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PaymentsJournal
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How Rules-Based Fees Engines Drive Innovation
Dec 5, 202400:15:43Tap to summarizeOrganizations seeking more flexibility and sophistication in devising transaction fee and commission structures are increasingly turning to rules-based fees engines. Billing systems are designed to handle invoicing and collect payments, but they are limited in their ability to help companies create new fees and commissions. Rules-based fees engines allow payment processors to stay competitive and profitable, enabling them to offer new value-added services, develop creative incentive programs, create new revenue streams, and respond quickly to market shifts. In a recent PaymentsJournal podcast, BHMI’s Chief Technology Officer Mike Meeks and Senior Program Director Cheryl Fitzgarrald spoke with James Wester, Co-Head of Payments at Javelin Strategy & Research, about the advantages of rules-based fees engines and who benefits from them. Developing the Solution Rules-based engines allow fees and commissions to be configured from any combination of attributes, such as the payment method used, the amount, the merchant category, and the time of day the transaction occurs. Unlike traditional billing systems, a rules-based fees engine provides the ability to measure and test the financial viability of new fees and commissions before they are implemented. “Back in 2004, we were approached by one of the country’s largest debit networks, which was not able to introduce new products or new pricing strategies without long software development cycles,” said Meeks. “All of their rules for how they price things were embedded in code, which made it very slow and costly to roll out new structures and to respond to what their sales teams were asking them to do in a timely manner.” “They needed a solution that was flexible and could meet unforeseen future requirements,” he said. “That’s what drove us to the concept of a rules-based engine and the kind of open-ended capabilities it would provide. For more than 20 years now, we’ve been implementing these solutions for companies all over the world.” This solution gives companies the ability to be creative and innovative, supporting any business opportunity, client relationship, or product offering that marketing and sales bring to the table. It also speeds up time to market, as new fee and commission structures can be quickly configured and implemented. “Research is showing that there is a requirement now in payments for companies to be able to pivot quickly, to be able to bring products to market quickly and to not necessarily be held hostage by those development cycles,” Wester said. A modern rules-based fees engine should have the flexibility to create any type of fee or commission on any type of payment transaction. This includes card-based transactions as well as account-to-account and real-time payments. It should also have no limitations on the types of fees or commissions that can be configured and should allow for additions and modifications without requiring software changes or downtime. Another important factor is that the system must be able to access payments data in real time, applying the appropriate fees or commissions while the transaction is still in flight. Finally, rules-based fees engines should provide companies with a real-time view of fee revenues, enabling them to analyze the financial impact of those revenues and easily determine if adjustments are needed. Under the Hood A rules-based fees engine integrates data from multiple sources. The most common way to access data from these sources is real-time APIs, but in some cases, automated file-based mechanisms are required, depending on what is supported by the originating data source. “The typical sources that we see are credit and debit card transactions that an authorization system is writing to a transaction log file, a clearing system that creates a clearing file for POS dual message systems, and a card network that creates a settlement reconciliation file,” said Meeks. “A modern rules-based fees engine can use data from any and all of those sources to assess fees and commissions as a transaction is being processed.” Once that data is collected, companies have discovered a wide variety of use cases for the technology. “The possibilities are unlimited,” said Fitzgarrald. “Some common use cases would include things like calculation of gateway fees, processing and service fees, and recurring fees. They are also used to calculate many different types of commissions. If you think about it, a commission is just like a fee, but the money goes the opposite way.” Opening Up Creativity Rules-based fees engines have allowed companies to be more creative with their services and pricing structures. Fees can vary based on time sensitivity, such as higher fees during peak business hours and lower ones during off-hours. Companies can also introduce fee models tied to loyalty programs or specific merchant partnerships, incentivizing behaviors that increase transaction volumes or customer loyalty. Once a company implements a rules-based fees engine, the infrastructure allows them to better analyze and address important questions like which fees bring in the most revenue, which commissions provide the most incentive, and whether a particular service can be expanded or rolled out to other customers. “One of the amazing parts of this is the approach to testing,” said Wester. “Testing is very difficult and time consuming. The idea that you can test a product or a fee, and pull it back if it doesn’t work, gives you a tremendous amount of flexibility.” Any company that processes transactions and has a need to calculate fees and commissions can benefit from this technology. “Probably the single most important reason that I’ve heard for people adopting rules-based fee engines is that they are money makers,” said Fitzgarrald. “They allow the company to rapidly configure creative fee and commission models and let them pivot quickly in response to changing market conditions. All of this Is done without the cost and delay of code changes.” Learn more about maximizing your pricing and fee structures.
