PaymentsJournal

It’s 2022 and many consumers are splitting restaurant bills with peer-to-peer (P2P) apps and initiating a wide range of payments without having ever written a check, or in some cases, even having a checkbook. 

On the flip side, according to Payveris Chief Innovation Officer Marcell King, some consumers are making big-ticket monthly payments for items such as cars and mortgages by dispatching a paper check with a paper coupon through the mail to move those loan payments to their lenders. The latter situation is a combination of legacy systems that haven’t been reimagined and a gaping need for banks and other lenders to anticipate what their customers’ payment preferences are and will be. 

King and Sarah Grotta, Director of Debit and Alternative Products at Mercator Advisory Group, joined an episode of the PaymentsJournal podcast to discuss the issues around faster payments in the loan industry, what the opportunities are for banks and credit unions, and the risks involved in not evolving to meet the needs of modern consumers. 

King cited his own children — all in their 20s and at an age to be taking on car loans, mortgages, and other monthly payments — as evidence of what these lenders are up against with today’s borrowers. None of his children, he said, owns a checkbook. 

“For a consumer to have to pay their loan with a check and a coupon, it’s kind of ludicrous,” he said. “From a loan payments perspective, you have to be able to give the consumer the ability to pay with whatever method they want that’s eligible for a loan repayment.” 

Grotta said the prescription must be a consumer-first, consumer-centric approach. “If a financial institution thinks about that first, [it’s] always going to have a more successful solution,” she said. “But I don’t think the banking industry has necessarily done that to date.” 

Grotta and King both discussed what she calls “the decentralization” of the financial lives of consumers, who might have some money in a mobile wallet, some in a checking account, and some in a PayPal or Venmo account. Consumers will want to draw on those pockets of money and might find themselves stymied when it’s time to repay their loans. 

“You don’t want to constrain your customers,” King said. 

It’s not just a matter of meeting customers where they want to be. A bank or credit union that might have only a lending relationship with a given consumer and proceeds to limit the interactions with that borrower misses on a chance to expand the relationship. 

“It really diminishes your cross-sell opportunities,” Grotta said. 

Lenders that haven’t been able to rise to the occasion of greater payment flexibility and speed are primarily burdened by two factors, King and Grotta said: 

Taking an “if it’s not broken, why fix it?” approach is a risk, King said, because any lender waiting to hear what a consumer wants in terms of payment flexibility isn’t likely to receive that feedback. 

“Customers generally aren’t going to ask for something,” he said. “They’re just going to find what’s most convenient for them. You miss a little bit of the boat there.” 

He suggested that banks, credit unions, and other lenders view the matter through these customer-centric lenses and leverage the data they’ve gathered: 

Grotta cited Mercator studies on consumers’ preferred channels and payment types and the “stark difference” between how payments are made today and how consumers would prefer to make the payments. 

The U.S. bill pay market — not just loans, but all forms of bill pay — is $4 trillion, Grotta said. “It’s worth paying attention to.” 

With fintechs, neobanks, and others crowding into the lending marketplace, customers’ satisfaction will only expand as a point of differentiation. Here’s the ringing bell for financial institutions: Consumers like these new players. 

A 2021 J.D. Power and Associates study of satisfaction with mortgage servicers uncovered startling statistics: 

King noted that nontraditional lenders, such as Rocket Mortgage, many of which are tech companies first, are “leveraging technology to provide consumer convenience, speed, and simplicity — things that the consumers are looking for — to differentiate their products from other products and other organizations.” 

Grotta said banks, credit unions, and other traditional lenders have unmet opportunities in making payments both frictionless for consumers and in leveraging tools associated with those faster, less cumbersome payment methods. Texted prompts and alerts about things such as late payments and overdrafts create high-response touchpoints with consumers and build trust. 

Ryan Cole, the podcast host, quoted Mercator Advisory Group’s Vice President of Payments Innovation Tim Sloane, who called payments “an ‘and’ industry,” in that it’s ever-expanding in its offerings, in its methods, and in what consumers want from it. 

Striving to meet consumers is worth the effort, King said. “Loans are a primary source of revenue for financial institutions,” he said. “If you don’t make it easy for consumers to make their payments, it’s going to lead to frustration.” 

Like companies in other realms of financial services, credit unions must grapple with how to build the experiences their members want in a world that is increasingly digital, particularly since the onset of the COVID-19 pandemic.

As more and more of their members adopt digital tools to access their accounts and engage with their financial institutions, credit unions are devoting more resources to optimizing the experiences in those channels.

In this episode of the PaymentsJournal Podcast, Brian Day, Technical Sales Engineer/Solutions Consultant at PSCU, and Mercator Advisory Group’s Sarah Grotta, Director of Debit and Alternative Products, discuss how credit unions can make informed decisions about plotting their digital road maps. Creating low-friction, pleasing member journeys can position credit unions for growth and success now and into the future.

PSCU’s own numbers tell the story: Consumers have considerably shifted toward using financial institutions’ digital channels. This shift has been driven, in part, by a change in habits forced by the pandemic, as branch visits were either closed off entirely or curtailed while consumers sought other ways of accessing their accounts.

That shift has not been temporary, largely because it was already occurring before the pandemic set in. Now, the permanency of the shift is clear: Consumers who migrated to digital channels have stayed there and are being continually joined by others. Among respondents to a PSCU survey, 85% note an increase in digital channel use, and 82% say they expect their digital use to continue increasing.

“We were seeing growth broadly across the industry pre-pandemic,” Day said. “Then COVID-19 really accelerated that.”

In his digital consulting, Day is seeing the shift play out in two major ways:

The expectation that digital use will only continue expanding has played out in how businesses in the digital banking space have reacted. These reactions include:

“It’s critically important for credit unions to get a sense of what they’re doing today and how that stacks up against the competition,” Day said. “Specifically, are they offering a robust set of features? Are they removing friction as much as possible from that journey?”

