Money and the idea of its exchange through payments have evolved a lot from the time of its inception. From goods to grain, from metal coins to paper, from bank accounts to e-wallets, money has taken various shapes, sizes, and forms. Payments evolved from a barter system (exchange of goods for grains) to the token system (exchange of coins and cash on paper) to cash pooling (bank accounts and deposits) to cashless payments (credit cards, checks, e-wallets). Over the last decade or so, payment technologies have grown at a dizzying pace.
Payments are now evolving at a rapid pace with new providers, new platforms, and new payment tools launching on a near-daily basis. As consumer behavior evolves, an expectation of omnicommerce emerges – that is the ability to pay with the same method whether buying in-store, online, or via a mobile device. This shift precipitates a need for retailers to adapt toward fast, simple, and secure mobile payments.
The payments industry would be in a transformational state in 2017. The ongoing war with alternative payment channels will intensify and challenges in emerging markets would force the incumbents to take drastic measures. Some key drivers would be:
1. Real-Time Payments: RTP represents a new phase of evolution within the payments industry, with several key features that differentiate them from current payment methods, specifically speed, value-added messaging capabilities, and immediate availability of transaction status. RTP will provide FIs with the functionality/features to innovate and meet customer demand.
2. Distributed Ledger Technology (DLT)/Blockchain: Blockchain has the potential to completely change the financial transaction processing cost model amongst its various applications. It also enables all processing to be done over a distributed system network or in the cloud, avoiding the usage of costly data centers or mainframes.
3. Expansion of Payments to Non-Physical Interfaces: Traditional interfaces are challenged by external stakeholders (Amazon, Google, Facebook, and Apple) in two ways – voice assistants and VR. Connected assistants become smarter and add functionality with the enhancement of NLP and image recognition. Betting on physical interfaces, and mobile, in particular, can no longer ensure long-term relevance as voice-first solutions evolve. With Facebook obsessed with killing the smartphone to own virtual spaces, classic interfaces and solutions developed for them will gradually fall out of grace.
4. Unified Platforms: The first Visa/Mastercard/SWIFT-free payments system – the Unified Payments Interface (UPI) by NPCI was launched in 2016. UPI is an open-source platform designed for the mobile age that helps with the easy integration of various payment platforms. UPI is powered by a single payment API and a set of supporting APIs. UPI offers a whole new model of the financial services industry ecosystem. UPI became a starting point of what SWIFT called a journey to a single payments platform. UPI is a benchmark to what the payments landscape should be moving towards given that oversaturated payments ecosystem, where too many ‘pay’s’ won’t let anyone win. Disjoint experiences across businesses create customer confusion, and, in the end, with a limited customer base, limit opportunities for every payment service provider – existing and new. Professionals from SWIFT emphasize that the payments industry must migrate from a plethora of aging and expensive systems and schemes to a single platform to process all payments. However, a single payment experience for customers (based on seamless system interoperability, comparable to mobile telephony) is a more probable future than a single payments platform.
Here are three main payment channels based on market participants and underlying funding mechanisms:
Regulation, demographics, and technology are affecting B2C and B2B in various ways. Technology is most actively shaping C2C payments while B2C and C2B have not been left behind with technology partnerships mushrooming across banks, enterprises, and startups. C2C payments have the highest potential to evolve as a result of several factors:
Processors for the payment systems can use different channels to make a payment and each has different operating characteristics, rules, and settlement mechanisms. All payment systems can be broadly placed into one of the following four payment channels:
Source: What does the payment ecosystem look like?, Ecommerce Foundation
The Online Banking ePayments (OBeP) scheme is a type of payments network, developed by the local or international banking industry – in conjunction with technology providers – designed to facilitate online bank transfers or direct debits.