Transcribe →As Payments Speed Up, Slowing Down Fraud Is More Critical
Dec 4, 202400:20:59Tap to summarizeAs the world hurtles headlong toward real-time payments, speed and efficiency have often been prioritized over security. However, with faster payments comes faster fraud, and just as organizations deploy technology to streamline their systems, criminals are deploying complex schemes on a global scale. In a recent PaymentsJournal podcast, Dal Sahota, Director of Trusted Payments at LSEG Risk Intelligence, and Brian Riley, Director of Credit and Co-Head of Payments at Javelin Strategy & Research, discussed the prevalence of fraud, the challenges it presents as payments accelerate, and the ways organizations can defend themselves. Sophistication at Scale Criminals seize upon any weakness they can exploit. They might imitate genuine companies or individuals using deepfake IDV profiling and attempt to manipulate organizations, or use authorized push payment scams to defraud vulnerable individuals. “Is there ever a day where I don’t hear a new anecdote about fraud, or new evidence of fraudsters’ sophistication?” Sahota said. “The sophistication is at a scale we’ve never seen before, and it’s across the globe. It’s not one or two individuals, its highly sophisticated networks that are creating a dramatic impact and financial consequences across the ecosystem.” Traditionally, payment systems had built-in delay payment processing, particularly to provide a buffer for merchants, customers, and institutions. The added time gave all parties an opportunity to ensure that the transaction was legitimate and authorized. As technology has accelerated payment processing, the objective has shifted to delivering funds to recipients in real time. However, this eliminates the longstanding safety net, as instant payments are often irrevocable. “A good example is credit cards, which traditionally took three days to reconcile,” Riley said. “It was practical because the business model was built in the 60s and 70s and that delay was inherent. Now even debit card payments, or a clearance on a check, they happen in a snap. It’s important to have controls on the front end of the process rather than on the back-end settlement.” A Perfect Storm Guardrails are even more critical as cross-border payments gain traction. Fraud is more difficult to catch when payments are sent across different jurisdictions, and criminals know that. “It’s a payments perfect storm where on one side you have faster payments, which create a lot of benefits across the marketplace,” Sahota said. “But at the same time, on the right-hand side of that storm, the deep clouds of fraud are exposing vulnerabilities due to the speed at which payments can move today.” Faster cross-border payments face issues on several levels. Some countries have fraud controls built into their financial infrastructure that make it simpler to conduct bank account verification, and to identify and share data on fraudulent accounts and cards. “Banks are typically linked through the central bank, so there’s an easier flow in countries like the U.S. or Canada,” Riley said. “Without that link, there’s no universal banking rule for fraud mitigation or vetting payments. You have that complexity where it’s going faster, it’s crossing borders, and countries have different standards for fraud management throughout.” High Exposure Fraud vulnerability is especially pronounced in industries that are less regulated or lag behind in adopting digital payment processing. These organizations are more likely to rely on paper-based or email-based communications, which create exploitable weaknesses for criminals. Authorized push payment fraud, where criminals send phony invoices or pose as vendors, has become a rampant threat. Criminals know it can be difficult for larger organizations that receive invoices from multiple supply chains and multiple vendors to keep tabs on each invoice. “When an update comes through from a vendor that their bank details have been updated, there aren’t effective ways for companies to carry out verification on all those types of invoices and all the updates coming through,” Sahota said. “That creates high exposure on the side of corporates, who might not have the anti-money laundering or fraud controls to mitigate that exposure.” Within the payments infrastructure, there is often an assumption that companies will establish their own frameworks to manage risk. In contrast, regulators typically assume that consumers lack the knowledge or the resources to protect themselves. While consumers protection is crucial, the risks faced by organizations can be equally damaging. “Instead of consumer payments where you’re moving high-volume, low-value payments in the thousands of dollars, corporates are moving low-volume, high-value payments in the millions, or tens of millions of dollars,” Riley said. “If you picture a multinational company where invoices are coming in, It’s a great environment for fraud.” An Array of Protections Because criminals are constantly probing for weaknesses, organizations require multiple layers of defense. Protections should be in place at every critical touchpoint: during customer onboarding, when users make account changes, and as transactions occur. “It’s not one defense, it’s multiple defenses,” Sahota said. “At any touch point where a customer—or a potential fraudster—is engaging with your business, you want controls and defenses in place. Continue to update them on a cyclical basis because as criminals get smarter, they’ll find ways to sophisticate and infiltrate an enterprise. “ One of the reasons why it is so critical to have ongoing fraud prevention initiatives is because, in many large companies, there can be delays in implementing new solutions and procedures. On the other hand, criminals don’t need meetings and approvals to shift course. “How do we get in front of the problem and get ahead of the fraudsters, when they seem to be somewhat ahead, if not way ahead, of the market?” Sahota said. “The agility of the fraudster means not all these problems can be solved by one mechanism.” The Right Hands In discussions about innovation, faster payments, and new fraud prevention solutions, the impact of fraud can sometimes be dismissed. “We should not lose sight of the emotional impact fraud creates,” Sahota said. “It could be for anybody—brothers, sisters, moms, dads, grandparents—there’s no immunity here. At the corporate level there can be reputational impacts, but there are also impacts to employees. If an accounts payable member pushes out a payment to a fraudulent vendor, they may have the fear of being fired or facing repercussions.” Fraud has such far-reaching impacts on both a corporate and individual level that it should always be top of mind for organizations. That is especially true as faster payments continue to gain traction. To combat that threat, many companies are turning to solutions like LSEG Risk Intelligence’s Global Account Verification platform. The platform was specifically designed to combat authorized push payment fraud—it is a global account verification product which allows customers to input key data elements and verify a recipient before a payment is issued. “It provides greater certainty that you’re not getting duped out of funds, that you’re not getting scammed,” Sahota said. “There is greater certainty at the point of payment initiation, so an organization knows that the money is going to land in the right hands, and not the wrong hands.”
Transcribe →Prepaid-Powered Loyalty Programs Drive Customer Engagement for Merchants
Dec 3, 202400:23:00Tap to summarizePrepaid cards are in the midst of a dramatic transformation. With the incorporation of digital wallets, contactless payments, and artificial intelligence, prepaid cards have quickly become one of the most popular payment tools. In a recent PaymentsJournal podcast, Mani Farhang, Vice President of Product at Fiserv Gift Solutions, and Jordan Hirschfield, Director of Prepaid at Javelin Strategy & Research, discussed the key innovations occurring in the prepaid space and the ways merchants can leverage them to drive customer engagement. A Generational Shift The prepaid card market was once dominated by financial giants like Visa and Mastercard, but PayPal and Apple have emerged in the industry. And it’s no coincidence that these two companies also offer two of the leading digital wallets. “The themes in the industry are the broader shift to digital payments and increasing integration into first-party and third-party wallets,” said Farhang. “Our research indicates that 70% of consumers have downloaded a merchant app to store gift cards and fulfill loyalty rewards. This is driven by a generational shift—millennials and Gen Z are more likely to use digital gifting and take advantage of stored value in loyalty programs.” In the prepaid industry, Starbucks has been the beacon for other brands to follow due to its success with end-to-end loyalty programs. One important aspect of Starbucks’ prepaid program is how it bridges between physical and digital gift cards. For many consumers, a physical gift card is their introduction to a brand. Organizations who follow Starbucks’ lead and offer customers the means to digitize their cards into a stored-value wallet can use the initial interaction to introduce consumers to their loyalty and reward program. “That incentivization makes for a more immersive experience for the consumer, not just in gifting but in self-use,” Hirschfield said. “There is also the opportunity to engage customers beyond the value of the initial card. For merchants, they don’t want the initial prepaid card to be the only interaction—they want it to become the start of a cyclical relationship.” Lifetime Value Merchants have an opportunity to expand their prepaid program by upgrading their payments terminals to support contactless payments. Contactless payment through near-field communication (NFC) technology has revolutionized the payments industry, and NFC has begun to gain traction in prepaid. There has also been the emergence of omnichannel, multi-purse wallets, which are first-party wallets that act as stored-value containers for multiple funding types. These wallets give