IBM RegTech Innovations

Balancing customer expectations (and risks) in real-time payments

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Riddle me this? Would you rather travel from New York to Los Angeles, hyperloop style, in half the time of flying, knowing that your safety is not assured, or sit aboard a conventional flight for 7 hours, knowing that you have chosen a statistically safer, though significantly slower, means of travel.

Consumers are almost unanimously voting for the former, at least, metaphorically, when it comes to payments.

Boon to consumers, bane to banks

For those who keep a close eye on the latest news in the world of payments (we are a wild bunch indeed!), this has been a banner year for real-time payments. In addition to marking the first decade of UK Faster Payments, at long last Australia has entered the club as well with their New Payment Platform (NPP).

For consumers, real-time payments present nothing but upside; fewer late fees when you realize the utility bill is due today, and less time waiting for money when you split the dinner bill with your friend who always seems to forget his wallet. If there is fraud on your account, your financial institution will make you whole, as long as you were not negligent and make them aware of the incident in a reasonable time frame.

While on the flip side accelerated payment speed is not always rosy, especially for the institutions who must facilitate them and absorb much of the risk. Following the rollout of UK Faster Payments, there was a 132% uptick in payment fraud, which initially led to smaller transactional caps and subsequently drove  the need for more advanced fraud controls.

A 10-year journey that’s far from over

It’s easy to think that, since so many countries have already taken the faster payment plunge, the upcoming US initiative would be a smoother operation. However, that would mean operating under the assumption that payment activity has remained the same as it was ten years ago, which is clearly not the case. Even now, efforts to expand Faster Payments for use in retail are being explored, presenting their own unique challenges.

The question for the looming 2020 rollout in the US is, ‘will it be too late for the consumers who would most likely adopt it?’ Granted, a perfectly rational person would choose a payment method with robust fraud protections and provisions for compensating consumers in the case of legitimate fraud. Yet, P2P apps without those same safeguards are already well established among the US consumers and are making headway in retail as well.

Once more, consumers are exchanging their security and privacy for convenience, as they have with social media and other nascent technologies like voice assistants. It is not until a headline grabbing event that the realization of vulnerability is brought to the fore, and by then it is too late.

Making faster payments, safer payments too

If the progression of faster payments has taught us anything, it is that the future of how people and businesses will exchange funds is an ever-moving target, one that fraudsters will continue to exploit as the path of least resistance in the financial system. The initial response to fraud in the UK was to lower payment thresholds so much that the system was rendered virtually useless. The same draconian approach in the US could have a major impact on the rate of adoption, especially when there are already established and reliable (though more vulnerable) alternatives. So, what’s a bank to do?

  1. Prepare for never being “done”: After a decade, the UK is still working on Faster Payments. Connected homes, cars, devices and the ‘Internet of Things’, while still in early adoption were mainly the stuff of science fiction when the program was rolled out in 2008. These will become commonplace in the next decade as will payments through some, if not all, of these media. While getting your car or refrigerator to pay for your pizza delivery may seem insane now, “Future You” will see it as a fundamental right.
  2. Build for the future: Since, you’ve accepted a Sisyphean payments management existence, your systems and infrastructure must be adaptable, not only to the new types of applications that will access it, but also to evolve with the new fraud schemes that will emerge as well. This means you need to react quickly and be able to handle the scale of transactions that will flow through your various channels in a rising tide.
  3. Scale like it’s your job: With everything from Teslas to toasters sending and receiving payments, being able to react and process at scale will be essential. This scale of transactions across multiple channels will also provide valuable insights into emerging fraud as well as help your institution understand your customers better. This helps you suggest the right products to groups of customers based on common transactional behavior whilst maintaining the personalized experience we all expect as special little snowflakes.
  4. Leverage data to balance convenience and risk: Consumers, especially in this brave new world of “connected payments”, will be sharing a treasure trove of data. Understanding how all the data points corroborate an individual’s identity, location and intent will ensure greater confidence in approving or denying their transactions.

Are these a few years away? Absolutely. But the accelerated pace of technological evolution versus glacial pace of financial services integration means that you really need to start now. Consumers will continue to prioritize convenience, and if there are faster ways to pay, the traditional financial services industry will be a step behind the alternative (albeit riskier) players. In the meantime, consumers’ transactions will just have to rely on their hyperloop of payments to (probably) get them there. Fingers-crossed.

Want to get face-to-face with the future of payments? Join IBM experts at the Sibos 2018 Conference in Sydney, Australia and visit the IBM stand (#F22). Or attend one of our various speaking sessions to hear from and chat with our experts.

Watson Financial Crimes Global Technical Sales Leader

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