Grotta suggested that the pandemic’s role in shifting consumer patterns has, in significant ways, built a guidepost for credit unions as they decide what to prioritize.

“Certain digital products have really seen a huge surge,” she said.

Day concurred, noting that the financial reports across the industry pointed to enhanced digital use, thus driving attention and investments.

“That climate has caused credit unions to say, ‘This is really, really important, and this is something we really need to focus on,’” he said.

The top-of-mind questions, from a credit union perspective:

“We need to narrow it down and look at the granular perspective,” Day said.

PSCU, through its Advisors Plus arm, now offers the Curinos Digital Banking Hub to help guide its clients through those questions to uncover what makes the most sense for meeting their members’ needs now and into the future.

Curinos goes into the marketplace and develops intelligence to help institutions see the road ahead, in terms of the present challenges, the trends in the marketplace, benchmarking, key performance indicators, and ultimately, a return on investment.

“It will help them look at and compare their digital experiences versus what others are doing and prioritize,” Day said.

Grotta used the example of a credit union that wants to add loan payments to its roster of digital banking features. It can draw on intelligence to see how prevalent that feature is across the marketplace, then examine individual experiences offered by issuers and see how those features are managed. The credit union can then plot its course.

Day noted that such research is being done today by credit unions, but it tends to happen informally. He told the story of a single employee at a client credit union who was testing providers by opening personal accounts with them. When told about the gathered intelligence and information through the Curinos Hub, Day said, “he was really excited about it and his comment was, ‘This is great—I can do the same research without destroying my credit score.’”

Grotta noted that credit unions, as smaller organizations that have thrived by offering personalized service, aren’t under pressure just from larger banks with larger budgets. Neobanks are in the space, and more are coming in all the time. Challenger banks are competitors, too. And they’re taking their share of the market. Javelin Strategy & Research found that in 2021, 52% of all consumer financial relationships were with nonbanks.

“Competition is coming from every direction,” she said.

Day said it’s incumbent on credit unions, as smaller institutions, to understand what their competitors are offering in the digital space, then matching or exceeding those features that are most important to their own customers. The age-old credit union strength of knowing their members personally must extend to knowing their digital pathways and habits. Above all, he said, don’t do damage through friction-filled digital experiences.

“If you’re not delivering the key features that members are looking for on a day-to-day basis, that can be very damaging,” he said. “It’s really critical to have those key components of your journey optimized.”

“If it’s not, there are lots of choices in the market today. The member may not want to, but they may find themselves expanding the relationship into another financial institution that’s providing a better digital experience.”

Grotta pointed to what happened in bill pay, which seemed primed for financial institutions to dominate. But the investments didn’t follow, the experiences weren’t smooth, and billers developed their own, better experiences for customers.

“That’s one of the examples of how not having a great digital experience can really have a significant impact on your ability to serve your members,” she said.

Payment facilitation, or PayFac, is quickly becoming table stakes for many merchants. With new technology diversifying payment methods across all industries, merchants are clamoring for streamlined payment acceptance functionality. Businesses are increasingly looking toward independent software vendors (ISVs) to provide those services, and those ISVs want to deliver fast and easy payment acceptance activation to their merchant partners through Software-as-a-Service (SaaS) offerings. 

To learn more about the growing trend of ISVs implementing PayFac platforms to bundle payment acceptance into their software, PaymentsJournal sat down with Jareau Wadé, Chief Growth Officer at Finix; David Dew, Senior Manager of Digital Acceptance at Discover Global Network; and Don Apgar, Director of Merchant Advisory Services at Mercator Advisory Group. 

Over the past several years, there has been a steady decline in the number of businesses obtaining merchant services from their local bank or acquirer and a commensurate rise in businesses getting solutions from software providers. “This is part of a bigger trend that we’re tracking,” explained Apgar. “What we used to call a ‘merchant account’ is now less of an account, per se, and more of a software feature.” 

This trend makes perfect sense when one considers the concurrent growth of SaaS as a business model over the past decade or two. “Combine that with the ease of accepting payments that has happened both on the consumer side and the infrastructure side, specifically when it comes to payment facilitators,” said Wadé. The result is small and midsize businesses (SMBs) primarily obtaining financial services through software providers. 

The concept of vertical SaaS—providing software for all elements of one industry—is becoming more popular as a business model. “The average number of SaaS providers that a small business uses to run their company is seven, and some obviously use more,” noted Wadé. “What that means to me is that the vertical software companies like the ones that Finix supports have an opportunity to simplify business for their SMBs.”  

Wadé continued: “If you can become the system of record—starting with payments, and then layer on things like tip management, payroll, etc.—that is going to allow you to be the bedrock of how these SMBs run their company…. I wouldn’t be surprised if the majority of consumers and merchants get their financial services in the future through SaaS companies.”  

SaaS represents a true democratization of technology; even very small businesses can access solutions on a pay-as-you-go basis. “The influx of software companies has really transformed the payments industry,” Dew emphasized. “More and more of these vertical SaaS companies are embedding payments into their offering, and by working closely with partners like Finix, [Discover] is getting a much better understanding into the growth of payment facilitation within this segment and beyond.” 

There are a variety of ways for SMBs to take advantage of payment facilitation. Legacy models such as referrals from independent sales organizations (ISOs) are still options, though those who use that method may find themselves at a disadvantage from parties who have done PayFac integration themselves, either by outsourcing to a dedicated PayFac or converting the business into a PayFac.  