consumers multiple ways to fund their stored-value wallet, whether through gift cards, pay-by-bank, debit cards, or credit. For merchants, it’s another way to engage and reward loyal customers. “Moving forward, there is the opportunity for brands to offer rebates and rewards, and even integrate third-party health and wellness programs into their digital ecosystem,” Farhang said. “The orchestration of disparate payment instruments into one ledger is advancing the integration with contactless payments.” These instruments are frequently contained in digital wallets, which are increasingly becoming the primary option for consumers, even in brick-and-mortar transactions. Businesses should have a strategy to leverage digital wallets so they can reward consumers and pre-load funds into wallets, which is a key opportunity to offer discounts and create exclusivity. Many mid-tier businesses utilize platforms that provide white-labeled apps and digital wallets that can be integrated with a merchant’s existing app, which allows them to merge loyalty points from multiple brands into a single source. Though first-party wallets are a powerful tool, third-party wallets like Apple Pay and Google Wallet should also be incorporated in an end-to-end loyalty program. “The more you engage with a customer the more you remove them from the traditional transaction process and bring them into a lifetime value scenario,” Farhang said. “Acquisition costs will decline because the brand is driving higher engagement. It can be a powerful tool for merchants because prepaid cards can increase the amount of the average order and drive repeated transactions.” The Behaviors of Purchase Making prepaid transactions more secure is another way to increase customer satisfaction. Fraud is a hot-button issue within the prepaid space, but it’s also an area where another emerging technology—artificial intelligence—can make an impact. AI’s superior pattern recognition abilities make it an efficient tool for detecting fraudulent activities in real-time. “AI can be implemented to understand if the behaviors of purchase match the existing behaviors of the customer we have engaged with and understand,” Hirschfield said. “The less anonymous the purchases, the more those technologies can identify when purchases seem suspicious. Fraud and scams won’t ever be eliminated, but the prepaid industry can take more steps to mitigate them.” E-commerce merchants can use AI to vet both B2B and B2C accounts, because machine learning can collate signals from a range of business data and fraud detection programs in near real-time. This functionality can help merchants with decisioning and authorizations, which is often a convoluted and cumbersome process. There are also ways to implement technology that can reduce fraud at physical locations. At a retailer, a cashier might get an alert if something about a purchase looks suspicious, and they could ask the customer a series of questions to ensure the purchase is legitimate. Overcoming Barriers Although fraud will always be a concern, it hasn’t slowed the rapid expansion of the prepaid market. Many businesses want to offer branded prepaid cards, but there are often barriers to entry. For this reason, third-party platforms have emerged to provide merchants with a way to get their prepaid products to market sooner. Prepaid-as-a-service has been driven by the overall shift to digital payments, but it is also extremely effective in certain use cases. In the gig economy, for instance, prepaid cards are often used as a payment instrument for freelance contractors. Many governments utilize prepaid cards to disburse payments to their citizens for various reasons. Corporations are also increasingly giving prepaid cards to their employees as incentives for loyalty or performance. “Whether it’s a retailer or a government entity, their priority is serving their customers or citizens,” Hirschfield said. “The best practice is often for them to focus on providing their products or services and implement best-in-class back-end systems to run their prepaid programs.” The Core of Change To achieve an optimized prepaid program, organizations will have to leverage new technologies, particularly platforms that facilitate personalization. Merchants have more customer information than ever, and AI can use that data to supercharge recommendation engines, making them more contextual and customized. Artificial intelligence is also the engine used to create the artwork and messages that drive the personalized wrapping and unwrapping experiences that have become a popular part of digital gifting. “Digital gift cards are on the rise, and digital wallets will continue to be at the core of change as more of our lives become digitized,” Farhang said. “The move to digital will continue, and there will be a convergence with the physical in a single stored ledger. The ground is shifting rapidly in the prepaid space—though gift cards are one of the most common applications for prepaid.
Transcribe →How FIs Can Get Ready for Nacha’s Upcoming New Rule
Nov 20, 202400:22:01Tap to summarizeAs fraudsters become more innovative in their schemes, Nacha is rolling out new rules to address emerging fraud risks, particularly scams involving business email compromise, vendor impersonation, and the increasing use of money mules. These key changes, centered around the ACH rules, began rolling out in October and will continue through 2026. In a recent PaymentsJournal podcast, Glenn Fratangelo, Head of Fraud Prevention Product Strategy and Marketing at NICE Actimize, and Suzanne Sando, Senior Analyst of Fraud and Security at Javelin Strategy & Research, discussed what financial institutions need to do to enhance their fraud detection programs to better protect both banks and customers. The Growing Threat There’s no doubt that authorized fraud is on the rise. Fraud threats have increased in both volume and complexity, especially as payment innovations evolve to keep up with advancements in technology, as well as consumer and business needs. “Javelin has noted these increases over the last few years in terms of imposter scams, fraud, and other new activity,” said Sando. “Anecdotally, we’re hearing so much about imposter activity, which is becoming more sophisticated and convincing. It relies on that sense of urgency for the unsuspecting customer to act, and it’s not going to go away anytime soon. The digital and fast-paced nature of payments has really emphasized the importance of dealing with the problem.” In the past, Receiving Depository Financial Institutions (RDFIs) managing ACH transactions on behalf of their customers could take a more reactive approach, handling each transaction as it came through. The responsibility for detecting fraud primarily rested with the originating institution, or ODFI. However, the new rules now hold RDFIs accountable for catching fraud in real time—or as close to real time as possible. This shift means actively reviewing suspicious activity, flagging transactions that seem off, and taking the initiative in returning funds that do not belong in certain accounts. RDFIs can now return questionable transactions, and ODFIs have more leeway \to request returns when issues arise on their end. Starting in 2026, these monitoring requirements will become even more stringent. Increasing the Burden In terms of operational burden, RDFIs will now bear greater responsibility for real-time fraud detection and case management to effectively identify and prevent fraud. “Traditionally, that fell under the purview of the ODFI, but with the shift RDFIs will have to dedicate resources to monitor suspicious transactions and potentially fraudulent activity that is incoming, something they previously did not have to do,” said Fratangelo. “That’s going to create increased workloads for an already stretched operations team, which will now be required to flag and investigate suspicious incoming transactions in real-time.” Larger financial institutions will need to implement new machine learning models, which will require additional governance time and introduce another layer of complexity to their existing fraud detection systems. “Larger institutions may have the capacity and ability to scale their teams, but we all know quality investigators are hard to find,” Fratangelo said. That’s why there’s a ramp up period to train analysts and investigators and get them up to speed.” Smaller institutions will face even more difficulty, as they often lack effective automation. As their transaction volumes grow and new alerts are added, scaling up their workforce can be cost-prohibitive. These costs are sometimes passed on to customers in the form of lower interest rates or higher fees. Maintaining Business As Usual Generative AI and deep fakes are making this situation even worse, exposing corporations to business email comprise and account takeovers. Previously, the RDFI took a passive approach to matching account numbers, but now it’s not just the account number that needs to match—the individual must also be verified, and the organization needs to ensure the recipient is not a bad actor. “It can become more difficult to maintain business as usual if you’re a smaller institution, like a community bank or credit union,” said Sando. “With operational shifts like these, there are often also impacts to the customer experience for the customer, particularly when financial institutions personnel are now faced with spending significantly more time manually reviewing suspicious transactions instead of spending time with their everyday customer needs.” For financial institutions, fighting these threats involves more than just securing incoming funds. They need to focus on the accounts and applications they receive, ensuring that they aren’t being created with synthetic or fraudulent identities. “Fraud is all interconnected,” said Fratangelo. “It’s not just a singular fraud typology that’s coming through. But we have to follow the breadcrumbs, as we’re seeing more responsibility shift to receiving banks to address the current issues. Ultimately, it’s about protecting customers, and we need to ensure protections are in place to protect those customers. Bad actors can’t have access to these funds.”
