5 threats that keep fintech execs up at night
E-commerce, mobile and faster payments are making a whole new world of experiences possible for consumers, merchants and financial institutions — but gaps linger that could hinder or even harm progress.
Poor integration, fraud, inability to handle volume spikes, user experience and a lack of interoperability among parties all stand in the way. Any latency, disconnect or financial loss turns away the users that are necessary for these new innovations to succeed.
PaymentsSource spoke about these challenges and opportunities with Randy Schmidt, chief operating officer of Houston-based ATM and online payment company CV Systems; Jack Baldwin, chairman of Omaha-based electronic payment, POS, mobile and prepaid technology provider BHMI; and Mickey Goldwasser, vice president of Glastonbury, Conn.-based payment technology company Payrailz.
Here are five of their takeaways on how to best navigate an environment that is at once fraud with risk and full of possibility.
In the background, but not invisible
Most users don’t see the back office, and may not even be aware of its role. But there’s no chance of success unless of merchants, issuers and processors can link together behind the scenes.
“The back office has to maintain a running record of payment participants and reconcile those positions,” said Baldwin. “And that has to be performed in a timely manner.”
That was easy for decades, when updates could happen overnight and most money moved via paper. But the new payments market includes mobile transactions, internet of things, wearables, and even cars. Not to mention gig economy workers and micro merchants.
Mobile commerce and irregular payrolls can stress back-end systems, which can be cumbersome to upgrade or replace easily. And the internet of things brings about new fraud threats that can crop up almost instantly.
“The back office is where all of the balancing, validation and settlement takes place as the number of payment types expand,” said Schmidt.
There are emerging technologies, such as APIs and cloud hosting, that can help firms manage payment options and spikes in volume.
“The back office isn’t an afterthought anymore,” Goldwasser said. “There are tools that allow people to see what’s coming and going, and where there may be breakdowns in the system.”
Is there a such thing as too much money, too fast?
New payment types, or a popular app, can cause volumes to spike — as can a special shopping day such as Black Friday, Cyber Monday or Singles’ Day. These spikes can stress the user experience on mobile apps and also create delays or glitches in processing.
Executives say the right mix of software and hardware is necessary to create a scalable system that can accommodate rapid changes in volume.
“If you deploy faster hardware or expand the hardware you have, that’s still going to get into limits,” Baldwin said.
A particular concern is creating an ecosystem that can handle an increasing number of payments, though in much smaller amounts as mobile commerce systems take hold.
That requires improvements in monitoring transaction volume to better inform companies about how and when payment spikes may occur.
“Working in parallel to take advantage of the volume is a challenge that’s hard to achieve,” Baldwin said.
Finding the speed bumps of faster payments
Faster payments and real-time processing have been goals for years, particularly in an age of omnichannel shopping and P2P transfer apps. Since one of the goals of P2P is to pivot into other payment types, such as retail sales or insurance disbursements, transaction processing is more complicated than the simple concept of “faster.”
It’s here where the back office comes into play again, said Schmidt. “It comes down to how a push for faster payments impacts the back office. Before, you could have a couple of ACH transfers a couple of times per day. But now it has to happen a lot more.”
Goldwasser said his firm has built more tools to find points where a payment may get stalled in the workflow, or at a particular party in the transaction. Then it makes an adjustment.
There are also differences in how financial apps manage funds that can create challenges across the entire market, Baldwin said. In some cases, the P2P payment is nearly instantaneous for the users, but the actual cash moves a day later between the financial institutions. “That opens up an opportunity for fraud,” Baldwin said.
One model is Australia’s national faster payment system, which is designed to manage processing for disparate transfer services, allowing settlement in seconds, Baldwin said. “In the U.S., we really don’t have a national system for this,” Baldwin said.
Who pays for new payments?
Upgrading to mobile payments, or faster payments, involves an investment. Someone has to incur that cost.
“We want faster payments but we can’t pass along a lot of fees to consumers,” Goldwasser said. “We can’t tell them we want to make things faster for you but charge you more.”
The expense of adding a new payment service, such as real-time payments or P2P (or a combination of both), results in tricky math that measures customer churn and cart abandonment against higher purchase amounts and the stickiness that can accompany a good user experience.
Other complications arise from the number of parties that may touch a transaction, with each attempting to extract a fee, Baldwin said, adding his firm often gets asked to help determine the mix of who gets a fee for which part of a transaction, and when.
“Banks, merchants, processors for the banks; processors for the merchant; and card networks all want part of the action,” Baldwin said. “The trick here is to be able to keep a running record of fees and being able to move money.”
Finding common ground — or forcing it, if necessary
Advancements such as distributed ledger and digital ID require cooperation among competitors and between different industries. Digital payments can include merchants, banks, processors, fintechs, venture capital firms and governments.
These parties don’t always work together but will likely need to if shopping, payments, ID and government transactions are to be ubiquitous and international.
“A lot of what we have to do is in different rails, but how can we take advantage to streamline where we can?” Goldwasser said. “Consumers don’t really care. They just know they want to pay.”
Encouraging transparency and more open standards for processing, faster payments and other digital advancements would encourage more transparency, Schmidt said. Given how easily technology-driven disruption can occur, the standards group concept should be encouraged, Baldwin said.
Baldwin mentioned the national Australian payment system as one example, and mentioned group efforts to move the Federal Reserve’s framework for faster payments as examples.
“Another good example of this is PSD2,” Baldwin said, adding models and standards for open banking could work in other markets. “In effect you have the European Union guiding how banks should open up to fintechs.”