“There has been a renaissance with mobile technology and SaaS in general,” Wadé pointed out. “At Finix, what we are seeing is companies coming to us to become PayFacs, but also folks who have that aspiration someday and want to get started with something that might be a lighter lift, that still provides the path towards greater economic benefits and more control of the user experience.” Many SaaS users are pushing companies in that direction simply because it is so much easier to bundle everything in one place with an ISV. 

Finix has developed a metaphor to describe different payment integration models, intriguingly referred to as “Pizza-as-a-Service.” Wadé broke down the options: 

The idea of tackling payment facilitation entirely in-house may seem appealing at first—until companies learn that between PCI and OFAC compliance and software development for screening, dispute management, settlements, reconciliation, onboarding, etc., the time to market would be about 18 months (eons in the SaaS world) at a cost of $2–$3 million, plus several hundred thousand dollars on a regular basis for maintenance.  

“[SaaS companies] really don’t want to be in the payments business, but they want to offer payments,” Apgar stated. “Outsourcing some of that would be a tremendous advantage for some of these SaaS companies.” Using a company like Finix to develop a payment stack means ISVs, SaaS providers, and value-added resellers (VARs) can outsource much of the cost, increase speed to market, and retain more control over the services they provide to SMBs. 

Both Finix and Discover work closely with Passport Parking, a notable use case for payment facilitation. Passport, which offers ticketing solutions for different cities and municipalities, was managing 22 different payment gateway integrations once upon a time. PayFac integration with Finix allowed Passport to get a distribution deal with Google Maps. 

“That is the benefit of owning your own payments,” clarified Wadé. “You bring it in-house, even if you are outsourcing parts of the infrastructure to a partner, and you still have much more control of your destiny.” Moreover, such a model lowers the opportunity cost and frees up internal resources for core projects and expansion. 

“Emerging technologies have really layered payment processing when you compare it to the traditional acquiring model,” Dew concluded. Integrated payments have become a necessity for SMBs, and a streamlined payment stack provided by a trusted partner makes business operations that much easier. 

To learn more about including payment facilitator capabilities, read Discover’s whitepaper here. 

One needn’t look far to see that neobanks and other types of digital-only banks — the upstarts in financial services — have altered retail banking. 

These numbers tell part of the story: 

But there’s more: The five-year projection from 2021 to 2025, shows that the number of U.S. accountholders at neobanks will rise from 29.8 million (11.4% of the population) to 53.7 million (19.9%). 

These new players in banking are rising on a tide of consumers’ basic inclination to adopt new technologies (for example, music fans, over time, have veered from needles on vinyl to lasers on discs to files in the cloud) coupled with a pandemic-accelerated shift toward digital and a hyperfocus on customer experiences. 

For traditional banks and credit unions, the headwinds are considerable, but there are also opportunities to stand out and to burnish the credentials they have been accumulating for years and to validate the trust they have earned.  

To learn more about how neobanks and digital-only banks are competing with traditional financial institutions for consumers’ attention and wallets and how traditional FIs can respond, PaymentsJournal sat with Wesley Suter, Director of Product Solutions at Fiserv, and Sarah Grotta, Director of Debit and Alternative Products Advisory Service at Mercator Advisory Group. 

It starts with knowing how neobanks arrived and where they are headed. 

Suter started by noting that neobanks’ focus on the customer experience “really cracked the code of what consumers are seeking: ease of use and convenience.” 

In the neobank world, the customer experience is everything. Neobanks’ mobile-first approach attracted accountholders in droves, as illustrated in the numbers above. What should be more concerning to traditional brick-and-mortar FIs such as legacy banks and credit unions are customers’ attitudes toward neobanks. 

Mercator research shows that two-thirds of consumers holding an account at a neobank perceive it to be their primary financial account. Their number one reason for opening a neobank account in the first place is the ease and convenience of the digital user experience. 

Those high-end experiences, Suter noted, are “the new form factor of loyalty.” 

Neobanks and other digital-only outlets can trace their beginnings to the narrowest of focuses: They were interested in solving a market problem and flowing consumers to their solutions. For SoFi, Suter noted, that was student loans, and from there, the company “manifested into other services.” For Chime, it was about taking on the traditional routes into the wide spectrum of financial services, with a hyperfocus — that word again — on a strong digital experience. 

In some ways, however, the neobank model is showing cracks that have emerged over time. Among them: 

Such factors can cause a hesitation in consumers to fully commit to these new accounts. In fact, more than 70% of consumers who have digital-only accounts also retain a relationship with a traditional FI. 

Herein lies opportunity. But it must be joined with an understanding of how and why consumers organically reach for new solutions, how that natural inclination underwent an acceleration in recent years, and how traditional FIs can take cues from the upstarts while at the same time leaning hard on what they are already good at providing. 

Suter used a generational example to show how consumers have progressed to a high degree of comfort with fully digital interactions. He cited his Depression-era grandparents, who kept cash around the house, having seen how easily it was lost otherwise. “That was their perspective,” he said. Suter then contrasted that mindset with his own, describing himself as midcareer and noting that he did not experience online banking access until his mid-20s. 

Next, Suter pivoted to his children: “They’re fully immersed digitally.” His kids still mow lawns and shovel snow, but they are getting paid via Venmo and Zelle. 

Neobanks are “leaning into that comfort zone” with digital experiences and the convenience they engender. 

And convenience equals loyalty, in the most basic equation. 

Though it is clear that changing technology and the market solutions brought to bear by harnessing it were inevitable, with the March 2020 declaration of COVID-19 as a pandemic by the World Health Organization, consumers’ adoption of fully digital experiences went into hyperdrive, something Suter called an “accelerant.” 

He described this as being “forcibly reconditioned to reevaluate all aspects of their lives.” 

