Physicist Niels Bohr — or maybe it was ballplayer Yogi Berra — once said predictions are hard, especially the ones about the future.
Any sudden shock to the system like we have observed with the pandemic exposes both vulnerabilities and opportunities, especially for payments.
But as to where we are headed — well, that’s a bit tougher to divine.
In a roundtable discussion, the last in the “Powering the Digital Shift” series with Karen Webster, six experts in money movement, fraud prevention, banking and financial technology discussed one sure bet: “Digital optional” is no option as we move toward contactless commerce.
Panelists included Mark Standfield, president at Midigator; Imran Hajimusa, head of Payments Platform at Silicon Valley Bank; Jim McCarthy, president at i2c; Mike Massaro, CEO at Flywire; Drew Edwards, CEO at Ingo Money; and Rob Eberle, CEO at Bottomline Technologies.
“Payments are going to really exist in the context of our behaviors, of our expectations, of our norms, how we're conducting the rest of our lives," said Bottomline’s Eberle.
Setting The Stage
As Flywire’s Massaro said, the shift to the new normal that is still evolving has transformed any number of verticals.
“We run a business that has educational clients, healthcare clients and travel companies that have traditionally had office environments. Now they are being forced into this digital shift,” he said, and therefore have had to boost their digital capabilities.
The technological stage has been set for that embrace of digital transactions with a slew of new payment products and services on offer.
i2c’s McCarthy noted that looking back over the past 10 years, “I wouldn’t have believed the types of structural changes we’ve seen” where the advent of PayPal, Zelle, contactless cards, and mergers and acquisitions that have created companies with full suites of payment products have made the shift easier.
That’s not to say that all stakeholders — merchants, yes, but the financial institutions (FIs) serving them, too — have crossed the digital Rubicon.
As McCarthy stated, “if you don’t have digital capabilities, you’d better get them now,” adding that “I worry about the folks that have historically been a face-to-face, brick-and-mortar business.”
He said community banks and credit unions (CUs) have tended be on the trailing edge when it comes to digital.
And there have certainly been laggards when examining whether certain transaction types have caught up to the digital age.
As Ingo Money’s Edwards said, there’s been very little innovation for decades on the disbursement side of payments.
The recent payouts by the U.S. government of trillions of dollars in stimulus payments — across direct deposits and paper checks — has brought those inefficiencies to light, he said.
Part of that adherence to the old ways of doing business, and clinging to paper checks, offered Silicon Valley Bank’s Hajimusa, is tied to human nature — and the adage of “if something is working, don’t shift it.”
Consumers had not changed their shopping habits until they had to.
(Inertia, added Eberle, is the biggest challenge.)
But as Hajimusa told Webster, we’re likely to see a wholesale uptake of contactless payments, contactless delivery, and even contactless packing.
For companies looking to implement a completely contactless journey across all parts of the consumer journey, it’s important to build scalability in platforms and ensure the technology in place is resilient and adaptable.
For now, and for those payments that are being done digitally — and specifically, through card-not-present (CNP) transactions — there’s been a need to reconsider the risks tied to those transactions, said Midigator’s Standfield.
“Visa and Mastercard and the card brands in the last two years have made more updates and changes to their chargeback rules and technologies than they did in the previous 25 years,” he told Webster.
That landscape had been scaling since before the pandemic occurred, he said.
But the renewed focus on security and dispute resolutions is a critical factor as McCarthy noted, “there’s a whole raft of merchants that are 20 years behind the curve that have quickly had to go online” and take transactions done in bits and bytes.
He cautioned that security is not just a merchant problem, and that as time goes on, we’re likely to see the bad guys move quickly to account takeovers, a tempting target especially given the stimulus payments that have been making their way into bank accounts.
Looking At Digital IDs — And Friction
The questions revolving around security will necessarily move beyond simply focusing on the transaction and will force merchants, issuers and others to examine whether consumers are who they say they are.
Improving friction, commerce and security at the same time will involve looking at transactions in a new way, said Standfield.
Historically, he said, payments firms have focused on “pre-sales” fraud protection, but post-sales protection has been largely ignored. Against that backdrop, friendly fraud has been growing by leaps and bounds.
