to get their holiday shopping done. “Some people are early shoppers and they want to get it done and deal with some of these shipping, logistics, and supply chain issues,” said Harrison. “What this really means for your business is the peak planning season is well underway in September.”

For fraud management, the there is an upshot of these findings. It is that policy changes for the holiday season should be implemented earlier in the year.

“If you’re having a policy change that you think will start the week of Black Friday, that policy or risk adjustment of adaptive friction for peak period might need to start November 1 rather than Thanksgiving,” said Harrison. “It’s a bit of a paradigm shift in fraud strategy that the season is moving earlier.”

According to Kount, gift cards will be a big purchase this year. In fact, 83% of consumers are preparing to buy gift cards for the 2022 holiday season. As a result, during those months, fraud strategies need to relax their scrutiny of such purchases because they’re so common during this time of year.

“Another big insight we’re seeing is in the alternative payments space,” said Harrison. “While we’re seeing growth in buy now, pay later [BNPL], it still [makes up] a minority of transactions. Many consumers said they would engage with some purchases using BNPL, and that said, around 80% of transactions will still be through credit and debit cards.”

For merchants looking at their fraud strategy this holiday season, there are a few key takeaways. Fraud will be rampant this holiday season. And merchants should consider adaptive friction that is customized, based on a variety of customer information. Merchants should also consider focusing on riskier cases of fraud. So with the increase in transactions they don’t have to hire additional fraud investigators. In any case, the policies that they adopt should be put into place in early November. As the Kount survey shows customers are starting their holiday shopping earlier and earlier.

Fraud continues to pound embattled financial institutions, which are aiming to stay ahead of increasingly sophisticated attacks. More organizations are realizing that fraud prevention tools and strategies must remain top of mind, which means investing heavily on the most effective tools on the market today. Great strides have been made thanks to powerful tools such as analytics, artificial intelligence (AI), and machine learning, yet financial institutions are failing to capitalize on another vital tool they have in combatting fraud in the payments space: data sharing.

Bruce Diesel, Global Head of Product and Payments at Diebold Nixdorf, David Excell, Founder of Featurespace, and Marco Salazar, Director of Technology and Infrastructure at Mercator Advisory Group, discussed the delicate balance and challenges between enhancing the customer experience and delivering robust customer protection against fraud.

Data sharing provides vital insights about customers and can also inform FIs on what solutions their customers are demanding. But it also plays a vital role in protecting customers from fraud.

“Data sharing enables the banks to protect the customer and create new experiences for that customer instead of [offering] new products and services to meet those real-time needs and requirements,” said Excell.

With the surge of customer information in circulation comes bad actors ready to swipe from the massive sea of data.

“Increased data sharing is increased opportunities for fraud,” added Diesel. “An increased volume of transactions means a bigger attack surface area for fraud.”

“Data sharing, if done correctly across business units and third parties, allows for broader detection of fraud before it even begins across a wider array of products,” said Salazar. “There’s this delicate fine balance that needs to be played when thinking about data sharing.”

Another reality that Excell pointed out is the proliferation of data sharing among fraudsters. It is through compromises that they get access to data in order to both share and sell data between themselves. He continued with proposing current solutions such as artificial intelligence (AI) and machine learning to use these data in order to protect customers in real-time environments.

Diesel also mentioned that the systems fraudsters use are far more agile than the systems used to mitigate them. He emphasized the importance of using the latest fraud technology to outpace fraudsters.

According to Salazar, a critical element is needed to use AI and machine learning systems effectively: “Those models just need large amounts of data to work properly. But this only happens if the data is standardized, is normalized.”

“You can’t build machine learning and AI on poor-quality data,” Diesel added. “It’s not a tool for improving the quality of data.”

Salazar continued, “In this case, you’re trying to improve the quality of the data from the onset and that’s going to help scale, not just scale these solutions, but increase their robustness.”

The latest innovation on fraud technology has kept up to pace to minimize the potential for fraud.

“The industry’s done well applying technology that has increased the level of authentication, which has meant things like account takeover and phishing type tactics are harder for the fraudsters to do,” said Excell.

However, when it comes to the end game of battling fraud, technology cannot do all the heavy lifting. The customer must play a central role.

“You can’t just rely on technology,” said Diesel. “I always advise to go back to consumer education and awareness.”

The newest fraud tools such as AI and machine learning have been an effective means of fraud protection. But certain consumer expectations do need to be curbed.

Friction within the digital payment experience is not popular with consumers, yet some friction must be tolerated to ensure fraud protection.

“There’s a balance point where consumers are prepared to accept an amount of friction to get the protection that they want and make them feel safe.” said Diesel. “The friction needs to be at a tolerable level to the consumer.”

“Data needs to be well shared, and it needs to be real-time shared between channels,” said Diesel. “Most banks are still operating in a very siloed manner in these channels. This creates a significant challenge.”

Another piece of the puzzle to mitigating fraud is consumer data and their use. Ultimately, consumers should have the final say as to whether their data can be accessed and for what purpose. When organizations are transparent about the gathering and use of consumer data, a bridge of trust and brand loyalty can be built. If organizations cannot prove the value of gathering consumers’ data, the result will be consumers revoking access.

“When a new payment method emerges, it’s going to need access to specific types of data,” said Salazar. “Once that’s established, the consumers are willing to try these new instruments. They understand that data needs to be shared in order to have these experiences. Firms have to be able to provide a permissioned access to data.”