The impacts on financial institutions were immediate and obvious. Customers who preferred banking in-branch “had to figure something else out,” as branches closed and customers were rerouted to call centers and online and mobile log-ins. The adoption of neobanks rose, as consumers needed to be able to access their money and move it without personal interaction. The game was changed. 

Financial institutions were not alone in having to adapt. For example: 

“All of these things were natively happening,” Suter said, “but the accelerant was the impact COVID-19 had.” 

Such an environment made innovative players in the banking space naturally attractive to consumers already leading digital lives. “Our lives are fully immersed,” Sutter said. “Everything is on. We have an instant link to the rest of the world.” These connections pervade payments, entertainment, and consumers’ work lives. 

Naturally, consumers wondered why their banking experiences could not be as easy and immersive as their other digital experiences. 

Again, this is an opportunity not just for the upstarts trying to claim turf and shares of consumers’ wallets but also for the traditional FIs that have been there straight along. 

For traditional FIs such as card issuers and banks and credit unions, the importance of the payment relationship is paramount. “That’s really the gateway to the other products an institution supplies,” Suter noted. 

That puts the focus squarely on debit cards for banks and credit unions. Those ubiquitous cards, employed with the frequency that consumers once spread around with cash, are used more than anything else in a bank customer’s wallet. The potential loss of those transactions is the nightmare scenario.  

“Ultimately,” Suter stated, “if you lose that payment relationship, you’re at risk of losing the overall relationship.” 

The prescription is that banks and credit unions should: 

Neobanks receive rightful praise for the way they’ve leveraged their insistent focus on customer experience and gained a share of consumers’ financial lives. Suter stated that for traditional FIs, the proper response is NOT to emulate the digital-only model, but to refine digital experiences upon a foundation of trust and reputation that the upstarts can’t match. 

“Lean into how you as a traditional institution win today,” he noted. “You have worked to build this affinity of your brand. You provide a high-touch, personal service excellence.” 

Key questions for leadership at traditional FIs to consider in their digital offerings: 

Recall the journey of the music lovers. CDs and eventually digital files crowded in, but vinyl never went away. There is an experience there that can’t be matched. Similarly, remember the 70% of neobank accountholders who have not let go of their traditional bank. They’re valuing something in that relationship: trust. 

Trust is gained over the long haul, and it is the essential building block of the future. 

For any leader of an organization steeped in payments — banks, fintechs, and technology providers — it’s a time of great opportunity and great complexity.  

Customer demand for instant payments, instant credit decisioning, and more-frictionless payments is increasing. Borders are coming down, at least in the realm of transactions, creating a need for solutions that enable the free movement of those payments. More and more players are crowding into the real-time-payments (RTP) space, complicating the choices and costs for those entities that process payments. And then there’s all the associated data and how to use them. 

In this episode of the PaymentsJournal Podcast, three industry experts discuss what’s going on at the intersection of cloud computing and payments connectivity and where things seem to be headed: 

“We hear consistency across the board from all the clients around trying to improve that end-to-end customer experience,” Loos said. He pointed to the past decade or so and the rapid growth and increased competition in the payments space, which “requires you to invest in ways to do things more efficiently.” 

He said all of SWIFT’s clients have some sort of cloud strategy, ranging from the short term to the long term, because of the inherent benefits: 

“When you start combining these technologies, it really starts creating a different experience behind the scenes, which can create a much better and different experience up front,” Loos said. 

SWIFT’s point of emphasis, Loos said, is on “creating an instant and frictionless world for cross-border transactions.” 

“These technologies are going to be required to do that in various forms,” he added. 

ISO 20022, the International Organization for Standardization’s standard for electronic data interchange among financial institutions, is at the heart of SWIFT’s efforts to facilitate these payments that transcend borders and methods, Loos said, calling it “table stakes.” 

“We will start that journey later this year [November],” he said. “I call it a journey because it will take many years for the industry to translate completely into an ISO 20022 format.” 

The result, he said, will be more data but, more importantly, more structured data, which can be used to refine back-end processes and front-facing experiences for customers. 

“Clients are ready,” he said. 

Dusane said AWS sees two macro trends playing out now and into the future: 

Feedback across all customer segments, Dusane said, points to a desire to make the data associated with payments more useful. Accordingly, he said, AWS works with partners to create customer-facing solutions that bring together structured data (data that are organized and decipherable by machine-learning algorithms) and unstructured data (information that is not arranged according to a pre-set data model such as message strings and emails). 

Machine learning, for banks, has been in use for decades, Loos said, particularly for things such as straight-through processing and dealing with repeat errors. The turn now, he said, is toward “anomaly detection,” which has applications in fraud detection and anti-money laundering, among other uses.  

At SWIFT, he said, large volumes of data are generated by transactions. “It’s not our data,” he said. “It’s our clients’ data.” Securely leveraging that information, SWIFT has been developing models based on that historical data, with additions from its clients, to develop a more powerful base of knowledge. 

“Securing it and making sure we do it in a meaningful way is critical,” Loos said. 

In the credit sphere, the implications are enormous. The data that drive Know Your Customer (KYC) standards and identity verification make possible payments mechanisms such as Buy Now, Pay Later. “Let’s be honest,” Loos said. “This is just great technology companies coming up with an amazing algorithm that is probably more powerful than banks have had in their credit departments in maybe 20 years.” 

Dusane said AWS approaches the steps as “individual processes within a payment transaction” — instant decisioning, KYC, additional verifications, whatever is needed for the payment to succeed. The goal, he said, is to analyze that vast data quickly, at scale, without creating a financial burden for the bank or payment company to run those models. 

Loos said that he expects the fragmentation in global payments — new methods, new players — to increase certainly in the short term but also probably in the longer term as well.  

