The PaymentsJournal Podcast

When it comes to business-to-business (B2B) payments, those funneled through automated clearing house (ACH) rails are increasingly popular.  Although many businesses are still mailing checks as payment, more businesses are seeing the risks and looking toward ACH payments as a cost-efficient and convenient alternative.

During a recent PaymentsJournal podcast, Brian Holbrook, Director of Product Strategy and Integrated Services, LSEG Risk Intelligence, and James Wester, Director of Cryptocurrency and Co-Head of Payments at Javelin Strategy & Research, delved into the current landscape of ACH payments in B2B use cases, the potential impact of Nacha’s proposed amendments on originators, and the challenges and opportunities for originators that are arising from these amendments.

ACH payments have been growing in popularity among businesses making B2B payments. Funds are transferred seamlessly between bank accounts, and settlement times range from one to three days. ACH payments are also fast and more cost-effective than paper checks. As waiting for payment becomes less sustainable in the maintenance of cash flow, B2B use cases will continue to expand.

“So when we look at data coming out of Nacha, we can see that the B2B volume increases across ACH are up nearly 10%,” Holbrook said.

“We’re seeing a significant growth across the originator landscape, seeing multiple increases in different verticals, different industries. And, of course, with those increases come additional risk.

“We see some new rules coming out that are going to have an impact on the whole ecosystem, but particularly on the originator side.”

With the ACH network processing tens of billions of transactions, with thousands of banks in participation, and numerous regulations, the network can be difficult to navigate.

“I think that sometimes it’s a bit of a surprise—just how the infrastructure for ACH transactions, the use of the ACH payments network, and the need across multiple use cases is growing so very, quickly and so expertise in this space is sometimes hard to come by,” Wester said.

According to Holbrook, Nacha reported that Same Day ACH payments were up 20% in Q3 of 2023 over the same quarter a year ago, a significant jump indeed.

“When you look at that Same Day (ACH), as we began to see that demand for faster and faster settlement times, faster and faster throughput, the other side of that coin is, OK, less and less time to address issues, less and less time to figure things out like fraud, suspicious transactions,” Wester said.

“I think that surprised everybody in terms of how quickly we are beginning to move to this need for faster and faster settlement across multiple networks, but especially across ACH.”

Nacha is proposing a new risk management framework that could affect the entire network, including a third party, the Receiving Depository Financial Institutions (RDFI), the Originating Depository Financial Institutions (ODFI), or a new regulator. The proposals will require more from industry participants.

“These proposals are going to require everybody in the value chain to have more diligence on the accounts, on the account ownership, particularly with higher-dollar value transactions,” Holbrook said.

“It’s going to be critically important that they understand where those funds are coming from, where they’re going to. When something suspicious is happening, that the receiving institution has an opportunity to reject that, that inbound money, or for the originator to call it back.

“It’s going to be paramount that they have the tools to validate accounts, validate identities, and to be able to do it. And as close to real time as possible.”

Risk, Wester said, was not an important topic for a long time. The original focus among fintech players within the industry was growth. However, the tides have changed and more FIs, their partners, and technology vendors have shifted their focus to mitigating risk.

“Risk, compliance, governance, fraud, security, all of those things are now becoming more and more important in coming to the forefront,” he said. “And we’re hearing a lot more about the need for risk, and risk tools, and the things that financial institutions and the financial system have done very, very well.

“So I think that’s a very interesting switch in the last 12 to 18 months, that prominence in terms of risk and compliance being a talking point or something that we’re discussing more.”

Said Holbrook: “It’s really about monitoring across all parties in the value chain funds, recovery tools and standardizing of information so that individual names, descriptions are standard across the network, that there is an ability to recover funds, and that there is monitoring across that. I think that’s really what it comes down to across the value chain.”

Although regulations are put in place to protect participants from fraud, there will always be the challenge of establishing a happy medium between mitigating risk and delivering a seamless customer experience.

“People want these funds moved in as close to real time as possible. So striking the balance between good customer service, good throughput speed, and risk and fraud mitigation is going to be a needle they’re going to have to thread very carefully,” Holbrook said. “They’re going to have to strike a balance there, and they’re going to need processes, procedures, and tools to be able to do this.

“And those tools are going to have to work in as near real time as possible so that you’re not applying excessive friction to your customer base or to the movement of funds.”

Wester elaborated on the required balancing act.

“And that’s almost as much art as it is science,” he said. “That’s one of the things that we’ve said about security for a really long time. You can make something absolutely secure, but it’s completely useless (if it repels legitimate users with friction), or you can make something very open, but unfortunately, it’s not very secure.

“That balance that you were talking about between customer service and protecting things, making sure that risk is taken care of on one side, but also making sure that customer service and access and all the stuff that we want in terms of payments are available on the other side. It is a balance.”

And it doesn’t end there. Wester said achieving it will require constant monitoring and fine-tuning, ensuring that organizations are doing everything in compliance in terms of fraud, risk, governance, and security. This has to be done in tandem with customer retention efforts.

Although these newly proposed amendments are likely to create some headaches, there is a silver lining, and that is the many potential benefits for the ACH Network and the consumers and businesses using it.

“There’s an opportunity for them to not only improve what they’re doing today, but it’s an opportunity to help them reduce risk and loss further within their systems,” Holbrook said.

“There are opportunities here where these tools that they would apply to these types of transactions can be used in other parts of their business that will also, whether it’s at account opening or account closure and throughout a customer lifecycle. Those tools that are available in the market can absolutely help them in other parts of the business.

“And I think that’s a huge opportunity for them to reevaluate many of the systems and processes they have in place today and look for ways to enhance them, make them better, make them faster.”

Said Wester: “A lot of times we think we’re going to take a tool and we’re going to apply it to the problem. Especially a digital solution is going to come in and it’s going to fix things.

“You do have to look at those processes, those things that are internal that may have nothing to do with the technology or the tool, but you still have to address those.

“It is better to have those tools that are easier to integrate, the partners that are easier to work with because you are going to have a lot of stuff internally that you have to work on.”

Before originators can tackle and implement the directives under the proposed amendments, they must get educated. Reading up on these amendments on the Nacha website and attending conferences and webinars can be valuable ways to stay current. Once armed with information, originators can look at their current toolbox and see what they have and what they need to add.

“This is an opportunity for compliance departments to really go back and evaluate what they’re doing today, where they may have gaps,” Holbrook said. “What tools do they have in place today that are going to help address these new rules? Or do they need to be looking for something new?

“In some of the other workshops that we have done, many of our clients tell us that they feel good about where their risk and compliance mitigation is at. But there’s more to do. This is where these areas need to be out looking at new solutions and looking at different providers, and seeing what’s going to best fit their needs, what fits into their technical ecosystem, and what’s going to give them the best performance when they’re looking to strike that balance between speed and risk.”

Wester and Holbrook agreed that preparation and proactivity are keys. Organizations need to grant themselves ample time to research, invest, and implement new solutions to remain compliant.

