The PaymentsJournal Podcast

The rise in e-commerce fraud, combined with consumers’ increasing willingness to file chargebacks, has left issuers and acquirers scrambling to shore up their dispute management processes. With a complicated process that varies depending on the payment network involved, chargebacks have become a huge operational challenge for many merchants.

In a recent PaymentsJournal podcast, Cheryl Fitzgarrald and Kate Knudsen, Senior Program Directors at BHMI, and Don Apgar, Director of the Merchant Payments Practice at Javelin Strategy & Research, discussed why chargebacks are an increasing concern for so many merchants—and what they can do to combat the problem.

A chargeback allows consumers to dispute a transaction and request a refund for a variety of reasons, such as fraud, unauthorized charges, or dissatisfaction with goods or services. When a consumer initiates a chargeback, a detailed workflow process for handling the payment dispute unfurls. This process is meant to provide a standard method for dispute claim management.

One of the main reasons chargebacks tend to get complicated is the number of parties involved. There’s the cardholder, the issuer, and the merchant that sold the goods or services being disputed. There’s also the acquirer, which acquires the payments on behalf of the merchant. Finally, there are the card networks, such as Visa and Mastercard, that oversee the entire process.

“Most of our clients support a wide range of payment networks, from the global giants like Visa and Mastercard to regional players within the client’s own country,” Knudsen said. “Each of these networks comes with its own set of dispute regulations. And in the U.S., we’ve got federal regulations, like Reg E and Reg Z, to keep in check too. These regulations tend to be very stringent and lay out the requirements, process, and timelines for handling disputes.”

That means handling chargebacks can require not just a group of trained personnel but also flexibility.

“We’ve got a dedicated team focused on tracking every mandate from the networks and integrating them into our dispute workflows,” Knudsen said. “It’s a constant cycle of review and modification. We’re always poring over that mandate documentation and identifying the necessary changes to our workflows to ensure compliance. It is a tedious and meticulous process but one we’re fully committed to because managing disputes effectively and compliantly is vital to our clients.”

Data breaches and hacking have resulted in more card numbers and consumer credentials for sale on the dark web than ever before. But other factors are also driving the increase in chargebacks.

 One is the growth in e-commerce merchants. It’s never been easier to launch an e-commerce storefront and sell products online, but many retailers focus on the site and not necessarily on customer experiences. Consumers often have a question about their bill and want to request a refund, maybe because something was damaged or didn’t arrive. And if they can’t find a way to connect easily with the merchant, they’ll contact their card issuer and initiate a chargeback.

Another factor is recurring billing that’s difficult for the consumer to cancel. Consumers often find it easier to initiate a chargeback with their issuer rather than weave through customer service at the recurring billing provider.

“Many companies find it difficult to invest the time and money required to continually analyze the ever-evolving mandate changes,” Fitzgarrald said. “But if they are not up to date, this results in penalties and claim losses. And many companies are still using legacy systems that require a lot of human intervention. For instance, some companies still use spreadsheets and manual processes that make it difficult to keep up with the regulation changes and the growing number of disputes.“

“Another area we see is on training,” she added. “It’s difficult to hire somebody with experience in chargebacks, and there is a high turnover in this area. Then you have the complication of the different networks involved with different rules and regulations.”

What many companies use is a swivel chair approach. This refers to the manual process of navigating back and forth between internal applications and external card network dispute systems like Mastercard Claims Manager and Visa VROL. The changing protocols and lack of automation and integration with the networks can lead to inefficiencies, errors, and unnecessary claim losses.

“Naturally, as the number of chargebacks increase, so does the overall cost of managing them,” Knudsen said. “And another reason that goes hand in hand with the increasing volume of chargebacks is that, due to the complexity and the ever-changing regulations, claim losses can be high. Many acquirers opt not to even pursue a certain portion of their chargebacks because of the cost and the complexity.”

Apgar noted that a lot of companies and merchants aren’t prepared for chargebacks. “They will provide customer service and answer a phone call or an email from a customer,” he said. “But if that transaction turns into a chargeback, the merchant hasn’t organized and categorized that data. They don’t have the information in one place and organized so that when the chargeback comes in they can provide a definitive story to the card-issuing bank.”

One of the most impactful things businesses can do is to streamline the management of disputes with consolidation and automation. Many companies juggle multiple systems and rules and processes, but there are solutions that allow companies to manage all disputes within a single integrated solution. This includes various transaction types, card-based and non-card-based, like account-to-account or peer-to-peer payments.

API integration is a game-changer here. The swivel chair approach can be replaced with two-way APIs that interface with Mastercard Claims Manager and Visa VROL. This automation streamlines the exchange of dispute data with these networks and eliminates the need for manual intervention.

When companies replace manual processes with preconfigured workflows that guide dispute workers through each step of the workflow, the percentage of claim wins dramatically improves—and so does employee satisfaction.

Self-service capabilities are another cost-saving option. For example, a payment service provider could provide a solution that allows its merchants to access their own transactions and manage their own disputes.

“From a merchant’s perspective, the two most important things they can do is first to audit the customer journey, especially in the e-commerce world,” Apgar said. “Are the descriptions of the products accurate? Are the expectations being set in terms of when and how it’s going to be delivered?“

“Secondly, use a platform to organize and collect all the data that the merchant tracks. Most of the fraud prevention and other customer contact information comes from third-party systems. Keeping that information organized in one spot so that they can quickly respond to a chargeback and tell their side of the story is vitally important.”

With the proliferation of digital shopping, and particularly the growth of the subscription economy, retailers should expect chargebacks to continue to increase. As BHMI’s experience shows, anticipating that chargebacks will happen—and building the infrastructure to handle them—will be key to combating this erosion of profitability.

The post New Approaches to the Persistent Problem of Chargebacks appeared first on PaymentsJournal.

Successful companies must constantly change to preserve their success, but digital transformation may be the most radical overhaul most of us will ever see. For organizations to make this transformation a success, getting employees on board and fully engaged is a requirement. 