Add to that what the future of monetary systems is likely to be, and the challenge becomes getting all of these payments systems and all of these elements of the payments infrastructure — The Clearing House (TCH) in the United States, the European Banking Authority (EBA) — working in concert when consumers seek ways to use the method and currency (central bank digital currencies, stable coins, etc.) they most desire. 

“At the global level, the way[s] a customer can make payments are going to be different,” Dusane said. “What that leads to is different payment networks getting created all over the world.” 

Interoperability plays a big role in solving that puzzle, he said. Just as important: controlling costs for financial institutions. With a proliferation of payments networks, the costs of connecting can become so high that institutions will opt out, thus missing out on potential markets and customers. Cloud services can mitigate that, he said. 

“That will enable these payment networks to service the needs they’re trying to cater to,” he said. 

The many digital touchpoints today’s consumers use to connect with merchants and buy products have been a boon for businesses. Merchants have many different digital avenues to meet customers where they are and enable quick and seamless payments options for products and services. While this digital world has created convenience, it has also created ample opportunities for fraud.

It’s much easier to commit fraud in the digital realm than, for example, in a storefront, due to the quickness and ease with which transactions can be completed. Merchants must be vigilant against fraud without introducing too much friction to the seamless digital experience consumers have come to expect. This can be a difficult balancing act. 

PaymentsJournal recently sat with Erika Dietrich, VP of Global Merchant Payments Analytics & Optimization for ACI, and Don Apgar, Director of the Merchant Services and Acquiring practice at Mercator Advisory Group, to discuss how merchants can toe this delicate line.  

Apgar noted that because merchants operate in many different geographies, each of which has different rules about the kind of data that can be collected and with different regulations for each kind, using standard tools to detect fraud is difficult. 

Though card transactions are fairly standardized, “the fraud prevention tools and third-party data sets, issuer data sets, and some of the connectivity vary from region to region, as do the privacy laws,” he added. 

This means that merchants need fraud solutions that are “adaptable and easily adjusted for external variables,” Apgar said. 

Dietrich agreed, adding that fraud prevention can’t be looked at in a vacuum, but that there needs to be orchestration between merchants’ fraud prevention and payments strategies. She added that this is why merchants need a solution that can operate across all entry points, including card present and card not present, and that uses artificial intelligence and machine learning to understand different operating points and can change and adapt to the different payment options and digital channels. 

Having this in place means merchants can strike the right balance between fraud prevention and digital customer experience.  

“It’s not about trade-offs, but it really comes down to having the right tools and solutions in place that enable you to monitor what’s happening on both a real-time, short-term basis, and also a very long-term basis, and look at how the performance is day over day, hour over hour, month over month, and quarter over quarter,” she said. 

Payments fraud was already increasing during the last decade as digital payments became more popular and prevalent, but it was exacerbated by the COVID-19 pandemic and its related lock-downs, which pushed even tech-wary consumers into transacting digitally. Even though lockdowns globally are largely a thing of the past except in certain countries, the habits consumers adopted during that time have stuck. The many more consumers that are now buying things online and using digital payments have created many more targets for fraudsters. 

The U.S. Federal Trade Commission noted that consumer complaints increased significantly during the pandemic, and in 2020, fraud cost consumers more than $3.3 billion, nearly double the $1.8 billion figure in 2019. Fraud and cybersecurity firm Arkose Labs also noted that fraud attacks recorded on their network doubled during 2020.  

Dietrich observed that while the ease and convenience of the growing number of digital payments options is a boon for consumers and merchants, there will always be bad actors that try to exploit these processes. 

“Where there’s a will, there’s a way,” she continued. “Payments fraud is a never-ending battle for merchants and payment service providers.” 

Fraudsters have many different avenues to attack in the digital realm. For example, Dietrich noted that many are using synthetic IDs — fake personas created using a combination of stolen personally identifiable information (PII) from real consumers — which can be difficult to detect. Bad actors are also continually engaged in account take-over attacks. They do this by purchasing lists of username and password combinations that have been leaked in data breaches in order to take over real accounts. After they have successfully taken over an account, they can then appear as if they are that real customer when visiting a merchant’s platform. 

There is also an increasing amount of fraud that is not malicious per se, but still disruptive. One example is people who use bots to acquire high-value, limited-quantity items to then resell for a profit, such as limited-edition sneakers or hard-to-find video game consoles. There is also the issue of first-party fraud, or friendly fraud, Dietrich noted, where genuine customers order an item and then say it never came in order to get a refund and ultimately receive the item for free. 

Since digital payments fraud is increasing daily and fraudsters are constantly changing and adapting their tactics to avoid detection, merchants need a solution that can adapt in real time, Apgar advised.  

He said that rules-based solutions often become obsolete the moment they are deployed because the fraud patterns they are designed to detect quickly change as fraudsters pivot.  

“The problem is the environment changes so fast, and fraudsters pivot so quickly, that by the time you write the rules, someone has figured out how to get around them,” he said. “You need software that writes itself and can pivot quickly.” 

Dietrich also advised that merchants vigilantly monitor signs of potential fraud. For example, an account that has been dormant for a long time that is suddenly active can be a sign of a “sleeper attack.” 

She also said merchants should look at sales patterns, and be cautious when sales figures are unusually high for that period of time. Unfortunately, “high sales that may look atypical could be fraudulent,” she said. 

In the current environment of high inflation, soaring gas prices, and threat of recession, consumers are looking to get the most out of their purchases and being judicious about where they spend their money. That is why rewards programs are more critical today than ever; merchants and businesses need the right rewards program in place to entice existing customers to continue to spend and to attract new customers. While there are many types of rewards programs businesses can offer, Blackhawk Network data points to rewards in the form of gift cards as one of the most effective.  

