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The Green Sheet Online Edition

February 26, 2024 • Issue 24:02:02

AI brings new opportunities to payments

By Victor Orlovski
R136 Ventures

Ecommerce continues to grow unabated. The global ecommerce market is projected to grow from $5.2 trillion in 2021 to $8.1 trillion by 2026. The number of digital buyers worldwide will also jump from 1.3 billion in 2014 to 2.6 billion at the end of 2023 (see tinyurl.com/mup9bth6). And the footprint of e-commerce is expanding as well. Today, social commerce, i.e., purchases made on social media networks, is rapidly growing, with sales expected to top $144 billion by 2027 (see tinyurl.com/23422u5z).

And cyberfraud continues to plague ecommerce as well. E-commerce merchants in North America and Europe spend 10 percent of total revenue on fraud management. Their peers in APAC countries spend 15 percent and those in LATAM countries, 19 percent. Merchants lose $207 for every $100 of fraudulent orders, including wholesale, shipping and fulfillment, chargeback, and processing costs (see tinyurl.com/na8ahptt).

The increase in transaction volume, continued high rates of cyberfraud and consumers' interest in a more seamless payments process create the need for new levels of payments innovation. The integration of artificial intelligence (AI) addresses all three trends and has the promise to dramatically improve the payments experience for consumers, banks and merchants.

However, AI can also be used by fraudsters to improve the means of fraud especially in the area of social engineering. Thus the AI revolution will continue a never ending race of fraud generation and fraud prevention. But let's focus now on a positive aspect of AI.

AI strengthens payments infrastructure

AI improves the infrastructure of payments in five key areas. First, it reduces fraud. AI ingests enormous datasets and applies advanced algorithms to identify patterns and anomalies that are indicative of fraud. It provides continuous monitoring and real-time analysis to identify anomalous transaction patterns and then take appropriate action.

It also provides enhanced identification, authentication and authorization through tools such as biometric recognition and multi-factor authentication (MFA). These capabilities enable banks to detect and prevent fraud in near real-time. Ultimately, AI will learn fast and will be able to predict possible threats better than humans.

AI enhances know your customer (KYC) risk assessments by analyzing engagement among customer accounts, merchants and banks to detect suspicious activity. It can assign risk scores to customers based on factors such as location, transaction history, account balance, spending patterns and more. It then can require extra verification processes for customers it deems higher risk.

AI further supports KYC through monitoring activities such as checking that a business's description provided by the merchant is consistent with its website content. AI may be able to perfectly distinguish human activities versus other algorithms.

Next, AI improves speed and efficiency. It automates transaction processing to improve customer satisfaction, automatically categorizes and analyzes transactions, enabling banks and merchants to better track spending behavior; forecast revenues, inventory and staffing; and to analyze purchase trends. It also automates repetitive operations, both reducing errors and making more human resources available.

Creating a more personalized experience is another way AI strengthens the payment infrastructure. It enables merchants to make more customized offers and banks to offer additional banking products to their customers, both of which increase transaction volume.

AI-driven customer service can answer many of the most commonly asked questions regarding payments, refunds, status of transactions and more. This results in higher customer satisfaction as well as reduces bank and merchant costs. Some AI tools already make it extremely difficult to impossible to realize that the customer is interacting with a machine not a human.

Finally, AI is a valued capability in lending to provide more comprehensive risk assessment in real-time. It can analyze large amounts of data to assess the risk associated with lending to specific individuals or businesses, while also providing better assessments that can result in more educated lending decisions.

Examples bring AI in payments to life

To underscore the benefits AI can bring to the three key players in payments: merchants, banks and consumers, below are two examples of AI in payments at work:

Merchants face a wide range of challenges as they compete for and try to retain customers. Many such challenges stem from the rise of ecommerce and more recently social commerce. Other challenges arise from the continued disruptive effects of the COVID-19 pandemic. A key strategy for attracting and retaining customers is optimizing the customer experience whether the transaction is online or in a brick-and-mortar location.

By accelerating transaction monitoring, merchants can approve payments more quickly and avoid keeping customers waiting, as well as reduce fraudulent activities. Retailers can automate or dramatically streamline checkout, which can help in-store customers avoid queues and help all customers check out faster. Improved transaction analysis facilitates offering customers personalized promotions, often in real-time before they check out, to further drive sales.

Banks and merchants have periodically had difficult working relationships. AI can help banks make the engagement more frictionless by offering new banking solutions that protect merchants from fraud as well as streamline the payments process. It also arms banks with the requisite information to provide credit assessments more quickly and accurately, assisting with better lending decisions.

Real-time analytics help banks make better decisions in their relationships with merchants.

While AI is not a panacea to cure all the ills of the payments industry, it does address several issues that have hindered creation of a better experience for merchants, banks and consumers alike. Faster decision making, more accurate decisions, enhanced flexibility and increased personalization all lead to a more responsive payments industry.

However, as with any powerful technology, there need to be guardrails to protect the entities AI is deployed to serve. That will be the subject of my next article. Like in many other areas, we will witness a rapid evolution of payment services through AI transformation and Web 3.0 adoption (blockchain rails) and rapid development of new payment solutions compared to the revolution the payments industry faced in the early 2000s. end of article

Victor Orlovski is the founder and managing partner of R136 Ventures, an investment firm targeting mid- to late-stage startups with a focus on the United States, Israel and Dubai. He is recognized for his expertise in fintech, ML, AI, IoT, marketplaces and high-performance IT platforms. Victor authored From Rhino to Unicorn: How Fortune 500 Companies Can Evolve for the Digital Era, a book that sheds light on the challenges of digital transformations in the business world. Contact him at victor@r136.vc.

The Green Sheet Inc. is now a proud affiliate of Bankcard Life, a premier community that provides industry-leading training and resources for payment professionals. Click here for more information.

Notice to readers: These are archived articles. Contact names or information may be out of date. We regret any inconvenience.

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