By Dale S. Laszig
It's hard to fathom waiting thirty days to balance a merchant account or saving paper receipts in shoeboxes for seven years, but that was once our reality. Forty-odd years ago, screechy modems ferried authorization requests over phone lines, waiting for an answering screech to train and synchronize and eventually complete a handshake. While these gestures still exist, they have been subsumed by more secure, intelligent, agile and transparent digital commerce.
Contrasting yesterday's dial-up POS with today's data-driven solutions demonstrates the payments industry's resilience. And in the fullness of time, today's digital commerce may seem equally quaint to future generations. This article explores the role of intelligence in payments, sharing perspectives from designers and architects of next-generation payment technologies.
Adrian Talapan, co-founder and CEO of Fee Navigator, compared early payment systems to freight trains that moved data back and forth in a preprogrammed, linear way, in what he termed "the old school paradigm." As the payments environment changed, POS systems became more intelligent, he stated, and began to anticipate historical and forecasted trends. "Merchants can better predict risks to their inventories and can better handle variable order flow," Talapan said. "In payments, we are seeing smarter detection of fraud, as well as increased fault tolerance. We are also seeing customer behavior intelligence drastically improving conversions and reducing the sales cycle." Intelligence makes payment solutions resistant to fraud engineering and optimizes performance, security, and operational characteristics, he added.
Talapan additionally pointed out that intelligent, self-learning systems become smarter overnight, citing, for example, that the same Alexa you may have purchased in 2014 can do a lot more now; or you may notice new features in your car, delivered over the air—some of them simply updating existing safety and driving models, like emergency stop, lane following, etc.; and the thermostat in your smart home may learn when you're typically in the house and automatically adjust to your preferred temperature during those times.
Carolina Rojas, senior associate at Distributed Ventures, suggested the old-school paradigm is alive and well in the insurtech sector, where she noted numerous organizations rely on outdated legacy systems. "Few companies know how to implement successful strategies and navigate the disjointed workflows all together," she said. "A successful example would be automating insurance payments from start to finish. This type of technology innovation in the insurtech payment space addresses the need and ability to evolve beyond siloed legacy systems."
Rojas also mentioned she has seen intelligent solutions and touchless commerce scale in the post-pandemic insurtech space, especially with peer-to-peer and business-to-business use cases. Insurance platforms are trying to capitalize on contactless payments, she added, such as buy now pay later, streamlined payment platforms and other fintech advances. However, she predicted that only a few will succeed, and the need for advanced intelligent platforms will only increase as insurtech firms try to differentiate to gain venture capital backing.
Dr. Jack Baldwin, chairman at BHMI, noted that intelligence in payments is not only creating solutions designed to handle the modern landscape, but also solutions that can adapt quickly and effectively to whatever may come next. "This is especially true for the back office, which often gets overlooked," he said. "Many companies are currently using disparate, batch-oriented systems to perform back-office processing for electronic payments."
He pointed out that these legacy systems were not designed to accommodate the current market's high transaction volumes and new payment mechanisms. "Today's rapid-paced payments environment has given us some great innovation, but it has also presented challenges," he said. "Many payment networks, banks and third-party processors that made efforts to update their front-end interfaces are discovering their legacy back-office systems cannot handle modern payments environments."
Baldwin additionally emphasized the need to modernize back-office systems to support not only traditional credit, debit and ATM transactions, but also mobile, real-time and P2P payments. He suggested that intelligence in back-office operations can be increased by adopting a fast, agile, adaptable application environment, which can make the back office more flexible, dependable and cost effective. This, he said, would enable payment companies to process all types of transactions, regardless of type or source, while meeting stringent service level agreements in the face of ever-increasing transaction loads. And being able to access and view data, results and reports at or near real time is a huge advantage, he explained, noting that the ISO 20022 supports these capabilities.
"The new ISO 20022 messaging environment being used by real-time rails around the world is designed to support a broad range of payment types in a wide variety of payments domains," Baldwin said. "As adoption of ISO 20022 continues to grow, companies need to ensure they can allow any type of payment to be brought into a unified payments back office environment, not just card payments supported by traditional ISO 8583 messaging."