As the head of Corporate Strategic Planning and Management for Wells Fargo, Amy Downey understands the optimal ways of steering a company’s strategic direction and organizational design. In a recent PaymentsJournal podcast, Downey spoke with Emmett Higdon, Director of Digital Banking for Javelin Strategy & Research, about how to maximize employee engagement amid a digital transformation.  

Digital transformation is a multifaceted concept, but a more suitable characterization may be: effectively aligning with customers’ preferences. It necessitates alignment across all facets of a business, ensuring consumers and the companies serving them anticipate an on-demand, hyper-personalized approach to banking services. In that light, digital transformation revolves around adapting an organization’s processes to create a sense of customization for each individual. 

Employee engagement is a critical part of that transformation.  

“I read an article in the Harvard Business Review called ‘How Companies Can Improve Employee Engagement’* that outlined two ways that employees want to engage,” Downey said. “One is they want to know that their work is connected to a larger purpose. And secondly, they want to make sure that their work is enjoyable and not very stressful.” 

Sometimes people think of digital transformation as involving just the IT department, but it affects every division in an organization. “I often tell my banking clients, let’s stop calling it digital banking,” Higdon said. “It’s just banking. Banking today is digital. And we need to transform every aspect of how we go to market with consumers today to meet the enormous expectations that they have.” 

Banking will always involve human interaction. Decades ago, many assumed that we eventually would not have branches because ATMs represented the future. But branches and bankers are still very much around. People want to talk to people, and interaction with a human being is still important to some banking customers. 

Given the urgency in making a digital transformation, Downey stressed the importance of acting quickly. “How do you get customers what they need in both physical and digital terms?” she said. “How do you approve requests quickly enough to satisfy your customers every time? When employees of the bank know they’re the face of positive change, it causes less stress and reduces fear.” 

Downey identified four critical skills for product transformation. 

When companies examine how their customers navigate digital transformation, it’s crucial to leverage capabilities across the entire bank enterprise. Customers are indifferent to how their bank is structured or which team handles their request. They simply want to get what they need, whether it’s putting a down payment on a home or paying for a snack at the local deli. 

“Brains only take you so far,” Downey said. “You can become the world-class expert on whatever topic, but you also have to have the brawn. You need the courage, the leadership and the ability to influence. If you don’t have those influence skills, it doesn’t matter how great you are in terms of the technical skills.” 

Long-tenured employees can be vital to making digital transformation a success. Often, organizations assume that they’ll need to bring in new individuals to ensure a change can happen, but it can be helpful to turn to those who have been around for a long time and have seen the ups and downs, the economic cycles, and the leadership changes. Those long-tenured employees bring a wider perspective. 

“If there’s a role where someone has part of the necessary skill set, take a chance on a long-tenured person before you bring in someone new,” Downey said. “If you bring in all new people, then you’re basically saying we’re going to reset everybody, right? A necessary part of the change is showing the organization that you’re bringing them along.” 

“When I was managing mobile strategy at TIAA-CREF, I met a younger gentleman in his 20s who said to me, ‘Oh, really, a guy of your age managing mobile, that’s great,’” Higdon said. “It was like he was patting me on the head. But when you’ve been around for a while, you can look at a tool and see many different opportunities and many ways to use that tool.” 

One way to make use of all the talent on a team is to set up small focus groups with eight to 10 people. Tell them: “Here’s what we’re thinking. What do you think based on your experience?” That can resonate with people, whether they’re new to the workforce or have a long tenure with the company. 

“More important than any of the insights, we got was responses like ‘Thank you for listening to me,’” Downey said. “’Thank you for making me part of it. I feel like I’m part of that digital transformation. That makes me committed to you as leaders but also to you as a bank, that you actually cared enough to ask me.’” 

There’s also value in listening to detractors. They shouldn’t be ignored, but it’s also important to ensure the project is moving along. Listening to the detractors doesn’t mean allowing them to derail things or to become a continual distraction. 

“Meet employees where they are and understand the different perspectives,” Downey said. “You’ve got to get in front of people. There’s no substitute for in-person.” 

“The key to all of this is communication. Change isn’t easy, but at the end of it, you’ll see benefits.  Your customers will be happier about what you offer to them, and you’ll see benefits in the day-to-day life of employees, resulting in a seamless experience. And that’s ultimately the goal of the digital transformation.”

The post Turning the Ship Around: Insights for Navigating Digital Transformations  appeared first on PaymentsJournal.

As businesses strive for innovation, efficiency, and scalability, the path to digitization is fraught with challenges. It’s a journey that requires addressing outdated processes, adopting new technologies, and most important, gaining buy-in from leadership and colleagues.

In a recent PaymentsJournal podcast, Reetika Grewal, Executive Vice President and Head of Digital Transformation at Wells Fargo, and Albert Bodine, Director of Commercial and Enterprise Payments at Javelin Strategy & Research, delved into how Wells Fargo is helping its clients with digitization and optimizing digital experiences for customers, as well as what makes fintech partnerships successful.

Businesses face many challenges in running their operations smoothly. Prioritizing efficiency and productivity is crucial, and can be achieved through the automation of manual tasks, streamlined workflows, and enhanced accuracy in record-keeping. Leveraging advanced software for data analytics empowers businesses to make informed decisions and gain valuable insights.

“At a very simplistic level, companies need great software to help run their business,” Grewal said. “That is one of our core missions, and that’s what we rolled out last year with Wells Fargo Vantage.

“It’s a singular place where a company can go and find that dashboard of the activity on their accounts, determining what things need their attention.” It also gives them opportunities to  manage their users, tailor their online experience, and manage anything new with their company.

Access to data is a significant competitive advantage, enabling businesses to tailor solutions to customers’ needs effectively. Without proper integration, however, this valuable data remains inaccessible, undermining competitiveness and impeding growth prospects.

“Something that midsize companies struggle with is not having partners that have the comprehensive set of tools to integrate those other systems as the business grows,” Bodine said.

Wells Fargo has adopted a client-first mindset, creating resources that help the company tailor the company’s experience—and address client pain points.

“We have built a library of personas that covers a variety of company sizes and company industries,” Grewal said. “We also talk about archetypes because in this space you have a variety of user types that come in. In a smaller company, it may be just a couple of people in the company that are interacting with the Vantage software. But at the higher end, it could be 200 people logging in.”