In an OBeP scheme, the consumer is authenticated in real-time by the consumer’s financial institution’s online banking infrastructure. The availability of funds is validated in real-time and the consumer’s financial institution provides a guarantee of the payment to the merchant in case the payment is made as a credit transfer (push payment): the consumer/buyer initiates the payment. In case the merchant initiates the payment – a debit transfer (pull payment) – the consumer is protected from wrong debits and has the right to reverse the payment depending on scheme regulation and market legislation.
OBeP schemes often allow for direct merchant integration and do guarantee payment to merchants. Other benefits are the relatively low transaction cost compared to card, wallet, or other alternative payments.
Across markets, there are several OBeP scheme types to distinguish:
A three-party scheme consists of three main parties whereby the issuer – who has the relationship with the cardholder – and the acquirer – who has the relationship with the merchant – is the same entity. The three parties consist of the consumer, the merchant and the scheme.
Often the three-party model is a franchise set-up, whereby there is only one franchisee in the market. There is no competition within the brand; however, there is competition with other card brands and other alternative payment methods. Some examples of three-party card schemes: Diners Club International, Discover, and American Express.
In the last few years, these schemes have also partnered with other issuers and acquirers to ensure the issuance and acceptance of their card brand. These schemes could be seen as ‘premium’ card schemes as they tend to have a strong cardholder focus and to provide additional privileges for cardholders. Merchants are often charged a relatively high merchant commission rate.
In a four-party scheme, the issuer – who has the relationship with the cardholder – and the acquirer, who has the relationship with the merchant, are different entities. The four parties consist of the consumer, the merchant, the issuer, and the acquirer. These four-party schemes are referred to as ‘open schemes’ as they allow banks and financial institutions to join, to start issuing their cards, and/or to acquire merchants for card acceptance. In principle, there is no limitation to who may join the scheme, as long as the scheme requirements are met. Some examples of a three-party card scheme: Mastercard, Visa, Maestro, UnionPay, JCB, and RuPay (India).
The four-party model is known for its interchange fee revenue model. The interchange fee is a fee – fixed or a percentage of the transaction – that is paid by the acquirer to the applicable issuer. The interchange fee represents a major share of the total commission charged to merchants.
The single euro payments area (SEPA) harmonizes the way cashless euro payments are made across Europe. It allows European consumers, businesses, and public administrations to make and receive the following types of transactions under the same basic conditions (credit transfers, direct debit payments, card payments). This makes all cross-border electronic payments in euros as easy as domestic payments. SEPA covers the whole of the EU. It also applies to payments in euros in other European countries: Iceland, Norway, Switzerland, Liechtenstein, Monaco, and San Marino.
The advantages of the SEPA Scheme include:
SEPA is a collaborative process. The SEPA project was launched by the European banking and payment industry represented by the European Payments Council (EPC). The EPC has designed the SEPA schemes for credit transfers and direct debits and is developing a scheme for payment cards. It is also currently working on a new framework for mobile payments. The principle of equal charges both for national and cross-border payments applies to all electronically processed payments in euros – including credit transfers, direct debits, withdrawals at cash dispensers (ATMs), payments by debit and credit cards, and money remittance.
Countries outside the euro area may also extend the application of this regulation to their national currency. The SEPA vision is one of a harmonized European-wide standard payments environment using mandatory and consistent ISO 20022 XML messaging. Eventually, it will bring significant savings to companies by driving down transaction costs and cross-border charging practices.
Further benefits include:
Payments transactions are processed through a variety of platforms, including brick-and-mortar stores, e-commerce stores, wireless terminals, and phone or mobile devices. The entire cycle usually takes place within two to three seconds.
We will use a credit card payment as a model to demonstrate each step in the transaction process, which includes the following participants:\
In the authentication stage, the issuing bank verifies the validity of the customer’s credit card using fraud protection tools such as the Address Verification Service (AVS) and card security codes such as CVV, CVV2, CVC2, and CID.
In the clearing stage, the transaction is posted to both the cardholder’s monthly credit card billing statement and the merchant’s statement. It occurs simultaneously with the settlement stage.