Angela Murphy, Ph.D., vice president of business development at Photon Commerce, pointed out that modern payment transactions, built on the ISO 20022 standard, do more than display amounts; they tell payers and payees what a payment is for and why it was made in full, rich, itemized detail. "Conventionally, a payment may only contain four data fields: payer, payee, date, and amount," she said. "The ISO 20022 standard is the new global standard for all payments, which delineates over 300 structured data points for every payment."
Murphy additionally noted that the ISO 20022 standard and its surrounding systems form the foundation of modern, smart, faster payment processing systems, which share the following three attributes:
Payment solutions that don't deliver on these three elements cannot itemize, structure and validate data, she said, adding that they just process payments without providing the rich data, integrations, approvals and ancillary systems that link payments to workflows. In addition, she stated, manual processing systems are prone to processing delays, exceptions, errors and fraud.
"Trends we are seeing in this space include faster payments, real-time payments, data standardization through the ISO 20022, accounts receivable and accounts payable automation, artificial intelligence, machine learning and natural language processing," Murphy said. "Service providers should evaluate the holistic needs of the payments use case, whether they be B2B, B2C, P2P, A2A, or B2G. Payment processing itself is approaching a commodity, but the systems and experience around payment processing is where the value is."
Srii Srinivasan, co-founder and CEO, Chargeback Gurus, agreed that intelligent systems are an asset to payments as well as manufacturing, distribution and environmental management. Commenting on the old-school paradigm, she noted that legacy POS systems lack the resources to advance new trends and are less likely to anticipate customer needs. Without these capabilities, old POS systems can't deliver an exceptional customer experience, and merchants who use them may have difficulty delivering value or retaining customers, she said.
"Old, unintelligent systems are neither KPI-driven nor scalable, nor do they evolve in response to emerging trends," Srinivasan said. "Intelligent systems can be KPI-driven due to their capture of key metrics such as transaction approval and denial rates, false positive rates and their ability to differentiate between true and friendly fraud rates. These systems provide a seamless, frictionless transaction journey for cardholders while creating a high level of friction for fraudsters and malicious attacks."
Srinivasan noted that smart POS systems keep fraud checks in balance by utilizing intelligent routing capabilities to accept payments from cardholders around the world, while maximizing approval rates. These solutions, she added, can also adapt to the changing payments landscape of peer-to-peer payments, mobile wallets, credit cards and cryptocurrencies.
Trends worth noting in chargebacks include high percentages of fraud and disputes occurring in Latin America and other emerging markets, Srinivasan stated, noting Visa released new mandates to help merchants with friendly fraud disputes. The emergence of NFT platforms and marketplaces that accept credit cards for NFT and cryptocurrency purchases are also facing high dispute volumes due to buyer confusion, and buy now, pay later service providers continue to experience high levels of friendly fraud and chargebacks, she added.
Srinivasan pointed out that service providers can mitigate these emerging threats by identifying the needs of merchants and their respective customer bases and offering solutions that can help them grow their revenue. Partner with reputable managed service providers who can help fill gaps by addressing specific pain points or growth needs of merchants, she said.
Stay up to date with evolving industry trends and new merchant solutions by regularly attending industry events, she advised, noting that these activities will help keep your products and services aligned with the ever-changing payments ecosystem while remaining secure, compliant, agile and intelligent.
Baldwin stressed the need for payments companies to make sure the intelligent systems and solutions they leverage are secure. "They need to ensure any application under consideration is PCI PA-DSS or PCI Software Security Framework compliant and listed as a Validated Payment Application on the PCI Software Security Standards Council's website," he said.
Baldwin noted these certifications will affirm not only that the system owner has the most up-to-date data security, but also that system users will be able to access only the information allowed by their configured roles.
"Bottom line: service providers need intelligently designed architectures that will allow them to be competitive in the changing world of payments," he said. "By ensuring their systems can support high transaction volumes for any type of payment mechanism, they can have peace of mind knowing that their back office processing can not only handle today's fast-paced environment, but that it also will not be obsolete in a few years."
As payments experts have noted, secure, intelligent, agile and adaptable frameworks will support future generations of payments applications, devices, networks and platforms. This flexible architecture, combined with flexible, rules-based engines will help clients futureproof enterprises across the payments ecosystem.
Dale S. Laszig, senior staff writer at The Green Sheet and managing director at DSL Direct LLC, is a payments industry journalist and content strategist. Connect via email dale@dsldirectllc.com, LinkedIn www.linkedin.com/in/dalelaszig/ and Twitter dsldirect@DSLdirect.
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