To learn more about this trend, PaymentsJournal sat with Aimee Wright, VP of Strategic Relations & Digital Commerce at Blackhawk Network, David Southwell, Head of Strategic Relationship Management at Blackhawk Network, and Brian Riley, Director of the Credit Advisory Service at Mercator Advisory Group.  

Riley noted that gift card use by consumers tends to be associated with increased spending overall.  

Data from Blackhawk’s newly released 2022 study revealed that depending on the card value, up to 90% of gift card recipients are willing to spend more than the amount on the card. Overspend can range anywhere from around $50 for a $10 gift card, to over $100 for a $500 card.   

Riley added that store-specific cards also provide the benefit of allowing the merchant to bypass the typical interchange fees associated with debit and credit card use.   

The high degree of flexibility of gift cards also makes them appealing. Riley cited one example of flexibility: in the current environment of sky-high gas prices, grocery stores are offering discounted gas cards to customers who spend a certain amount of money at the store. Gift cards also can incorporate incentives that make them appealing, Riley said.  

“There’s a component where consumers can get a gift for themselves as they give a gift,” Riley added. “Such as an offer where if they spend $100 on a card, they get a $20 card back. For the retailer, that’s a win with two potential customers now.”  

All of these reasons make gift cards an attractive reward for consumers who participate in loyalty programs. Blackhawk Network’s Aimee Wright acknowledged that “cash back has always been king in the realm of loyalty programs” but that gift cards are becoming increasingly popular. Gift cards can incent the consumer to spend within that merchant’s ecosystem and are also less expensive to manage than cash-back programs.  

“For businesses, gift cards help with managing the cost of loyalty programs,” Wright said. “Cash back is the most expensive reward [for businesses], then travel and gift cards are third. So, it’s a much more appealing reward to give consumers than cash back or travel.”  

Southwell added that gift cards make consumers more engaged with the specific brand associated with the card and they usually spend more time on that merchant’s website. Consumers also tend to use gift cards sooner than other rewards associated with loyalty programs. It’s no surprise then that many merchants and businesses have begun to embrace gift cards.  

“Loyalty programs supported by Blackhawk Network have seen double-digit growth in the past few years,” Southwell said.   

Gift cards can be distributed physically or digitally, and that is important especially as the COVID-19 pandemic drastically shifted consumer behavior. When consumers were stuck inside their house during lockdowns and could not visit friends and family for birthdays, holidays, and special occasions, they relied on sending digital gift cards, Wright said.  

It’s important for loyalty programs to not only be robust, but the rewards should be delivered “in whatever channel consumers want and as timely and as fast as possible,” she added.  

The experience of gift cards is also just as critical for engaging consumers. In that regard, Wright noted that Blackhawk Network has seen great success with its line of Blackhawk Originals Choice multi-brand gift cards that bring different brands together onto a themed gift card. For example, a “Retail Therapy” card can be used at a variety of fashion, beauty and home stores, and “Happy Birthday” card offers retail, restaurant and entertainment options. In addition to gift cards’ traditional use as a gift for others, Blackhawk Network research also points to the idea that gift cards are being tapped more and more for personal use and “treat yourself” moments.  

Ultimately, gift cards help businesses keep the customer more engaged in their rewards programs. Wright said that while 87% of Americans belong to at least one loyalty program, with the average consumer being enrolled in six, the typical consumer only actively participates in one or two.   

“Loyalty program spending is all about keeping the customer in your ecosystem so you can capture that overspend while rewarding them at the same time,” Wright said. “And the more engaged the customer is, the less likely they are to migrate to other competitors.”  

Looking ahead, gift cards will make up a portion of consumers’ digital wallets, which will also include traditional debit and credit cards as well as airline miles and cryptocurrency, Wright said, adding that this future scenario will result in “making currency ubiquitous.”  

“We are already rapidly moving toward this reality, with 88% of consumers using some form of digital wallet,” Wright said. Furthermore, “by the end of 2022, half of all digital payments will be made using nontraditional payment methods,” Wright added.  

Consumers are increasingly looking at all forms of payment vehicles as currency, and gift cards will play a key role in this new payments reality.  

“We’re moving into a future where consumers will use a single digital wallet where all currencies will be deposited in and can be used collectively at the point of sale,” Wright said. “And the point of sale can prompt the option to use rewards to pay for an item.”

To learn more about Blackhawk Network’s portfolio and how they can support your loyalty program, click here.   

Real-time payments occupy a unique niche in the payments industry, both for its diversity and its rapid growth. The Clearing House RTP® network processes more than $16 billion each quarter, and Zelle processes more than $120 billion. Direct push payments such as Mastercard Send and Visa Direct settle payments in less than thirty minutes and usually within seconds, and same-day Automated Clearing House (ACH) payments settle within hours.  

All these options have different use-case benefits and combine to create a very rich environment. However, this level of choice can confuse financial institutions (FIs) as they discern where to place their bets based on what their customers will find most important.  

To learn more about how FIs need multiple payment rails to achieve true payments innovation and why it is key for FIs to access rails through a unified “payments hub,” PaymentsJournal sat with Mark Majeske, SVP of Faster Payments at Alacriti, and Sarah Grotta, Director of Debit and Alternative Products Advisory Service at Mercator Advisory Group. 

With the myriad choices available to FI executives, one might wonder why they do not simply focus on a one-stop-shop payment rail. “Not all rails have the same advantages,” Majeske explained. The RTP network, which was launched in 2017, covers 60% of the U.S. demand deposit account (DDA) market, so if a bank or credit union wants to cover the other 40%, it needs another payment rail. 