“I think one of the things we’re also seeing a recommendation for is (to) be proactive on this,” Wester said. “A lot of times, when you look at deadlines, when you look at compliance issues, you do an, ‘OK, I must be done by this date,’ and you do a workback. This is one of those where you start sooner rather than later.

“There are issues, there are areas where there may be problems, there may be costs, there may be concerns that need to be worked through that you didn’t know, the things you know that the unknown unknowns.”

Preparation is essential, Holbrook said.

“If you’re going to engage with a new solution, you know you’ve got to get it into a road map, you’ve got to develop, you’ve got to have resources that can work on it, and then you’ve got to have time to test it and do proof of concept,” Holbrook said.

The post ACH Proposed Amendments: Originators Must Prepare appeared first on PaymentsJournal.

Embedded payments have been a mainstay for consumers for several years due to the rise of digital payments via smartphones and mobile apps. As consumers continue to enjoy the speed, convenience, and security of such payments, the business-to-business (B2B) space has been lagging behind.

That is not to say that many businesses are content with this; on the contrary, more businesses would like to see embedded payments featured highly within the B2B payments space so they, too, can benefit from the speed, convenience, and cost efficiency.

During a recent PaymentsJournal podcast, Daniel Artin, VP of Strategic Partnerships at Boost Payment Solutions, and Albert Bodine, Director of Commercial and Enterprise Payments at Javelin Strategy & Research, discussed what embedded payments look like within the B2B ecosystem, why they are growing, the market opportunities available, and how to select the right payments partner to begin incorporating embedded B2B payments.

Embedded payments originally centered on such use cases as consumers hailing a ride using the Uber app or ordering groceries via the Instacart app. Both platforms offer fast and convenient ways to pay for products and services with a simple tap on an iPhone, with no need for entering credit card information.

Within the B2B payments arena, businesses are demanding the same perks that come from embedded payments, including enhancing the customer payment experience, automating the processing of payments, and providing protection against fraud.

“When you talk about embedded B2B payments, it’s always within the context of embedded finance, which as we know has become sort of the buzzword, the flavor of the month within the payments and finance sphere,” Artin said.

“So for those nascent audience members listening, we define embedded finance as the integration of financial services and tools primarily to non-financial software platforms. Think of this as incorporating banking, lending, sometimes even insurance into various (software-as-a-service) providers and platforms.

“I’ll be focusing on embedded payments, particularly in the context of B2B payments, which I believe is the edge case of embedded finance.”

Said Bodine: “I see in my research that embedded finance, open banking, it’s really going to be the major disruptor to the legacy banking system. Certainly, things like correspondent banking and getting away from the notion that you have to go through your bank in order to make a payment.

“These are very important, interesting times for the world of B2B payments.”

As businesses continue their expansion across the world, large multinationals as well as small and mid-market companies are taking their enterprises to a global level. As they move toward a more digital ecosystem, the complexities amplify, especially for back-office processes.

“And of course, we can’t forget to mention the impact of COVID,” Artin said. “I really believe consumer (tendencies) begets B2B. What we saw during those three years was almost a fast forward in the mind of the retail and the regular consumer of wanting simplicity, wanting digitization, wanting a seamless experience and businesses also caught that wildfire.

“What we’re seeing is businesses starting to have a desire and almost demand to move away from an analog swivel chair process into more of a seamless digital experience from a holistic level.”

Even with businesses ready to digitize B2B payments, there are still some businesses that happily embrace the old ways of operating. Bodine recounted a conversation he had with a wholesale restaurant provider.

“We got into the subject of payments, and I said, ‘What does your daily payments file look like? Are you sending a batch file?’” Bodine said. “He went into his drawer and took out a stack of checks about that thick, and I said, ‘Do you mean to tell me that you’re still receiving checks as a primary mode of payments?’

“He said, ‘Absolutely. It’s 90% of how we are paid.’

“It might be that particular industry, but it reminds me of a statistic that still 33% of payments made globally are made by paper check, which every time it comes out of my mouth, it just boggles my mind.”

Artin attributes business’ use of legacy processes to inertia. Businesses that have been writing checks, fulfilling procurement orders, and paying invoices in the same manner for decades seem to have embraced the status quo and feel no urgency to make changes.

As B2B payments become more digitized, the opportunities for embedded payments will grow significantly as companies seek a more seamless payments experience.

“In the U.S., depending on which report you’re reading, it’s anywhere between 25 to 27 trillion (dollars) in total addressable market for B2B payments,” Artin said. “What we’re seeing right now is that embedded payments make up roughly 5% of that, so about 2.6 trillion.

“And over the course of the next five to six years, we see that growing considerably upward of $7 trillion, a 170% increase.”

For those SaaS companies debating on whether to incorporate payments into their platform, Artin contends there’s a “first-mover advantage to be gained.”

Companies that adopt payments stand to boost customer lifetime value. Plus, it’s an effective strategy to diversify revenue streams, not only from subscription-based models but also from a basis-points viewpoint. Through the integration of payments, the transaction volume alone will give valuable insights to the sales team, equipping it with a valuable toolkit to help land more clients.

As much as businesses would love to have embedded B2B payments mirror the consumer side, a long road looms ahead. For one thing, B2B transactions are significantly more complex. There are so many moving parts within the B2B space, including invoicing, reconciliation, handling multiple parties, and risk management. Moreover, the amount of money being processed is also considerably higher within the B2B realm.

“While the demand is high, it’s a slow-moving train,” Artin said. “I think one of the narratives that’s being pushed out there is that you’re going to see in the B2B world, at least in the near term, exactly what we saw in the consumer world, which is almost invisible payments.

“If you think about getting into and out of an Uber or booking a payment on an Airbnb, or buying groceries on an Instacart, it’s going to be a long time for us to mirror that type of engagement and automation in B2B.”  

Adoption of embedded payments is happening within the accounts receivable space, where previously the focus was on collections and deductions. Businesses are now implementing a “mosaic” of accounts receivable modules. Artin explained that the order to a cash system can now be featured on the tech stack.

He also mentioned adoption within the freight and logistics space, as well as in healthcare. Manufacturing and health insurance claims are also seeing an increase in adoption.

Naturally, the B2B space has its own nuances and complexities. Therefore, partnering with a solutions provider that has expertise in the B2B space is a must. Solutions that have served the business-to-consumer (B2C) space will simply be the wrong fit.

“Incorporating a payment facilitator model is a best suggested route here—partnering with an established B2B payment facilitator,” Artin said.

“Here’s a few selection criteria that I would consider. The first: Do they have a track record of playing in this playground, playing in the B2B space? Do they have a developer software layer? Do they have a streamlined onboarding process?

“Once you get customers bought in, are they going to be waiting 2 1/2 weeks to get a congratulations letter that they’re now part participating in the program? Do they have a reliable and accessible customer support?

