PaymentsJournal

There is a common misconception that business credit cards are only for midsize to large businesses, as small business owners commonly use personal credit cards for their businesses. Furthermore, marketing for business cards has not traditionally been targeted at small business owners.

However, banks are starting to rethink that strategy. They see small businesses as essential for business card portfolio growth and are using innovative expense management tools to help attract small business customers.

To find out more about how business credit card management plays a role in driving business card portfolio growth, PaymentsJournal sat down with Surender Chuahan, VP Product Management at Fiserv and Brian Riley, Director of Credit Advisory Service at Mercator Advisory Group.

Offering business credit cards represents an attractive revenue opportunity for financial institutions. The average ticket size of a business transaction is 2.4 times that of a consumer ticket.

Historically, financial institutions have focused on midsize to large businesses. Recently, the landscape has changed a lot with the gig economy in the picture, and we are seeing a huge growth of small businesses. As Chuahan noted, “there are 32.5 million small businesses in the US alone.”

Most of these small businesses need cash, liquidity, and lending. Arguably, the credit card is the best way to do that. Among other benefits, credit cards provide a grace period to make payments.

Research shows that many small business owners just use a personal Visa or Mastercard. This practice is convenient, but it also has drawbacks.

If you go through an IRS audit, you’re going to have to reveal all your [personal] purchasing habits to the IRS if they’re on your card. Having a separate business credit card for expenses keeps personal and business activities separate.

There are other drawbacks to using a personal credit card for business purposes. Chuahan described how it can be frustrating for employees who use their own credit cards for company purchases and then have to file for reimbursement through a cumbersome process.

“You don’t want to get stuck because there is somebody who’s waiting to get some approval because they have to, they need to go and get reimbursed back,” Chuahan said.

Small businesses face many challenges today when it comes to credit card use and expense management. These challenges include proper expense tracking, controlling those cards for employees, and risks with file sharing.

Chuahan outlined the tools needed for a business credit card to work well for a small business. Small businesses need clear visibility of how much they have spent so far, and how much credit and cash is available. Also, the management system must be mobile.

An ideal business credit card system would provide flexibility around payments and transparency of what has already been purchased, but it might also allow the bank to give small business customers different options for different products.

Chuahan said, “If my bank knows how much I spend [and] where I spend, the bank might be able to leverage this information to provide competitive offers to customers.”

For example, say that a bank sees that a small business customer buys supplies from XYZ company at a particular price. The bank may have many other businesses that buy similar kinds of stuff elsewhere at a lower price. The bank could then provide this information to this small business, which could then adjust its buying patterns.

Artificial intelligence (AI) is revolutionizing many different sectors of the economy, enabling the optimization and automation of various types of systems. Expense management will be no different. AI will help small businesses with business credit cards spend less time on expense management, freeing up time for other tasks.

In the case of business credit cards, AI will most likely be applied to expense management. An AI tool could be programmed to learn about a business owner’s spending habits and use this information to create a categorization system that will help with accounting later on. Chuahan explained, “The tool can automatically put different expenses into the right tax category so that at the end of the year, when you’re filing your expenses, you’re just clicking a button and sending the data to your accounting system.”

Fiserv has built a tool that can help small businesses manage all their expenses automatically. The tool learns the pattern of what small businesses are doing, eventually do it for them, and let small business owners focus on other tasks.

The future is bright for business credit cards. New features will make it easier to run a business, and the benefits will make those cards a no-brainer for small business owners. For more information on all of these topics, listen to the podcast in which Chuahan talks about these issues in more detail.

For debit and credit card issuers, marketing has always been a pillar to growing the business: attracting new customers, activating those who have gone dormant, and finding incentives that increase business from active customers.

As happened with so many elements of consumers’ lives, the fundamentals of their engagement with card accounts shifted after the onset of the COVID-19 pandemic, requiring issuers to adjust their marketing approaches.

In this installment of the PaymentsJournal podcast, Lesley DeCator, General Manager of the PaymentsEdge Marketing and Advisory Services at FIS, and Don Apgar, Director of the Merchant Services Advisory Service at Mercator Advisory Group, discussed the current environment in marketing strategies, the importance of proper customer segmentation in campaigns, how the pandemic affected the offering of incentives, the use of communication channels to most effectively reach current and prospective customers, and extracting actionable intelligence from response rates and thus building a strong return on the marketing investment.

As DeCator noted, the pandemic certainly changed the spending environment—for example, debit and card-not-present transactions rose, consumers shopped extensively from home rather than in large groups in brick-and-mortar stores—but the underlying principles of marketing have proved durable.

“The basics are the same,” she said. “We need consistent communication, a very strong call to action, compelling incentives, and great cardholder service. The key to success is careful planning and timely execution. … And then you need to be able to pivot when situations change quickly, as they are prone to do.”

The aim of PaymentsEdge, DeCator said, is to tailor marketing campaigns for clients based on the following foundation:

Here’s how those efforts played out vs. the results for FIS clients not using the PaymentsEdge advisory services for 2021 vs. 2020 in terms of growth:

The numbers are striking: spending growth for PaymentsEdge clients was 126% higher (23.31% vs. 10.31%), transaction growth was 23.7% higher, total active accounts growth was almost 109% higher, and total debit card growth was 177% higher.

While some issuers go it alone with their marketing campaigns and do an excellent job, DeCator said, others need help making sense of the results those campaigns generate and how to assess that information to further hone their approaches. She describes the PaymentsEdge service as “cradle to grave” in this respect, with the company continually testing its campaigns and messaging for efficacy and adjustments.