Transcribe →During a Hectic Holiday Season, Gift Cards Continue to Be a Reliable Bet
Nov 19, 202400:19:49Tap to summarizeThe holiday season is here, bringing with it a host of celebrations. From office parties to family gatherings, shoppers are navigating an evolving landscape of gift-giving traditions. In our latest podcast episode, we dive into how consumer trends, new technologies, and the timeless appeal of gift cards are shaping the way people are gifting this season. In a recent PaymentsJournal podcast, Sarah Kositzke, Director of Research, and Jonathan Soffin, VP of Global Brand & Product Marketing at Blackhawk Network (BHN), chatted with Jordan Hirschfield, Director of Prepaid at Javelin Strategy & Research. They discussed the results of BHN’s Holiday 2024 Shopper and Gift Card Insights, the trends driving holiday gift card purchasing, and the accelerating momentum of the prepaid industry. Moments of Celebration One of the most notable trends in recent years is that consumers are no longer buying gifts for just a single occasion. Instead, they’re shopping for multiple events throughout the holiday season, including school occasions, office parties, and get-togethers with friends and extended family. “There are all these great moments of celebration throughout the holiday season that often require gifts,” Kositzke said. “One of the things that we’ve been tracking is how consumers determine what the right gift is for different people across different events. How are they going to figure out what’s the right thing to bring for grandma, their daughter, or a co-worker?” According to BHN’s research, roughly half of consumers will directly ask recipients what they want, while others will source ideas from family and friends. Some shoppers even check social media to see the products or services the recipient has liked on Instagram or Pinterest. An emerging tool for holiday shopping this year is artificial intelligence, with about half of younger consumers planning to use it for their gift shopping. The ways they’re leveraging AI range from finding deals to generating unique gift ideas. “I have twin teenage boys, and when it comes to Christmas presents, they want to make sure one doesn’t get a better gift than the other,” Soffin said. “I asked ChatGPT which gift I should get them, and it came back with fashion tech gadget [recommendations] like wireless earbuds, gaming accessories, and sports gear. At the top of the list was a gift card to a gaming platform or a streaming service. If I’m not sure what specific brand of tech or fashion they want, a gift card to their favorite store is a great option.” Shopping Motivations Holiday shoppers are starting earlier than ever to find the perfect gifts for everyone on their list. Budgets are now spread across a longer period, beginning even before September and extending through December. However, only about a quarter of consumers’ holiday budgets are spent at the start of this period, with the remainder concentrated from Black Friday through the end of the season. Younger consumers, in particular, are motivated by promotions and sales events. The BHN report found that Gen Z encounters more seasonal sales events than older generations, which drives many to wait for Black Friday and Cyber Monday promotions. What’s more, many Gen Z consumers have tighter budgets, as they may be recently out of school or in their first jobs. “For all ages, what gets people out of bed are the sales and deals and promotions,” Kositzke said. “There are still concerns about the economy and inflation, coupled with the sheer number of people that consumers want to buy gifts for. Sales and deals have become an important factor in holiday budgets.” Another consideration is there are five fewer days in the holiday season this year. The condensed holiday season is driving many retailers to push early holiday promotions to bolster sales. “The shorter timeline could also impact the transition to digital formats,” Hirschfield said. “Many last-minute shoppers might not have time to mail a physical card, or maybe it’s just a consumer is concerned about misrouting or mail theft. Gift cards are shifting towards digital delivery in general, because it offers consumers the ability to send their gift quickly and confidently.” Online and In-Store Given the growing digital preference among consumers, some retailers may be unsure whether their promotional funds are best spent online or in-store. However, all indications show that shoppers will use every avenue that’s available to them, shopping both in-store and online. “The short answer is that it’s really a blend of both,” said Soffin. “Customers still prefer doing their holiday shopping in store, but online is closing the gap. Today, 85% of all consumers plan to shop in-store. When we ask consumers why they shop for physical cards, they say the convenience of already being at the store and completing their shopping all in one trip is the top reason.” When dialing down on where consumers purchase gift cards, Javelin’s data indicates that the number one choice is a gift card mall at a retail store. The malls at grocery stores or drug stores give consumers a place to browse for the right gift card and pick up cards for various recipients at once. The second most popular place to purchase gift cards is at a retailer’s physical store. Consumers may already be shopping for other gifts and decide to pick up a gift card while checking out. A retailer’s website ranks as the third most popular venue for buying gift cards. <img loading="lazy" decoding="async" width="1024" height="572" src="https://www.paymentsjournal.com/wp-content/uploads/2024/11/PJP-Holiday-2024-Slide_where-consumers-are-shopping-1024x572.png" alt="" class="wp-image-480190" srcset="https://b2161880.smushcdn.com/2161880/wp-content/uploads/2024/11/PJP-Holiday-2024-Slide_where-consumers-are-shopping-1024x572.png?lossy=1&strip=1&webp=1 1024w, ...
