PaymentsJournal

Zelle has laid the groundwork for what could be the massive P2P wave that has taken consumers and financial institutions by storm. Consumers want more convenient ways to pay, and this solution was the answer to many of their pain points. Consumers are now expecting their FIs to provide this type of P2P service as part of their regular offerings.

But many FIs are concerned about making the leap and possibly being on the hook for millions of dollars.

In a recent PaymentsJournal podcast, Karen Buell, SVP of Operations, Banking and Fintech Solutions at Paymentus, and Kevin Libby, Fraud and Security Analyst at Javelin Strategy & Research, discuss the true story behind the headlines of these P2P fraud schemes, how can fraud be confronted, and how FIs can enter the P2P market armed with information and not fear.

P2P Expands Despite Growing Incidences of Fraud

With popular P2P platforms such as Zelle making the news, and with increased incidences of fraudulent attacks on consumers who have no recourse, it’s no wonder that many FIs are leery of adopting these payment platforms and offering them to customers.

“In 2022 alone, 28% of identity fraud scam victims that suffered a loss ended up losing that money through P2P transfers,” Libby said.

“That percentage is essentially flat year over year, but that’s a significant number of consumers, and from a consumer protection point of view, the fraud we’re seeing is enough to get the attention of consumer advocacy groups and regulators, and I think that’s why we’re seeing some of the headlines that we have.”

Headlines aside, consumers want an easier way to pay. They don’t always carry cash, and even if they do, it’s rarely the right amount. P2P payment platforms offer them a way to conceivably pay at any time, any place.

What FIs Can Do to Quell Consumer Fear Amid Growing P2P Fraud

The key to settling the apprehension customers feel about using P2P payment platforms is to provide education. Although fraud is still taking place, current statistics, according to Libby, show that “as a percentage of transactions, fraud on P2P platforms is very low.” In fact, reports have shown that the incidents are lower than 1% and even decreasing.

“FIs can do a lot to educate consumers that they don’t need to be afraid of these tools, of these payment methods, but they do need to be smart about using them,” Buell said.

Specifically, FIs should warn customers not to give away their banking credentials, as this seems to be a more common occurrence. Furthermore, implementing technology that protects consumers is essential for FIs to safeguard against and mitigate fraud.

Implementing challenge questions that only the consumer and the recipient would be familiar with would help offer that protection. This can also avoid situations where the sender might mistype a phone number or provide another type of vulnerability that can enable an account takeover to happen.

Preventive measures are key, as P2P payments are essentially real-time payments. They are immediate and final.

Buell emphasizes the importance of FIs’ role as a trusted partner, equipping customers with the critical knowledge they need to protect themselves and their accounts. Ultimately, FIs should empower them to use these platforms with confidence.

FIs should also educate their customers on what banks will never do or how they will never engage in a certain way with their consumers. For example, it’s important that FIs communicate with their customers that they will never ask for their PIN number or their one-time passcode.

“Analysts at Javelin, in our fraud and security practice, have been arguing for years that education is the cornerstone of any building plan designed for reducing fraud across most payment channels,” Libby said.

“I think that’s especially true for P2P fraud, particularly since many identity fraud scams culminate in P2P transfers. Susceptibility to scam victimization is largely about being educated about what’s out there, what scams are taking place, how to recognize them when you see them, and what to do if you believe you’ve been targeted.”

Knowledge is power. Educating consumers on some of the pitfalls of using these platforms better equips them to use the solutions carefully and responsibly.

“Another thing that FIs can do to reassure consumers is to let them know that they understand the fraud that’s taking place and that they’re employing and constantly refining very sophisticated fraud detec...

In a recent podcast, PaymentsJournal talked with experts from different parts of the payments world to discuss how real-time payments are proceeding throughout the world, and particularly in the United States and Australia. It featured Elisa Tavilla, Director of Debit Payments, Javelin Strategy; Adrian Lovney, Chief Payments & Schemes Officer, Australian Payments Plus; Nathan Churchward, Payments Domain Lead, Cuscal; and Kate Knudsen, Senior Program Director, BHMI.

With the launch of FedNow, the United States has fully embarked on its journey toward real-time payments. Across the globe, real-time payments are creating not only competition among payment methods but also new use cases, making previously unattainable services accessible to businesses and consumers.

Yet the road to global ubiquity in real-time payments has challenges. Technical hurdles, legacy systems, and the imperative of interoperability need to be overcome. In a world with seventy-nine countries operating real-time payment systems, achieving cross-border real-time payments requires diplomacy and meticulous planning. Furthermore, the modernization of outdated back-office systems is imperative to keep pace with the exponential growth in real-time transactions. The good news is that businesses recognize this urgency and are upgrading technology infrastructures and streamlining processes.

Real-Time Payments in U.S. and Australia

Real-time payments are quickly becoming more widely available throughout the world. In the United States, FedNow’s launch in July is starting to increase traffic and demand for real-time payments.