Apgar also noted the importance of keeping the marketing spending from negatively affecting the return on investment for card issuers.

“At the end of the day, if you’re spending a lot of money to deliver the results, you’re really adding a negative impact on the ROI,” he said. “Keeping the costs low, that denominator low, in the ROI equation is really important.”

Segmenting a customer base for subsequent delivery of marketing messages is essential, DeCator said, noting that her group tests new segments and incentive groups throughout the year, with thorough vetting of a campaign before it gets included in the calendar.

In the debit sphere, targeting new inactives, long-term inactives, low users and mid-tier users, particularly within 90 days, drives the highest response and ROI, she said.

For credit card portfolios, a program that increases credit lines can allow for the growth of transactions and balances—“You can’t ask for additional spend if your cardholders don’t have any room”—and regular promotions for acquisitions, rate and use, balance transfers, and skip-pay campaigns also prove effective.

In the end, it’s about data aggregation, Apgar said.

“If you don’t have a good way of tracking ROI, even if you’re successful, you really don’t know why or where to invest additional resources and what to double down on and what to back off on,” he said.

The pandemic “absolutely shifted” the approach of marketing to cardholders with incentives, DeCator said. The thrust of campaigns switched from travel and dine-in restaurants to shop-from-home experiences such as Amazon, Apple, Google Play, and Barnes & Noble, to name a few.

The pandemic also drove a shift in imagery. Marketing showed consumers shopping for and receiving goods in their homes, on their porches, and kicking back and watching a movie or playing a game in the comfort of their homes. Diversity in imagery, always a consideration, was also front and center, she said.

There were other effects, too.

“We had to change our baselines,” DeCator said, noting that the circumstances of the pandemic clouded whether a given card was useful or not to consumers. That forced her team to reach further back for historical data to guide decision-making.

“It was unprecedented. We were very successful, but it’s not an exercise we’re anxious to repeat.”

The pandemic, Apgar said, shined a light on the extent to which consumers are constantly evaluating their options for payments. The ability to harness data on consumer choices and habits and drive meaningful marketing toward them is paramount.

“Consumers are looking for leadership from the brands they do business with,” he said.

Here’s another shift as a result of the pandemic: PaymentsEdge is finding that in the post-COVID-19 environment, “most of our junk mail is in our [email] inbox.”

The best marketing approach with small to midsize clients, she said, is one that starts with direct mail and follows up with an email. For larger issuers, email remains the most cost-effective way of reaching customer segments.

As technology advances and new modes of communication kick in, it can be tempting, she said, to employ every possible means of getting a card user’s attention, such as through text messaging. But there are privacy concerns, she said, and testing continues before those campaigns are formally launched.

Said Apgar: “When you get too close to the consumer, it’s a little Orwellian. It’s a fine line.”

The ACH (Automated Clearing House) Network affects most Americans daily, having moved nearly $73 trillion in payments in 2021, according to Nacha, the organization that governs it. 

As payments constantly evolve and become more digital and faster, the ACH Network is also evolving in order to meet the needs of both businesses and consumers. To learn more about how it is handling the new world of payments and what might be in store for the future, PaymentsJournal sat with Michael Herd, Senior Vice President of ACH Network Administration at Nacha, and Steve Murphy, Director of Mercator Advisory Group’s Commercial and Enterprise Payments Advisory Service, for a discussion on this vital payments network that Americans use every day.

Payments volume, especially B2B payments, continues to grow significantly on the ACH Network in 2022, noted Herd. The number of transactions on the ACH Network increased 2.8% so far this year, with B2B payments increasing 14% so far in 2022 B2B payments are defined as invoice and supplier payments from one business to another or merchants and businesses getting funded for card activity. It does not include payroll direct deposits, which are a separate category.

“So, the increase in volume of B2B payments has been really dramatic,” he said. “We’re also seeing very, very high levels of dollars moving through Same Day ACH windows. And consumer payments continue to be strong as well despite the end of the pandemic-era assistance payments.”

Murphy asked about the impact of the ACH Network’s move in March to increase the Same Day ACH payment limit to $1 million. Nacha members approved a measure to increase the per-payment maximum from the previous limit of $100,000 to $1 million effective March 18, 2022. It applies to all eligible Same Day ACH payments, including credits and debits for both businesses and consumers.

The $1 million limit can be used for many different types of payments, from insurance claim payments and payroll funding to business-to-business and tax payments, according to Nacha.

The second quarter was the first full quarter with this per-payment increase. There were 185 million Same Day ACH payments transferring $486 billion in the second quarter, respective increases of 24.4% and 94.4% over the same timeframe in 2021.

“That has obviously had an impact?” Murphy asked.

Herd replied, “we have gotten a lot of good feedback from the industry on that step,” and businesses especially have been taking advantage of the new limit increase. 

“Businesses are really the entities that have a need to send larger-dollar payments,” he added. “They have really been taking advantage of the new dollar limit.”

It’s not only businesses but also consumers who have benefited from the increased $1 million limit, Herd said. Some examples of consumers taking advantage of the new limit include authorizing payments from a personal banking account to a brokerage account or a retirement account, or conversely, taking money out of such accounts and into a personal account.

“We’re seeing a lot of activity here,” he said. “People want the ability to move that large amount of money on a same-day basis.”