Transcribe →Taking On the AI-Assisted Fraudsters
Nov 13, 202400:25:18Tap to summarizeArtificial intelligence is fueling a major transformation in the financial fraud landscape. AI has democratized criminal sophistication and fraud at a very low cost of conducting business, generating more malignant actors that financial institutions have to fight against. What can these institutions do to mitigate increasingly sophisticated frauds and scams? In a recent PaymentsJournal podcast, Kannan Srinivasan, Vice President for Risk Management, Digital Payment Solutions at Fiserv, and Don Apgar, Director of the Merchant Payments Practice at Javelin Strategy and Research, discussed how fraudsters are using generative AI to hone social engineering and bypass authentication, and how we can fight back. The Deep-Fake Threat Driven by AI, deep fakes represent a new frontier in fraud. There has been a 3000% increase in deep fake fraud over the last year and 1200% increase in phishing emails since ChatGPT was launched. Synthetic voices have been around for decades. They used to sound like a hollow robot, but recent advances in technology have allowed voices to be cloned from just a few seconds of audio. They are so realistic that fraudsters were able to use a deep-fake voice of a company executive to fool a bank manager into transferring $35 million to them. “In banking, especially at the wire desk, talking to the customer is always considered the gold standard of verification,” said Apgar. “So if somebody sends an e-mail and says I want to initiate a wire, they’ll actually have to talk to a banker. But now, if the voice can be cloned, how do bankers know if it’s real or not?” In business applications, single-channel communication should not be accepted, said Srinivasan. “If you get a voice call from somebody to do a certain thing, don’t just act on that,” he said. “Send an email or a text to confirm that you heard it from that person. Or hang up the phone and confirm through another channel that this is exactly what they wanted. “We hear stories about a phone call coming in and saying your son has met with an accident and they’re in a hospital, you need to send $8000 for an emergency procedure. They prey on human emotions. We have to make sure that we step back, think about what’s happening, then call your family or friend to make sure that the news is accurate.” A Range of Use Cases Imposter scams have also exploded recently across other use cases. Large language models can take a phishing email, customize the content and iterate it until the scamster gets a successful response from the victim. Sophisticated criminals are creating packages for less-sophisticated criminals to buy. For $100 a month, a would-be hacker can purchase a bot-as-a-service turnkey application. To conduct a fraud operation, they just need to upload the victim’s information, such as their phone number and the impersonating business name and phone. The bot will automatically call the victim and impersonate the business, often requesting that they read out the one-time password. Once the criminal gets the OTP, they can do whatever they want with it, including logging into the institution under attack, authenticating transactions, and changing passwords. The entry barrier to committing fraud has come down significantly. “There’s almost a multiplier effect on the attack vectors end,” said Apgar, “because AI is not only making it easier to crank out more and more phishing emails more efficiently, but it also makes them more realistic.” How Are We Stopping Fraud? Machine learning models have allowed us to identify pockets of fraud and scam so that we can detect and stop them. Auto machine-learning tools have allowed Fiserv to perform this function at scale. Srinivasan said that Fiserv is also deploying self-learning models, which will generate models at a more automated pace. Since the models can be generated much more frequently, they can more effectively detect any change in fraud patterns. “We use more than 500 risk signals to identify any emerging trend and deploy preventative measures against them,” said Srinivasan. Getting Started For a financial institution initiating a strategy against AI fraud, the first step is to make an inventory of all the touch points they have and conduct a vulnerability assessment. Determine all the possible risk areas that could be subject to a fraud attempt, such as the new account opening processes or login controls. Don’t forget about money movement, changes in user behavior, and brand-new patterns of usage. Two other back-end processes are critical for assessment too. The first is customer education on scam awareness. Reach out to consumers via multiple channels to make sure they are aware of the nature of these new scams. When they are targeted by a scam artist, they should alert the bank to what is happening. The second is to educate employees and frontline representatives on the techniques used in fraud, to ensure that they are not social engineered by fraudster when they are reviewing a transaction or removing a hold. Then, when a user calls, they can educate the consumer on potential scam activity to make sure that they are not falling into one. The most successful fraud mitigation outcomes result from adopting a hybrid approach. Machine learning has to work in conjunction with an intelligent human to ensure a contextual application of the response being deployed. Make sure that the organization has absolute good governance and oversights on whatever results it’s giving, so there is no bias in the strategy. “Having a variety of mitigation options offered to the client or the financial institution helps a lot,” said Srinivasan. “Pick and choose or deploy all of them, so that we can keep the consumer safe.” While fraud attempts will always be an issue, Fiserv and financial institutions are working toward solutions that mitigate fraud while improving the customer experience. Working together, we should be able to manage fraud losses to very low levels. By combining layered security strategies, the industry can foster a more robust difference against both existing and new fraud payment threats.