But after these data are amassed, who’s responsible for them and who regulates them?

“Where is that data at the end of the day and under which regulatory body does it exist?” asked Diesel. “It’s very challenging.”

According to Salazar, new mandates take considerable time to reach the market. The example used is cryptocurrency companies and exchanges. Many of the companies within this market want to expand their reach. But they are hesitant to do so because a regulatory framework is absent from the market. These companies know that, in order to see mass adoption of crypto, consumers need to know that their experience will be a safe one.

Since there are no foreseeable mandates, financial institutions continue to sit out of the crypto game, as they do not want to incur any risk. Most organizations that want to operate within the crypto market desire to do so in a legal matter.

Also, by its very nature, technology tends to advance lightspeeds faster than any regulatory body can contend with.

Consumers want to know that their payments are protected, with as little friction as possible. This will be the ongoing challenge that most organizations will continue to face. Diesel noted that financial institutions can communicate their fraud strategies in order to build trust with their customers.

“We’ve seen a number of financial institutions advertise what they do with fraud controls and educate consumers around scams that are taking place,” said Excell. “It’s the reputation of the financial institution and that brand loyalty that’s at risk. So I think it’s a huge differentiator for FIs to be able to protect their customers and keep their money safe, which is one of the main reasons why we want to use a bank rather than keep the cash under the mattress.”

In the event of a possible recession, it’s important for acquirers to make their businesses as efficient as possible. Increasing sales is one important part of that, but so is reducing transaction fraud. Yet, being overzealous with transaction fraud detection has its risks. If false declines on transactions are too high, customers become frustrated and stop shopping with certain merchants. This can lead some merchants to switch acquirers, which in turn ends up costing acquirers billions of dollars.

In a recent podcast, PaymentsJournal sat with Amyn Dhala, Chief Product Officer at Brighterion, a Mastercard Company, and Brian Riley, Co-Head of Payments Research at Mercator Advisory Group, to discuss why optimizing transaction fraud detection is important in the face of increased volatility.

Banks and acquiring banks are making use of machine learning (ML) models. They are leveraging internal data to predict which transactions are most likely to be fraudulent and stopping them pre-authorization.

“The key objective for acquirers is the same as it has always been — increasing revenue for merchants, increasing approval rates, and reducing fraud,” said Dhala.

What’s different now, according to Dhala, are the new tools and developments during the pandemic. They have changed the way fraud may be tackled in an economic downturn.

Brighterion uses artificial intelligence (AI) models to leverage Mastercard network data. And these models are trained on billions of transactions, and the latest payment trends.

During the last few years, customers have changed. “Over the last couple of years, we’ve seen an increased use of [digital] wallet payments. For example, making payments using messaging apps. There’s also the use of newer credit products such as buy now, pay later (BNPL),” said Dhala.

Combatting fraud is part art and part science, according to Riley. “You could stop fraud by not approving any transactions,” he said. “Or you could increase sales by approving every transaction. It’s finding the balance between the two that’s important. If you think about the number of false positives that you can control, it’s crucial to set the dial for false negatives right. Learning from the customer’s experience with the fraud system, and recalibrating accordingly, shifts it from a science to kind of an art.”

Modern transaction fraud detection systems are characterized by cloud compatibility, rich data models, and success in real-life application. Cloud-based solutions also allow acquirers to detect transaction fraud without having their own servers, and help acquirers more easily scale up or down depending on the needs of particular companies. For example, during the holiday season, a company may require more fraud detection capacity than the rest of the year. With a cloud-based model, the company doesn’t need to permanently acquire extra server space for those months, but can ramp up or down according to its needs on a moment’s notice.

At Mastercard, much of the data crunching is done by using machine learning. Implementation of these systems are typically a big lift that can take months or years, but have the potential to really pay off. “What we’ve seen with our Mastercard models is that you can detect 30% more fraud by reviewing less than 1% of transactions,” said Dhala. Brighterion has access to data from a wide variety of merchants. As a result, it’s able to offer analytics based on what is happening in the broader business community and not just the data of individual clients.

One issue with machine learning is that machines create models that are effective at predicting which transactions are likely to be fraudulent, but are completely opaque about how they work. Machine learning systems can function as black boxes, and one current area of research is how to make this less the case.

Brighterion’s market-ready models bring together AI technology and foreign intelligence database of hundreds of billions of transactions. “This juxtaposition combination helps us provide a solution, which delivers exceptional accuracy in reducing false positives,” said Dhala. “We now have market models delivering real-time intelligence in the Americas, Europe, the Middle East, and Asia.”

Market-ready models have a few key features that make them desirable. First, an acquirer assesses payments for likelihood of fraud before the payments are authorized. Second, the solution integrates the models easily into case management user interfaces. They implement fraud solutions, as well as business intelligence applications.

“It comes down to the core basics,” said Dhala. “Acquirers and merchants are focused on improving customer experience, increasing revenue, and reducing fraud. Minimizing false positives is key. This is especially crucial in the holiday season, when customers are going after Black Friday deals.”

As previously mentioned, acquirers are focused on increasing revenue and conversion and reducing fraud. “Market-ready models help do that from day one,” said Dhala. “Because it’s already been pre-trained on billions of transactions from which you can derive insights to inform and improve your customer experience.”