Herd observed that the COVID-19 pandemic spurred higher use of digital payments, and that looks set to continue even as we move into a post-pandemic era. This was especially true for small and medium-sized business, which have adopted digital payments in droves after years of relying on paper-based payments such as checks and cash.

“The pandemic era was really transformative in how small and mid-sized businesses send and receive payments,” he said. “This change in behavior to more digital payments [for SMBs] is something the industry has been trying to push for decades with only moderate success. But in the two-plus years of the pandemic era we have seen transformational change.”

This is true even for businesses such as personal services providers, which have largely been cash-based historically.

Murphy asked if the current economic climate and possibility of a recession are affecting the volume of B2B payments. “What are you seeing reflected in the network?” he asked.

Herd said that, so far, there has been no discernible decline in business payments on the ACH Network.

“We have not seen a decline in volume that is attributable to a recession,” Herd said. “We’re still seeing growth in B2B payments, which is a core part of economic activity.”

Herd also discussed several new innovations on the ACH Network and some potential future plans. He said that in September it will start implementing late-night file deliveries to all 9,800 financial institutions that are part of the ACH Network. This means payments can be transferred later at night on banking days and that “this is really addressing a gap that exists today.”

He said this move will provide accountholders with more accurate and up-to-date information on account activity and what their balance will be at the opening of the next banking day.

“This will create a better user experience and help consumers avoid things like overdraft fees,” he said.

Murphy speculated on whether the ACH Network will look at implementing another increase past the current $1 million limit in the near future. Herd noted that the limit was raised from $25,000 to $100,000 in 2020 prior to the current increase. Nothing is set for yet another increase, but it is a situation that the ACH Network is watching.

“We will see what the activity looks like over the next six to nine months and how the market is adapting to the larger dollar amount,” Herd said. “There is nothing on the table at the moment, but it is something we are acutely aware of.”

Halfway through 2022, it’s not that the fight against payments fraud has shifted to a whole new ball game. While criminals’ tactics are ever-evolving, the real challenge lies in the breadth and complexity of the fraud. It’s many ball games on many fields, all at once, and that’s the environment confronted by card issuers, merchants, and consumers alike.

Eric Kraus, Vice President of Fraud, Risk and Compliance Solutions at FIS, and John Buzzard, Lead Analyst in the Fraud & Security practice at Javelin Strategy & Research, discussed the current environment on an installment of PaymentsJournal Podcast, going in-depth on such topics as the evolving nature of fraud, how FIS’s acquisition of Worldpay has fortified efforts to combat fraud, insights gleaned from Javelin’s most recent identity fraud study, the risks of peer-to-peer payments, and ongoing consumer education and the steps needed to preserve and strengthen the connected relationships between card issuers and customers, customers and merchants, and merchants and acquiring banks.

It’s a lot for all the parties to take in — as Buzzard noted, increases are being seen across almost every area of fraud that is tracked, a situation he described as “joker’s wild” and Kraus called “the Wild West.”

Kraus broke down the present situation for both card issuers and merchants.

On the card-issuing side, the biggest fraud challenges are:

On the merchant side, two big areas of fraud stand out, Kraus noted:

As consumer behavior has gone increasingly digital, Buzzard said, criminal behavior has followed with automated attacks across digital channels. “We just continue to see a lot of crime-as-a-service and malware-as-a-service schemes out there,” he said.

The 2019 FIS acquisition of online payments company Worldpay has led to some enhancements in the fight against fraud, Kraus said. Among them:

Kraus also cast the acquisition in consumer-centric terms. “Stopping fraud is super important,” he said. “That’s what we’re here to do. … But we can lose focus on the most critical player in all of this, and that’s the consumer and that relationship.” He noted the creation of what is internally being called a “fraud fusion center,” which will gather together fraud-fighting intelligence, including resources for customers.

Buzzard was particularly enthusiastic about that development. “They’re looking for guidance,” he said of consumers. Later in the podcast, he noted statistics that should get the attention of any issuer:

Javelin’s 2022 Identity Fraud Study: The Virtual Battleground, authored by Buzzard, sets down the stakes.

From the report:

The increases in identity fraud are seen across categories, Buzzard said: a 109% increase in new-account fraud and a 90% increase in account takeover fraud. Averaged out, the increase in total identity fraud is 79%.

“We’re back to pre-pandemic criminal behaviors,” he said, noting that criminals will always follow the money and the path of least resistance. It’s easier to fleece an individual consumer through compromised personal information than it is to crack a bank.

The silver lining is that the number of identity fraud scam victims has fallen by 12 million from Javelin’s 2021 study, perhaps signaling some impact of consumer education efforts. The takeaway, Buzzard said, is to not ease up on those efforts.

“There are still a lot of victims,” he said. “Refine your educational messaging. Something is clearly working.”

The era of easy money movement through peer-to-peer (P2P) apps has also seen a rise in fraud associated with those payments. Kraus noted that this rise has coincided with a generalization of how such payments are used.

The payment type began as a way of moving money between people known to each other. Bills were split. Handymen were paid. “Now,” he said, “it’s kind of morphed into a regular payment type. Criminals are going to follow the trends.”

Securing those payments, he and Buzzard noted, will require an emphasis on advanced authentication methods beyond the ubiquitous static passwords, including multifactor authentication, tokenization, and biometrics.