“In the U.S., the FedNow service recently launched with 35 financial institutions,16 service providers, the Department of the Treasury, and more set to join,” Tavilla said. “The RTP network, run by The Clearing House, hit 500 million transactions with over 370 participating institutions. With two real-time gross settlement systems live in the U.S. now, I’m optimistic that it will help accelerate the growth and adoption of instant payments here [in the U.S.].”

In many cases, real-time payments are much more developed abroad. For example, Australia in 2018 launched its New Payments Platform (NPP) for real-time payments, and it has taken off ever since.

“Around 30% of the volume that was previously processed through the bulk Electronic Clearing System in Australia has now transitioned to NPP in the past six years,” Lovney said.

Initially, purchases on the platform were mostly P2P, but now, it is increasingly used by businesses and corporations. Some examples include paying taxi or Uber drivers at the end of their shifts and making insurance or emergency payments.

According to Lovney, the next phase of use cases will involve recurring (bulk) debit payments, such as subscriptions or utility payments.

“We expect to see bulk payments coming from businesses, corporations, and government entities, such as salary or dividend payments,” Lovney said. “Australia has set a goal to potentially phase out the ACH system by around 2030, approximately 12 years after the launch of NPP.”

As Churchward hinted, all of this is slowly creating significant competition among payment methods.

“During the pandemic, as cash usage declined and electronic payment methods increased, including ACH, we saw significant growth in account-to-account payments, especially person-to-person credits, accounting for 38% of the total payment volume growth,” Churchward said. “However, NPP’s growth has outpaced that of ACH. Currently, real-time payments represent 37% of all account-to-account credit transfers among our clients, which include banks and payment service providers.”

But real-time payments are creating new use cases, not just the substitution of existing ones.

“Payment service providers, in particular, are offering receivables management services to businesses using account-to-account payments that weren’t available before NPP,” Churchward said. “Customers love using Pay ID, a feature that links their mobile number or email address to their bank account—80% of payments received by our payment service providers from business customers use this feature.”

Challenges in Implementing Real-Time Payments

The United States has over 11,000 financial institutions, and many of them, especially the smaller ones, rely on legacy systems.

“Transitioning to a payment system that operates 24/7, 365 days a year will take time, and e...

Over the past decade, financial institutions have undertaken various efforts to modernize their payments systems. Now with the emergence of COVID-19, the world is witnessing an accelerated journey toward digital transformation in the payments ecosystem. In an interview with PaymentsJournal at the 2021 Money20/20 event, Soumya Johar, Director of Strategic Alliances & Partnerships at Opus […]

The post Banking on Modernization: Why Payments Digital Transformation is the Key to Success appeared first on PaymentsJournal.

In the past decade, the payments industry has experienced more change than in the previous 40 years. The number of payment options for consumers is multiplying, and the adoption of real-time payments is soaring.

While this is an exciting time for the payments industry, financial services companies are facing tough challenges as payment processing requirements become increasingly complex—especially in the back office. In a recent PaymentsJournal podcast, BHMI’s Chief Technology Officer, Michael Meeks, and Director of Software Engineering, Jon Protaskey, along with Albert Bodine, Director of Commercial and Enterprise Payments at Javelin Strategy & Research, spoke about these challenges.

The Historic Role of the Back Office

Backoffice transactions are largely hidden. After a payment has gone through a front-end system for authorization, the back office takes over and performs several key functions. It settles the transactions among the financial entities involved and reconciles them with various sources, such as front ends and network clearing files. The back office also charges the appropriate fees, handles transaction disputes, supports transaction research, and allows real-time financial positions to be viewed.

Thirty years ago, when banks were first moving from cash to digital payments and cards, the ecosystem was different. The legacy systems that were built decades ago are just not capable of meeting today’s payment demands. Those systems were written with an isolated perspective and minimal requirements, then added to and pieced together over the years. The gaps in the operation still often require manual processes to be in place.

At that time, nobody could have projected the transaction volumes seen today. As a result, there was no expectation for real-time processing or real-time data access for decision-making. Everything was handled in batches, and the need to support non-card-based transactions wasn’t even an issue. These historical card-based systems were written to support ISO 8583, not the new standard of ISO 20022—which makes it hard for back office environments to adapt and put the new requirements into their systems.

“We have seen many organizations quickly upgrade their front-end client interfaces, but they have been a bit slower to upgrade outdated back office systems,” Bodine said. “Modernizing these systems is all about the elimination of friction, which means improvements in efficiency, accuracy, cost savings, and a variety of other things. As we started to get into the pandemic, we saw more folks working on back office processes. Now we’re really seeing efficiencies throughout the ecosystem by eliminating friction.”

Another challenge is the workforce that was in place more than 30 years ago and initially used those legacy systems is aging and retiring. Those who built the systems are taking most of the historical knowledge with them.