“So how do we make sure we’ve got that right Rubik’s Cube of who you are, what are you trying to do, what problems are you trying to solve, and how do we get the right information in front of you?”  

When selecting a partner, companies feel it is crucial to assess their ability to scale with a growing business. While it may be tempting to focus solely on immediate needs, considering future scalability is essential. Overreliance on multiple vendors can introduce unnecessary inefficiencies and complexities down the line.

“One of the big areas I see with organizations that are growing is that they might start as a garage business,” Bodine said. “Then fast-forward five to 10 years, and all of a sudden they have 20 vendors that they work with because the original vendor was not intended to scale in a bunch of different areas. The ability to be with a partner that has that scalability element is very important.”

Transforming processes from an analog version to a more digital version is not just a matter of plug-and-play. Digitization is never a streamlined process, and therefore, the more leadership provides support, the easier it will be. It will be easier not only to educate corporate culture but also to make decisions and allocate the necessary resources to make digitization happen.

“When we think about the strategic elements, it’s about making sure that the change management goes along with it,” Grewal said. “If you’re implementing a new process to drive some automation, how do you make sure that the tools that people are using are the right tools and then all the processes change along with it?

“If you’re moving from paper to electronic payments,” Grewal elaborated. “How do you make sure that you understand the timing differences and the information needs and things like that? That is also part of the digitization process—making sure that all the things that go around driving a change are also there to support the change holistically.”

Success hinges not only on technology but also on getting people on board. Effective communication of benefits is essential to ensure buy-in from all stakeholders.

“Change management is critical, and I like to call the antithesis of that ‘digitization for the sake of digitization,’” Bodine said.

Consumers expect digital payment experiences to be fast, convenient, and secure. Failing to meet these expectations could drive them to seek alternative solutions. Therefore, companies must prioritize offering the preferred payment methods for customers, with mobile being a basic requirement given the prevalence of mobile banking and shopping.

“It’s knowing your customer, knowing how to motivate them, knowing what the right size solution is for them. That is how I would encourage others to approach it,” Grewal said.

To foster customer loyalty, digital payment experiences must be convenient. Seamless transactions not only enhance customer satisfaction but also encourage repeat business. Cumbersome checkout processes are a turn-off for customers.

“I would add ease of use and minimal friction in everything we do. I’m a proud Wells Fargo banking customer, and I use my Wells Fargo app every day. One of the reasons I use it is because it’s easy to use and I use it over using my laptop or desktop to pay bills,” Bodine said. “We’re starting to see a lot of that coming to the stodgy old commercial world. Wells is taking a page from the consumer side. So it’s nice to see.”

Financial institutions can leverage the forward-thinking ideas and agility of fintechs to respond to evolving customer needs. These collaborations enable the introduction of innovative products and services—something Wells Fargo has been exploring.

“We look to partner with companies that will supplement and enhance what we’re doing, either to help us deliver a really unique product or service to market or help us accelerate our client experience,” Grewal said.

“Bringing new opportunities to our clients that maybe we don’t offer ourselves and finding that partner that is willing to spend the time with us, work with us, understand the integration options, understand the partnership options. That’s important.”

The Opportunities and Challenges of Fintech Partnerships

When it comes to partnerships between FIs and fintechs, aligning with a partner that shares the same visions and goals is crucial. Being open about challenges, expectations, and wins only solidifies trust and collaboration.

“We’re going to be really deliberate in terms of how we go about it,” Grewal said. “We’re going to make sure that we leverage the collective expertise at Wells Fargo to do this well.”

“Partnering with technology, partnering with risk, partnering across the organization, we bring our experts to the table to make sure that we do this well. In terms of challenges, it’s just making sure that we’re all operating on that same rhythm. It is important that we all have that shared goal of ‘this is the problem we’re trying to solve, this is how we’re anticipating solving it.’ And then, as we learn more, we can put more structure around any kind of partnership.”

The post Navigating Digitization Through Strategic Fintech Partnerships appeared first on PaymentsJournal.

With the Clearing House’s RTP network and the Federal Reserve’s FedNow, the demand for instant payments continues to grow from consumers and small businesses. How can businesses best accelerate this process?

Debbie Smart, Senior Product Marketer at Q2, and Keith Gray, Vice President of Strategic Partnerships at the Clearing House, sat down with Elisa Tavilla, Director of Debit Payments at Javelin Strategy & Research, for a PaymentsJournal podcast and explored the landscape for instant payments. Although the path can be different for different institutions, it’s clear that customers have come to expect real-time payments. Late adopters beware.

From the beginning, account-to-account payments have been driving many of the real-time use cases. The growth of providers like Zelle and Chuck has fueled the expansion of business-to-consumer payments.

One application that has been frequently overlooked is payroll, including daily payroll and earned wage access. These functions are already key users of the RTP network—and they’re growing every day.

“Who would have thought that six years ago when we launched this that a lot of people would prefer getting paid every day for what they do?” Smart said. “Now all of the rideshare companies and the companies like Grubhub are using RTP to push money out to their contractors.”

On the commercial side, especially with business-to-business (B2B) payments, the most significant value is in the data. The rich messaging on the new payment rails doesn’t exist in the older payment rails. Commercial customers are increasingly excited about the possibilities as they learn more about this.

Another important usage involves paper checks. A third of all B2B payments are still made with a check. But 78% of the time, when a business pays another business via ACH, the identity information or remittance information doesn’t go along with the transaction. It goes in an email or via U.S. mail, which makes it time-consuming for these businesses to complete reconciliation. Part of the excitement around the power of instant payments lies with the ability to have that remittance information from the start.

It’s not just the immediacy of the payment. Timing is critical in a B2B transaction as well. “If I owe a supplier a million bucks tonight at midnight,” Gray said. “I can keep that in my account till 11:59 and 45 seconds, and then I’ll shoot it out. I’ll get a confirmation back and everything will be closed and settled literally within seconds. That perfect timing and visibility of an immediate payment is a key part of the value proposition of an instant payment.”

Other use cases are being explored, if not offered already, in payments that traditionally have been limited to business hours. “In the auto industry, most consumers tend to shop for cars after work or on weekends, when the banks were closed,” Tavilla said. “With real-time payments, the 24/7/365 enables more convenience and better business processes.”

