2022 just started and we got so much to see and learn this year. But, we are not alone in this learning journey. Machine Learning and Artificial Intelligence are here to stay, so we also should learn why and how it works for the payments industry.

Starting this season of Payments on Fire®, we will have Ismini Psychoula discussing fundamental technology, AI and ML, and its role in financial services. Ismini is a Research Scientist at OneSpan. OneSpan is a global organization that is focused on digital banking security and e-signatures, delivering trust and business productivity solutions for more than 10,000 customers in 100 countries. In the financial industry, more than half of the top 100 global banks rely on OneSpan solutions to protect their online, mobile and ATM channels.

Ismini Psychoula got a PhD in Computer Science with a thesis about Privacy-Preserving Machine Learning for Smart Healthcare. At OneSpan she’s Researching and designing privacy preserving and explainable machine learning models for financial systems.

In this episode, you’ll hear about Ethical AI, AI feeding and monitoring, Machine Learning bias and how it all affects the financial system. We’ll take a deep dive in the research to prevent fraud and increase transaction security.

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The new year is coming with lots of innovations for the payment industry. Some of them will impact some companies and/or all the industry, changing how things work on the marketplace. George welcomes back Russ Jones to Payment on Fire and they will uncover the lens of the game-changing innovations, including talking about the upcoming events and changes that really matter to the arc of the payment industry. Glen is a Payments Consultant, Analyst, Co-Author of “Payments Systems in the U.S.” and partner at Glenbrook Partners.

In this episode, Russ will discuss the Webinar presented by him and Yvette Bohanan between December 15th and 16th about innovation and payments, with topics like types of payment systems and technologies, how the different use cases lay out what’s unique about each, variations and differences around the world and how the payments industry is structured.

You’ll also hear about core system modernization, systems running 24/7/365, strong customer payment authentications and several other topics. Let’s hear George Peabody and Russ Jones talk about what to expect for the payments industry in 2022.

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If you’re an e-commerce merchant selling across border, you’ve got to answer a few questions:

1. What methods of payment should you support in each country you sell in? Not every country is as infatuated with cards as is the U.S.
2. And even if customers in those countries are using cards, how do you optimize your authorization rate? If you’re not sophisticated about this, your decline rate could exceed 40%, a huge hit. It turns out routing transactions via local acquiring banks is one answer. But how do you do that?
3. Subscription services store card numbers or a tokenized version to initiate periodic payment transactions. They never want to have a card declined because they, honestly, don’t want to have to contact customers to request they update their card account info because some portion of those customers are going to decide to cancel little used subscriptions. How does a merchant mitigate those lost payments?

Serving the e-commerce needs of merchants operating across borders is a primary focus of payments service provider BlueSnap. In this conversation with BlueSnap CEO Ralph Dangelmaier and Payments on Fire® host George Peabody, you’ll hear how multiple discrete steps combine to keep AUTH rates high and costs in line.

Frictionless is not a Differentiator

Ralph is a well respected payments industry veteran. He shares his views on fintech and the opportunities available to new players in payments. He makes the point that, with 30% of users using wallets, cached payment credentials, and one-click payments, the frictionless checkout is no longer the differentiator. It’s cost control and AUTH optimization

AUTH Optimization is the Priority

He also discusses the needs of his primary customers: mid-tier e-commerce merchants doing $1B in sales but needing help around the particular challenges of operating internationally.

Ralph makes the point that revenue optimization results from doing multiple smaller things right. Card authorization rate optimization requires multiple steps.

1. Use local acquiring banks to route transactions into the card networks.
2. If a merchant wants to use fewer acquirers overall, then send those acquirers more data to help them make a better decision.
3. Looking at the BIN data from individual banks, determine which acquirers have the highest AUTH rate against a given issuer. Perform A/B tests with local acquirers against each issuer in order to determine the best path for a card transaction.
4. Adjust fraud settings to match local conditions
5. And plan to adjust these parameters on a regular basis. Things change so “set and forget” is not an option.

In other words, small things, in aggregate, really matter. And make each step, as Ralph says, “local, local, local.”