“The whole identity space is ripe for a ton of innovation because as people become digital, we need to figure out a way to identify the person without a whole lot of friction in order to solve the commerce problem,” said McCarthy.
Standfield noted that “fraudsters are not going to stop being fraudsters” and will try to take advantage of the speed with which consumers and merchants will move to adopt new payment methods.
To combat that fraud, data sharing will be key between issuers and merchants, merchants and acquirers and issuers and acquirers.
“Along those lines, what the [payment] networks are trying to do with network tokens and SRC [secure remote commerce] could be game changing,” said McCarthy, as they help ensure identities and the payment instruments themselves are trusted, which helps with know your customer (KYC) and anti-money laundering (AML).
In the brave new world of life (and commerce) done digitally, questions surrounding data sharing — and privacy — naturally arise. Thus far, said McCarthy, data aggregators have been using data for purposes of monetizing information, where they have been tasked with using it for ensuring identities, among other things.
Standfield said that GDPR and the California Consumer Privacy Act have been well-intentioned, aiming to have consumers control their data, but he said such regulation can “also inhibit the ability to know your customer and even have a tokenized transaction. So, there is a balance that needs to be struck.”
Speed of payments changes the fraud equation, and the balance that needs striking. Edwards termed real-time payments “an ACH killer … it’s moving today’s batch process of banks exchanging files with each other to a Federal Reserve centric master account to an ‘instant’ way for banks to do it.”
But as Eberle said, moving money more quickly means that simple, smart and secure fraud protection becomes essential.
Hajimusa stated that it’s important to differentiate between security and privacy. There are ways to build seven layers of security and authentication protocols aimed at making sure an individual’s identity cannot be stolen or money taken from accounts.
Privacy centers on whether consumers are willing to divulge certain information that can help firms market to them and build convenience into the commerce equation.
“With the new regulations, what needs to be considered is that most organizations don’t even know what data exists in their organization,” said Hajimusa. “They have never done data inventory and don’t know what data exists from the consumer’s side or what kind of data they are ingesting.”
Cross-Border Friction — And Bitcoins And Blockchain
Friction is readily apparent in cross-border commerce, and especially in P2P and B2B payments done across currencies. Edwards stated that the “smokestack” economy has yet to catch up to more digitally agile interactions that mark consumer-facing commerce.
With the aid of technology, payments can smooth over some of the cross-border frictions, contended Massaro. In some cases, facing the fact that bank branches were shuttered, a business owner looking to make a $60,000 wire payment might have faced blocks (or wanted human assistance at the branch) to get those payments to Cambodia or Vietnam.
“There’s an immediate gap,” said Massaro, that can be addressed by platforms and portals that address KYC and AML requirements and manage foreign exchange (FX) and conversion intricacies.
In the bid to streamline and secure payments cross border, bitcoin and digital currencies have been much in the news, as has blockchain.
The current crisis, said Massaro, should have been a turning point for digital currencies. Cryptos in particular, have promised a “race to zero” for costs tied to moving money — but the costs are actually a result of regulations and dispute frameworks, which cannot be taken out of the equation.
Added Massaro, “I don’t see people putting all their money into crypto in a crisis.”
Looking At The Future
Looking out at the emergence of digital and connected commerce ecosystems, said the panelists, the point of sale (POS), as defined by the terminal or checkout page, is likely to disappear as we transact across phones and digital wallets, and all is done in contactless fashion.
There will be sensors, different technologies, different ways to detect who you are and where you are, McCarthy said. Consumers will be able to authenticate purchases with checkout-free payments.
And on a larger scale, predicted Eberle, there’s likely to be more deal making among payments players — from traditional FIs to FinTechs.
Said Standfield, “Best of breed technology solutions are already being produced, and those are going to grow a little bit to where you can have an ecosystem that is more interconnected,” especially as CNP payments increase.
“We're all headed towards a future where buying things and getting paid is going to catch up and meet in the middle,” Edwards said. “It's got to be easy for money to move in both directions.”
And according to McCarthy: "The future of payments is guaranteed to be more personalized and tailored. Firms are going to have to really dive into their customers, what their customers want and need. If you're not tailored or personalized, somebody is going to beat you.”