Starting real-time payments with receive only makes sense for several reasons. It allows a business to get connected to networks and get the plumbing in place, so to speak, for using the new rails.

“The biggest benefit is what they can bring to their accountholders by receiving instant payments,” Smart said. “I’ll give you an example. We’ve got a customer, a $9 billion credit union, who started with receive only in January of 2021. The first month, they had 3,400 incoming transactions. By December 2023, that number was almost 38,000. They didn’t promote it, or even announce that it was available—they just enabled it. What’s even more interesting to me is the fact that the day they went live, the first payment hit within 60 minutes.”

Smart pointed to Grubhub as an entity where real-time payments grew from demand by the users of the app. When a Grubhub driver opens the Grubhub app, a message says: “Would you like to be paid immediately? If your bank doesn’t support it, click here for a list of banks that do so.”

Financial institutions should plan to eventually support send and receive capabilities. That enables FIs to take advantage of all the capabilities that RTP and FedNow have to offer. For example, you must be able to receive and send in order to receive requests for payments. If you can’t send, you wouldn’t be able to push payments out, given that RTP and FedNow transactions are push only or credit push payments.

“An analogy I often like is that if you have a phone and can only receive calls, you can’t really take advantage of the technology,” Tavilla said. “It’s just a one-way system. Whereas if you have a two-way system, there are many more possibilities and value that you can take advantage of with the network.”

FIs have always had multiple payment networks to choose from, across all payroll and payment types. Since FedNow launched, there has been a lot of concern in the industry about how to deal with these choices.

“My point is that we’re used to it and we’ll figure it out,” Gray said. “In the meantime, what we’re seeing is that most of the banks that are joining FedNow are also on RTP, or are getting on RTP. That’s also true of all of the technology providers that I deal with, both the big guys and the smaller guys.”

Over the long term, it’s possible that the networks will become interoperable, as they are on other payment rails. But the fact that the connectivity partners all support being able to connect to both networks makes it easier for financial institutions.

The bottom line for most FIs is this: What am I doing for my accountholders to enable them to move money the way they want to be able to move money?

“When financial institutions are considering implementing real-time payments, look at your own customer base and their financial needs and pain points,” Tavilla said. “Think about how real-time payments can complement the existing payment methods that your financial institution currently supports. Think about how you can help solve your customers’ problems and improve the customer experience.”

Download the Q2’s Instant Payments white paper, “What to Know and Where to Start“ 

The post Preparing Your Organization for Instant Payments appeared first on PaymentsJournal.

As anti-money-laundering challenges escalate and new liability shifts loom on the horizon for 2024, fintechs must be prepared. Proactive measures are crucial for establishing a firm foothold in the fintech landscape. Reactive approaches will only leave businesses vulnerable to attacks and financial losses.

In a recent PaymentsJournal podcast, Matt Herren, Director of Product Management at CSI, and Jennifer Pitt, Senior Analyst of Fraud and Cybersecurity at Javelin Strategy & Research, delved into how the regulatory landscape has evolved, the importance of security for growth, and the proactive vs. reactive approach to risk mitigation.

From the start, fintechs functioned within a less stringent regulatory environment. However, even then, they were obligated to adhere to anti-money-laundering (AML) and know-your-customer (KYC) regulations. As fintechs expand in scale and impact, new regulatory frameworks have emerged to address issues such as data privacy and security.

“The regulatory landscape for fintechs is in an emerging evolutionary state right now,” Herren said. “It might be less stringent than banks, but as they grow—and their services become more complex—it’s an inevitability to be subjected to additional levels of scrutiny.”  

FinCEN publications, issued by the Financial Crimes Enforcement Network, regularly communicate new or revised regulations for financial institutions to remain in compliance with AML and Combating the Financing of Terrorism (CFT) rules. Some regulations, including the Customer Due Diligence (CCD) rule, have included FIs and non-banks. This requires FIs and fintechs to authenticate the identities of their customers to stop money laundering and terrorist financing.

“We’re also going to see a shift toward the FRAML (fraud and anti-money-laundering) framework,” Pitt said. “The convergence of fraud and money laundering are often intertwined with money mules or predicate crimes. Regulatory aspects of fintechs are going to have to incorporate a FRAML framework—not only with the actual fintech products but also investigations on both fintech providers and financial providers.”

Faster payments have brought about heightened concern regarding fraud risks, allowing malicious actors to exploit vulnerabilities. Although new fintechs seek rapid customer expansion, it’s crucial to complement growth strategies with robust security solutions. Failure to do so could undermine customer trust and jeopardize long-term success.

“You see startups, upstarts who are in customer acquisition mode—they’re not necessarily thinking about these [fraud liability] things,” Herren said. “But subsequent fines and lawsuits, they really do have an impact down the line because they’re not able to keep going. A suspension of operations to a company that’s 18 months old is essentially a death sentence.

“Any organization in that situation has to be thinking, ‘You know what, what would happen if we were to encounter that and try to avoid it on the upfront?’”

In most of these fraud incidents, consumers are stuck in the middle, losing large sums of money without a resolution. Understandably, they’re looking for better protection, and one way to give it to them is through a collaboration with FIs.

“We’ve seen the fraud, the consent orders come through banks recently, but there’s also been fintech fraud and money laundering,” Pitt said. “You look at the NFT (non-fungible token) and cryptocurrency space, at some of the online platforms like Venmo, PayPal and GoFundMe, and there is a lot of fraud that’s happening with that, and customers are really not happy about that.

“In the U.S. we’re going to start to see some fraud liability shifts like there is in the UK. It might be shared liability, but we’re at least going to see everything get back to a more customer-oriented realm of servicing people. If that means giving a partial reimbursement one time, then that’s the general direction we’re going to go in.”

When new businesses come to the fore, fraud is seldomly on their immediate radar. However, this could be a costly mistake, leaving the organization vulnerable to fraud attacks. It’s a balancing act to juggle customer acquisition and security—but a necessary one.