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As part of Glenbrook’s ongoing efforts to highlight new approaches to financial inclusion in the US, Erin McCune and Justin Pituch recently spoke with a panel of expert practitioners in the financial health space: Kimberley Gartner, Arjan Schutte, and Ryan Falvey.

Topics discussed include:

• History of the financial health space
• Current trends in financial health and financial inclusion
• Key innovations helping financially vulnerable consumers
• Advice for financial health practitioners in the payments world

Meet the Panelists

Previously, we’ve written about how financial wellbeing is measured in the US, and what fintech companies are doing to improve outcomes for low income consumers. In this podcast, we bring together a trio of experts to share their perspectives on the state of the financial health space. All three worked at the Financial Health Network early in their careers, and have since moved on to exciting new ventures. Kimberley is Chief Growth Officer at Canary, a company that helps businesses establish emergency relief funds for their employees. Arjan and Ryan both work in the venture capital space; Arjan leads Core Innovation Capital and Ryan heads up Financial Venture Studio.

What’s Changed?

All three panelists have been active in the world of financial health since the early 2000s, and naturally we wanted to know what’s changed since those early days. Ryan and Arjan both worked at ShoreBank, a Chicago-based community development bank. The bank spun out the Center for Financial Services Innovation, which would eventually become the Financial Health Network. In an era before smartphones, API calls, and open banking, there was a greater focus on education and community investment. But education can only do so much when harmful behaviors are incentivized by financial services providers. And community development banks, with their deep ties to specific neighborhoods, are inherently unable to scale. ShoreBank folded in 2010.

Where Are We Going?

Since then, new approaches have transformed financial health. Arjan noted that the scope of financial health has expanded to include more Americans who may not appear financially vulnerable on the surface, but are actually living paycheck to paycheck with no emergency funds. Ryan pointed out that fintech firms are disrupting traditional financial services paradigms by placing greater emphasis on the value of information than on capital. In a way, this is creating a more democratic environment in financial services by changing incentives for providers in a way that deemphasizes attracting wealthy consumers. Additionally, Kimberley pointed out that corporations are increasingly recognizing the needs of their employees and stepping up to help them through hard times.

Other trends on our radar may only be fleeting: for example, despite some interest from lawmakers in DC and California, our panelists aren’t particularly keen on postal banking. In an age of increasing digitization, turning post offices into bank branches doesn’t make a whole lot of sense. Your phone is the new bank branch, and the vast majority of Americans have smartphones in 2021.

What Do Payments Professionals Need to Know?

This is all interesting history and context, but we wanted to make sure our panelists left us with tangible next steps for our payments professional listeners. Kimberley highlights the value of innovation in faster payments; financial health improves when consumers have access to funds right when they need them. She also notes that payments professionals should understand the everyday financial lives of American consumers and recommends reading Jonathan Morduch and Rachel Schneider’s The Financial Diaries. Ryan advocates for keeping an open mind and disrupting entrenched practices. And Arjan wants us to create financial products that aren’t just frictionless, but aligned with our better selves.

We’re hopeful that folks in the financial health space are pushing the industry in the right direction, and we’re excited to see what Kimberley, Arjan, Ryan, and others like them bring to the market next.

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This podcast with Mimi Joy explores consumer financial wellbeing in the US and initiatives to improve access to quality affordable financial services for low and moderate income Americans. Mimi shares her perspective as Head of Partnerships at the Financial Health Network, a leading authority in the space.

Topics discussed include:

• The current state of the financial health landscape
• Research on the effect of the pandemic on low and moderate income consumers and their financial wellbeing
• New approaches to serving the needs of vulnerable consumers
• Key financial health lessons for payments professionals

What is financial health?

As the economic recovery continues, financial health is attracting increased attention from stakeholders across the financial industry. The Financial Health Network, previously CFSI, works with stakeholders including banks, technology providers, and others to improve financial health by enhancing consumer resilience and increasing opportunity. The first component of this goal, resilience, refers to a household’s ability to withstand a financial shock. The second, opportunity, refers to a household’s ability to save for the future, for housing, education, or retirement.