Buzzard sees optimism in consumers’ attitudes toward biometrics, noting:

One of the pain points with payments fraud lies in sorting through rights and responsibilities in the aftermath. Consumers, understandably, will look to their financial institutions for help in reconciling the fraud and being made whole, Buzzard said.

“By the time we learn about the consumer struggles with identity fraud, they’re pretty worn down,” he said, noting that fraud instances take approximately 16 hours of consumers’ time to resolve. “They’re frustrated.”

He and Kraus both drove home the point of clear, transparent communication with consumers and the clear availability of resources online and in digital channels.

“Improving the client experience takes that negative aspect away,” Buzzard said.

Digital transformation is top of mind for financial institutions of all stripes, yet many are cautious when initiating such projects and unsure where to begin due to the inherent risk associated with modernizing legacy systems.

This is especially true when it comes to modernizing payments systems. Today’s consumer wants to not only pay using traditional card-based methods, but also wants to use the vast array of digital payments available and new innovations such as buy now pay later (BNPL).

How financial institutions can successfully modernize their payments systems will be a focus of discussion at Diebold Nixdorf’s upcoming Intersect conference in Las Vegas on August 29–31. The annual conference is returning after a two-year hiatus brought on by the COVID-19 pandemic.

To hear more about what financial institutions will learn about modernizing, PaymentsJournal sat with Michael Engel, Managing Director & VP Payments for Diebold Nixdorf, and Sarah Grotta, Director of Debit and Alternative Products Advisory Service for Mercator Advisory Group.

The biggest reason financial institutions put off modernizing their payments systems is the potential risk and fear of something going wrong. Engel noted the adage “no one ever got fired for buying IBM,” and said many bank and credit union executives hesitate to move from systems that work fine, even if the systems are decades old.

“Banks do understand that they need to future-proof,” he added. “But change is always associated with risk. Many feel soft and cozy with their legacy systems, and it feels safer to do nothing than to take a risk.”

Still, he noted that there are risks involved in simply staying the course. For one, financial institutions that do so can’t offer their customers access to the latest innovative digital products and services. Being able to do so is a matter of staying competitive.

“Fintechs will come in and provide these services and win customers if banks don’t change,” Engel said.

He added that the siloed legacy systems many financial institutions have in place are saddled with technical debt and are increasingly time-consuming to keep running smoothly.

Grotta agreed that many financial institutions are now reaching a tipping point when it comes to modernizing systems.

“I talk to a lot of banks about modernization, and to date, it’s mostly been a lot of talk, but we are now reaching the point where they are talking about when and where and how to modernize,” Grotta said.

A major focus of the Intersect conference will be helping financial institutions answer those questions of when and how and where to modernize. Engel noted that for many institutions, getting started is the biggest hurdle; they simply don’t know where to begin.

“For so many individuals at financial institutions, finding a way to get started and just defining what modernization is, is the really hard part,” Grotta added.

That’s why Diebold Nixdorf usually proposes a phased, step-by-step approach to modernizing systems. Engel noted this is safer than a “big bang” approach where systems are all replaced at one time, and the step-by-step approach usually assuages risk-averse bank executives.

The conference will feature an in-depth workshop on how banks and credit unions can take this approach, with a workbook they can fill out to help make a business case and hearing case studies from institutions that Diebold Nixdorf has already successfully worked with on modernization.

“We’re looking to create a process that takes them step-by-step,” Engel said. “We’re going to look at the risk associated with changing systems and share best practices from real-life implementations and what worked and what didn’t work.”

A big key is to consider up-front the potential challenges that may arise throughout the project and make plans for dealing with them.

“A systems migration should not be rushed into, and no detail should be overlooked because it can create a burden at the end,” Engel said. “You should spend more time on analysis and planning at the beginning.”

However, Engel added that taking a measured approach does not necessarily mean that it will take a long time to roll out the new technology.

“It may sound contradictory, but if you keep that steady pace in a risk-minimized environment you can actually deliver new products faster than with any big bang approach,” he advised. “The key is to deliver value during each phase as it becomes available in this cloud-based native environment and ready to be consumed by customers.”

Grotta agreed, noting that “the big bang approach is fraught with risks” and a phased approach is easier to sell to internal stakeholders.

“The idea of a methodical and phased approach has got to be music to any bank executive’s ears,” she said.

Ultimately, no matter where any financial institution stands in its own modernization journey, it can benefit from the workshop and hearing learnings and best practices from other institutions that have went through the process already, Engel said.

“We want them to know that they are not risking one’s job or career by embarking on a modernization project,” he added. “It’s about how to approach change in a manageable way.”

There is a common misconception that today’s bank and credit union customers want to do everything in a digital channel. The fact is that when it comes to financial services, consumers often have high expectations: in-person assistance when help is needed, plus the convenience of on-demand, self-service digital and mobile channels. How can retail banks and ATMs help meet these expectations?

ATMs play a key role in delivering this experience. Specifically, interactive ATMs that can handle most of the basic transactional work typically done in branches by tellers, such as check cashing, withdrawals with multiple denominations, account transfers, loan payments, and more.

To find out more about how ATMs play a role in a financial institution’s overall channel strategy, PaymentsJournal sat with Brendan Watkins, VP of Product Management at Fiserv, and Sarah Grotta, Director of Mercator Advisory Group’s Debit and Alternative Products Advisory Service.

ATMs can play a key role in facilitating and offering choice to consumers, especially Millennials. Watkins noted that ATMs are a key touchpoint for Millennial consumers, and that, contrary to the popular belief that this cohort does everything digitally, physical cash still plays an important role in their lives.