“They know there’s trade-offs in being too aggressive in their fraud mitigation, and so often they seem to err on the side of, ‘We’ll figure it out later and let’s get the customer onboarded,’” Herren said. “I’m a huge advocate for balancing false positives, but if your organization is only focused on successful onboarding, it may be easy to overlook some of the details around assessing risk.“

When it comes to fraud prevention, it really is about a shift in priorities. It’s better to make the necessary investments from the beginning rather than implement anti-fraud solutions down the line.

“Fintechs and financial providers can really cost-effectively do that if they just creatively shift around their resources,” Pitt said. “If more resources are focused on the detection and prevention of fraud, you’ll have less fraud to investigate.

“You can shift some of those investigators toward the detection or shift your detection models away from people and shift it more toward the AI, machine learning aspect, once the security issues are kind of figured out.”  

With regulatory bodies and governments cracking down on fraudulent attacks, the reliance on passwords alone is diminishing in efficacy against these threats. As a result, mandating multifactor authentication will become crucial.

“We’ve seen a lot of data breaches,” Pitt said. “Some of what’s come out of the investigations is that companies are not securing their information well or employees are clicking on that email, or victims of social engineering attacks.

“Making sure you’re having end-to-end encryption with all of your data, all your information, making sure security policies, compliance policies are in place and understood by all fintech and financial provider employees is going to be essential.”

Taking a proactive approach to risk mitigation is far more advantageous for businesses when it comes to compliance. It is more cost-effective, and implementing security protocols from the outset could also prevent data breaches, potentially saving organizations from legal fees, hefty fines, and reputational damage.

“Risk mitigation and compliance are about business success more than anything else,” Herren said. “Including them at the foundation of what you do is also going to keep you from having to try to shoehorn a process in after the fact, either by regulatory decree or in the wake of a major event, either a loss or a fine.

“Starting off with active monitoring is going to be far easier and it’s going to have the added benefit of data that you can glean insights into your processes as well.”

When organizations choose to play catch-up to compliance measures, this can lead to myriad problems, such as inefficiencies, hurried decisions, and greater costs due to the poor planning of strategies. Reactive responses can ultimately hurt an organization’s image, reflecting a lack of foresight with stakeholders.

“Part of the issue with being reactive is we’re already behind the curve,” Pitt said. “An incident happens, we learn from our mistakes, they make regulatory changes or implement mandates, and then we go on. The problem is we’re basically playing games of whack-a-mole, and we’re behind the curve.

“Fraudsters are way ahead of us and thinking forward. One of the key things going forward is to hire forward-thinking people who can think several chess moves in advance on, ‘This is what fraud and money laundering are going to look like in the future, you know, five to 10 years down the road.’”

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The term “fraud” has become a catch-all for some financial institutions, which sometimes downplay these occurrences as mere nuisances rather than genuine threats. However, the stark reality is that fraud has given rise to a multitude of attack methods, each carrying its own nuances and varying degrees of impact on customers and financial institutions.  

In an age of escalating cyberattacks, the proverb “knowledge is power” holds truer than ever.  A financial institution’s familiarity with various fraudulent tactics becomes central to its ability to prepare for and safeguard against potential threats. By delving into the intricacies of these attacks, institutions can strategically invest in the right fraud prevention solutions that address particular types of fraud.

According to a Javelin Strategy & Research webinar, Cybersecurity: 2024 Trends and Predictions, more serious fraud attacks are set to wreak havoc for FIs in 2024 in the form of deepfakes and other artificial-intelligence-related scams. FIs that don’t take these types of attacks seriously could face reputational and monetary damage.

Sunil Madhu, CEO and Founder of Instnt, and Tracy Kitten, Director of Fraud & Security at Javelin Strategy & Research, further delved into this topic during a recent PaymentsJournal podcast. They discussed the current types of fraud that face financial institutions, why first-party fraud is complex to resolve, and what steps FIs can take to resolve first-party fraud.

The pandemic brought on an acceleration toward digitalization, and this opened the door for cybercriminals to leverage the latest in tech innovation to detect vulnerabilities in their targets and launch attacks. These attacks have been especially felt within the banking sector.

Madhu outlined the types of fraud having the biggest impacts on financial institutions today:

Synthetic ID fraud: This is also referred to as synthetic identity theft. Fraudsters create a fake identity by using real and fictitious personal information. Criminals begin by stealing a real Social Security number through the dark web or other data breach, then create a fictitious name, date of birth, and address. This new “synthetic” identity is then used to open credit cards and bank accounts and to take out loans.

Third-party fraud: Also known as identity theft, this occurs when a fraudster uses a person’s stolen identifiable information to open new accounts without the consent of that individual. This type of fraud has a shorter lifespan; the victim quickly learns of the compromise and can take immediate action to bar further malicious activity.

First-party fraud: This occurs when a consumer takes out a loan or opens up a credit card without intending to pay it back.

Madhu explained that first-party fraud is the most difficult to detect because there is no way of knowing beforehand whether a consumer will default on a loan. Although there are genuine consumers who will default on loans because of economic reasons, such as a loss of a job, some premeditatively take out loans with the clear intention of not paying them back.

“You can’t put [genuine consumers] in the bucket of fraudsters,” Madhu said. “That would have legal dire consequences for people already in dire circumstances. So the industry as a whole cannot preemptively solve this problem.

“You can examine and cross-reference people’s personal information and figure out if the ID is fake or stolen. At the time when the loan is issued, you can’t really say, ‘I’m going to call you, I’m going to mark you as a fraudster because I think you’re going to default on the loan.’ So what the industry does is they make the loan payment after looking at all of the historical and financial data of the individual.”

After a loan is issued, the mode of operation for banks is to simply wait and see if the first payment is made by the consumer. If not, the next course of action is to use collection as a means of identifying whether the account is fraudulent.

This may not be the best tactic for banks, as it can expose them to more financial losses—the fraudster could spend more money before being detected, for example. And if this is a genuine customer who unfortunately can’t make that first payment, being labeled a fraudster would be a wrongful accusation.

“This emergence of what we define as scams—where you have a consumer who is conned or convinced in some way to open up a loan to transfer funds to use an account in a way that they have not historically used it—it just adds to the complexity, because it’s going back to the fact that this is a consumer, a trusted consumer for whatever reason, something has changed,” Kitten said. “The habits or the use of that account have changed.