Fees and Costs
Depending on the type of merchant and through which platform a good or service is delivered, credit card processing rates will vary. They usually are charged as flat fees, per-transaction fees, or volume-based fees. The major costs include:
An offline transaction, also known as a signature debit transaction, is a payment method that uses a debit card to transfer funds from a checking account to a merchant across a digital credit card network.
How It Works
When a cardholder pays for goods or services with a debit card, he/she has an option to process the payment in one of two ways:
Offline Transactions Are Processed Much Like Credit Card Transactions
They are sent over one of the major credit card networks – Visa, Mastercard, Discover, etc. – depending on which credit card network the bank is associated with as a member bank. The cost of the transaction, called an interchange fee, is charged to the vendor/merchant rather than the bank.
Mobile payments in offline mode are gaining popularity among consumers. With offline mode, consumers can make mobile payments when Internet service is temporarily unavailable. Offline payments are processed automatically when the device regains connectivity.
Making mobile payments in offline mode involves three distinct stages:
Users are required to set funds for offline payments in advance to make use of the offline mode of mobile payments. The fund limit can be set in the prepayments stage along with expiry and number of transactions limit and it also enables the user to restrict the locations for the use of offline funds. For making payment in the offline mode, consumers can connect smartphone devices with retail POS terminals using Bluetooth or NFC means. Once the balance details are confirmed, the payment system processes the transaction in offline mode.
Major players in the mobile payments industry are coming up with offline mobile payments solutions for in-store payments. Leading players in the mobile payments industry like Square and Google Wallet provides offline mobile payments option for their users to make in-store payments.
Source: Digital Payments 2020, BCG
Online/Digital Payments – Companies
Interchange fees typically consist of a % of each transaction accompanied by a flat per-transaction fee. Assessments are typically based on a % of the total transaction volume for the month.
Examples of these non-negotiable interchange and assessment merchant account fees include Merit 1/e-commerce/CNP fees, NABU/APF/data usage fees, dues, and assessments.
Each card association publishes its interchange and assessment fees online.
Note: These are the wholesale rates. With the interchange-plus pricing structure, the processor will quote a markup – the amount the processor will add to the wholesale rates. On a tiered pricing plan, the quote will be with the Qualified, Mid-Qualified, and Non-Qualified rates. Those quotes have the margin baked right into the quote, thus making it more difficult to tell what the processor’s margin is.
Society as a whole is using less of the physical monetary medium, and more businesses are adapting by accepting credit and debit cards. The payments market is changing from cash to checks, from cards to online payments to payments using mobile devices. Businesses that didn’t accept credit cards a few years ago are now embracing the change to speed up the payments cycle and maintain or grow their customer base. Now you can even pay your rent, taxes, and monthly bills via credit cards. It’s predicted that by 2025, 75% of all transactions will be made without cash. Mobile payment applications and mobile banking are increasing in popularity, which is indicative of consumers’ willingness to use smart devices and cards.
Payments are now evolving at a rapid pace with new providers, new platforms, and new payment tools launching on a near-daily basis. As consumer behavior evolves, an expectation of omnicommerce emerges – that is the ability to pay with the same method whether buying in-store, online, or via a mobile device. This shift precipitates a need for retailers to adapt toward fast, simple, and secure mobile payments.
Mobile payments are defined as the use of mobile phones to pay for the purchase of goods and services at a retail point-of-sale (POS) terminal or on the Internet. Payment may be initiated via SMS text message, mobile browser, downloadable app, contactless near field communication (NFC), or quick response (QR) code. As more and more smartphone owners use their devices to pay for products online, mobile payment services such as Apple Pay, Android Pay, and Samsung Pay are predicted to grow rapidly. At the same time, the emergence of one-touch checkout buttons, peer-to-peer payments, and the rise of sharing economies have created new opportunities for remote mobile payments.
The market is highly fragmented, with market growth attracting additional participants.