“Are you going to be resorted to a 1-800 number or a generic listserv or are you going to have real folks in there that can handle issues that are inevitable about coming up? Is there a robust compliance management system?”

Artin said working with a flexible and nimble partner is paramount. Businesses must ask whether their partner can conform to any shifting conditions.

In addition, partners must be able to take into account that all businesses have their own accounting systems and their preferred methods of settling funds into their accounts, whether it be gross settling or net settling. Are they able to offer seamless reporting?

“The good news is that the fintechs that are still out there are really healthy,” Bodine said. “Most of them, because they’ve had to apply austerity measures, they are profitable. They’re actually really good acquisition targets for that reason.”

“Right now, more than ever, I think it’s an ideal opportunity for any forward-thinking SaaS platforms that are out there to consider embedding payments into their platform,” Artin said.

“It’s not an encouragement. It’s a must, and if you’re looking for that sort of expertise, there are folks out there that can help guide and coach you to make sure you’re making the most educated decision.”

The post Embedded B2B Payments: A Forward-Thinking Strategy for Long-Term Growth appeared first on PaymentsJournal.

The rapid improvements in the payments industry over the past decade have had the unfortunate side effect of making money laundering more of a challenge for institutions to detect and deter. With a greater number of methods for exchanging money and with most transactions happening digitally, it has become harder to chase after money launderers’ latest tactics. According to the UN’s Office on Drugs and Crime, more than $1 trillion is now laundered worldwide.

During a recent PaymentsJournal podcast, Amber Goodrich, Compliance Analyst at CSI,  a leader in the fintech, regtech, and cybersecurity solutions space, sat down with Kevin Libby, Fraud & Security Analyst at Javelin Strategy & Research, to discuss how money laundering has changed in recent years and what companies should be doing to deter it.

The world of exchanging assets has changed dramatically since the initial rules and regulations aimed at money laundering were put into place years ago. “You don’t know who you’re doing business with,” Goodrich said. “And we’re seeing many different types of currency coming into play.”

For one thing, the Anti-Money Laundering Act of 2020 has yet to be finalized, with new regulations still being proposed. New rules are being rolled out to increase penalties, and discussions are centering on imposing multipliers on individuals found to have committed repeat offenses. The subsequent uncertainty has made it harder for institutions to find their footing.

“The thing that we’ve seen the most guidance on is the beneficial ownership piece that’s set to go into effect early next year,” Goodrich said. “But even with that, there’s still a lot that hasn’t been defined yet.” 

Criminals are using social media to contact and enlist recruits, making it harder to detect laundering efforts. “Criminals are using money mules who have never been involved in the practice, so there’s no prior data to use to identify them as potential money laundering parties,” Libby said. “All of those things make it harder for financial institutions to meet those regulations at all, let alone not have repeat problems if they’re getting behind on alerts or having trouble making those connections.” 

One of the most frightening developments is that professional groups are being established specifically to launder money, which presents a distinct problem for financial institutions. It can be very difficult to identify connections between parties that might have an association with a money launderer. And these cabals have been hiring professional accountants and lawyers into these organizations with the purpose of more effectively laundering the money and with greater levels of secrecy. 

Goodrich said she has increasingly heard from financial institutions CSI works with about how hard it is for them to keep up with the amount of reporting they are required to do. Budgets are a limiting factor in combating money laundering, but regulators don’t consider budgetary constraints legitimate reasons for not complying with requirements.

“Modernization is a term that they use, but it’s not defined on what they want us to do with that,” Goodrich said. “They don’t necessarily come out and say you need to go out and invest in new software systems, or you need to completely overhaul your policies and procedures to make sure you’re up to date on these things. But it’s implied.” 

Even absent these provisions, most institutions would be happy to rely on the latest state-of-the-art technology, using machine learning and artificial intelligence. This would allow organizations to adapt their rules on the fly to recognize emerging trends in money laundering more effectively and to make connections between pass-through accounts. 

CSI has an anti-money-laundering (AML) solution that offers artificial intelligence and machine learning as a part of it. “That’s huge because old systems for AML and transaction monitoring are not enough anymore,” Goodrich said. “You need systems that have smarter types of alerts that can look at past behaviors that your customers have and see where the changes are happening, without having to manually review reports and create spreadsheets.” 

According to Libby, a positive of the recent regulatory moves could be that they prompt institutions to get over the jump and invest in the technology they need.

“As Amber suggested, it’s saying with a wink and a nudge that you need to invest in these new technologies,” Libby said. “That could go a long way toward streamlining processes.” 

AI automated systems could reduce the burden that excessive reporting creates for institutions. Integrating AI involves some pain points but also some opportunities. Financial institutions should focus on the latter. Compliance is required, painful or not. 

As far as compliance risk, CSI has been seeing violations involving multiple regulatory agencies have been involved. A single compliance deficiency may be cited not just by the Financial Crimes Enforcement Network but also by the Office of Foreign Assets Control and even the Department of Treasury because it may be related to a sanctions program. There’s risk of criminal violations that come along with it as well for Bank Secrecy Act and AML officers: If they are cited for something, there can be criminal penalties for them individually. 

One of the most important things for organizations to do is combine all of their data and get a holistic picture. A solution that offers API technology can bring that together and provide a whole picture of who an institution’s customers are engaging with in business. 

Data integration is a huge part of being able to effectively identify money laundering activities that follow current trends and those that might emerge in the future. Data is everything in that regard, and the more seamless an integration is across an organization, the better. 

“How do you decide who was a high-risk customer or a low-risk customer, especially when you’re working with limited data?” Goodrich said. “We offer risk scoring that can help you decide how risky your customers are.”

Artificial intelligence and machine learning will be critical components as anti-money-laundering technology evolves. The sheer number of parameters that can be tested—and the interaction between those parameters—can only be teased out by a computer system. 

It’s never too soon to start establishing an anti-money-laundering protocol. FIs shouldn’t wait until the regulations settle on a hard start date, leaving organizations behind the curve. One area that hasn’t yet seen much regulation is cryptocurrencies, a huge risk to financial institutions even if they do not realize they are doing business in that area. Don’t wait for regulations to get started on a crypto AML plan.

The post Why Organizations Can’t Keep Up with Money Laundering  appeared first on PaymentsJournal.

As financial fraud continues to become more intricate and more commonplace, and risk remains a deterrent for innovation, the inadequacies of “black box” solutions of third-party fraud vendors are coming to light. To effectively detect and mitigate fraud – and protect the FIs, their customers and their shareholders — banks need full transparency into the strategies, tactics and performance of their third-party fraud solutions.

Transparency between parties is the key to successful fraud mitigation, and during a  recent PaymentsJournal podcast, Matt Raile, SVP of Fraud & Bill Pay Operations at BillGO, and James Wester, Director of Cryptocurrency and Co-Head of Payments at Javelin Strategy & Research, delved into the importance of choosing the right third-party vendors to mitigate fraud, the red flags FIs should look out for, and why transparency is the linchpin in the battle against financial fraud.