“What makes it very challenging for financial institutions is to know when this consumer is under duress and at what point does an institution step in to take some kind of action.”

Kitten also pointed out that financial institutions continue to struggle to detect synthetic identity fraud. She recommends stronger verification and authentication at the early stages.

First-party fraud is one of the most challenging types of fraud for financial institutions to resolve. The main reason is first-party fraud involves the legitimate accountholder. It’s difficult for FIs to accurately gauge the intent of the accountholder, and it’s even more complex to differentiate between a legitimate activity and a fraudulent activity.

“The challenge for FIs with first-party fraud is the very intrinsic nature of it and that it’s a psychographic behavioral change of the individual or some financial change, or economic circumstance change that may be outside of the view of the financial institution,” Madhu said.

“Traditionally, the leading indicator for first-party fraud is that the very first installment payment from the loan or the charge is missed.”

Adding more to the complexity is how most financial institutions operate, by taking a less proactive approach and simply waiting for missed payments before proceeding to the collections process.

Another indicator for FIs that a missed payment is the result of first-party fraud is an inability to contact the borrower. After 120 days of missed payments, the bank simply takes the loss. Over time, this will not be a sustainable approach.

Consumers from younger generations often lack credit histories and therefore are not accepted by traditional credit models, leaving them vulnerable to predatory loans. This can place them in a more difficult financial situation if they default on their loan because of something like the loss of a job.

A preemptive measure, according to some in the industry, is to take the data of these individuals and compile it into a consortium block list database, categorizing them as fraudsters and thus avoiding any potential risk. The problem, Madhu points out, is that this could block these individuals, who are already in dire financial circumstances, completely out of the financial industry.

Another solution is to use a universal identity. It will be a form of digital identification through which consumers pass know-your-customer requirements and build a good reputation. This will reward them with a reusable pass and identification to demonstrate digital proof of ownership. Those in the financial services industry will be able to see beforehand what level of risk that individual is approved for, without having to worry about taking on a fraud loss.

Madhu also proposes the use of Instnt’s solution, which can assess the risk of first-party fraud, assign a financial value to the risk, and transfer the risk off the balance sheet.

“We came up with an underwriting mechanism looking at the first-party loss rate of a particular business to price the losses using technology that we’ve built end-to-end so we can control all the aspects of false positives through the system instead of layering different technologies together,” Madhu said.

“We can therefore say yes to more people than businesses could traditionally do themselves. We can offer to transfer the risk that they’re holding on their balance sheets up to the tune of $100 million a year off through our SaaS platform and on to the insurance industry, which has studied that risk and studied the underwriting algorithms and has agreed to partner with us to create an insurance product in the marketplace to transfer that risk.”

The post Outsmarting First-Party Fraud with a More Proactive Solution appeared first on PaymentsJournal.

As real-time payments expand globally, financial institutions confront the challenge of modernizing their legacy systems to meet the digital expectations of their customers. The positive aspect is that there’s no need to overhaul core systems. Instead, modern software can relieve core banking systems from real-time demands.

During a recent PaymentsJournal podcast, Carlos Netto, Co-Founder and CEO of Matera, and Elisa Tavilla, Director of Debit Payments at Javelin Strategy & Research, delve into the success of Brazil’s Pix and what U.S FIs can glean from other countries that have successfully ramped up their instant payment efforts.

Pix, Brazil’s instant payments system, has enjoyed remarkable success since its November 2020 launch. That’s attributed to several factors. For one, certain financial institutions were mandated by the central bank to participate, and the regulator played a role in developing the system’s technical aspects. This ensured uniform standards, encouraging widespread adoption.  Pix’s free availability to all users also differentiated it from traditional banks, which typically restricted fund transfers to business hours.

“Pix is used by people to send money to friends, pay in stores, or by reading a QR code,” Netto said. “It’s not only a rail but also a way to move money from one bank account to another bank account.

“Pix and related technology enable every use case. We have QR codes so consumers can pay businesses instantly. We have the directory so we can send money to our friends. And there’s a standard UI so every bank providing Pix has to offer it in the same way so it’s easy for everyone to use. It enabled Pix to grow fast. Faster than we were expecting. It moved from zero to five billion monthly transactions in three years.”

The surge in transactions due to Pix has had a significant impact on core banking systems. With transactions moving directly between demand deposit accounts (DDA) without intermediaries, traditional core banking systems were not equipped to handle such high volumes.

This has led to Matera’s latest challenge, developing a core banking system that can handle a high volume of transactions brought about by Pix’s success.

As a core banking provider, Matera set out to not reinvent the wheel but to add to it. Requiring banks to make a significant overhaul in their legacy systems, upgrading to facilitate 24/7 payments, and enabling Pix acceptance across digital channels was a tall order. Matera decided to enhance the existing core with its Digital Twin solution.

“We call this a light ledger,” Netto said. “It’s a thin, high performance ledger software that runs on top of our own core banking. This light ledger doesn’t perform all the activities a core banking system performs. As far as regulatory reports that need to be sent, we don’t need to do this in real time.

“The challenge was to keep the user happy. The user must be able to see their balance, see their statement, and use the money, pay, and receive. That’s it. Why do more than necessary?”

The success of Pix proves that integration remains a viable solution with legacy systems, avoiding the need for overhauls and minimizing disruption. Brazil’s success offers valuable insights into the requirements for advancing the adoption of real-time payments.

“A big step for the United States would be creating a standard QR code or a standard way to make payments in-store because they don’t have this standard yet,” Netto said. “It can create new use cases for FedNow and instant payments.

Using a QR code to pay in-store means that the merchant can benefit from paying a much lower merchant discount rate. Furthermore, the customer can benefit by enjoying a special discount for using the QR code.

“Unlike Brazil, the Federal Reserve does not mandate FedNow adoption,” Tavilla said. “Nor is there any mandate in the U.S. to adopt real-time payment systems.

“We also have a very complex and diverse banking and payments ecosystem with roughly 10,000 financial institutions. So getting agreement or a consistent standard around QR codes as well as other technology—whether it’s APIs or an alias system—is certainly more complicated and would take time to achieve.”

