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The Green Sheet Online Edition

January 27, 2020 • Issue 20:01:02

The continuing evolution of payments

By Patti Murphy

The payments landscape has changed dramatically over the past decade. Ten years ago, for example, mobile payments weren't much more than a pipe dream. Today, it's a different story altogether, as mobile apps like Venmo and Zelle spur all players to action.

"Mobile is really maturing," said Jack Baldwin, CEO of BHMI, which specializes in back-office software solutions to support electronic payments. "If you're not there already you need to be playing catch up."

Shahid Mansuri, co-founder of Peerbits, a mobile app company with operations in the United States and India, believes the best is yet to come. "[I]nnovations in the mobile payments niche have just begun," Mansuri wrote in a recent blog post. "In the coming years, more and more advanced mobile wallet technologies will emerge and it might even eradicate the use of paper money altogether." Mansuri said he expects greater adoption of mobile loyalty programs tied to branded payment apps in 2020.

It's a convenience play that cuts across digital payment platforms, said Simon Fairbairn, director of solution development for Western Europe. "Alongside enhanced security, monetary savings and ease of use, digital payment rewards will increasingly become embedded in payments as a value-added service," he said. "With innovative payment terminals on the rise, such as Android, that offer enhanced applications to collect more consumer data, customers will expect more personalized offers."

A new report, prepared by Harvard Business Review Analytic Services for Mastercard, shows strong interest in revamped customer loyalty strategies. Drawing on a survey of 400 executives spanning more than a dozen industries across the globe, the report reveals that fewer than half (42 percent) believe their companies' customer loyalty strategies are effective, and they're looking for more.

As recently as five years ago, executives ranked traditional rewards, such as points and miles, as the top determinant of success for loyalty programs, the report noted. As of last year, those traditional rewards had fallen to fourth place, behind exceptional customer service (cited by 51 percent of executives surveyed), digital and omnichannel access (48 percent) and ease of use (45 percent).

Perhaps even more telling, surveyed executives believe that five years from now, digital and omnichannel access will be the most important customer loyalty success factor (cited by 53 percent), while economic rewards will fall to eighth place, tied at 29 percent with "building a community among members."

"Today's consumer has a bank branch, a retailer and all of her friends within her reach," said Francis Hondal, Mastercard president for loyalty and engagement. "We need to meet consumers where they are, when and how they want to engage," Hondal said. "This means connecting them across channels in a meaningful way, and bringing them high-value services. These are the building blocks for robust loyalty programs today and into the future."

Terminal contactless

One driver of mobile wallet usage is near field communication (NFC), which allows for the exchange of data between smartphones and POS devices. The biggest impediment, until recently, was a dearth of NFC terminals. But that's changing as more terminals and workaround technologies emerge to support tap-and-go payments.

Visa said it is seeing "strong interest" in its "tap to phone" program, which turns smartphones into tap-and-go payment devices. In early January, Samsung introduced a new enterprise smartphone model, called the Galaxy XCover Pro that features Samsung POS. Visa said it has been piloting tap to phone in nine countries where contactless penetration is high, and that Samsung POS has been used in at least one pilot.

In a blog post describing the partnership, Visa said the app is well suited to a variety of industries, including retail, healthcare and logistics. Typical use cases include kiosks, food trucks and self-employed professionals.

Programs like tap to phone leverage the growing base of NFC-enabled POS devices ushered in by EMV. (EMV-compliant terminals typically have NFC functionality built in.) Most major retailers, including Target and CVS, now support contactless payments, which means as many as 60 percent of retail purchases now occur at terminals that support contactless payments (initiated by phones or cards), said Sarah Grotto, director of debit and alternative products at Mercator Advisory Group. Further boosting the trend, several major metropolitan transit authorities have deployed contactless payment terminals, including New York, Chicago and Portland, Ore. The consultancy Strategic Resource Management is predicting a steep climb in consumer adoption of contactless payments this year. "Offering the convenience of contactless can book a significant win over the next 12 months simply by enabling this feature within card portfolios," the firm said.

Financial institutions are tuned into the message. Several major banks, including Bank of America, Wells Fargo and JPMorgan Chase, have revealed plans to offer contactless card options this year. Like mobile payments, contactless is a convenience play. Consumers want quick and convenient service, and tapping a card against a terminal is quicker and more convenient than dipping, Grotto noted.

A July 2019 survey by CreditCards.com and YouGov found 14 percent of rewards credit cardholders have contactless credit cards and have used those cards to make contactless payments; 10 percent said they have the cards but haven't used the contactless feature to make payments.

But the big growth will be in contactless mobile payments, according to predictions by eMarketer.com. "We forecast that proximity mobile payment users will account for 30.6 percent of U.S. smartphone users in 2020, equivalent to nearly 70 million people," eMarketer.com said. "That's still a relatively small number, but as contactless options for transit and shopping increase, we expect that number will continue to show healthy increases in 2020 and beyond."

"It's going to happen," Baldwin said. "People have become very comfortable relying on their mobile devices to run their lives." From the merchant's perspective, mobile holds another potential advantage: lower cost payments, Baldwin suggested. "Mobile gives them an opportunity to tap into other channels that don't have those [interchange] fees," he said.