When vendors approach financial institutions, it’s common practice for them to proverbially beat their chest and announce just how many transactions they have processed, along with other success stories. Although this information may sound impressive, it does little to demonstrate what they can do for a particular organization.

“There [needs to be a] hard conversation with these vendors,” Raile said. “That’s great what they’re advertising for other portfolios, but what are they going to do for your portfolio? How transparent are they going to be with you on the performance of your specific portfolio? And how they are managing your portfolio?”

According to Wester, the right technology partners will offer a more customized solution, not just something out of a box. It’s a partnership, and an important one.

“A key point that really resonates in terms of the research that we’re doing when it comes to vendor management is that idea of the cookie-cutter model versus what a vendor is actually providing—either more personalized or actually being a partner and knowing what a financial institution is really looking for,” Wester said. “That takes time. It takes effort.”

A true partnership between a financial institution and a third-party vendor involves sharing goals and pooling resources and information to meet those goals. Above all else, there needs to be trust. For that to develop, transparency is necessary.  

“If you’re running a rules-based environment or if you’re running a model, you’re going to know exactly the model that’s running on your behalf, the rules that are running on your behalf, the configuration thereof, and you’re going to have performance data that speaks to every rule and or every model on a daily frequency,” Raile said. “You’re going to have the same level of knowledge and insights with BillGO as your third-party vendor that you would inside of your own organization.”

Overall, it’s in the best interest of customers that financial institutions continually monitor the environment to ensure there is no disruption of service.

What FIs want to avoid—particularly amid the lack of transparency that’s still consistent in the industry—is being told by a third-party vendor that something is “taken under advisement.” It’s equally suspicious when vendors refuse to share any further details because of concerns about their intellectual property. In fact, Raile points out, when third-party vendors refuse to share how their solution identifies a set activity or how it’s performing in that activity, a red flag automatically goes up.

FIs shouldn’t have to make a special request to receive more information. Rather, they should have access to information about how certain fraud patterns are ultimately affecting their portfolio.

“You hear vendors talk about their ‘secret sauce’ all the time,” Wester said. “And it’s like, well, why do you have a sauce that’s secret, especially when you’re talking about things like protecting customers or fraud or security or any of the things that go into the costs that a financial institution has to bear to protect their customers?

“Sometimes I have to take off my analyst hat and put on my consumer hat and say, ‘Why would you do that?’ It’s better for all of us—as consumers of financial institutions—to know that fraud patterns are being shared, that they are being looked into, that they are being looked at from a vendor standpoint to protect those consumers.”

If third-party vendors want to remain competitive, they need to tackle potential fraud risks more effectively. As compliance requirements grow, that would also be a key differentiator when it comes to selecting a third-party vendor.

“If you have a new fraud pattern, if it takes you days or weeks or months for your vendor to listen to you and to deploy a solution that specifically addresses your attack vector, then that’s not good enough,” Raile said. “That’s not good enough for your consumer. That’s not good enough for your shareholders.”

As Wester points out, regulatory oversight and compliance risk won’t get any easier. “We are seeing things happen in the payment space, especially as we begin to see developments in things like A2A or P2P payments, or all of these new payment types that we’re seeing come out,” he said. “We’re seeing more regulatory scrutiny, and we all know that’s going to be the case, so I would think that anything that would make those discussions easier would be a good thing because, again, it’s not going to become simpler or faster.”

Time is of the essence when it comes to fraud mitigation. To protect consumers and their experiences, third-party vendors need to be more responsive. As soon as they are made aware of a new pattern, the solution must be deployed.

“I’ve got an example here with one of our clients where a new fraud pattern had been detected on the financial institution side,” Raile said. “Thankfully, it had not yet penetrated its way into bill pay.

“However, the experience was shared with us and we were able to test and ultimately move our solution up through our production environment and have it deployed on this particular client’s behalf in just under six hours. For any of those out there listening today that are managing fraud vendors, I know when I was detecting new fraud patterns in former workplaces that response time was usually measured in months, if not quarters.”

Wester said a slow response seems to be the modus operandi for most third-party vendors.

“Not doing that [response] quickly is actually kind of alarming that it’s allowed to go on for as long as it does because it’s not just a cost to the financial institution, but you have to think about it from that consumer standpoint, from that end-user standpoint, the cost and the inconvenience and everything else that goes into that,” he said.  

The post Why Transparency with Tech Partners is Vital for Financial Institutions appeared first on PaymentsJournal.

Although artificial intelligence has been one of the hot topics of the past year, it has been around for a very long time, dating to the 1940s. Over the past 20 to 30 years, there have been many permutations of what is often called traditional AI—and not just in the world of finance. Now, we’re living through a new boom of the technology in the form of generative AI.

Billtrust, a B2B order-to-cash and digital payments software leader based in New Jersey, has been at the forefront of these emerging AI solutions for all types of companies. In a recent PaymentsJournal podcast, Ahsan Shah, Senior Vice President of Data Analytics at Billtrust, sat down with Christopher Miller, Lead Analyst of Emerging Payments at Javelin Strategy & Research, to talk about where AI is making the most significant impact on businesses, now and into the future.

Industries have been using AI tools like anomaly detection and classification for decades. But the new wave of generative AI uses language models as a fundamentally different approach, which can then be combined with traditional AI to solve business problems. That has resulted in a lot of excitement but also a lot of confusion about what is and what is not AI.

Generative AI is a language-based capability, offering an interface that nobody expected to happen this quickly in the AI evolution. In the past, when individuals spoke in a common language, it required a great deal of modeling and training data. But with open AI, these foundational models can translate language to code, to an action language, or to SQL. “It doesn’t circumvent what could be done with traditional AI,” Shah said, “but now you have a different toolkit in the box to be able to use language in capabilities, and fundamentally all of our customers speak in certain languages. And so this offers almost a new door of possibilities and features across the stack, across the industries, across various domains.” 

Miller added: “What you’re saying is we shouldn’t really talk about artificial intelligence, but maybe about artificial intelligences. The ways that we would use these different flavors of artificial intelligence really vary from one another. The types of problems or business applications that are right for generative AI might not be right for a strictly deep learning approach.” 

Where generative AI may be most helpful is in the interface layer with customer service, to help with natural language questions about data. “When I think about generative AI, it is an augmented assistant pattern to yourself as an individual, whether you’re in marketing or sales or at a SaaS (software as a service) company, whether it’s B2B or B2C,” Shah said. “It’s almost like an add-on assistant. A situation that might have taken a collections agent a long time—to find out which buyer to go to and personalize those types of workflows—is going to have a much more efficient process using AI, with the human element augmenting it to reduce that overhead.” 

To this point, many people’s interfaces with AI have been limited to a chatbot that pops up when they access a website.

“There’s a difference between a chatbot that is consumer-facing and is the only thing that the customer interacts with and an interface that is used by a customer service agent to retrieve information who delivers that information through a chat interface,” Miller said. “With new technologies, folks often start by trying to match the technological capability to, for example, the type of data that’s available. You might further then segment your customer base and determine which type of experience they’re going to have, and different technologies may be appropriate to deliver those different experiences.”