Tavilla further notes that banks are heavily invested in their core providers and legacy systems. Any upgrade at this point would require considerable resources and could disrupt operations.

If U.S. FIs want to participate in real-time payments, they must prioritize collaboration with other key players such as merchants and fintech companies.

“This QR code should be agnostic. In Brazil, you just have one QR code because there is only one rail. In the U.S., you have three rails. It’s very important that merchants drive this to force the creation of this standard so every bank account holder can go to the store and pay by bank regardless of the rail they use.”

Consumers will not know the value of real-time payments if the current use cases don’t resolve their pain points. Addressing their frustrations and offering real advantages will encourage customers to develop trust in and ultimately adopt these real-time payments use cases.

“While in Brazil, P2P was a primary use case that has been extremely successful on Pix,” Tavilla said. “In the U.S., we haven’t seen quite the adoption with real-time payments, whether it’s FedNow or RTP with P2P payments. Part of that might be because before RTP or FedNow was integrated into P2P apps like Venmo or Zelle, to consumers and the users, it seemed like their money was already moving instantly when they sent it to their friends or family.

“But behind the scenes, the money wasn’t necessarily moved instantly, although today, depending on the user’s financial institution, the money is moved over RTP. Defunding those wallets has been a primary use case on RTP and FedNow in the U.S. Earned wage access is another use case, as well as defunding for gaming accounts. Focusing on the use cases that provide the most value to customers would be important.”

The post Beyond Rip and Replace: Alternatives for Modernizing Core Banking appeared first on PaymentsJournal.

Open banking continues to spread worldwide and is heading for the United States, in what some have been calling its “smartphone moment.” The infrastructure is falling into place to support open banking, and the Consumer Financial Protection Bureau has begun safeguarding the consumer protections necessary for this to happen.

In a recent PaymentsJournal podcast, Amit Shastri, Senior Director of Product Management at Worldpay from FIS, and James Wester, Co-Head of Payments at Javelin Strategy & Research, discussed the various payment rails that will facilitate open banking and what the benefits could be for banks, merchants, and consumers.

It’s important to understand the terminologies used in open banking, a new topic for many people. There are key differences between account-to-account (A2A) payments and open banking. A2A payments rely on legacy banking systems and often involve manual user steps, resulting in a suboptimal user experience. Open banking is not limited to the bank’s technology but can be seamlessly integrated into other apps with a stronger focus on conversion rates and experiences. A2A payments tend to lack interoperability across regions, whereas open-banking payments have the potential to be integrated into cross-border payments. In short: Although all open-banking payments are A2A payments, the reverse is not true.

In the United States, open banking is centered on the API-based connectivity that enables the sharing of bank account and balance information. U.S. consumers have become familiar with linking their bank accounts as part of the checkout process, then leveraging that connection to make payments again and again.

The term “real-time payments,” or RTP, refers to the underlying infrastructure that enables instant or near-instant transfer of payments between two parties. RTP operates 24 hours a day, weekends, and bank holidays. Open banking is effectively the overlay of services on these RTP rails, and it has the potential to revolutionize payments for consumers, retailers, small businesses, corporations, and governments. 

According to Shastri, open banking accounted for nearly $525 billion of e-commerce transaction value in 2022 and is expected to see a 13% compound annual growth rate through 2026. Some of the key successes of open banking around the world are seen in Brazil, which has a payment scheme driven by the Central Bank of Brazil, and in India with UPI, which was launched in 2016 by the National Payments Corporation of India and the Reserve Bank of India. In India, there were 10 billion open-banking transactions in September 2023 alone. 

If the market and the regulators support it, the potential of open banking worldwide is phenomenal. “The market-led approach that we have in the U.S. works very well for most consumers,” Wester said. “But what we are seeing is recognition that the open-banking model does work better, and that is where we need to be going, regardless of how it’s being led.”

Today’s consumers want improved, innovative shopping experiences, and they want instant gratification. Consumers want greater access to their financial data, and they’re willing to share that if it results in improved services and less costly financial products. Meanwhile, merchants are under extreme pressure to reduce their operational costs. Because open-banking transactions happen outside of traditional card rails like those used by Visa and Mastercard, there are no interchange and scheme fees. Open banking has the potential to save merchants millions of dollars annually. 

“At Worldpay, we do not discriminate between payment methods,” Shastri said. “We offer a plethora of payment methods to our customers because, ultimately, we want to drive financial inclusion. When consumers are successful, businesses are successful, and that’s what we are striving for every day.” 

Open banking is proliferating around the world, but it’s just getting off the ground in the United States. Shastri explained that there are four U.S. rails upon which to build an open-banking ecosystem: 

“For a payment method to be successful, it needs to reach the broadest possible consumer base,” Shastri said. “Shoppers don’t really care about RTP or ACH or FedNow. It’s for us as a payment service provider to solve that complexity for consumers and merchants, so that they have the broadest possible reach of the payment method in the country.” 

Perhaps the biggest challenge in this space is bank fragmentation. The United States has more than 12,000 banks, whereas countries like Canada are in the double digits. The legacy banking system that supports smaller financial institutions is not equipped to support real-time and clean data-sharing capabilities. 

Because no standards have been set, each bank can enable the sharing of data or enable payments in a slightly different way. “We could have tens of thousands of potential ways to connect to the bank account,” Shastri said. “The cost of integrating, managing, and maintaining these API integrations will be significant for the players in this space.”

With open banking, consumers are the ultimate owners of their financial data and can choose to share it with whomever they choose. But this leads to legal and ethical implications around sharing data with multiple third-party providers. “As an industry, we need to solve for some of these legal initial implications and assuage any concerns from a legal and ethical standpoint,” Shastri said. 

The legal basis of open banking flows from Section 1033 of the Dodd-Frank Act, which requires banks to make this data available to the consumer in a usable format. Earlier this year, the CFPB issued a notice of proposed rulemaking to allow consumers to have control over their financial lives and gain new protections against companies’ misuse of data. Consumers’ own data would be made available to them at no charge through digital interfaces that are safe, secure, and reliable. They would also have the legal right to share their data with whomever they choose and revoke their access to data as well. 