Transcribe →Very Real and Very Here: The Proliferating Use Cases for Instant Payments
Nov 12, 202400:31:03Tap to summarizeInstant payments have been a global phenomenon, but the momentum for real-time payments is building in the U.S. There is a growing expectation among both businesses and consumers that when they send funds, the recipient should be able to access them instantly. In a recent PaymentsJournal podcast, Justin Jackson, SVP, Head of Enterprise Payments, Fiserv, and Robert Clayton, Vice President of Product Management, as well as Albert Bodine, Director of Commercial and Enterprise Payments at Javelin Strategy & Research, discussed the increasing number of use cases for instant payments and the progress that has made toward adoption. Instant Use Cases One of the early use cases for instant payments has been in the gig economy, predominantly in the rideshare market. Drivers are constantly refueling, performing maintenance, and buying food and beverages. To keep them out on the road, it would be a great boon for rideshare drivers to refresh their funds throughout the day, any day of the week, through a real-time payments connection. “There are similar needs in the marketplace space,” Clayton said. “There is a demand for real-time, around-the-clock payments so marketplace sellers can manage their inventory. Marketplaces traditionally have set payment boundaries around sellers, where they must wait a prescribed amount of time or reach a sales threshold before they can request a payout. Real-time payments have tremendous benefits for those sellers.” The insurance industry is also seeing traction. Often, clients lose their car or house and it could be a massive competitive differentiator for an insurance company if they are able to settle a client’s claim in real-time during an urgent situation. Instant payments could serve government agencies in a similar capacity. The Southeastern U.S. was recently hit by hurricanes that did significant damage, which created the urgency needed for many to receive disaster funds. “Federal and state agencies are extremely focused on getting aid to the people who survived these events,” Clayton said. “They need to make those funds available as quickly as possible, but it can’t be location based. Even if the government could deliver checks same-day to disaster victims, many have evacuated or their homes have sustained extensive damage. The ability to pay a person digitally in real-time, wherever they might be, could be an incredibly important force for government agencies.” Shifting the Conversation Although the amount of use cases for instant payments has increased, some of the financial institutions that were early adopters of RTP or FedNow aren’t using the rails to their fullest potential. Many of these organizations can only receive instant payments; they don’t have the functionality to send. “Either they didn’t see the use case or the applicability, or those institutions are concerned about the risks,” Jackson said. “However, that mindset has shifted to where it’s not receive-only, it’s receive-first. They may not be ready to send instant payments now, but they want that capability in the coming months or years. They know they will have customers that want to make instant transfers or pay bills in real-time.” The risks of sending instant payments, and the potential for fraud, has daunted some U.S. financial institutions because real-time payments are guaranteed credit transactions that are instantly available on the recipient’s end. “It is a significant hurdle to clear to unwind an instant payment transaction if necessary,” Jackson said. “There is a need to have strong risk and fraud controls, many of which are already in place, but some institutions are still reticent on instant payments because they are not sure how they will handle fraud.” Instant payment volumes will also hit an inflection point where exponential growth occurs overnight. In that scenario, many organizations are concerned they won’t have the infrastructure to support it. There are additional concerns in corporations or government entities that are still reliant on paper checks. Many of those organizations have built their financial operations to account for the float between the time a check is issued and the time it is processed. A switch to instant payments would mean those organizations would have to drastically adjust their model. Though it might cause short-term issues, there are benefits to moving from paper checks to a real-time payments model. Chief among those benefits is an increase in customer or constituent satisfaction if they receive their funds instantly. “In the case of a natural disaster, if a government agency is able to send funds immediately, it shifts the conversation,” Clayton said. “Instead of a citizen who is focused on the hardship they endured, they can say they experienced a terrible act of nature, but their government was there to get them back on their feet. It shifts the conversation to a happy ending.” Intriguing Frontiers While there are a variety of domestic use cases, one of the most intriguing frontiers for instant payments is cross-border transactions. “Cross-border instant payments are compelling because there are already so many instant payments services that have been established in other countries,” Bodine said. “There is Pix and UPI, and there is FedNow and RTP in the U.S., but we can’t do a cross-ocean instant payment right now. It’s intriguing to see who will connect those disparate rails.” The global card networks operated by Visa and Mastercard could be a solution to that problem. International messaging network SWIFT has also made headway toward creating a cross-border framework. “There is a bit of reality in that there are so many disparate payment schemes locally across various countries and regions,” Clayton said. “However, RTP has discussed the potential of a SWIFT integration that would enable cross-border transactions from the U.S. into Europe. Europe is advantageous because there are consistent regulations in the region.” Instant Expectations Instant payments are quickly gaining ground in the U.S. but are far from being implemented in every use case. Adoption is indeed growing. There will be an increasing expectation from commercial enterprises, consumers, and small businesses that they can send and receive funds instantly. “Instant payments are very real and they are very here,” Jackson said. “Fiserv has approximately 700 financial institutions signed up or live for RTP and FedNow. We as an industry, including payments processors, financial institutions, merchant service providers, we all have to do our part to support instant payments adoption. Instant is fast becoming the expectation of the day, so we should continue to push that ball forward.”
Transcribe →Bank of Canada Takes Oversight of Payment Service Providers
Oct 17, 202400:15:33Tap to summarizeIn 2021, the Government of Canada passed the Retail Payments Activities Act, which required the Bank of Canada, the nation’s central bank, to begin overseeing payment service providers (PSPs). Under the legislation, Canadian PSPs—along with any entities involved in the electronic transfer or storage of funds—must register between November 1 and 15. In preparation of these new regulations, Ron Morrow, Executive Director of Payments, Supervision and Oversight at the Bank of Canada, spoke with Brian Riley, Co-Head of Payments at Javelin Strategy & Research in a recent PaymentsJournal podcast. They discussed how and why PSPs should ensure they are ready to comply with the upcoming requirements. Embracing the Regime After the legislation was passed, the Bank of Canada worked with the Department of Finance to develop regulations for supervising PSPs. The focus is primarily on two key requirements for PSPs. First, they need to establish an operational risk framework to effectively manage business continuity, cyber threats, and other related operational risks. Second, if they hold funds on behalf of end users, they must ensure those funds are adequately safeguarded. In the event that a PSP holding client funds goes out of business, those funds would be considered bankruptcy-remote and could be returned to the end users. “Many of the PSPs we’ve talked to actually embraced the regime,” Morrow said. “PSPs are largely unregulated in Canada, but coming into the regulatory fold will help their interactions with other regulated financial sector entities like banks and credit unions.” Once payment service providers come under the supervision of the Bank of Canada, they will be eligible to become members of Payments Canada after the government passes some necessary legal amendments. This will enable PSPs who meet eligibility requirements to directly connect to Canada’s national payments infrastructure. As a result, eligible PSPs will be able to participate directly in Canada’s real-time payment system, which is currently being developed by Payments Canada and other payment infrastructure providers. “The PSP, one way or another, is going to be dealing with regulated entities,” said Riley. “If they are not compliant with this, they’re going to have some downstream issues. If