Tech Trends in the Payment Ecosystem

The payment ecosystem consists of interconnected and networked electronic equipment, banks, and non-banking financial corporations that facilitate funds transfer between the purchasers and vendors. Read this article on to learn what contemporary technologies to use if you’d like to outperform your payment ecosystem competitors.
11 min read
26/02/21
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By Neil Smullian
Vice President of Business Development
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Tech Trends in the Payment Ecosystem

The latest tech being acquired by payment ecosystem players in 2021 include AI and ML, blockchain, and real-time transfers. These technologies work independently or synergistically to achieve their purpose. Since their adoption, the payment ecosystem in the United States has recorded a combined 8% average decrease in the number of security breaches and fraudulent use of credit and debit cards.

Furthermore, the payment ecosystem has also experienced a 25% increase in its efficiency, hence optimized profit margins, increased client satisfaction rating, and ultimately a greater client base attracted.

Let’s discuss in detail what payment ecosystem members can gain from tech in 2021.

How Payment Ecosystem Works

How Payment Ecosystem Works Schema

The payment ecosystem operates on complicated and quick communication channels established among the participating fiscal entities. Before digging deeper, let’s investigate the functionality of each system’s members.

  • The cardholder is the card’s custodian and the initiator of the payment to the merchant in exchange for goods or services acquired.
  • A card issuer is a bank or a financial organization that provides consumers with the card and is liable for the cardholder’s usage and acquisition.
  • A merchant is a seller of goods and/or services who accepts card transactions as payments and pays a transaction facilitation fee to the acquirer.
  • Merchant Acquirer is a financial entity that provides a card payment program, collects the vendor’s payments and is liable for the credit solutions.
  • Independent sales organization (ISO) / merchant service providers (MSP) are non-banking financial entities affiliated with banks and certified with card networks. They resell the payment processing services to vendors. Additionally, they provide an online payment gateway and POS devices.
  • Gateways provide the infrastructure that links both merchants and customers to the payments networks.
  • Card Networks provides technological infrastructure by connecting all the stakeholders in the payment ecosystem to enable merchant-issuing bank transactions. Furthermore, they determine the outlets where the card is used and charge merchant interchange fees for transaction processing.

The next section investigates what tech these payment ecosystem players need to incorporate for them to flourish.

The Latest Tech Trends Within Payments Ecosystem

In 2021 alone, in response to the pandemic, cashless systems like e-wallets and mobile payments have experienced an upsurge in popularity and usage courtesy of their effectiveness in preventing the spread of Covid-19. Amazon, a US-based e-commerce giant, experienced a 570 billion US dollar rise in value in 2020 attributed to the cashless payments used by online shoppers. The US e-commerce also experienced a 14.4% increase in sales translating to $794.5 billion at the end of 2020 – all thanks to cashless online payments.

Technologies to Help Acquirers / Processors Overcome Their Major Challenges in 2021

Almost for any business, delays incur losses. Payment delays are among the acquirers’ greatest challenges that compel them to search for and install faster, more convenient, and secure payment systems.

The Chase Paymentech cut off times for deposits, payments, and transfers are unnecessarily lengthy. These long transactional wait times extend to three days for special bank transfers and a business day for local interbank transfers. Delays in transfers of funds set back the client’s fiscal plan and often result in losses and client dissatisfaction, hence motivating a preference for faster alternative modes of payments.

A report by Strands showed that slow and poor cash flow management practices are among the leading causes of failure in small and medium enterprises. Deloitte also published a survey indicating that acquirer’s business clients are willing to pay 50% more in transactional fees if they are guaranteed to receive payments instantaneously. This survey is an indicator of the dire need by clients for an instant money transfer.

To address this challenge, acquirers should implement real time payments (RTP), a technology that became a remedy to the slow transaction menace that is derailing businesses. In the US, RTPs are being managed by the real-time payment network which ensures money is securely and conveniently transferred in a timely and ubiquitous manner to foster business growth. It provides services like e-invoicing, debt settlement, and payment of bills in addition to providing instant notifications accompanying each transaction.

Since its inception, the RTC has attracted the top U.S. acquirers, which in turn control more than 50% of the country’s transactions. These include Bank of America, Citibank, PNC, among others. Its adoption has also led to diversified revenue streams and growth, client satisfaction, and a competitive edge among the payment ecosystem new entrants.

Technologies to Help Card Networks Overcome Their Major Challenges in 2021

Card networks have enjoyed the monotony of setting up and distributing network infrastructure that links all the payment ecosystem players. Interchange fees paid by the different players have been the main revenue fuel of card networks until recently when novel technology infiltrated this niche.

The major challenge facing the major card networks like Visa, Mastercard, and American Express is competition from new entrants into the payment ecosystem environment, which threaten to render the solitary service redundant. To overcome this challenge, card payments have resorted to data utilization to guide their diversification and value addition of services through the introduction of new services and partnerships.

In this move, the card networks are extending their scope of service beyond payment authorization, authentication, card transaction routing, and clearing and settlement services. Reputable and globally recognized card networks like Visa and American Express have been reported to venture into value-added services to solidify the value proposition among the different payment ecosystem players.

The new value-added services include their recent and increased focus on loyalty and dynamic offers, analytics and insights, fraud management, consumer settings, risk management, debit insurer processing, money transfers services, and digital solutions. These new revenue streams have increased the overall profit turn over for card networks besides attracting a new client base. A recent report by Visa indicated that it recorded a 30% increase in revenue post the incorporation of the value-added services and also observed a 12.5% growth in their clientele.