Other options have similar blind spots or unknowns. The FedNowSM Service is coming out in 2023 with high expectations but zero ubiquity. Conversely, ACH is well-established but generally does not process payments over the weekend. “I don’t think there is one rail out there that is going to satisfy everyone’s needs,” Majeske continued. “There has to be a level of flexibility within financial institutions and service providers to provide a broad number of opportunities for banks to service their needs.” 

Once banks and credit unions identify the needs of their customers and members, they can move to monetizing real-time payments as well. “When you identify a big need, there is also the opportunity to actually charge for that solution—if you have found an area that can create real value,” Grotta added. Currently, FIs tend to look at faster payments in terms of cost center vs. profit center, which has restricted innovation. But FIs should start thinking about real-time payments as a value-add. “I think the tide is changing,” said Majeske. 

Recent evidence shows that consumers are willing to pay extra for the convenience of real-time payments. PayPal, for example, has for the first time begun enabling customers to send funds to their bank demand deposit account on weekends and holidays—at about a 70% adoption rate. Venmo has also been charging for faster payments, and consumers are paying. Clearly there is value there, and even if in the past consumers did not see the extra value in real-time payments, there will be more opportunities to enrich the payment experience by adding additional offerings such as messaging.  

“We have to look beyond the movement of money as just a ‘to-and-from’ transaction,” said Majeske. “We are going to see Amazon-like solutions being put in front of us that add enough value that customer[s] will pay for it, and I think financial institutions have long awaited that period of time.” 

Moreover, banks and credit unions have a way to ease into these new payment offerings—payment hubs. Right now, adding real-time payments functionality as a one-off for every different rail each time a consumer wants to complete a transaction is extremely time-consuming and costly. “Payment hubs can play a huge role in this to make it easy for banks to follow a ‘grow-as-you-go’ model,” Majeske noted.  

Bringing that “grow-as-you-go” model to life requires the integration of new payment types as needed. For example, Alacriti’s Cosmos Payments service currently includes the FedNow Service, and though no one can say with certainty what the next five years will bring, industry experts can make educated assumptions. “The key is flexibility and design,” said Majeske. That way, banks and credit unions can overcome the inherent hurdles in adopting new rails. 

One such roadblock is fraud, which can cause FIs to endlessly fret and prolong implementation as they try to set up robust defenses for essentially unpredictable criminal activity. “Enterprise-level fraud systems are designed and built for wire and ACH, but not for real-time instant decisioning on transactions that happen to be going out on Saturday and Sunday,” explained Majeske. “[Alacriti’s] Cosmos product, in addition to offering rails, can offer the capability of satisfying the need to augment [banks’ and credit unions’] current fraud systems.”  

On the back end, banks and credit unions might also want to bring in a funding agent to help manage liquidity, which will help avoid weekend dead zones with low funding and even enable rolling transactions over a three-day weekend. Overlays are also important for launching a real-time payments product. TCH RTP network and the FedNow Service are designed on the premise that the FI will create the UI/UX experience for the customer, which also makes it take longer to create innovative products. As such, Alacriti is also looking at delivering ready-made FI-branded models so financial institutions do not have to worry as much about the customer-facing element.  

Because of course, with mounting payment choices available to financial institutions, the most important determining factor is the needs of the customer. “When you look at payments in general, in the past five years we have had more change than we have [had] in the previous forty years,” Majeske emphasized. “And I think we’re going to see even more in the next five years.” Whittling down real-time options in the modern world is not always easy, but starting from the roots of customer service is always a safe bet. 

The payments systems infrastructure at many traditional financial institutions — banks and credit unions — is showing its age at a time when new, nimble players are entering the space.

These lumbering systems, many of which were constructed 50 years ago for electronic funds transfers and card services, are being left behind entirely by fintechs, or they are being shored up with patchwork infrastructure additions and payments islands that can handle new authentication methods.

Whatever the case, it all adds up to an existential challenge for traditional financial institutions, one that was broken down in a conversation with PaymentsJournal by Jens Audenaert, Global Head of Payments Software at Diebold Nixdorf, and Tim Sloane, VP of Payments Innovation at Mercator Advisory Group.

In their discussion, Audenaert and Sloane advocated for a move away from dated legacy systems to a cloud-based infrastructure, focusing on these key points:

“The pace of changes in payments has been unbelievable in the last seven to ten years,” Sloane said. Meanwhile, he said, the traditional model “has poured concrete around [traditional FIs’] payments infrastructure.”

“It’s time for everyone to start to recognize that and think, ‘How are we going to be competitive?’”

Traditional financial institutions derive 30% to 40% of their revenue from payments, Audenaert noted. Accordingly, the risks of maintaining legacy systems that he outlined all dovetail with banks’ need to continue generating those revenues.

The risks include:

Audenaert also mentioned the difficulty in leveraging data on legacy systems, which affects such areas as fraud scoring and decisioning. Most important, he said, was the drag on innovation and time to market.

“In those siloed, legacy systems, introducing new technology is extremely difficult,” Sloane said. “If you can’t do it, you’re going to be challenged by your competitors.”

Sloane noted that with new and emerging payment schemes and authentication methods, many traditional financial institutions have had to build islands to handle them: one for the bank, one for the branch, one for card use, and one for the call center. The result, he warned, is attrition.

“The consumer will walk away,” he said. “They’ll just get so frustrated, they’ll leave.”

Staying competitive and relevant would be enough to make any institution take heed. Add to that the steady encroachment of fintechs and other nonbanks in the payments space and the acceleration of innovation prompted by the COVID-19 pandemic, and financial institutions face an imperative to keep up.

One relatively new system, real-time payments, offers instruction here. According to a Deloitte report, Economic Impact of Real-Time Payments, the scheme’s impacts include:

Then there is the cost saving of in-cloud services as opposed to clunky, in-house legacy systems. Savings, Audenaert noted, are another form of lifting the bottom line.