they are compliant, it sets the stage for being able to move into other markets and going deeper within Canada.” Worldwide Standards When it was building out the regime, the Bank of Canada examined the approaches taken by other jurisdictions regarding payment regulation. “Wherever possible, we align our standards with what is already out there in the world,” said Morrow. “If there was a standard that was becoming common practice or best practice, and it made sense for Canada, we incorporated it into our own rules.” This should help PSPs in two key ways. First, domestic PSPs will be well positioned to conduct business in other jurisdictions due to the consistency of the rules with those implemented elsewhere. Second, it will alleviate the burden on PSPs that already operate in multiple jurisdictions, as the requirements from the Bank of Canada will align broadly with regulations in other parts of the world. Inside the Process Every year, PSPs will be required to submit a standardized template of information to the Bank of Canada, including details about the volume and value of payments. They will also need to report any significant risk events that occurred throughout the year. Additionally, each year, the Bank of Canada will select a group of PSPs for a deep dive into their operational risk frameworks. “We’ll be digging into the details about how they’re complying with the act, with a view toward whether or not there any gaps with the approach the PSPs are taking,” Morrow said. “If there are no gaps, great. If there are gaps, then we’ll have a conversation with the PSP around whether or not they agree. If there’s disagreement on the gaps or the PSP doesn’t feel they need to take action, we might move the issue to our enforcement division, but our enforcement is really based around ensuring compliance. We want people to comply with the act. We don’t want to be punitive or punish people.” The Bank of Canada has identified over 3,000 entities that are expected to fall under the scope of the Act. Once the registration window closes, they will follow up with those they believe are PSPs but did not register, informing them that failure to register will result in enforcement actions. For More Information The Bank of Canda’s website outlines the scope of the regime and the organizations to which it applies. If a PSP is performing one of five payment functions outlined on the site, they are potentially subject to being overseen by the regime. The website offers guidance on both the safeguarding of end user funds and what PSPs need to take into account as they’re developing their operational risk framework. “We have a number of scenarios on our website that highlight particular use cases or business models to help them help people get their heads around whether or not the regime applies to them,’” Morrow said. “If you’re in the business of moving people’s money electronically or holding their money electronically, and you’re not already prudentially regulated like a bank, it’s very likely that you’re subject to this regime.”
Transcribe →Accountants View AI as an Ally, not a Competitor
Oct 15, 202400:21:01Tap to summarizeArtificial intelligence has had a dramatic effect across industries in a short time. Accounting is no exception, but there has been speculation of whether AI would replace those working in the profession. In a recent PaymentsJournal podcast, Ted Callahan, Accountant Leader at Intuit, and Albert Bodine, Director of Commercial Payments at Javelin Strategy & Research, explored key findings from the 2024 Intuit QuickBooks Accountant Technology Survey and their implications for the accounting sector – including how accountants are interacting with AI. The survey gathered insights from 700 accounting leaders to assess the impact of AI and technology on their firms. Contrasting the Narrative Unsurprisingly, respondents identified the top challenges for accounting firms as maintaining compliance with regulations and tax laws and driving profitability for both their firms and clients in the face of high interest rates and inflation. “What was surprising was that in contrast to a common narrative, accountants don’t view AI as competition,” Callahan said. “Only 9% of the respondents said they were concerned about AI replacing their job. Instead, they felt that embracing technology would help them boost their efficiency and improve their client service.” “In addition, 71% of the surveyed firms said accounting technology solutions were the driving factor in the increased profitability of their clients,” he said. Another key insight from the report revealed that 30% of respondents identified the biggest competitive advantage of technology as its ability to enable customized services and advice through data analysis. “There can be a bit of fearmongering with AI and, in some cases, it can be justified,” Bodine said. “However, I look at areas like cash flow analysis, which can be one of the most difficult things to forecast. As AI tools become more prevalent and integrated into accounting platforms, they can deliver substantial benefits, especially if an organization doesn’t have the staff to perform that kind of analysis.” The Top Priority Partly due to staffing challenges, the accounting industry has embraced AI on a large scale—98% of respondents reporting that they actively use the technology to enhance client service. Additionally, nearly as many (95%) said that adopting new technology is just as important as traditional accounting skills to succeed as an accountant today. AI is also the top priority for new technology investments, according to accounting firm leaders. However, there are three main concerns hindering full-scale AI adoption: security, accuracy, and cost. “Firms are primarily concerned that effective data and security safeguards are in place,” Callahan said. “However, when implementing new technology, accountants must always do stringent checks to make sure the inputs of the process are valid, and the outputs are accurate. Of course, there will always be concerns about how the service will be priced and rolled out in the cost, especially as more experiences become automated.” A Vertical Leap To address these challenges, the broader accounting community can collaborate with clients to drive change through AI. Since the pandemic, there has been a vertical leap in the demand for accounting services among small and mid-market businesses. “Back in the dark days of COVID, the government offered assistance to ensure businesses didn’t go under due to staffing shortages,” Callahan said. “There was the Employee Retention Credit and other initiatives that were implemented. The sophistication level of the questions went way up because firms had to report to government entities, and client needs dramatically increased. Now, with inflation and rising interest rates, the questions are getting more sophisticated again.” Accountants have adopted AI to address the growing needs of their clients, from data entry and processing to fraud prevention. AI excels in identifying irregularities in data and providing real-time financial insights. On the firm side, accounting leaders are increasingly deploying AI in their operations—roughly 65% of firms in the study reported using AI to manage client portfolios and client communications. The Talent Gap One reason accounting firms have deployed technology is to enhance efficiency and accuracy amid staffing shortages. Over the past few years, there has been a significant talent gap in the accounting industry due to a decrease in qualified graduates. While AI can help address some of these challenges, an optimized technology platform can also assist firms in attracting and retaining talent. “Education and skills development can help a firm win the battle for talent, especially as more digital natives enter the workforce,” Callahan said. “A firm’s culture can be a strategic differentiator for attracting candidates, particularly non-traditional prospects, because there are fewer CPA-credentialed graduates. A robust training program that incorporates AI, coupled with positive culture, helps a firm retain its talent as well.” Instrumental to Success Concerns that AI might someday replace accounting firms seems to be unfounded. While accountants will increasingly integrate AI into their operations with growing sophistication, AI will always serve to augment rather than replace human expertise. However, the growing complexity of accounting platforms might cause apprehension among CEOs and business owners seeking the right partner for their organization. Fortunately, there are platforms that provide non-financial professionals with valuable insights into their company’s financial operations, which can be instrumental to a company’s success. “Our mission is to see businesses be successful,” Callahan said. “We’re doing everything we can to make the QuickBooks platform a single place where business owners can manage their finances. It’s built to be an integrated, AI-driven end-to-end experience. Our platform is designed to provide both the data insights accountants can leverage to help their clients, and tools their clients can use to help themselves.”