“More than anything, Millennials really want choice,” he said.

Grotta agreed, noting that Mercator research shows that Millennials do use cash and go to the ATM frequently. Research also shows that they are less concerned with paying surcharges, and more interested in choice. For example, Mercator research found that 72% of Millennials say that receiving cash from an ATM in their preferred denomination is important.

“Offering that choice is a big winner,” said Watkins. “Letting them get fives instead of tens or twenties is a great pleaser and incentivizes them to go back to that ATM.

Other ATM features Millennials deem important include the ability to receive an emailed e-receipt and accessing ATMs via a smartphone, according to Mercator research.

Specifically, consumers are drawn to cash for low-value transactions. Mercator research reveals that cash is used 49% of the time for payments valued at less than $10, and for 35% of transactions of any value conducted in person.

Interactive or “smart” ATMs also enable branches to operate more efficiently. Watkins observed that some banks and credit unions are using interactive ATMs and other advanced technology to create a sort of hub-and-spoke model of branch distribution. In this mode, there is a “hub” full-service location providing the single best opportunity to display your brand and deliver a premium consumer experience. Here, all your technology and servicing should be on full display, addressing the needs of consumers who want and need the human touch, as well as those who want significant self-serving options. Supporting the hub are the spoke locations, acting more like a café in a given area, where customers can come in and have a cup of coffee and talk about financial planning with a representative. In these smaller locations, consumers can conduct basic tasks, almost entirely manned by video ATMs and other smart technology. They don’t even require employees to handle cash; that can be done by vendors coming in to service the ATM.

Grotta added that this model can help banks and credit unions fill gaps in staffing; with interactive teller machines replacing much of the function of human tellers, financial institutions can then redeploy budget to hire in other areas.

“This is especially important because staffing and hiring is so competitive these days,” she said.

This also enables banks and credit unions to free up their staff to do more exciting and valuable work than just processing transactions, Watkins said.

“It offers a different type of employment opportunity for associates because they are less transaction-focused and more focused on building relationships with customers,” he added. “You also are able to attract a higher-quality associate. Associates are excited to do less rudimentary tasks.”

This ultimately allows banks and credit unions to operate more efficiently and effectively without drastically increasing budget. Where ATMs are connected to core account processing systems, Watkins noted some institutions are seeing a reduction in branch wait times Another example Watkins cited is creating longer hours for some branch locations. For locations that are transaction-based and mostly staffed by video tellers, banks and credit unions can deploy workers from different time zones or locations to work at different times to ensure the location is open longer than the typical nine-to-five hours.

“It gives you flexibility and the ability to create a remote workforce,” said Watkins.

Modern, interactive ATMs can also be connected with a financial institution’s core systems in order to deepen customer relationships. Watkins noted that Fiserv is uniquely positioned to do this, as it is also a core provider and has a robust card services program as well. He said interactive ATMs can be connected to core systems via APIs, which “lays the groundwork for future possibilities as well.”

This turns ATMs into more than just mere cash dispensers, but full-fledged customer touchpoints no different than the mobile or online channels.

For example, the ATM can be connected with CRM systems so that consumers’ full financial picture with the institution is known at the time when they interact with the ATM.

“So, you can deliver a targeted offer right there, similar to what we might do in online banking,” Watkins said.

Grotta compared this ability akin to what is happening in the realm of super apps, where a multitude of features are offered through a single app.

“You pool together more functionality and more of a consumer’s financial history and background into one single place,” Grotta said.

Another key advantage of modern, smart ATMs is that they can be serviced remotely, Watkins said, which means they can be repaired quicker as opposed to having to wait for someone to come in and physically fix the machine.

“It really helps with your ATM fleet uptime,” he added. “It greatly increases ATM availability.”

Digital innovation has transformed payments for businesses and consumers in recent years. One area that has lagged, however, is accounts receivable (AR). Many businesses still rely on manual, time-consuming, and costly processes when it comes to AR.

But that’s beginning to change. Advanced technologies such as cloud computing, artificial intelligence, and machine learning are starting to transform and automate AR processes, saving businesses time and money.

To find out how, PaymentsJournal sat down with Alex Hoffmann, EVP of Payments for Versapay, the industry’s first Collaborative AR Network, and Steve Murphy, Director of the Commercial and Enterprise Payments Advisory Service at Mercator Advisory Group.

Innovation in Accounts Receivable Payments

Innovation in accounts receivable has been slower than in other areas of business where teams enjoy cloud-based platforms like Salesforce and Asana, but Hoffmann noted that is starting to change.

“We believe we are at the onset of a cloud-based revolution that is combining payments with accounts receivable,” he said.

Murphy agreed, noting that receivables has not been an area where most companies invest in new technology, especially compared with accounts payables.

“But that has started to change the last few years, even before the pandemic,” he said. “Now companies are looking at their end-to-end processes and looking to connect payables and receivables.”

Hoffmann detailed several primary ways AR payments have been processed in the past, all of which have their flaws.

First, there has been a lack of adoption for the integrated customer portals that many manufacturers and wholesalers have introduced. Second, while many clients choose to pay their invoices with virtual cards, this creates headaches for their suppliers. Finally, there is still a substantial reconciliation challenge to process due to the fact that 30% of B2B payments are still received via paper checks.

Lack of Adoption with Customer Portals

Regarding customer portals, Hoffmann said that many companies have set these up to accept payments from their smaller clients. The problem, however, is a lack of adoption.