“This is the core basis for open-banking adoption in the U.S.,” Shastri said. “CFPB is doing a phenomenal job of regulating the space, making sure the ecosystem players behave and play by the rules while protecting consumers from malicious practices and data security.” 

Shastri expects to see action around the fragmentation of APIs, with common standards for the interfaces being adopted at least at a country level. That will be closely also aligned through the ISO 20022 messaging standard to improve the insights through data and conversion rates. 

“To me, this is like the smartphone moment of financial services,” Shastri said. “This is the start of the journey of building innovative products using data. Open banking will become more and more feature-rich. There is already work going on around variable recurring payments, which will enable person-to-business use cases across a number of industries. 

“Open banking is not just about sharing your banking data but sharing all your financial data, including mortgage, savings, and pension. We could even add other nonfinancial data, like your utility consumption or your Internet of Things data sources. Not just in the United States, but around the world, we will enable our merchants with tools that they need to create value for their consumers. We will create a better, financially inclusive ecosystem where everybody wins.”

The post Laying the Groundwork for Open Banking appeared first on PaymentsJournal.

Businesses often recognize that their success hinges on their ability to scale and expand. However, many businesses don’t anticipate the tightening of their profit margins on this journey to expansion.

At first glance, it may seem counterintuitive. After all, one would expect that increased growth translates to higher revenue and greater profitability. Yet the reality is that business growth comes with inevitable challenges. Chief among them are the mounting operational costs that chip away at hard-earned profits.

In a recent PaymentsJournal podcast, Nicholas Botha, Payments Sector Lead at AutoRek, and Brian Riley, Director of Credit and Co-Head of Payments at Javelin Strategy & Research, delved into what businesses must do to mitigate operational lag, how automation is revolutionizing reconciliations, and what the payment sector’s outlook is for 2024.

Efficiency and keeping operational costs low are paramount considerations for any business. When an organization starts to grow, managing the increase in transaction volume becomes essential.

“What we’re seeing is a lean towards more operational efficiencies—automation, new technology, cloud infrastructure—and that’s there to support this growth at an affordable rate,” Botha said. “This ultimately increases firm’s margins as they grow, and that’s how they can increase their revenues as they scale up.”

A company’s success ultimately depends on how well it optimizes its processes. Leveraging data is another key element businesses should prioritize.

“Rather than just dumping these transactions into the proverbial shoebox, one of the things I see about AutoRek is being able to help organize that and manage the process flow,” Riley said. “That seems to be very important, too, from an operational perspective.

“Certainly, squeezing the dollars and making it efficient makes sense, but also being able to use that data as a competitive weapon.”  

Most small payments companies initially rely on manual reconciliation processes that are typically straightforward. However, as these companies aim to scale, this once-simple process gains complexity, leading to time-consuming procedures and undue pressure on operations teams.

“When you’re performing data management processes, matching reconciliations, creating workflows, and reporting off the back of any reconciled items, manual processes—while they may work for smaller firms at an aggregate level—become a little bit more complex,” Botha said.

“There are a lot of intermediaries that become involved over time, and new technologies become available. It’s about ensuring that you use all these different elements to your advantage to create seamless, automated reconciliation processes.”  

C-suites and external stakeholders, including audit firms and internal teams, require strict control over these processes. Automating these procedures enhances efficiency across the board, ultimately delivering transparent reporting for internal and external stakeholders as well as customers.

“The workflow is really one of the most important pieces here,” Riley said. “Not just matching invoice A to invoice B but making that flow. Whether it needs multiple levels of approval within an organization or whether you split those transactions to route to one area or the other, what struck me as very interesting was how that has been engineered well and ready for setup.”

The United States has been behind the curve in adopting instant payments compared with other parts of the world. Although The Clearing House’s RTP Network was launched in 2017 and FedNow followed in July 2023, widespread adoption remains in its early stages.

In contrast, the UK’s instant payment system, Faster Payments System (FPS), has been in effect and widely adopted since 2008. The National Payments Corporation of India launched the Unified Payments Interface (UPI) in 2016. According to the World Economic Forum, this was the most preferred payment method for its citizens.

So what can the United States do to get up to speed with instant payment adoption?

“Communication, creating open forums between the different regulators, leveraging some successes and learning about some failures will make sure there’s widespread adoption across the U.S.,” Botha said. “We are seeing it a little bit in some of the states.

“If you think about New York, they’re a bit more ahead of some of the other states. But that adoption across the U.S. is going to be hugely important for the global payments space.”

Some of the developments seen in Europe and India are significant. “And it becomes a good test bed for the U.S. into faster payments,” Riley said.

The launch of FedNow has marked a pivotal moment for U.S. instant payments. As more financial institutions and networks join, the adoption of instant payments will grow.

Payment firms in the UK and the EU will face myriad regulatory changes this year, with safeguarding one of the most notable regulations.

Safeguarding is designed to protect customer funds held by payment service providers and e-money issuers in the event of the company’s insolvency. It encompasses a set of practices to ensure that customer funds don’t get mixed in with the company’s funds.

“What (we’ll) see is new jurisdictions picking up on this type of regulation,” Botha said. “We’re already seeing it in Canada, Israel, and Singapore. I don’t think that the U.S. is too far behind.

“In fact, I had a conversation with a client just last week, and they mentioned the safeguarding regulations. I’m not too sure where the Fed is on that. But I think changes to existing regulation, both state and federal, are going to be a huge thing for firms to focus on.”

According to Riley, the big buzzword right now is liquidity. Being able to isolate those transactions is also important. “We’ve seen a couple of big failures in the United States—SVB is a good example,” Riley said. “With the acceleration of payments, something that was not expected is that things like a run on a bank or a run on the institution can happen. It can happen a lot quicker than it ever happened before.

“Being able to have those guardrails is very important. Being in front of those issues and being able to isolate those transactions accordingly to make sure that the risk is minimal is important not only when you’re doing the process but also if you’re involved in the process with those sending those transactions.”

The post Automating Reconciliations and Optimizing Operations: The Keys to Scale appeared first on PaymentsJournal.