The earlier, the better, right?
That ancient wisdom would certainly seem to hold true in this quickly changing world of payments, a world being shaped not only by the rise of eCommerce and new transaction technology, but regulatory forces such as PSD2 and its Strong Customer Authentication (SCA) guidelines. What that means, specifically, is that merchants stand to make significant gains from the further use of pre-authorization risk checks when it comes to consumer payments.
That was among the main messages offered by Payments Risk Solutions Manager Dan Jiao of the global identity verification service provider Ekata, during a recent PYMNTS discussion. He gave a detailed view of the payment changes to come in 2020 — and made a case about why pre-authorization risk checks hold so much promise for eCommerce operators in the coming few years.
“It’s great for catching fraud,” he said, describing one major benefit of pre-authorization risk checks. Not only that, but prior to authorization, identifying consumers who pose a low risk of fraud can open up new experiences to shoppers: upsells, loyalty offers and bonuses during checkout. “That might be same-day or free shipping, and value-added services or other promotions,” Jiao said. “It can help with customer retention and loyalty, as well as increase their lifetime value.”
To hear Jiao tell it, pre-authorization risk checks are the wave of the future for payments, even if that future might be a bit slow in coming. The method is already showing promise in the travel industry and in digital goods. As Jiao said, “Those are places where a consumer is a little less patient, and the confirmation/fulfillment process needs to be faster.”
But over time, it seems likely that more merchants will get on the pre-authorization risk check trend, and not only because it can please those impatient consumers (and we are all impatient consumers these days). A robust and accurate pre-authorization checkout and fraud vetting process can reduce operational costs for merchants, Jiao told PYMNTS — because over the long term, it reduces the need for manual review of transactions, which are labor-intensive and expensive. Also, over time, a good pre-authorization process can save money for businesses in other ways: decreased step-up authentications and payment processing fees.
“Pre-authorization risk checks can enable authorization rates themselves to increase by anywhere from 1 percent to 5 percent,” he said. That adds up, especially for a big company. Even so, that ideal is still a ways off for most eCommerce operations. “Ninety-five percent of merchants still do their fraud-checks post-authorization,” Jiao said.
Pre-authorization risk checks aren’t the only potential long-term shift on the horizon. More and more merchants will turn — and are turning — not only to machine learning to fight fraud, but also to true artificial intelligence (see PYMNTS research for a further discussion of what that means). And as FinTechs step up to challenge legacy banks, those upstarts are turning to machine learning and artificial intelligence (AI) to lure customers away from the traditional players that only offer antiquated solutions, as other PYMNTS research has confirmed.
So how fast is this shift to AI really happening in the payments space?
“It’s happening at a surprisingly fast rate,” Jiao said. Speaking from his own experience at Ekata, he said merchant customers are increasingly turning to third-party fraud prevention providers who have machine learning and AI-backed platforms. Rules-based systems are not adapting enough to the more sophisticated fraud landscape.
But the norm never really lasts in this world of payments, not anymore, and certainly not in the new decades. The challenges are mounting with the increased competition — but so are the opportunities.