Transcribe →Prepaid Cards Are Essential Components of Rewards and Incentives Programs
Oct 10, 202400:19:22Tap to summarizeWhen the topic is prepaid cards, the store-branded or general-purpose gift cards at grocery stores and retailers might come to mind. However, a substantial number of businesses and organizations continually use prepaid cards for a range of cases, including employee incentives and customer rebates. In a recent PaymentsJournal podcast, Sheryl Shewman, Vice President of Business Development at U.S. Bank, and Jordan Hirschfield, Director of Prepaid at Javelin Strategy & Research, discussed the types of incentive programs and how organizations can leverage them to maximize employee engagement. A Must-Have More companies are offering some form of reward or incentive program. The reasons could be to improve productivity, increase engagement, or retain employees. A company might give a team member a prepaid card to recognize years of service or to show appreciation for hard work. Many organizations also give employees gift cards around the holidays. Many businesses are increasingly giving employees health-and-wellness-oriented prepaid cards. Healthier employees are happier and more productive, and a prepaid card shows them that the employer cares about their well-being. Even little incentives go a long way with a team. According to Hirschfield, Javelin’s data shows that roughly 83% of prepaid card recipients say an incentive increases their satisfaction with their employer. “Over the years, rewards and incentive programs have gone from a nice-to-have to a must-have,” Shewman said. “Prepaid cards are now an integral part of those programs, but organizations are using them for many different functions. They’re being used for payroll cards, for expenses, and even for government disbursements.” Fueling Sales Companies are also increasingly using prepaid cards to drive sales in lieu of monetary rewards. Sales professionals are competitive by nature, and sales performance incentive funds are a great way to fuel their competitive fire. A business could give a prepaid card as a reward for salespeople who achieve their objectives, such as when they meet their monthly quota or sell a specific product. A reward could also be given to the salesperson who cross-sells more products and services. “Whether a company offers an incentive for perfect attendance or a sales accomplishment, there is still plenty of room to improve organizational rewards programs,” Hirschfield said. “According to Javelin’s annual prepaid survey, only 17% of all employees say they get any type of employee incentive. That’s a missed opportunity to establish a program that can benefit both employees and the organization.” Brand Awareness Manufacturers and dealers often give prepaid reward cards to build brand awareness and add value to their products and services. These incentives are best given as a reloadable card so the same customer can receive multiple incentives and loyalty can be built. “At a tire store, there are multiple brands to choose from,” Shewman said. “So a tire manufacturer might give the store’s salespeople an incentive to promote their brand over another. Or it could be that the manufacturer is discontinuing a tire or launching a new product, so they offer a prepaid card to incentivize those purchases.” Manufacturers and dealers might also offer a prepaid card as a rebate, as reimbursement for a product return, or as a reward for participating in a survey. A Special Treat Although there are many reasons for companies to give prepaid cards, organizations should also consider the type of card they are giving. In a small local company, the manager might want to personally deliver the reward to employees. Remote organizations, on the other hand, will have to rely on digital prepaid cards. Rewarding employees with physical prepaid cards that can be digitized gives recipients the best of both worlds. They can use their cards in-store or load them into their Apple or Google wallets, where it can be reloadable. Recipients also prefer open-loop cards like the Visa or MasterCard prepaid cards that can be used anywhere, as opposed to closed-loop options like branded gift cards. “They want to use their reward for a special treat,” Hirschfield said. “They don’t want to use their incentive to pay a bill. In addition, organizations shouldn’t force employees into a gift card that doesn’t match their needs. Coffee shop cards are popular, especially when giving in lower denominations. However, only half of adults drink coffee daily, so that coffee gift card won’t exactly delight them, whereas a general-purpose card likely would.” A Better Solution In many businesses, managers still go to their local grocery store or retailer to buy the prepaid cards they give as incentives. That takes time and can also be more expensive—many gift cards, especially general-purpose gift cards, require a small activation fee. There are also fraud risks. Gift card fraud is infrequent, but there is a risk that criminals might have tampered with in-store prepaid cards. There is also a chance that card-buying employees defraud their organizations by buying extra cards for themselves. Even if they are trustworthy, there is the possibility that the cards are lost or stolen after the purchase. Purchasing rewards cards from a bank or a financial institution can mitigate those issues and add significant value for organizations. “Financial institutions will often conduct a performance assessment to understand the rewards and incentives program at a company,” Shewman said. “That means asking how a company will use the cards and why, and who will be on the receiving end. It’s a great way to ensure that an organization has the most cost-effective and optimized program.” Buying from a bank is typically less expensive than buying prepaid cards from a retailer. If a card is lost or stolen, it can be deactivated and replaced. Financial institutions can also deliver cards that have a company logo on them, creating a customized solution that keeps the brand top of mind. “When managers go out to Walmart or a grocery store and buy cards off the rack, there is no way for payroll and auditing departments to report which manager got what cards from where, and who received them,” Shewman said. “When companies order cards from a financial institution, they can track and manage spending in real time. A bank can also provide detailed reporting if an organization needs to run any 1099s.” Financial institutions can also do instant issues, in which an organization gets physical cards that have no funds on them. The business doesn’t load the prepaid cards until it is about to deliver the cards to the recipients, which adds an extra layer of security. Incentive Expectations An optimized reward and incentive program can keep employees engaged and maximize an organization’s productivity. The key to creating an effective incentive system is to keep the recipient in mind when the program is developed. Companies should give themselves a variety of options to make sure they deliver maximum satisfaction to employees. However, they should also be sure that the incentive doesn’t become an expectation. “One of my favorite stories is about a uniform company,” Shewman said. “Wire hangers are expensive, and drivers were given an incentive to pick up wire hangers after they dropped off new and cleaned uniforms. Originally, the uniform company added the incentive directly to the driver’s paycheck, but after a while, the drivers stopped picking up hangers. “It turned out that the incentive had become part of the drivers’ compensation, and they came to expect it. Once the reward was delivered on a reloadable prepaid card, it became a true incentive for their drivers.”
Transcribe →