The Financial Health Network measures the financial health of American families through periodic research including its ongoing Pulse Survey and the annual Finhealth Spend Report. Both track the financial lives of Americans, examining the effects of government stimulus, predatory lending, and new financial technology on how consumers, and especially vulnerable consumers, transact, save, and plan for the future. This research shows that low and moderate income households bear disproportionate costs for everyday financial services.

What are the levers of change?

It doesn’t have to be that way, and providers are realizing the opportunity to serve the broad swath of American consumers who lack access to quality affordable financial services and associated products. The changes don’t have to be monumental; banks eliminating overdraft fees or allowing grace periods before the imposition of an overdraft fee are good examples of seemingly mundane changes that can be hugely beneficial to consumers living paycheck-to-paycheck.

Outside of the traditional banking sector, fintechs are helping low and moderate income consumers make payments, borrow, and save through innovative new products.

What do payments professionals need to know?

As fintech players continue to expand their focus on historically underserved consumers and banks retool their offerings to better meet the needs of the segment, there’s plenty of opportunity for payments professionals to get involved in the changes going on in the industry.

Real time payments, for example, offer an opportunity to speed up access to cash for people who need their next paycheck as soon as possible. And advances in cross-border payments are making it easier for workers in the US to send money to family abroad. Providers can also use data to help consumers make informed decisions about spending and saving, and help people without a credit history borrow based on transaction patterns.

With all these developments, it’s an exciting time to be a payments professional thinking about financial health.

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We continue our series on fintechs and how they improve payments and data handling flows.

One of the major trends that has emerged in the last five years is the “as-a-service” phenomenon. Payments as a service companies – true payment platforms for those offering payment capability as well as those needing to make and accept payments – are broadly available. Stripe is just one example. We are now seeing “banking as a service” providers proliferate.

We spoke with Robin Gandhi of TripActions in Episode 146. TripActions is a fintech focused on the travel needs and expense management of its enterprise customers. And what’s become clear from that conversation and many others is the extent to which fintechs serving specific vertical markets are able to focus so crisply because they can partner with these “as a service” providers who have done the hard, back office work of integration to banks, payments systems, and enterprise software.

We’re calling this trend “multiplayer fintech”. It enables firms like TripActions to take very comprehensive capabilities to market that no single provider could ever hope to do. And to, in a matter of months, deploy more efficient payment transaction flows through process redesign, modern user experience approaches, and with multiple revenue opportunities for the provider.

In this episode, we speak to one of the leading enablers and participants in multiplayer fintech, a company that has done the hard work of software enablement of payment operations, those challenging back office services. We are joined by Modern Treasury’s CEO Dimitri Dadiomov, its Chief Growth Officer Rachel Pike, and Erin McCune, Glenbrook’s B2B practice leader.

A True Fintech

One of the pleasures of producing Payments on Fire® is hearing the creation stories of fintechs like Modern Treasury. And, as with other firms, the business of Modern Treasury grew out of the tool set that Dmitri and his colleagues had to build in order to delivery the services of a mortgage industry firm they’d started. Integrating multiple financial institutions into their payments flow proved challenging given the number of banks and their typical reliance on legacy infrastructure. Speaking with other fintechs addressing other markets affirmed the breadth of those difficulties. Modern Treasury’s raison d’être was established.

In enterprise payments, payments operations is especially challenging. Nothing is as simple as tapping a card or writing a check. Challenges include payment initiation from inside the right application, approval management and controls, reconciliation, and reporting.

In classic fintech fashion, Modern Treasury has taken a design approach that starts with the user experience and process efficiency. No more automation of previously paper-based processes. This is about new replacement processes.

APIs Everywhere

Following the fintech playbook, Modern Treasury’s offer is based on an extensive set of APIs that support multiple payment methods including ACH, wires, check, the Real Time Payment (RTP) network, global payout capabilities, connection to the Canadian EFT system, and digital currency exchange specialist Silvergate Exchange Network, another fintech.

External account verification is supported via microdeposits and through a partnership with the fintech Plaid.

Synchronization of payment activity into accounting is made possible by connections into QuickBooks and NetSuite.

The multiplayer fintech theme is clear here, both in the build-out of Modern Treasury’s own operations as well as in its role as a payments operations platform for other providers.