“Customers that move to the cloud are cutting their costs by 50%, some well over that for a transaction,” Audenaert said, pointing again to banks’ deriving up to 40% of their revenue from payments. “It really adds up.”

Recognizing the need to bring in a modern platform isn’t the issue for institutions, Audenaert noted. It’s deciding where to start and where to commit.

“Changing a payments platform for a bank is like open-heart surgery,” he said. “It’s really risky.”

Sloane described it this way: “I need to get to the cloud, but which applications do I move, how quickly can I move, [and] how do I manage security as I make that transition?”

As banks work through these questions — and they must because their merchant clients and rising generations of customers want modern payments — Audenaert noted that the flexibility of modern systems is on their side. New systems can be built in parallel with existing systems, allowing for the piecemeal migration of functions and services.

“It’s a very de-risked approach,” he said.

Audenaert suggested an elevated view of the benefits of moving to the cloud. It’s less about individual features and more about remaining nimble, a quality that the legacy systems don’t empower.

“Really look at what’s the architecture, what’s the technology,” he said. “So it’s future-proof.”

Sloane noted that many traditional financial institutions start the process of installing new systems with an on-premises notion of housing the infrastructure. That tends to fall away as they see how the cloud-based structure works.

As with anything, he said, the transition involves risk. But not as much risk as continuing to patch together legacy systems amid rampant change in the payments space.

“Sit back and consider where the real risks are,” he concluded.

Last January, Equifax announced a definitive agreement to acquire Kount, a digital identity trust and fraud prevention solution provider. On February 11, 2021, another Equifax announcement declared that the acquisition was complete.  

One year after the acquisition, Equifax has made noteworthy progress in combining the strengths of the two organizations to help businesses better engage with their customers online while combating fraud. With plans to move even deeper into the digital enablement space, Equifax is enabling businesses to thrive in a digital-first world with Kount, an Equifax company.  

To learn about what’s in store for the future of digital enablement, PaymentsJournal sat down with Brad Wiskirchen, SVP and GM of Kount, Mark Luber, Chief Product Officer at Equifax, and Tim Sloane, VP of Payments Innovation at Mercator Advisory Group. 

With access to a larger pool of data than either organization had alone, following the acquisition of Kount, Equifax has the combined digital identity and physical identity signals to create a safe and seamless online experience.  

Luber used the example of an auto loan to define physical identity signals. “When you get your auto loan, you are typically in-person for at least certain parts of the [process]. There are a lot of checks that go on throughout that,” he said. “For example, in-person buyers may provide a car dealership with paper proof of identification such as a payroll stub, utility bills, and a driver’s license.” 

On the other hand, digital identity relies on an ongoing stream of data from online interactions. “This is confirming the identity on an ongoing basis. It creates ongoing impressions of [a] consumer’s online behavior [and] creates ongoing confirmation of the identity associated with that person,” Luber added. 

When combined, digital and physical identity become even more powerful. “When you bring those together, you’re really creating a great experience. Because of the confidence we bring to these identities, the experience of your online transactions can have much lower friction on an ongoing basis,” explained Luber.  

When a company has a high level of trust in a customer’s identity, it can reduce the amount of friction needed in the customer experience. This translates to more money on the table for businesses. “The more friction you have, the less transactions you have. I always say… that 5% of CFOs have a fraud problem [but] 100% have a revenue problem. The more friction you introduce into any digital interaction, the more that revenue problem is exacerbated,” said Wiskirchen.  

This is where the value of combining Kount digital identity signals with Equifax physical identity signals becomes apparent. “To the degree that you can take these very unique data sets and reduce friction, you can simultaneously increase conversion rates, which increases top line revenue,” he added. 

Another significant aspect of the acquisition is that it has allowed Kount to shift its focus to digital enablement. According to Wiskirchen, this is “far more important to anybody engaged in digital commerce–not just retailers, but anybody engaging in selling insurance or literally any digital interaction.”  

As a digital enablement solution, Kount will be able to stop fraud without alienating customers by introducing too much friction. “It strikes me that the breadth of this solution presents an opportunity to go after new markets and perhaps even a couple of new products that are associated with particular use cases within the merchant environment,” speculated Sloane.  

In every digital interaction, there are opportunities to evaluate who a customer is and then use that evaluation to streamline the customer experience. “In just one year following our acquisition by Equifax, we’ve created solutions which enable you as someone engaged in digital commerce to identify who [a customer] is very early on in your interaction,” said Wiskirchen.  

By the time that customer gets to the end of their buying experience, Kount has already addressed regulatory needs, such as conducting anti-money laundering (AML) and Know Your Customer (KYC) checks, in the background. This means that by the time the customer gets to that transaction point, merchants can focus on improving the customer experience with important data related to their identity. In Wiskirchen’s words, this makes it “possible for [retailers] to make decisions about [the customer] in real time.”  

With its acquisition of Kount, Equifax is now able to better support businesses’ digital transformation journeys. “Every offering, every product, [and] every customer interaction needs to be digital-first as a result of the last couple of years. Even every legacy offline step or process or product either has or will be re-engineered to be digital-first. And that’s really what Kount enables,” said Luber.  

Equifax is also focused on digital enablement and improving the customer experience. “What we are working on is leveraging digital identity and frictionless experiences…to make it easier to access and leverage a customer’s credit to make the next best decision for that customer,” he added.  

For small and medium-sized businesses, satisfying consumers’ digital-first expectations can be a challenge. Fortunately, Equifax, with the addition of Kount is prepared to support businesses of all sizes as they execute a digital strategy.  

“We can bring data–and we talked about bringing that frictionless experience through data–to create great customer experiences in order to attract consumers and help those businesses grow,” Wiskirchen concluded.