Companies can personalize the experience far more than what was possible even a year ago. The chatbot can be prompted to say here’s the person you’re speaking to and here’s their background, and even suggest the tone of communication. “You can tell it to be soft with the person, because they’re frustrated after waiting at an airport for five hours with their family,” Shah said. “That’s information that’s out there, but your system has to be designed in such a way as to have that information source as part of the dataset. We want to talk to customers, understand their pain points, then use a phased approach in embedding AI workflows into our products in a systematic way.” 

Enterprise value creation from generative AI is a different engineering exercise from a simple chatbot, requiring enterprise data far beyond the window of what Open AI or ChatGPT can do. “What I recommend people to do is start small, with use cases that have tangible business value, and really go out there and explore,” Shah said. “The worst thing you can do is to do nothing.” 

A simple thing like invoicing can be a helpful place to start. “When we look at our customers, their goal is to get paid faster,” he said. “That’s really in a nutshell what we try to do. When an invoice comes in, it has to get paid, and if it doesn’t get paid, it goes to collections. You can look at something like that and ask, ‘What if I knew using traditional AI that an invoice that might be forecasted to default?’ But I might know something about the buyer based on their communication, their emails, and the correspondence to feed a personalized recommendation to that buyer. It combines personalization content with enterprise data.” 

Billtrust is building a unified accounts receivable system that can converge these functions to optimize the cache flows. The notion that the back-and-forth negotiating can actually take place in real time and perhaps even at the point of a transaction creates some very interesting potential opportunities. If, for example, a company’s agent and a seller’s agent are able to negotiate in real time, it’s also possible that financing offers could be included and evaluated in something near to real time. As the process becomes more templated, early adopters are likely to get an advantage. 

“If you’re looking for something that’s extremely atomic from a financial transaction perspective, you may not want a generative AI model going and actually processing a payment for you,” Shah said. “Where you do want it is in that interface layer that helps with customer service that helps with natural language questions on your data. There’s no doubt the different types of AI will eventually help you reduce manual overhead, simplify workflows, and ultimately deliver a better user experience.” 

The post What the Next Wave of AI Will Do for Business Processes appeared first on PaymentsJournal.

As the holiday season approaches, small and medium-sized businesses (SMBs) have an uphill battle to secure their piece of the sales pie. But the key for SMBs to win this year’s Q4 is not to play the same game as the major retailers but rather to play to their niche and delight their customers with an exceptional, personalized experience.

During a recent PaymentsJournal podcast, Nitin Prabhu, General Manager SMB, Developer and Payments at PayPal, and Daniel Keyes, Senior Analyst of Merchant Services at Javelin Strategy & Research, discussed the findings of PayPal’s SMB and Consumer Survey 2023 and determined what SMBs can do to differentiate themselves from larger retailers, leverage current technology (such as PayPal PPCP) to acquire new customers, and widen their customer base as they prepare for the holiday season.

SMBs struggle with particular challenges related to their size and scope of operations. And with the holidays on the horizon, SMBs face stiff competition from big-box stores and their slick marketing and advertising campaigns.

Moreover, SMBs incur considerable expenses to invest in additional inventory, of hiring new and knowledgeable staff to manage the influx of customers and sales, and of course shipping costs. If any of these efforts falter, there can be negative impacts on profitability and future customer acquisition.

PayPal surveyed thousands of SMBs at the start of the year, and a few key challenges were discovered:

“SMBs are not logistics experts, they’re not payments experts, they’re not returns experts,” Keyes said. “They are SMBs trying to make sales and get by and build their business. But they don’t come in with this level of expertise or NSA experience.

“It’s just a lot to handle, while a major retailer has whole teams for these issues. While an SMB might have one person, it’s just a lot to handle for a small business.”

The key differentiation tactic that Prabhu recommends is for SMBs to not only know their limitations but also to play to their strengths. The reality is that SMBs may not have the operational sophistication and the logistical support to reach all markets throughout various geographies.

The PayPal survey discovered that 80% of consumers expressed a willingness to purchase from small businesses, provided that the product they seek is available and at a comparable price. So how can that willingness be translated into sales? Prabu said the latest trends reveal that consumers are finding their products mostly online but also in-store.

As a result, he asks SMBs to consider where they can channel their marketing dollars to reach these customers where they shop. Prabhu suggests that social media is an effective platform to reach potential customers. Additionally, he encourages businesses to ask for reviews from customers within their niche as another way to build trust and brand awareness.

Offering exceptional customer service is another winning strategy Prabhu recommends, one that creates an essential loop tapping into customers’ feedback, which can then be incorporated into product and sales strategy. SMBs can also leverage the advantage of being smaller, as larger retailers are slower to respond to customer feedback.

“If you create a very personalized experience for your consumers, you engage them, understand what the needs are, how they like the product, what do they want to see in the next holiday shopping season, or in the next quarter,” Prabhu said. “You can quickly realign your inventory, your services, and customize, and this ability and nimbleness can take you much further ahead than the large retailers.”

Finally, SMBs must leverage technology. They must be able to offload any tasks that take them away from customer acquisition, such as inventory management, logistics, accounting, sales, or search engine optimization.

Luckily, many solutions providers are now developing their offerings to cater to the specific needs of SMBs.

“There’s a lot of opportunities to take advantage of—new areas that SMBs have largely had to leave to the bigger merchants before, “ Keyes said.

“And with these new tools, there’s opportunities to increase revenue, increase retention, improve loyalty, and so much more with the addition of some solutions.”

A final piece of the puzzle would be a game-changer in equipping SMBs to compete for holiday market share and enhance customers’ experience: leveraging the latest solutions. PayPal Complete Payment Solution (PPCP) has just launched in the United States, with SMBs in mind and based on direct feedback from this target market.

Prabhu believes that the features included in the solution will give SMBs a competitive footing equal to that of their larger retail counterparts.

With PayPal Complete Payment Solution, consumers can safely save their payment information directly on a merchant’s e-commerce website for future purchases. This feature not only reduces friction but also promotes conversion because more consumers will choose where they shop based on whether their preferred payment method is offered.

Plus, customers enjoy tracking their online orders, and PPCP now has package tracking available with more than 5,000 merchants through UltraCart, WooCommerce, and BigCommerce.

PPCP also offers foreign exchange as a service and enables merchants to list all products in the currency where the customer lives.

“Creating a seamless experience, “ Keyes said. “I think that’s the most important thing as merchants look to sell in different geographies and accept different payment types and sell online and in-store. It’s really important that not only do they do all those things, but they make sure that the experience for the consumer is consistent, whether that is how it looks or also how easy it is to go through the process.