In partnerships, Visa and Mastercard have taken bold steps to pioneer payment via wearables, like watches and fitness trackers. Visa has partnered with Swatch to create a watch that is integrated with an NFC chip that facilitates contactless payments at the point of sale terminals. Mastercard has also secured a deal with Coin to integrate a payment option into smartwatches and fitness trackers to enable clients to pay with ease at any outlet.

These data-driven changes have impacted the card networks positively in the finance and PR sectors. Card networks are encouraged to be creative with value addition and diversify their services to survive this technological wave of revolution sweeping through the payment ecosystem.

Technologies to Help Issuers Overcome Their Major Challenges in 2021

The U.S. issuers' main challenge is identity theft and card fraud which imposes losses on them to the tune of billions of dollars. Nilson’s report annual fraud statistics of 2020 indicates that issuers incurred losses attributed to card fraud totaling $19.59 billion, which is a 2% increase from $19.21 billion lost in 2019. Issuers suffer most as they account for 68.39% of the overall global gross fraud losses.

This trend is projected to be on the upsurge peaking at $35.67 billion in five years and $40.63 billion in a decade if the affected payment ecosystem players do not put in place measures to curb this negative vice. One of the latest victim of card fraud was Capital One, when hundreds of thousands of pieces of clients’ information were exposed to fraud in 2019.

AI/ML techniques allow companies to prevent fraud via early detection. Despite its extensive application in process automation, this technology is expanding its horizon to solve more problems in the payment ecosystem.

ML learns the financial operation habits of clients based on the available data and generates a trend, which then aids to detect fraudulent usage in case an outlier's activity is detected from the client’s normal spending habits. It offers more benefits of analyzing large datasets in real time and producing visually enticing and interpretable analytics.

Furthermore, ML and AI give room for the incorporation of fraud prevention security measures, like voice-activated transaction, biometric authentication, and smart assistant payment verification. Issuers that use AI-enabled security features include the Bank of America, which has recorded a significant reduction in identity theft and card fraud since the incorporation of AI into its security system. In 2021, more issuers are expecting to strengthen their AI-driven anti-fraud mechanisms, so do not postpone this activity, too.

Technologies to Help Gateways Overcome Their Major Challenges in 2021

Payment gateways provide an important service in the payment ecosystem by linking merchants and clients with the issuers and acquirers. Their services allow for international money transfer and multi-channel payment systems to operate efficiently. However, this payment ecosystem player experiences problems relating to its line of service.

The major problems with gateways that earned it the nickname “necessary evil” are the expensive transactional charges, card data security, and multi-currency and regional problems.

PayPal admitted a data breach in 2019 after it was brought to the limelight by a technocrat named Alex Birsan. He discovered a fault on the site's authentication flow which allowed hackers to view the session data of clients within the Java scripts. This was recorded as a security breach of lethal implication to the company. To solve this, gateways require to incorporate a multidimensional security technology besides the data encryption technique being used presently.

PayPal has since incorporated AI and ML into their complex anti-fraud algorithm managing to reduce their fraud rate to 0.5%, which is below the average fraud rate range of between 1.3 - 2.6%.

The slow transaction time, which ironically attracts exorbitant transactional charges, can be solved via the incorporation of blockchain and real time payment technologies that are fast and secure. Blockchain will avert the expensive cross-border transaction via the utilization of cryptocurrencies like Bitcoin – an international cashless currency.

It has been noted that clients complain of the expensive fees because the transactions are lengthy, and this will not be the case if real time payments are adopted. The incorporation of such data-based technologies as blockchain, AI and ML, and real-time payments into the architectural framework of gateways will significantly solve the challenges faced by payment ecosystem player.

Technologies to Help SSOs / MSPs Overcome Their Major Challenges in 2021

Merchant service providers (MSPs) are essential in the payment ecosystem dispensing a vital service of recruiting merchants into a card payment program and linking them to an acquirer. These MSPs are widespread in the United States with the likes of VizyPay gaining popularity by the day and constantly growing its client base.

MSP growth however is hindered by international integration. This curtails the global widespread of services due to the different regulatory policies adopted by each country in different continents. At times, the absence of regulation in some countries prevents MSPs from breaking into potential markets. To remedy this, MSP should leverage the power of computational data analytics to review the existing data on regulation policies conformation and tailor their services to adhere to each country’s regulations.

With existing data on the regulatory demands of different countries and regions, analysis can be done to identify the most suitable features, packages, and value-added services, which can be further incorporated into business models. These should align with the region’s regulatory requirements. This will also ensure that their services are strictly aligned with the resident countries of operation regulations and avoid litigation due to breach of the land’s laws.

Conclusion

The payment ecosystem is undergoing drastic and accelerated changes with the introduction of novel technologies to remedy the persistent challenges in this ecosystem. AI and ML, real-time payments, data science and analysis, and blockchain have been incorporated into the payment ecosystem to enhance its operation and security.

These technologies are shaping the future of cashless transactions, and they too are continually evolving to ensure a more efficient and secure payments in 2021. As a payment ecosystem player, you must be familiar with the relevant technology applied to your niche to streamline services. DataArt is available to offer customized business advisory services in case you are experiencing difficulties finding the best technology to alleviate your challenges.

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