Source: The Cost of Sending Remittances December 2015 Data, The World Bank
The Cost of Sending Money From and to G20 Countries
The Cost of Sending Money to Different Regions
The Cost of Using Different Channels to Send Money
Types of Products
Overall, global remittance is going through a positive change. There could be a variety of factors to that. However, with a certain confidence, it is impacted by the technological advancements within FinTech, and, blockchain technology, in particular. A significant number of banks are involved in relationships with FinTech companies in one way or another.
In modern economic transactions where goods or services are transferred from a seller to a buyer, the payment commonly represents half of the transaction: the part used to provide compensation to the seller. The cost of doing transactions affects the structure and organization of the economy. If the cost of doing a particular type of transaction in the market is higher than doing them within an organization they will not occur in the market. Instead, these transactions will occur within companies or structures that will form and grow from being more efficient than the market. This now-established thinking began with the influential *Nature of the Firm *article by Ronald Coase in 1937.
In transaction cost economics, various origins of transaction costs are considered – such as the cost of finding the right product, price, and legal terms before making a trade. When parties engage in large or complex transactions the cost of payment is usually too small to be significant in this context. However, for microtransactions, transactions where the value is small, the cost of performing the payment can represent a major part of the transaction cost. A second, often-ignored cost for small transactions is the mental cost. This is the cognitive effort required by the buyer, and seller, to decide if an offered transaction is beneficial and the effort to perform the steps needed to make the payment. To conclude, if transaction costs are pushed low enough, small internet transactions can become useful and profitable in the open market. New business models will emerge and existing business models will need to change.
What Are Microtransactions (MTX)?
Many modern user engagement models have a reward transaction associated with almost every action that a user takes. For example, a user can earn points for checking into the application, spending time in the application, participating in a survey, posting comments in the forum, or sharing product information with friends over social networks. Once earned, points can be expended when the user employs certain features of the application, plays a game, or purchases some in-app digital items or entertaining gadgets. The volume of microtransactions that can be generated by a modern application using this model to keep users engaged can be very large.
Examples of interesting use cases for microtransactions include:
MTX enables service providers to tap into one of the fastest-growing monetization models in the online and mobile industries: the in-app microtransaction. The use of app-based virtual coins, points, and tokens that can be used to fulfill microtransactions is growing rapidly, thanks to the proliferation of mobile and social network games and applications.
With MTX, Service Providers Can:
Real-time payments enrich the payment ecosystem – not only do they provide alternative means of payment, but they also provide ample opportunities to develop new consumer and business services. Real-time payments (RTP) provide consumers and businesses with the ability to immediately send and receive funds directly from their accounts at financial institutions anytime 24/7/365. RTP represents a new phase of evolution within the payments industry, with several key features – specifically speed, dependability, and immediate availability of transaction status. RTP will provide FIs with the functionality and features to innovate for the future. Many countries are developing faster payments systems to expedite the movement of money and increase the speed that transferred funds are made available to recipients.
Real-time payments provide consumers and businesses with the ability to conveniently send and receive immediate fund transfers directly from their accounts at FIs, anytime 24/7/365. Financial institutions can leverage a variety of features – enhanced speed, security, and messaging capabilities – to create unique offerings for their retail and corporate customers. RTP also provides a backbone on which new business models can be redefined.
Business-to-Business (B2B) Payments
Business-to-Consumer (B2C) Payments
There are primarily three players in the RTP Ecosystem:
Source: Real-Time Payments – Experience & Adoption
Drivers for RTP
What Stands in the Way of Creating a Real-Time Payments System?
As of September 2016, there were 18 countries ‘live’ with RTP systems – 12 countries that are ‘exploring/planning/building,’ and an additional block of 17 countries that are ‘exploring’ through a pan-Eurozone initiative. Several of these countries are considering how best to implement real-time payments but have yet to publish the way forward. At least 12 countries have implemented 24/7 retail RTP systems supporting immediate low-value account-to-account transfers, and work is well underway in Australia, Europe, and the United States.