Typically, many manufacturers and wholesalers have a “long tail” of small business clients, said Hoffmann, and they try to streamline payments from these clients using payments portals. However, this has not proved to be a great solution, as many clients simply don’t use the portal.

“The problem is a lack of adoption,” he added. “The worst thing you can [do] is invest in software that your customer doesn’t use.”

That’s why Versapay developed a different approach. Their Collaborative AR Network provides complete payment data, actions, requests, collaboration history, payment predictions, and actionable insights to facilitate delightful customer experiences.  It has a cloud-based collaboration portal that connects AR teams with their customers. It makes data transparent and combines powerful invoicing, collections, and payments automation.

“It intermediates the dialog between buyer and seller. For the seller, issues get resolved quickly and easily, and relationships are built, not broken. The Buyer experience is improved by not missing invoices, and the ability to easily apply credits and eliminate delinquency calls happen more efficiently, thus increasing a better a customer experience,” said Hoffmann. “This enables invoices to be resolved quicker and businesses to get paid faster.” Versapay also has an Intelligent Invoice, which was redesigned so the invoice data is tracked to provide complete remittance data throughout the entire AR lifecycle.  

“So smaller customers have a very easy way to make payments the way that they want and an easy way to communicate with the supplier,” said Hoffman. “It’s why Versapay clients enjoy an 80% customer portal adoption rate while other leading providers only see around 20%”

Virtual Cards: Convenience for Payer, Hassle for Payee

Many large businesses, on the other hand, prefer to make their payments to suppliers with virtual cards. These are generally very convenient for the payer, but often are a challenge for AR departments, Hoffmann opined.

“Typically, [AR departments] will receive an email that contains a card number, then click [on] a link to obtain the card number, and then manually input the card number into a virtual terminal somewhere,” Hoffmann explained. “Then the remittance data must be input manually, and the payment needs to be reconciled with the ERP [enterprise resource planning] system.”This causes a lot of manual work for accounts receivable receivable departments, which not only take up a hefty amount of employees’ time but can also lead to human error.

Automation, however, can remove much of this headache. For example, Versapay has partnered with American Express to automate AmEx virtual card payments that are made to suppliers in order to increase efficiency and accelerate cash flow. The solution includes Versapay’s ePayment Delivery Service (ePDS), which eliminates email-based payment delivery and automates the processing and reconciling of virtual card payments. ePayment Delivery Service ingests, transforms, and delivers remittance data directly to suppliers. With available straight-through-processing, ePDS can fully automate virtual card acceptance. 

The benefits to AR departments are many by implementing this kind of virtual card automation. They get paid faster and their employees are freed up to focus on more strategic work.

Checks: Still a Predominant Payment Method

While much of the world has largely ditched checks, checks are still widely used in America.

This poses an obvious problem for businesses, as checks are a costly, inefficient, paper-based way to process payments. Typically, businesses receive a check along with some form of remittance file and then must match the service or product to the payment.

“Despite the digital transformation taking place across the industry, checks are a time-intensive and complicated process to deal with,” Hoffmann said.

By implementing AI-based cash application solutions, companies can avoid this hassle. Earlier this year, Versapay recognized that this was a major issue in the AR department and acquired DadeSystems, a leading cash application software that uses AI and machine learning to automate one of the most challenging parts of AR by streamlining the receipt, matching, and reconciliation of payments no matter how they are received. By adding DadePay solutions to Versapay’s Collaborative AR Network, enterprises can digitize and automate all their customer payments, including checks, bank-to-bank transfers, credit cards, and mobile payments.  

Accelerating over Hurdles

When it comes to upgrading accounts receivable systems, the biggest hurdle for most companies is inertia, Murphy noted. It can be hard to get buy-in from internal stakeholders or prove the ROI for upgrading systems. However, cloud-based systems that automate accounts receivable processes make the case easy, he said. There is no need for significant IT investment and there are no long implementation times.

Furthermore, automating AR processes will enable businesses to operate more efficiently and take better advantage of all the data they possess, Murphy said.

“As you automate systems and processes, you will be gathering a lot more useful data,” he said.

In tough economic times and in a rising interest rate environment, automating accounts receivables also provides a significant benefit because it enables companies to get paid faster as cash becomes more expensive, said Hoffmann.

“We see this as the moment of acceleration for AR innovation,” he said.

The technology and payment rails to enable real-time payments in the U.S. already exist, though real-time and faster payments still have not entirely permeated the U.S. financial system.

That’s because many of the more than 10,000 banks and credit unions in the U.S. today have been slow to adopt real-time payments. The reasons for this are myriad, including the complexity of integrating new payments types, the complexity of dealing with different payment rails, and the fact there is a lack of a federal mandate to do so.

However, financial institutions need to embrace faster payments and real-time payments now or risk being left behind. To find out why this is such a pressing issue for banks and credit unions, PaymentsJournal sat with Dave Keenan, Senior Vice President for Card Services and Payments at Fiserv, and Sarah Grotta, Director of Mercator Advisory Group’s Debit and Alternative Products Advisory Service.

Keenan began by observing that consumers and businesses are increasingly expecting real-time payments, and failing to deliver that can lead to severe consequences down the road.

“There is going to be a sea change in payments that is going to drive different consumer and business behavior, and financial institutions are going to need to adapt if they are going to retain those relationships,” he added.