“You have consumers in different places or paying in different ways. There’s a lot of opportunities for things to go wrong or not being consistent or be confusing. Then you lose sales, you lose loyalty, and that’s obviously not what merchants want when they’re adding all these new capabilities. So it’s really important to make sure that everything remains cohesive. Having it all on one platform is certainly a way to do that.”

The post SMBs Can Leverage Tech Solutions and Partnerships to Drive Customer Acquisition and Retention appeared first on PaymentsJournal.

Faster payments have plenty of benefits for businesses and consumers, but the technology has also opened the door to a new breed of fraud: authorized push payment (APP) fraud. Banks and their customers have taken a considerable financial beating due to APP fraud. As losses soar, FIs are struggling to get a handle on this increasingly sophisticated fraud scheme, which could mean a loss of customers to competitors who are more invested in protecting their customers.

During a recent PaymentsJournal podcast, Dave Scola, CEO of Form3 (US), and Tracy Kitten, Director of Fraud and Security at Javelin Strategy & Research, discussed the formidable challenges banks face to mitigate APP fraud, why inbound transaction processing could be the catalyst for confronting APP fraud, and how banks can be the key change-makers in curbing this fraud scheme.

APP fraud is a scheme by which a criminal deceives a consumer or a business into sending funds to a fraudulent account. These bad actors target their victims to part with their money through social engineering or impersonating a real person or an existing company.

Banks face tremendous pressure to stop these malicious attacks. The problem is that these increasingly sophisticated attacks are rapidly outpacing the FIs’ ability to detect and mitigate such fraud.

“What makes it challenging is that most of the bank systems that are in play today have been geared towards monitoring the sender rather than monitoring the receiver,” Scola said.

“That puts a lot more onus on the banks to shift their position and start to look at the receiving end of that transaction, which is a change in posture for the industry as a whole.”

APP fraud is essentially a two-fold problem, according to Kitten. It has a technical component and a social engineering component, making it an incredibly complex fraud tactic to overcome.

“There is obviously a technology piece that plays a role here, but there’s also a human element, a psychological piece that’s a big part of this,” Kitten said.

“I think part of what makes resolving the scam issue so challenging, because as you know from the FI’s perspective, these are legitimate transactions. These are transactions that the users are actually authorizing.

“These are authorized push payments, but because they’ve been manipulated, socially engineered in some way, and they result in fraud. So it’s a huge challenge, and it’s one that is only going to continue to get worse.”

Banks have typically focused on outbound transaction processing, which monitors transactions originating from the sender. However, inbound transaction processing enables banks to monitor and examine transactions originating from the recipient’s account, where the bad activity in cases of APP fraud is actually instigated. This is where banks must redirect their focus to combat such fraud.

“It becomes much more effective to monitor the receiving accounts than it is the sending accounts,” Scola said. “Because as we look across the industry and the activity that’s going through various payment rails, you can start to see similar types of transactions, similar amounts, similar times for these transactions that I think help reflect the fact that they are fraudulent.

“It’s working to identify those commonalities on the inbound side that make the identification of that fraudulent activity possible.”

Inbound transaction screening can be a dependable way to detect fraud, such as anomalies in these transactions.

“But I think that some of those things that we’ve talked about in the industry for a long time, some of those tried-and-true methods can really be things that we can fall back on,” Kitten said. “I think back to the days of ACH account takeover and wire fraud. What were some of the indicators of compromise there?

“We looked at the time of day of the transaction, the transaction, transaction amount, if you know this was a transaction that perhaps has been initiated by a sender that doesn’t normally have interactions with this particular recipient. Some of those types of things can assist.”

With the speed and nature of faster payments, banks are simply not fully equipped to detect fraud. More banks are leveraging emerging technologies to revolutionize how they detect APP fraud.

“On the bank’s side, beyond relying on clients to identify [APP fraud], there are some other mechanisms that are starting to come into more popular use amongst the banks,” Scola said. “And that is the application of AI.

“I know everybody mentions AI is the solution to all things these days. But I really believe particularly in the payment side that fraud is the ultimate use case for AI. And the reason is, as Tracy mentioned, you are dealing with instant payment systems. They are irrevocable payments. They are happening within seconds.

“The only way you can successfully monitor that data at that speed is through the application of AI and really looking for commonalities among the payment activity that’s going through the network.”

Another powerful tactic to mitigate APP fraud, Scola said, is for banks to collaborate. Fraudsters will initiate this type of fraud across many banks. If these banks were to share their data, they could easily detect the fraudsters’ activities as well as the accounts they are leveraging. That would allow banks to ultimately close them down and block the funds from further distribution.

Kitten noted that many fraudulent activities, and the losses incurred, go largely unreported. It could be due to embarrassment. But this, according to Kitten, is a mistake.

“My recommendation would be anytime there’s some kind of fraud or scam that’s reported that it be tracked in some way or another, so we have some kind of grasp as an industry on how much is being lost or how much is potentially being lost,” she said. “Then there’s an opportunity for these teams to get some budget to make some investments in actually thwarting this issue.”

Without question, real-time payments are here to stay. To remain key players in this increasingly competitive environment, banks need to focus on reinforcing their fraud detection solutions.

“A lot of the banks we see are now leveraging API integration to start tying together best-of-breed technologies, micro-service environments where they can start to piece those together, using APIs to integrate and increasingly leverage the cloud for scalability and speed in activities that were kind of anathema in the past for banks to move off premium bank accounts,” Scola said.

According to Kitten, there is still work to be done among banks when it comes to fortifying themselves against real-time payments-related fraud.

“A lot of the institutions that I spoke with nearing the end of last year had done nothing as far as technology advancements, improvements to address the launch of FedNow,” Kitten said. “So, this has been back-burned again. Budgets are tight. A lot of fraud issues to look at.”

“Unless they’re really seeing losses that they can track and put on a budget line, it’s difficult for them to really pay attention to it. But I think that’s going to quickly change as we see a lot of losses linked to faster payments.”

The post Fighting APP Fraud with AI and Collaboration: A Two-Pronged Strategy for FIs appeared first on PaymentsJournal.

In a world of immediate payment options like Venmo and Zelle, most U.S. banks are still using the same payment-processing technology they installed in the 1980s. Consumers have come to embrace real-time payments, looking increasingly to digital-first nonbank financial players for increased speed and convenience. It has created a landscape where many legacy banks are lagging behind both their customers’ expectations and their competitors’ capabilities.

To explore how legacy banks can get up to speed on real-time services, PaymentsJournal sat down with John Brady, Chief Architect and Head of Engineering at BillGo, as well as Elisa Tavilla, Director of Debit Payments at Javelin Strategy & Research.

Legacy U.S. banks have several real-time payment options right now, with FedNow going live in July as well as other options like working through the Clearing House and debit card and credit card networks. The key question is whether banks’ legacy infrastructure can truly process real-time payments. 

As Brady explained, most banks’ payment processing today is still batch-oriented. But for the first time in over 40 years, there’s a new real time payments infrastructure and technology that can move money in real time, whether that’s through RTP or FedNow.  “The rest of the financial infrastructure as well as operation needs to catch up and update to a 24/7/365 environment in order to get the most value and benefit out of real-time payments,” Tavilla said.