The European Retail Payments Board has agreed on the need for at least one pan-European instant payment solution. In the United States, the Federal Reserve Board has called for the implementation of a safe, ubiquitous, faster payments capability and The Clearing House has announced that it will create a national RTP system. The diagram below illustrates the global span of 24/7 retail RTP systems to date. There is a clear trend towards more and more countries either having the ability to conduct faster payment transactions or starting the process of developing a system that allows them to do so.
Wholesale and Corporate Payments
B2B (business-to-business) is the exchange of products, services, or information (e-commerce) between businesses, rather than between businesses and consumers.
B2B2C is a business model were online, or e-commerce, businesses, and portals reach new markets and customers by partnering with consumer-oriented product and service businesses. A business developing a product, service, or solution partners with another business to use a particular service, such as an e-commerce website, portal, or blog.
The B2B2C model combines business to business (B2B) and business to consumer (B2C) for a complete product or service transaction. B2B2C is a collaborative process that, in theory, creates mutually beneficial service and product delivery channels.
An explanatory example of the B2B2C model:
What are APIs?
Originally developed 15 to 20 years ago in the era of enterprise systems and service-oriented architecture (SOA), Application Programming Interfaces (APIs) are software tools that enable different systems and applications to talk to each other and share processing and data. In their early days, APIs were largely internally-focused, proprietary, and non-standardized, meaning they were inaccessible to the outside world and that substantial customization work was needed to link to them. But today, with the emergence of open APIs, their role and importance have escalated to a whole new level.
Historically, banks competed against each other on the strength of their own services and technology portals – which, until recently, were almost invariably developed, owned, and managed internally. Now, however, they’re moving to a world where the basis of differentiation has shifted to two other criteria: first, their core transaction banking services and fees – essentially the transactional engine into which third-parties can integrate their customer-focused front-ends; and secondly the quality of the open APIs they offer to enable third-parties to achieve this integration. In this context, the quality of the APIs comes down to the accuracy, timeliness, and comprehensiveness of the information they can share. Open APIs are visible externally, easier and simpler to access. Their emergence over the past decade or so reflects the rise of the developer as a force in corporate IT. Open APIs emerged to enable new software to be developed on top of other products and platforms. To meet these needs, open APIs share a number of characteristics:
These qualities have seen open APIs take off rapidly in industries such as technology and social media. Now, these same attributes are positioning them as a disruptive and potentially revolutionary force in banking and payments.
The development and implementation of an open API standard for banking will permit authorized intermediaries to access information about bank services, prices & service quality, and customer usage. This will enable new services to be delivered that are tailored to customers’ specific needs.
Source: The Magic of Open APIs
The benefits of open APIs are positioning them as a disruptive and potentially revolutionary force in banking and payments. Traditionally, banks have built, owned, and controlled the channels and applications through which customers access their services – be a retail customer checking their balance online or undertaking a mobile transfer, or a corporation initiating a batch of cross-border payments. With open APIs, third-party developers can gain access to banks’ systems and build their own channels and interactive screens for customers to use. The result is that customers are able to see and manage their banking transactions and accounts through portals that the banks haven’t set up and can’t directly control.
A variety of banking API providers have expanded opportunities for entrepreneurs to build solutions for different segments of the financial services industry:
Banking APIs are known to enable banking customers – through a single application – to manage accounts held with several providers. They also allow customers to authorize the movement of funds between current and deposit accounts to help avoid overdraft charges or to benefit from higher interest payments. They let customers make simple, safe, and reliable price and service quality comparisons tailored to their own usage patterns.
For businesses/institutions, banking APIs allow to monitor a current account and forecasting a customer’s cash flow. Using businesses’ transaction history, API providers allow a potential lender to reliably assess a business’s creditworthiness and offer better lending deals than they would without this information.