Luckily, for banks and credit unions that have not begun down this path, it’s still not too late. But they cannot delay any longer.

“You’re not out of the game if you are still at [the] starting blocks; don’t worry, it’s still a marathon not a sprint,” Keenan said. “But it’s time to move.”

He advised financial institutions to talk with their trusted vendor partners about how they can help and find out what options are available immediately, as well as “find out what your customers, your members, want and what solutions they are using. That is a good indicator of what they will value.”

Grotta noted that many banks and credit unions don’t need to immediately start with the most cutting-edge real-time payments technology, but rather, can start by taking small steps.

“Some financial institutions are also waiting for the right business case to materialize or for the market to mature,” she continued. “But your customers want this now. You can start with a few use cases to get your feet wet.”

Peer-to-peer (P2P) payments are a clear example where real-time settlement can be implemented, Keenan said. Enabling workers in the gig economy to get paid faster is another. He cited research showing that more than 50% of gig economy workers are willing to pay a fee to get paid immediately as proof of the demand in this area.

There are also numerous business-to-business use cases, such as vendors getting paid immediately after making a shipment to a client.

“Small businesses, which rely greatly on cash flow, want this,” he added. “Pretty much everybody prefers when they are owed money to get it faster, and we are just now starting to see a number of use cases blossom.”

Grotta added that there are internal efficiencies that banks and credit unions can also realize by implementing real-time payments. Fraud detection, for example, can be more robust because it can spot potential attacks or fraudulent patterns in real time as opposed to long after the fraud attacks have occurred.

Financial institutions can also make better use of customer data to gain greater insight into spending patterns or cash flow trends and be able to offer more proactive assistance to clients.

“There’s a lot of opportunities,” she added. “I don’t think we’ve really scratched the surface yet.”

Technology already exists today to enable real-time payments. the ATM. When a consumer takes out cash from an ATM that is not operated by their financial institution, that ATM operator has to “talk” to the withdrawer’s institution to ensure there is enough money in the account to meet the cash withdrawal request. If there is, the cash is dispensed and the account is debited. This is all done in  real time.

“We’re talking about technology that is 50 years old,” Keenan said. “The rails to support this are very mature.”

Keenan further noted that over the next 10 years, the amount of money moved by real-time payments networks will exceed that of the card ecosystem today.

“And that’s very exciting,” he added.

Grotta said that banks and credit union clients will not care what technology is used or how their institution provides real-time payments, just that they do so and that the user experience is topnotch.

“If you look at the P2P payments space, it has taken off because the user experience is so good, and when someone gets money through a P2P app, they know it is available to them immediately,” she said. “They don’t care what is happening in the back office.”

And more and more consumers every day want this experience.

“Consumers and businesses want to do business with those solutions that help them get their money faster,” said Keenan. “That’s just obvious.”

Buy Now, Pay Later (also known as BNPL) as a consumer financing option—and, importantly, a merchant marketing tool—is a relatively recent arrival to the scene, if also a fresh branding of a not-so-new idea.

PayPal’s June 15 announcement of its Pay Monthly product, allowing customers to make a purchase and break the payments over a period of six to 24 months, proved a good entry point for a PaymentsJournal Podcast Show discussion among three veterans of the consumer lending space and its associated technologies:

PayPal’s initiative comes at a time when BNPL offerings are undergoing a shift. Originally driven by younger consumers attracted to no-credit-score decisioning, BNPL has made strides toward being governed by more traditional aspects of consumer credit.

Riley, Shah, and Broadbent discussed a range of topics, including what PayPal saw in the BNPL space that prompted this new offering, the challenges involved in credit risk decisioning and underwriting for BNPL services, how the players in the space are shaking out, and the perspective of merchants and how they drive BNPL.

After all, Riley pointed out, it’s a merchant-centric payment proposition, which is the twist that BNPL puts on older, similar financing models that were centered on the consumer.

“It really shifts the center of the transaction,” Riley said. And that, he said, is good news and bad news. With BNPL, merchants have been able to bring in entire new segments of customers. On the flip side, with decisioning that hasn’t always hewed to regular consumer lending standards, there’s been “skyrocketing risk.”

Shah noted that the basics of BNPL are nothing new to PayPal, pointing to its 2008 acquisition of Bill Me Later, which it went on to rebrand as PayPal Credit. However, he did draw a distinction between how BNPL was utilized before the pandemic and how it’s evolving now. Before, he said, it was mostly focused on younger demographics and their interests: “Fashion, electronics, home, a bit of travel.”

“What we’re seeing now,” he said, “partly because of the pandemic and partly because new, larger entrants are coming into the space, is adoption across all consumer segments and adoption across all verticals.”

At its core, Shah said, BNPL is “fundamentally a lending product. You have to know how to run that business…if you want to be able to scale in the space.”

Shah sees growth ahead for BNPL, even amid current economic uncertainty. PayPal’s new offering changes the dimensions, allowing for bigger-ticket purchases stretched out over longer repayment periods. “It’s not a question of whether Buy Now, Pay Later is here to stay or grows,” he said. “It’s just how it grows, whether it grows responsibly, and how it pivots to meet the demands of the cycle we’re going through.”

Broadbent traced the modern-day iteration of BNPL to millennials and younger consumers who embraced it, attracted by the no-credit-check entry into the purchasing arrangement—or, as Broadbent put it, “if you can fog a mirror, here you go, financing.”