Most banks handle Same Day ACH by running batches multiple times a day. “To get to a truly real-time system, you’re not going to be able to run the batch for every single transaction,” Brady said. “Some of that fundamental infrastructure really needs to change in order to handle real-time payments going forward.” 

For legacy institutions to truly come up to speed, they need to address real-time payments, real-time settlement, and real-time core processing. Given the demand for faster as well as actual real-time payments, the infrastructure behind the scenes will need to be caught up. 

“As more systems process transactions in real time, it’ll be increasingly important for the legacy core systems to be able to clear and settle in real time,” Tavilla said. “Otherwise, the lag and the complexities where the different types of payments and transactions aren’t aligned in terms of the actual movement and settlement time can pose challenges, whether it’s fraud or insufficient funds or other issues.”

Many banks will rely on a memo post so the customer perceives the transaction to be happening in real time, but it won’t actually post against the core system in real-time. “So the banks are kind of faking it in terms of this real time aspect of things,” Brady said. “As payment products get more sophisticated, it’s going to be harder for banks to do that fake-out type of real-time posting.” 

According to Tavilla, consumers in recent years have become accustomed to being able to send money to friends and family or other uses in real time, although behind the scenes. The money might not be moved and or cleared and settled in real time,” Tavilla said. “That emphasizes the importance of financial institutions adopting systems that are actually able to move the funds in real time.”

In today’s world, these banks impose transaction limits, putting a dollar limit on Zelle or debit card transactions. As banks move toward real-time settlement, those limits could potentially be increased because there is more of a guarantee that the funds will clear.

Real-time capabilities are having an impact on legacy infrastructure. Under normal payment flows in bank systems today, a bank will process an ACH transaction in a batch file, then pass it to a money movement hub or run it through its fraud systems. These fraud systems are necessarily designed to expect a delay in settlement. Once the transaction goes into the core systems, there are multiple balances, including the memo balance, available balance, collected balance, and available balance. Those balances are updated multiple times through multiple batches throughout several days as the various funds settle and clear with other banks. 

“If you think about a true real-time settlement, that whole payment processing up front is going to have to change,” Brady said. “The fraud models are going to have to change, the funds availability models are going to have to change, and the core processing on the back end is going to have to change as well.” 

Said Tavilla: “The top real-time payments use case for both FedNow as well as RTP is the ability for consumers to be able to make a last-minute, real-time bill payment. Based on Javelin’s research as well as other studies, one of the aspects that consumers appreciate most about paying bills is the instant notification or confirmation. With real-time payments, the messaging and the finality of instant bill payment would improve the customer experience as well.”

Another impediment to the full embrace of real-time payments is the siloing that is prevalent at banks.

“I’m concerned that a lot of these systems today are owned by different departments within the bank,” Brady said. “If banks don’t take a holistic approach, each of these departments is going to devise their own strategy for how to deal with real-time processing.”

There is broad agreement on what needs to happen: Bill pay needs to be fully integrated with payment acquisition systems, risk systems, and core systems. Banks also need to consider how regulations interact with that. It’s only within that kind of comprehensive framework that banks can continually improve and, ultimately, provide their customers with better service.

The post The Challenge of Real-Time Payments for Legacy Banks appeared first on PaymentsJournal.

Acquirers, processors, and payment facilitators (PayFacs) are grappling with a host of challenges involving risk—including sophisticated fraud attempts—that demand innovative solutions. These industry players must harness cutting-edge technologies to strengthen their risk management strategies and ensure the integrity of the payments ecosystem.   

In a recent PaymentsJournal podcast, Amyn Dhala, Chief Product Officer at Brighterion, a Mastercard company, and Brian Riley, Director of Credit and Co-Head of Payments at Javelin Strategy & Research, delved into the frustrations many are facing and the technologies they should consider to tackle these obstacles.

One can argue that the single most important thing within the payments space is the irrefutable ability of the transaction. For acquirers, processors, and PayFacs, that means the payments system has integrity and the controls in place to ensure the transactions are indisputable.

But that’s easier said than done. Many factors are attacking the system, and many players continually seek to disrupt it.  

“You have people that might go outside the bounds of their credit lines or their available credit and people gaming the system,” Riley said. “But having the fundamental controls there are really what distinguishes the payment process and an effective transaction through the whole system.”

Dhala agreed, stressing that merchants are ultimately looking to increase their bottom lines. 

“It’s basically a very dynamic space with lots of opportunities,” Dhala said. “But at the same point in time, it has its own challenges. It comes back to the core (of it) for acquirers and PayFacs, and that’s how do we actually increase revenue? And how do you minimize fraud risk?”

Artificial Intelligence has become a popular and effective tool for industry players to leverage in detecting and preventing fraud. That’s because AI solutions can analyze an enormous amount of data, which can then detect patterns and anomalies, revealing fraudulent activity. It can also lessen the number of false positives.

“Fraudsters are operating at scale,” Dhala said. “So, there are some quick learnings which you can get by leveraging (AI) insights.”

It’s important to note, however, that an AI solution must be fed an enormous amount of data to be truly effective and accurate in its predictions.

“The importance of AI is to keep learning,” Riley said. “It’s not to have a static model that says these are the exceptions we do. The more transactions that go through give (payments players) the ability to learn more on what’s a good or bad transaction.

“If you do this in a box on your own as an issuer, you’re limited to the information that you have. And your solution really uses a lot of the learnings with consortium data to apply that logic throughout the cycle. That really helps make this more powerful.”

An AI solution is only as good as the quality and variation of the data it collects, but amassing data for the sake of it is not the answer. Payments players need to be able to continually learn from every transaction, every approval, and every declination that goes through. Doing so will give them a larger knowledge base, Riley says.

“It’s all about that particular balance, which is so crucial to maintain,” Dhala said. “For the acquirer, for the acceptance ecosystem—and frankly the whole commerce ecosystem—to succeed, that’s the core objective. That’s the basis for some of the market model transaction fraud models because it really leverages the network intelligence, which we have at Mastercard.”

A common roadblock to the full adoption of AI solutions is the complexity of its integration. However, Brighterion’s AI Transaction Fraud Monitoring solutions are not only market-ready but also require 30 data elements to train the model, versus hundreds of types of labeled data elements.

“We’ve honed the technology over the last couple of decades, and our fraud intelligence is enriched every year with over 100 billion transactions,” Dhala said. “The combination of this delivers exceptional accuracy, which we can enable to our customers through these transaction fraud models.”

The post How Turnkey AI Solutions Can Help Payments Stakeholders Mitigate Fraud appeared first on PaymentsJournal.

The holiday season is quickly approaching, and consumers and retailers are gearing up for what’s to come in the world of gift-giving. The economic roller coaster of the past year has given rise to a cautious but optimistic consumer mindset where value and deals reign supreme.