For both banks and the third parties tapping into their systems, open APIs is a seismic shift that’s being driven by a number of forces. A specific driver in Europe – and one that may have wide implications globally, depending on how the rules are interpreted – is the European Union’s second Payments Services Directive (PSD2), which mandates that banks must open up access to accounts, payment flows, and end-customer data to third-parties approved by those customers. But even without such regulations, the global move towards open APIs in banking is unstoppable for two main reasons:
The first is the rapid worldwide emergence of the FinTech industry, delivering a constant stream of innovation focused on meeting customers’ financial services needs more effectively – especially in areas like payments, mortgages, and financial management for small and medium-sized enterprises (SMEs). All bank customers – including major corporations – are now demanding payments, cash management, and treasury service experiences that mirror the speed, ease, and convenience provided by consumer applications and devices. They don’t mind whether these solutions are provided by their bank or a non-bank third-party – and the rise of FinTech means the latter is increasingly the case.\ \ Banks are eager to harness this innovation quickly and flexibly within their own offerings to win and retain customers. To help them do this, they’re moving away from purpose-built solutions to an environment where they assemble solutions from a series of vendors, using open APIs as the glue to link all the components together and create the customer experience they’re seeking to deliver. This approach generally involves using software-as-a-service (SaaS) platforms, where applications can be provisioned easily at a low upfront cost and then dialed up and down as needed.
The second key driver for the adoption of open APIs is the growing need for real-time service experiences and information, including the ongoing implementation of real-time or immediate payments infrastructures across the world. This trend means the traditional model of creating batch files of transactions and sharing them via an FTP site is no longer fit for purpose, with organizations and applications needing to exchange data in real time – a requirement ideally suited to the use of publicly-available APIs. Among banks, a leader in this area is BBVA, which has effectively published its entire banking platform on the Internet for other organizations to innovate around. This move reflects the wider pivot in the software industry from products to platforms, enabling problems to be solved faster, more efficiently, and more holistically.
With on-premise deployment, banks integrate their preferred API technology into the payment services hub. This model should ideally allow for real-time payment initiation and inquiry all the way from the point of demand by the end-user in the third-party application to the execution in the payment hub. Banks should also look for a solution that offers an extended suite of highly granular services for everything from debit authorization to fee calculation to payment submission.
With this approach, the bank utilizes a hosted service that houses all the software and hardware required to run its payments operation, under either a multi-tenant service bureau or dedicated managed service model. In an open API world, the solution should enable third parties – payment initiation service providers (PISPs) and account information service providers (AISPs), in the language of the EU’s PSD2 – to connect directly to secure, controlled APIs housed within the infrastructure. Ideally, the chosen solution should combine the benefits of pay-per-use provisioning of best-in-class technology for payments processing and execution, with one-stop access to the world of open APIs.
Organizations across all industries are moving from a world where security was defined in terms of guarding to one where effective security can only be accomplished through sharing. The best example of this shift is the disruptive power of blockchain technology, where strong security can be achieved through a capability that’s both open and public. So while opening up systems through APIs does present risks, these can be overcome through the right technologies and collaborative approaches.
The oversight of payment instruments should be aimed at ensuring the soundness and efficiency of payments made with such instruments. The soundness of payment instruments may be exposed to various risks, as is any payment system. Therefore, all schemes offering payment instruments covered by the scope of the oversight activity should comply with the following standards:
ISO 20022: Universal financial industry message scheme – is the international standard that defines the ISO platform for the development of financial message standards. ISO 20022 is seen as a way to improve payments efficiency, to create a common, level playing field.
The first focus of ISO 20022 is on international (cross-border) financial communication between financial institutions, their clients, and the domestic or international ‘market infrastructures’ involved in the processing of financial transactions. There is, however, a strong opportunity to use ISO 20022 for the development of new domestic financial messages as well, thereby streamlining all communications for financial institutions.