In Europe, however, where this version of BNPL got its start, regulators and credit bureaus have begun pushing back, positioning the vehicle in more traditional retail credit underwriting. In the United States, the arc is following suit.

The challenge for BNPL providers, Broadbent said, is to employ the more traditional rules of advancing credit while also creating a seamless experience for consumers and the merchants that want to sell them products. The hallmarks of those experiences include:

“At the crux of all that is the idea that we need flexible rules,” Broadbent said, the kind that allow lenders to react when a consumer is underwater and when fraud is being perpetrated.

Riley noted that more traditional lending rules will also help ensure consumer relationships merchants value. “Anybody through the turnstile” can artificially swell the ranks but “the hope with a customer relationship is that it goes on a while,” Riley said.

While the easy view of BNPL might be that fintechs and other upstarts are the dominant players while more traditional companies have been slower to enter, Riley advocated for a more nuanced view. PayPal, for example, is both a fintech and a maturing company.

“From the perspective of a merchant to its funding source, the merchant needs someone who’s going to be there tomorrow, and next year, and the year after that,” he said.

Shah said that was the view PayPal took toward expanding its credit offerings with Pay Monthly and its flexibility with bigger purchases and longer payment timeframes. He said the company is well positioned to thrive as a more traditional lending environment settles over BNPL.

“Working with regulators, working with credit bureaus is just part of what you have to do to run a good business and keep that responsible growth,” he said.

“From a merchant point of view, doing business with those more established providers can make or break your own reputation in the long run. We think we have a pretty good shot at being a top player in the space.”

Merchants want customers and sales. Customers want payment flexibility. BNPL fills a need.

“Customers are always going to pay the way they want, when they want,” Shah said. “It’s why people carry so many different payment methods in their wallet.”

With BNPL, even under tighter standards of credit decisioning, the control point shifts, he said, offering a way in for consumers who can qualify for credit but are fee-averse or interest-averse or long-term-debt-averse.

And then there’s the marketing power of BNPL and its ability to pull new customers into marketplaces, whether online or in physical store locations.

“You can’t ignore the power of that merchandising tool,” Shah said.

Merchants, their acquiring banks, and payment service providers (PSPs) all face a daunting challenge: They’re under pressure to reduce ever-increasing transaction fraud while at the same time increasing revenue by taking on more volume with less friction for customers and merchants where sales are made. 

According to Amyn Dhala, Chief Product Officer at Brighterion, a Mastercard company, this is where machine-learning models can get ahead of fraud trends.

In an episode of PaymentsJournal Podcast, Dhala and Don Apgar Director of Merchant Services Advisory Practice at Mercator Advisory Group, discussed how these fraud detection models are changing, the rapidly evolving fraud techniques that make the models valuable to merchants, banks, and PSPs, and the challenges in deploying the models.  

Among their discussion points: 

The challenge, in sum, for acquiring banks, PSPs, and large merchants, is to decrease fraud while still increasing revenue. That is, handle more transactions, say yes to more credit applications and subsequent sales, minimize false positives in fraud detection, and still reduce the overall instances of fraud, all while making the processes for identifying and mitigating fraud as frictionless as possible. 

And do all of that while accounting for fraud techniques that are ever changing and increasingly sophisticated. 

In instances of known fraud, static rules for transactions have worked to the advantage of banks, PSPs, and merchants, Dhala noted. The problem lies in the evolution of fraud, which cries out for an equally evolving means of detecting it. 

“As time progresses, these rules are not adaptive,” Dhala said. “They become a drag in terms of your operational performance.” 

Enter AI models, which draw on large, world-class data sets for intelligence on how fraud is perpetrated, allowing for more accurate prediction, detection, and assessment of trends. The Mastercard Brighterion models, for example, are underpinned by “billions of transactions,” Dhala said. 

Apgar noted that Mercator research into chargeback fraud grasped the scale of the challenge. “It almost became unmanageable without tools like machine learning and AI,” he said. 

For any organization’s fight against fraud — be it a bank, a merchant, or a payment service provider — the coin of the realm is data.  Data can provide a better perspective on fraud. The problem lies in extracting the data that can train a machine-learning model to predict, detect, and anticipate fraud. Further, organizations must contend with other issues, including: 

Dhala noted that a “market-ready” model should be able to handle these tasks at scale, whether on-premises or in the cloud. “Interoperability becomes crucial,” he said. 

As fraud prevention has evolved from rules-based to initial fraud modeling to the most recent iteration, Dhala noted that so-called “market-ready” machine-learning models should be exceptionally accurate and based on a broad, deep set of historical data. Models should also be underpinned by billions of transactions containing data that can identify fraud and be able to learn from those patterns. Finally, machine-learning models should be “network agnostic” and customizable to relevant user specifications.

“It’s not just you feed your data into the grinder and the answers come out,” Apgar said. “The machine or algorithm is getting smarter by assessing the actual outcomes vs. the predicted outcomes, then using that knowledge to improve the score. When you talk about ‘market-ready,’ there’s already been a significant amount of development and additive value that’s come to the model.” 

Dhala said that fraud detection — relying on a vast trove of historical and ongoing data extraction as well as real-time scoring of all transactions — can be achieved while reviewing fewer than 1% of the transactions and with no customer interference.

But he also noted the top-line benefits. When issuing banks see fewer fraudulent transactions from a merchant or an acquirer, approval rates will go up, thus increasing revenue. 

“The more data that you can review and the more efficiently you can review [the data] really is what drives that equation,” Apgar concluded.