Changing consumer sentiment is driving retailers to adapt and provide attractive incentives to draw shoppers in. Not surprisingly, gift cards are emerging as the stars of the upcoming holiday season and are expected to make up a substantial 43% of the holiday budget, according to Blackhawk Networks’ recent “Better & Better: 2023 Holiday Gift Card Shopper Research.”

To shed light on what to expect this holiday season and offer valuable insights into consumer behaviors, gift card trends, and retail strategies, PaymentsJournal sat down with three industry experts: Jay Jaffin, Chief Marketing Officer at Blackhawk Network; Sarah Kositzke, Director of Research at Blackhawk Network; and Jordan Hirschfield, Director of Prepaid at Javelin Strategy & Research. They dug into Blackhawk Networks’ research, which explores:

Although concerns around inflation and job security are top of mind for many consumers as the economy continues to fluctuate, consumer confidence is increasing. According to Jaffin, this year’s retail outlook looks positive, with more consumers planning to shop for the holidays. That said, consumers are erring on the side of caution, shifting toward fewer shopping trips and fewer locations, conducting most of their shopping online. As a result, retailers need to maximize each visit and focus on providing incentives to attract shoppers.

“I would encourage retailers to really focus on value and deals,” Jaffin said. “When we talk to consumers, roughly two-thirds are planning to change their shopping behavior in some way this year. What we hear is that they’re moving more of their purchases to store brands or off-brands, buying more on sale, and using more coupons.

“In general, they’re buying a little less, and that’s some of the things to keep in mind as we enter the busy holiday season.” 

Javelin research backs up many of these points, Hirschfield pointed out. Confidence is on the rise, with many consumers planning to buy gift cards this holiday season. The key to capturing their interest lies in providing promotional incentives and flexible choices. “We’ve found that (roughly) 84% of consumers plan to buy gift cards, with 72% motivated to make a purchase if a gift card is offered as a promotional incentive,” he said.

Research from Blackhawk Network is finding that holiday shopping will start a little later this year. That’s because there will be five holiday shopping weekends, which will give consumers more time to find promotions and discounts.

“It’s really this mid-late November to early December shopping time when folks are about to begin,” Kositzke said. “For Gen Z, they’re almost entirely beginning their holiday shopping in November and December in particular.” Sarah noted that much of GenZ will be kicking off their shopping on Black Friday, and that they are out there looking for those sales and promotions, and they’re often looking at those new product releases as well.

On average, consumers plan to spend about $770 on gifts this holiday season. Although this amount is relatively flat compared with last year, gift cards are expected to account for 43% of that spending, a significant increase from the prior year.

Gen Z specifically is a driving force, with a 12-point year-over-year increase in its share of holiday spending allocated to gift cards, Jaffin says.

Overall, younger generations, including Gen Z and Millennials, are leading the way in purchasing physical and digital gift cards. Gen Z, in particular, plans to purchase approximately 17 gift cards, with a nearly equal split between physical and digital cards. Older generations are more inclined to buy physical gift cards.

“Gen Z loves to gift, they have more people to think about on their holiday list, and the value and the ability to give them those digital options is really where we’re seeing  that love for gift cards,” Kositzke said. “Not only do they love to give gift cards, but they want to receive them.”

Hirschfield also noted that there’s a growing interest in multi-brand gift cards and open-loop options, and stressed that retailers should consider offering more choice in their gift card programs, with an emphasis on flexible value loads.

When it comes to holiday shopping, younger generations are keen on using digital wallets and stored value. Digital wallets enable consumers to store and spend their gift cards conveniently, and as a result, 72% of consumers who prefer digital gift cards are likely to store and spend them through their mobile wallets.

Sustainability is also becoming a crucial consideration. According to Jaffin, 57% of consumers are interested in gift cards made from recycled materials. That’s a key focus for retailers today, as more are focusing on eco-friendly options, pledging to convert plastic gift cards to paper substrates. As sustainability gains momentum, this aspect will become more important for consumers and retailers.

“Consumers are becoming more conscious of not only the gift card brand or type, but what the gift cards are actually made of,” Jaffin said. “We made a pledge last year to work with our partners to convert the majority of their plastic gift cards to paper substrates by the end of next year. This is going to be a trend that gains more and more momentum.”

Retailers should take an offline and online strategy this holiday season, making the most of all their channels—including in-store displays, online options, and multi-brand gift card displays. Capturing consumer attention in various areas enhances the chances of gift card sales. In fact, by implementing a “be everywhere” strategy, retailers can see benefits that extend into Q1 and beyond, with increased consumer spending, visits, and engagement.

“We don’t always know exactly what people need or want, so having the flexible options available around every corner for consumers is helpful,” Kositzke said.

Emphasizing flexibility in payment options, promoting the value of digital wallets and stored value, and offering a range of digital and physical gift cards can also help retailers cater to different consumer preferences, Kositzke noted.

It’s key that retailers use all available channels to capture the benefits of gift card strategies. According to Hirschfield, 40% of consumers tend to spend more than they normally would when they have a gift card, and 25% opt for more expensive items. What’s more, 30% are inclined to visit stores more often, leading to long-lasting advantages well into 2024.

Shifting the discussion toward employees, Jaffin underlined the value of gift cards as a holiday gesture from employers. He shared insights from Blackhawk Network’s research, which revealed that employees highly appreciate receiving gifts.

“When you hand out gifts at the end of the year, it makes employees feel valued and really helps bring a new energy for the year,” Jaffin said. “Last year, very few employees received gifts and fewer are expecting anything this year, and there’s nothing better than a nice surprise.

“Gift cards are an affordable holiday gift, and they can easily be delivered because with digital gifting, it doesn’t matter where you are.”

The 2023 holiday shopping season is poised for change, with gift cards playing a central role. Retailers that embrace digital and physical gift cards, focus on promoting flexibility, and take a more sustainable approach will be well-positioned to meet the needs of diverse consumer preferences and ensure a successful holiday season.

Despite concerns about the economy, consumers are planning to hit the stores, shifting their focus to value and deals. Retailers need to provide promotional incentives and flexible choices to capture consumers’ interest. Meanwhile, Gen Z is playing a significant role in driving holiday spending toward gift cards, favoring physical and digital options—and retailers should take note not to overlook this group.

Finally, retailers are encouraged to take an omnichannel approach, combining in-store displays, online options, and multi-brand gift card displays to maximize their efforts. By offering a diverse range of gift card options—and, again, emphasizing flexibility in payment methods—retailers can create goodwill, increase spending, and enhance brand loyalty during the holiday season and beyond.

To download BHN’s, Better & Better: 2023 Holiday Gift Card Shopper Research, ebook, click here.

To learn more about rewarding employees during the holiday season, click here to download, The Holidays & Rewards: It’s Good Business, an easy-to-read BHN infographic.

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The post Gift Cards Take Center Stage this Holiday Season appeared first on PaymentsJournal.