So, listen to this episode. And, if you know how a particular industry works, dream of what you could assemble from building blocks like these.

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If you want to understand the incumbent merchant services business, the industry that puts payments capabilities into the hands of merchants, take a listen to this Payments on Fire® episode. It focuses on the realities facing the major stakeholders in that portion of the payments industry through a discussion with NMI, a payments technology provider.

Topics discussed include:

Getting payments acceptance capability into the SMB merchant’s hands is complicated. The merchant services industry, as it’s called, is complex. It has multiple sales channels serving dozens of merchant categories.

Multiple Channels to the SMB Merchant

If you are a merchant or an independent software vendor (ISV) or a value-added reseller (VAR), you have no end of ways to payment enable your business. For merchants, their interest is in payment acceptance at the right cost, with reliability, transparency, and flexibility as major concerns. ISVs and VARs who sell commerce systems, look to offer payments to their customers as an embedded value-added service and also as a way to generate revenue over and above software subscriptions or margins on hardware.

Financial institutions have been a traditional channel for merchant acquiring and revenue, often using independent sales organizations (ISOs) to be the sales channel and often a provider of payments technology to the merchant customer.

Many of the providers of payment services and platforms insert themselves into the transaction flow directly, taking a piece of the payment revenue. Pure-play technology enablement as a service is less usual and for the merchants and ISVs and others who want more control over the payments revenue component of their business, the tech-first proposition is very attractive.

The Value-added Gateway

This white label enablement of payment tech providers is where NMI plays. Its customers, its affiliates as the company calls them, are the ISOs, ISVs, and financial institutions selling payment acceptance to SMB merchants. NMI provides, behind the scenes, the tech stack for those sales channels.

Its strategy has worked. Handling over 1.5 B transactions a year with over $100B in value, NMI has a major role in SMB payment enablement. A quarter million merchants are on the NMI platform.

Fintech Disruption in Merchant Services

The ISO channel in particular has been disrupted by the likes of Square, Stripe, and many others. But these fintechs are not attractive as providers to ISVs or FIs because they take the payments revenue, leaving little or no payments margin for NMI’s customers to make money.

NMI provides a bridge to help its ISOs move to what NMI’s Nick Starai refers to as the NextGen ISO, a software-led company selling more than payment terminals and merchant accounts. NMI tech enables the NextGen ISO and supports its partnership with business focused ISVs selling tools that help the customer run their business.

As with other Payments on Fire® guests over the last year, NMI reports that the pandemic has accelerated adoption of touchless tech and its overall transaction volume.

One adaptation NMI has made to the touchless requirement is support for QR codes. Using NMI’s code, a merchant unwilling to upgrade its POS terminal for contactless acceptance can display a QR code to the customer who scans it with her smartphone. The QR code decodes as a URL that directs the smartphone browser to the merchant’s online payment page where the normal checkout process takes place. If the customer has Apple Pay or Google Pay provisioned NMI’s software detects it and displays the operating system’s checkout and payment flow. A scan and a couple of taps for the customer shifts the transaction to card not present rails.

The line between brick and mortar and online continues to blur because customers have come expect a seamless, touchless payment experience regardless of channel.

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The fintech phenomenon and the ability of software developers and their enterprise customers to embed payments capability into business processes relies on multiple forms of access.

• First, there is the establishment of the business and contractural relationship necessary for access to a payment system. The rules of payments schemes, i.e. payment networks, say that you have to be a financial institution to be a direct participant. Non-bank third parties must be sponsored into the network by a member bank. That requirement is in the network rules.
• Second, technical access is necessary. We’re all familiar with APIs, those application programmer interfaces, that companies like Stripe, PayPal, and others have built to simplify access to card network rails (primarily) and open up access to millions of new payment acceptors.

But there are other important payment systems. In the US, the automated clearing house (ACH) is systemically important because it is ubiquitous and carries far more value than cards, cash, and check. Because of that, the pandemic, and the secular trend to digital, ACH is hot as is connectivity to bank accounts through firms like Plaid and GoCardless (podcast link).