“It’s not a surprise to come into a new client and see them have many different systems that are siloed,” Protaskey said. “They’re all doing different functions of the back office and trying to get those systems consolidated is always a challenge.”

New Solutions for Instant Payments

With instant payments settling in 20 or fewer seconds, the potential for instant fraud is more prominent. Because those funds are irrevocable, fraudsters have the opportunity to increase the amount of money that they’re able to take from organizations. Automation and modernization are imperative to cut into what the fraudsters are doing.

“A modern back office can play a big role in helping to mitigate the risk and reduce the cost,” Meeks said. “The solutions we’re implementing continuously load payment data within seconds of the transaction being processed. When that data arrives in the back office, our software performs the back office processing immediately, including fee generation, reconciliation, and settlement. All this happens immediately after we’ve loaded the transaction rather than doing large batch processing at the end of the day. This provides you a real-time view of all the transactions that have been processed and real-time settlement positions throughout the day.”

Real-time data visibility allows banks to make decisions based on that data. Every business has proprietary data to capture and make decisions on. A system needs to be able to adapt to a given business’ data needs, not just what every other company has out there.

The Cost of Disputes

Another key consideration is the high cost of handling disputes. A modern back o...

After years of restrictions and uncertainties, people are eager to travel the world again, whether for leisure, business, or reconnecting with loved ones. As a result, international travel is getting back to—and in some cases even surpassing—pre-pandemic levels.

Dynamic Currency Conversion, or DCC, is making the travel experience more seamless. On a recent PaymentsJournal podcast, Ed Robles, Senior Director of Sales, Business Development at Euronet Worldwide, spoke with Albert Bodine, Director, Commercial and Enterprise Payments at Javelin Strategy & Research, about how simplifying currency management can create new revenue opportunities for financial institutions.

PaymentsJournal

Finally, Transparency in Currency Exchange

Travelers today expect to manage their finances abroad with the same ease and convenience they enjoy at home. Historically, this has been a challenge given the range of currencies international travelers have to deal with and the limited number of exchanges available. DCC is changing that.

DCC, which is offered at ATMs and point-of-sale terminals, allows international travelers to pay or withdraw money in their home currency instead of the local currency. Essentially, when a traveler uses their credit or debit card abroad, they’re given the option to convert the transaction into their home currency at the point of sale. Travelers can lock in the exchange rate at the time of the transaction, avoiding the uncertainty of fluctuating rates.

One primary benefit is transparency. Travelers can see the exact amount they’re spending in a currency they understand, which helps with budget management and eliminates the guesswork of exchange rates. DCC also provides a better exchange rate compared to traditional currency exchanges, reducing the overall cost of foreign transactions.

“If you are withdrawing pesos in Argentina and you don’t know what the conversion rate was, DCC will convert and provide the rate for you,” said Robles. “You have the option as the cardholder to accept or deny the transaction based on the conversion. If you accept, your receipt will give you exactly the same numbers you’ve seen on the screen, so you know what you paid for in your home currency, even though the money you’re withdrawing is the local currency.

“As it gets back to your bank, that same amount will be on your statement at the end of the month,” he said. “You don’t get hit with international fees or any other conversion fees.”

One common difficulty travelers face is the high fees associated with withdrawing cash abroad, along with fluctuating exchange rates that make it hard to know exactly how much they’re spending. Finding ATMs that accept their cards and offer reasonable rates can be an added inconvenience and time-consuming.

“At Javelin we analyzed some of the routes around the world,” Bodine said. “We found that if you were to send $200 through traditional correspondent banking means, in some cases that would cost you $104 in fees on one of the routes. You’re talking about 52% of the transmitted amount in fees that the intermediaries are taking.”

“I remember the days where, whether it was for a personal transaction or even a business transaction, cash was required, and we had to partake in some type of hedging activity,” he said. “I love the transparency aspect of dynamic currency conversion, where you can see the fee structure on the front end, and the cost that it drives down.”

Reversing the Transaction

On the other hand, some travelers may have leftover local currency as they prepare to return to their country of origin. While not yet widely available, technology exists to convert foreign currency back to dollars or another home currency. Euronet is in the process of certifying certain ATM models to handle this conversion.

Robles pointed out that this is an important service for overseas travelers to avoid the double whammy of currency exchanges. “We get hit by a 17% to 20% conversion rate at the airport kiosk,” he said. “When we want to exchange it back to our local currency, we get hit again.”

Benefits for Financial Institutions

For financial institutions and merchants, DCC brings several advantages. By enhancing customer satisfaction and providing a valuable service, it can lead to higher transaction volumes as customers are more likely to use services that offer transparency and convenience. Moreover, financial institutions and merchants can find additional revenue streams through better exchange rate margins and increased usage of ATMs and POS terminals.

Euronet recently noticed an emerging trend after reviewing r...