P2P inroads

Mobile-based peer-to-peer payment schemes, like Venmo and Zelle, have been making significant inroads, which will likely continue, and potentially displace some card payments. "Bypassing the card networks can make [digital payments] attractive to micro merchants," Baldwin said.

Zelle, which is owned by many of the nation's largest banks, handled 196 million transactions totaling $49 billion in the third quarter of 2019. "Today, one in two adults with a U.S. bank account have access to Zelle in their mobile banking apps," said Lou Ann Alexander, group president for payment solutions at Early Warning Services LLC, which operates Zelle.

Venmo, which is owned by PayPal, reported $27 billion in transactions during the third quarter of 2019 and an active user base of 40 million. Square also has entered the P2P field with Cash App, formerly known as Square Cash, and more recently an app specifically targeting businesses, known as Square Cash for Business that links to business bank accounts. Businesses set up a Cash.me page where customers can submit payments.

Estimates by eMarketer.com put the total of P2P mobile transactions at $309.95 billion in 2019, growing to $396.48 billion this year. There were an estimated 69.2 million P2P users in 2019, and that number is expected to grow to 73.8 million this year, according to eMarketer.com. Visa took note of the trend and recently disclosed a blockbuster deal to purchase Plaid, a data network that connects bank info to fintech apps like Venmo. Faster payments creating openings for fraudsters? The appeal of P2P payment schemes is the perception of speed. Recipients receive near instantaneous access to funds, although final settlement, on the back end, doesn't usually occur until end of day or the following business day.

"No matter how fast a payment moves through the network, it still has to be processed in the back office, and that is what will ultimately decide the speed of faster payments," Baldwin said.

The problem is that most banks and companies rely on back-office systems and processes that are decades old and ill-equipped to handle faster payments, he Baldwin added. Faster payments may also prove a boon to fraudsters. "There's not as much opportunity to detect fraud in flight," Baldwin said.

Further complicating the situation, said Trace Fooshee, senior analyst at the consultancy Aite Group, is that many banks have failed to prioritize investments in fraud mitigation on par with digital payment and service platform initiatives.

"Fraud executives are expected to reduce fraud losses while simultaneously making significant improvements to client experience, and with rigorously scrutinized budgets," Fooshee noted. "In parallel with these objectives, these fraud executives are expected to manage a variety of processes that are, for many FIs, still largely manual, within increasingly restrictive compliance requirements – all of this despite double-digit growth in fraud attack rates and losses, and a constantly expanding and ever-evolving digital surface area to defend and protect."

With more merchants adopting EMV terminals, it has become harder for criminals to commit payments fraud, at least in brick-and-mortar establishments. Fraudsters have reacted by moving more activity online.

One alarming trend bubbling toward the surface is synthetic identity fraud, whereby criminals use a combination of real information (such as Social Security numbers taken from data hacks) with fictional information (for example, made-up names). Over time, fraudsters build up the creditworthiness of their synthetic identities, then purchase high-value goods and services on credit, and then disappear.

McKinsey & Co. estimated synthetic identity fraud is the fastest-growing type of financial crime in the United States. Auriemma Group estimates U.S. lenders lost $6 billion to synthetic identity frauds in 2016. And losses continue to climb, said Ken Montgomery, COO at the Federal Reserve Bank of Boston and the Fed System's payment security strategy leader. "Crime rings see attractive opportunities in synthetic identity payments fraud," Montgomery said.

Data breaches are a leading contributor to the trend. Between 2017 and 2018, the volume of personally identifiable information exposed in breaches rose by 126 percent, with more than 446 million records exposed, according to the Identity Theft Resource Center. Complicating matters, this type of fraud is difficult to identify. ID Analytics estimated that upward of 95 percent of credit applications using synthetic identities aren't getting flagged by traditional fraud models, like those used to detect traditional identity fraud.

This is the impetus behind new detection approaches that leverage artificial intelligence and other machine learning tools. "Machine learning has greatly enhanced the ability to detect fraud, and all of the major payment networks are applying this technology through a combination of internal R&D as well as through investments and acquisitions," said Tim Sloane, Mercator's vice president of payments innovation.

Are in-car payments in the cards?

The Internet of Things is making all types of devices smarter – and payments enabled. Ingenico's Fairbairn, said he expects IoT payments to come to cars in a big way. He cited research suggesting 775 million cars will be connected to payment systems by 2023, accounting for $63 billion in transactions that year. "If these estimations are to be achieved, over 2020 we'll start seeing IoT payments for [fuel], tolls and food," he said.

Visa is counting on this. In January Visa revealed it is working with SiriusXM on an in-car payment prototype. A new SiriusXM e-wallet is being designed for integration into dashboards that will allow drivers and passengers to make all kinds of purchases (from gas and tolls to food and movie tickets) using simple voice commands. The app will leverage tokenization, which allows payments to be processed without exposing account details. end of article

Patti Murphy is senior editor at The Green Sheet and self-described payments maven of the Fourth Estate. Follow her on Twitter @GS_PayMaven

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