The US also has the fast payments network the Real Time Payments Network (RTP) from bank processor The Clearing House. While connected to far fewer financial institutions, its 24/7 availability and instant push payment capabilities are opening up new use cases in payroll and B2B payments (podcast link).

Programmatic access to non-card rails is the focus of this Payments on Fire® episode. Dwolla is a specialist in the programmatic access to the ACH and now TCH’s Real Time Payments (RTP) Network.

Founded in 2008, Dwolla has gone through some pivots. At one time it built a real-time payment switch with the ambition to connect all banks to it. Dwolla’s helped with the Fed’s Faster Payments Task Force and the Gates Foundation’s Mojaloop switch for e-money systems in developing markets.

Dwolla has always been a bit ahead of the market but now the market is catching up as interest in the use of non-card payment methods grows and the API-based proposition has become a foundational business modality.

In this episode, Brady Harris, Dwolla’s CEO, and Adam Steenhard, Senior Director of Corporate Strategy, join Glenbrook’s George Peabody and Elizabeth McQuerry to discuss the growth of digital B2B payments and enterprise interest in fast payments.

Brady and Adam speak to their experience with important capabilities built in RTP including the request for payment message type and the ISO 20022 payment data representation standard. They also discuss how partnering with other fintech providers gives them the ability to offer a broad capabilities set that would otherwise take years or be impossible to build.

This “multiplayer fintech” model relies on the assembly of capabilities offered by platform providers and offerings designed to address what a specific market requires. Dwolla uses the multiplayer fintech model to expand its offering into a comprehensive set of capabilities – a rich payments-as-a-service platform. TripActions has taken payments- and banking-as-a-service platforms and applied them to travel and expense management (podcast link). More on multiplayer fintech ahead!

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Fast payments are “must haves” in most economies. Their key attributes make them superior to other bank-led, open-loop systems. The speed of money has caught up with the speed of our communications. As Glenbrook’s Elizabeth McQuerry puts it, “this is a convergence of ideas around the world, a commonality, around this single approach in payments.”

Note: “Fast payments” is the term of art that the world’s standardized on. These new systems have gone by multiple names: real-time payments, faster payments, immediate funds transfers, and more. Very recently, the World Bank and the Bank for International Settlement (BIS) settled on “fast payments” as the moniker for these systems.

In this Payments on Fire® episode, Elizabeth and ACI Worldwide’s Craig Ramsey discuss the evolution of fast payments, its global spread, and the wide variability of use cases seen around the world.

ACI Worldwide is a $1.3B provider of payments technology to financial institutions, billers, merchants, and other ecosystem participants. Operating 24/7 in some 14 countries and 18 systems, ACI is a major participant in the global fast payment phenomenon. Among ACI’s roles are connectivity of core banking systems (the ledgers) to domestic fast payment systems. ACI also brings fraud management and back office services.

Elizabeth and Craig discuss the impact of rules on use cases, the slow rollout of services that take advantage of ISO 20022 messaging, and the nuances of deployment from country-to-country.

Craig notes that fast payments do not replace existing systems. They provide banks, and their customers, with a broader range of payments choices. Banks can make decisions about which rail to use for a given transaction.

An essential success factor is ubiquity. National mandates are enormously influential. The explosive success of Brazil’s new PIX system is an example. But even in a market-driven economy like the US, the benefits of fast payment systems are very apparent,

Push Payments and Risk

From a payments network and financial institution point of view, push payments are less risky than pull payments. The principal reasons include:

That said, those accountholders themselves can be victimized by fraudsters through social engineering.

Authorized Push Payment (APP) fraud occurs when the rightful accountholder has been convinced to send funds to the criminal. This fraud is troubling because the payment is initiated properly. The accountholder has logged into their financial institution and provided the correct credentials. They’ve simply sent the funds to a fraudster. This form of fraud is a concern for wire systems—high value, low volume system ($4.5M per transaction) and, as the UK has reported, it is a serious concern for the fast payment systems that are built for high volume, lower value transactions. In the UK, no systemic solution has been found.

Fast Payments Now, CDBC Later?

Payments on Fire® Episode 152 – Fast Payments with Elizabeth McQuerry and ACI’s Craig Ramsey.mp4 from Glenbrook Partners on Vimeo.

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