The need for an ISO 20022 standard arose in the early 2000s with the widespread growth of Internet Protocol (IP) networking, the emergence of XML as the ‘de facto’ open technical standard for electronic communications, and the appearance of a multitude of uncoordinated XML-based standardization initiatives, each having used their own XML dialect. The ISO 20022 standard offered a common way of using XML and a way to shield investments from future syntax changes by proposing a common business modeling methodology to capture, analyze and syntax-independently describe the business processes of potential users and their information needs.
The ISO 20022 flexible framework will encourage users to build business transactions and message models under an internationally agreed-upon approach and to migrate to the use of a common vocabulary and a common set of syntaxes. In ISO 20022, the models and the derived XML or ASN.1 (a data specification and encoding technology jointly standardized by ISO, IEC, and ITU, and widely used across several industries, such as cellular telephony, signaling, network management, directory, public key infrastructure, video conferencing, aeronautics, intelligent transportation, etc.) outputs are stored in a central financial repository serviced by a registration authority. The ISO 20022 repository offers industry users and developers free access to a Data Dictionary of business and message components and a Business Process Catalogue containing message models and corresponding XML and/or ASN.1 schemas.
If there are no ISO 20022 messages to cover a specific transaction, standards initiatives can be launched to define new models and messages and submit the new solution for approval by the ISO 20022 registration bodies. If the messages exist in the ISO 20022 repository but do not address all requirements of a new community, it can be agreed upon to update the existing models and messages and create a new version that will accommodate the needs of all.
“By taking a standardized global approach to ISO 20022 implementation, the industry as a whole will be in a much better place to manage and lower costs, ensure efficient implementation, and most importantly, keep the focus where it should be – serving our customers.” – MARCUS SEHR, Global Head – Institutional Cash, Deutsche Bank
The ISO 20022 message dashboard gives an overall picture of the five financial business domains in the scope of ISO 20022. Its purpose is to show which business processes are already supported either by existing ISO 20022 message definitions or by candidate message definitions covered by an approved business justification.
Financial institutions will convert their systems to ISO 20022 by the end of 2017. Corporate customers will change over by mid-2018.
Distributed Ledger Technology (DLT), or blockchain technology, will have a beneficial impact on each of the four parts comprising the global payments structure: relationship investment, funds transfer, funds delivery, and proof of payment.
A cryptocurrency-based global payment solution would thus work very differently from credit cards and other online transfers. Instead of the payment being authorized by the owner and then taken from the account by the recipient, the owner transfers the coins directly to the recipient – a push model, rather than an authorize and pull model. Cryptocurrency-based global payment solutions offer the possibility of vastly improving the speed and security of international payments while reducing transaction costs. However, as cryptocurrencies become more attractive as international payment solutions, businesses may need to fundamentally rethink the way they manage their cash flow.
The Internet of Things (IoT) is changing payments; that is, in the IoT, payments disappear behind devices or become invisible. There are a few technologies that are highly relevant to financial institutions that need to happen to make the payments piece of the puzzle come together: tokenization, embedded commerce, and APIs.
Online payments fraud is the space for a machine learning technique that uses historical and live data to create patterns for customers’ behavior. These patterns allow the system to make accurate fraud predictions. Machine learning is now used to prevent, or at least limit, fraud attempts.
Distributed Ledger Technology (DLT), or blockchain technology, will have a beneficial impact on each of the four parts comprising the global payments structure.
Source: How Blockchain Technology Will Change Global Payments
How Blockchain Will Change Global Payments
Cryptocurrency payments work in much the same way as cash. The owner keeps their coins in a secure digital wallet to which only he/she has the key – a digital signature that only the owner knows. The wallet can receive payments without being opened, but to make a payment the owner must open the wallet with the key.
To make things extra safe, some wallets have multiple keys: for example, a wallet might have three digital signatures, one held by the owner, a second held by a trusted third party, and a third in offline (cold) storage. Making a B2B payment from one of these multisig wallets requires two or more keys, not just one. This is not unlike business checks that must be countersigned to be valid for payment.
A cryptocurrency-based global payment solution would thus work very differently from credit cards and other online transfers. Instead of the payment being authorized by the owner and then taken from the account by the recipient, the owner transfers the coins directly to the recipient – a push model, rather than an authorize and pull model. To make the payment, of course, the owner must have enough coins in the wallet.
Cryptocurrency payments typically clear much faster than today’s international B2B payments, since there are no intermediaries. And as the wallet must contain enough coins for the payment to be made at all, in theory, the payment cannot fail.
Broadly, there are two types of verification protocols employed by cryptocurrencies vying to be the next big global payments solution:
The rapid expansion of the Internet of Things (IoT) offers payments companies an opportunity to expand beyond mobile phones, cards, and point-of-sale devices, to a broad and diverse ecosystem of internet-connected devices. Some estimates suggest that there will be 24 billion connected devices installed globally by 2020, up from nearly 7 billion today. And >5 billion will be consumer-connected devices by 2020, representing a massive expansion of touchpoints that could eventually offer payments functionality.
IoT is changing payments, that is, in the IoT, payments disappear behind devices or become invisible. Payments are becoming a component of every connected device and object on the market – ranging from the Amazon Echo to fitness trackers and smartwatches, to automobiles. As this occurs, increased emphasis is being placed on the overall commerce experience, with a noted drive toward frictionless and seamless transactions. Recent innovations such as tokenization have buoyed the industry’s drive toward connected commerce, helping support the payments status quo for some value-chain participants, while disintermediation threatens others. With the framework for the ‘Internet of (payment) Things’ now falling into place, the next wave of commerce innovation will come increasingly from ‘things buying things’ – building on top of ambient and frictionless payments.
Card networks have developed a basic framework to enable commerce in everyday devices. Visa and Mastercard are creating the underlying infrastructure to support the standardization of payments integration and stake themselves out as the key connected payments gatekeepers. Their payment platforms are universal, allowing digital payments to grow without being tied to the success of a particular manufacturer.
Consumer-facing IoT companies have much to gain from enabling payments in their devices, including improving the value of the device, being able to cross-sell products through the device, and laying the groundwork for future opportunities to earn incremental revenue. For payments companies, connected payments offer a new revenue stream and an opportunity to gain market share ahead of competitors. Wearables, connected cars, and smart home devices are expected to be the top connected payments product categories.
Accelerated innovations in the online payments industry perpetuate the sophistication of methods to steal sensitive data. Fraudsters are constantly changing their tactics to make their efforts more effective. And for online businesses, it’s getting harder to determine which transaction looks good and which one should be rejected. Well-known fraud management systems based on rules require more manual reviews so the entire purchasing process could take longer. Today, while e-commerce and m-commerce are is constantly growing, retailers have less time to detect fraudsters manually. Moreover, fraudsters are getting cleverer and they are utilizing new technology to launch more complex attacks.
Meanwhile, the cost of fraud continues to rise. At the beginning of 2015, less than $2 out of $100 was subjected to a fraud attack, but by Q1 2016, it was $7.3 out of every $100. Online payments fraud is the space for a machine learning technique that uses historical and live data to create patterns for customers’ behavior. These patterns allow the system to make accurate fraud predictions. Machine learning is now used to prevent, or at least limit, fraud attempts.
Advanced algorithms evaluate every transaction for fraud risk and take appropriate action. The system creates deep profiles based on gathered data and analyzes it to make the most accurate predictions and prevent fraud attempts. Machine learning integrates historical data with streaming information and is able to make the analysis in real-time. When a machine has more data, its accuracy will improve + a machine can check larger amounts of data in a much more efficient manner than humans. With machine-based processes, a person could check just one transaction in about five minutes.
Another major use case of AI in payments is Smart Wallets that are able to monitor and learn users’ spending habits and needs, analyze them, and based on the results, alert and coach users, when appropriate, to show restraint and to alter their personal finance spending and saving behavior.
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