Faster Payments: Fundamental Tech for Payments Innovation

Payments innovation comes in waves. And the wave that’s breaking on the U.S. – having swept over 50 countries around the world – is faster payments. Also referred to as Real-time Retail Payments (RTRP) these systems are fundamentally different from what’s come before:

• They are push payment systems
• They are new, systemically important domestic systems
• Risk and economic models are dramatically different than what’s come before
• They run 24/7 365 days a year. Go ahead, push money to and between accounts during your Sunday midnight snack
• Novel messaging and data formats open up new use cases and deep integration opportunities

Most important, these are “clean sheet of paper” payment systems built for the Digital Age.

Glenbrook has been working with these systems for over a decade. Our global experience gives us unique insight into how these systems are used and their real and potential impact on multiple stakeholders.

Why This Course is For You

If you are responsible for payment products and services in any way and you’re looking to differentiate your services, join Glenbrook’s Russ Jones and Yvette Bohanan on this deep dive examination of how faster payments is fundamentally altering payments industry dynamics.

Here are other reasons for you to join the workshop:

• Smart, expert workshop leaders to guide the group through the materials, make it interactive, and love QQ&A
• A crisp look at what these systems do, don’t do, and how overlay offerings in the UK, India, Australia, and Mexico extend their utility
• A deep dive into how The Clearing House’s Real Time Payment Network Request for Payment message operates and how the RTP Network settles (it’s a very new approach)
• Workshop attendees from across the industry bring unique questions and perspectives
• The workshop description has many more reasons. Check it out.

Take a quick listen to learn more about the workshop from one of its leaders, Russ Jones. George and Russ take a quick, fun tour through why this course is different.

Go here for the workshop detail, schedule, and registration.

The Fintech Phenomenon is rarely about doing something entirely new. It’s about doing things in a new way that better fits the needs of the target market. The fintech model also enables the provider to reach underserved market segments.

Lending is, of course, the core offering of banks. But between their legacy processes, underwriting requirements, compliance demands, and more, they simply aren’t nimble enough to serve new segments in our evolving economy.

And the banking crisis of 2008 left them even more risk averse.

That’s left small business lending wide open to fintechs.

Case in point: the online seller, that small business that makes a product or buys wholesale and sells direct to customers through their own website and, for most, through marketplaces like Amazon and Shopify.

Cash Flow is Everything

Here’s where success can kill a business. If their online store and what they’re selling catches on, they’ve got a tiger by the tail. They’ve already invested their own money to get the store off the ground. But they have to keep buying inventory in order to fulfill orders. Where’s the capital to pay for that inventory to come from in order to do that?

As the founder of multiple small businesses, I can tell you that cash flow management is a daily concern. It’s no different for these Amazon sellers because Amazon pays out every two weeks and it may take a month or more for the funds from some transactions to hit the seller’s bank account. With cash flow “everything” for the SMB, funding business growth is a major challenge. To keep up, you have to reinvest to feed the beast. You take all your earnings and put them into new inventory.

That’s where our guest for this episode comes in. Keith Smith is co-founder and CEO of Payability, a firm that has loaned over $2.5B since 2015 to Amazon and Shopify sellers.

Data Enables the Model

Payability, sitting between the seller and the marketplace, sees massive data sets that help it and its algorithms determine risk. Given the volume of data, the myriad sources of these signals, it’s impossible for humans to do the underwriting. Machine learning can examine far more signals than a human can ever handle. So, as Keith puts it, Payability’s staff “trains the robots” to help the company accurately price financing for those who would otherwise be locked out this kind of business.

The Money Supply Chain

In the business of selling money, you have to have access to it. You have to be part of the money supply chain.

Drastic changes in the finance ecosystem have taken place since 2008. With traditional banks stepping back from small business lending, fintechs have entered the money supply chain, as the new distributor of funds, enabled by their ML-based underwriting and risk models.

The fintech underwriting sophistication has been a boon to traditional sources of financing, both banks and institutional investors. They still sell money; they just do it through the new fintech channel.

The COVID Accelerator

As a funder of online businesses that have benefited from the COVID-driven shift to e-commerce, Payability has prospered in 2020. As Keith put it “we’ve seen four or five years of growth out of a single year.”

In Glenbrook’s payments consulting work, our discussions with merchants, billers, sellers, and their technology parters have included this common refrain. COVID has hurt many but others, able to respond to the challenges and opportunities of the digital shift, have prospered.

Find more podcasts and commentary at Glenbrook’s Payments on Fire® site, check out our blog Payments Views, and subscribe to the best payments industry news feed, Payments News. Read our COVID-19 Payments Industry eBook.

Click for transcript

In a crisp explanation of account takeover and authentication risks, George and Robert Capps, Vice President, Market Innovation, at NuData Security. They discuss the findings of a recent NuData report and its experience with the sophistication of online fraudsters. NuData’s techniques are all about foiling cybercriminals as they bang at the front door of financial institutions, merchants, streaming services, and more.

Payments on Fire® listeners know that we’ve been taking a steady look at fraud issues over the past few years. Fraudsters have been pouncing on every opportunity, taking advantage of pandemic relief payments as well as the shift from card present to card not present, remote commerce transactions. If this topic didn’t matter, we wouldn’t be talking about it.

Measuring and detecting what the fraudsters are up to and their impact is critical. To better understand what’s going on, we speak with Robert Capps, Vice President, Market Innovation, at NuData Security, a company that specializes in behavioral biometrics.

NuData published in Q3/2020 its e report on cybersecurity trends. And the findings are really interesting.

What They Found

The current scourge is account takeover. ATO is a concern for financial institutions, for retailers, streaming media companies, and more.

Attack method sophistication goes well beyond reuse of stolen user IDs and brute force password guessing.

It is an arms race of increasingly complex and sophisticated attack and detection techniques.

NuData and others have expertise in behavioral analytics, tools that detect, among other things, bots that are build to emulate human interactions at the account login page. The use of CAPTCHA is one technique to deter these attacks. But the fraudsters have responded, going so far as to establish call center-scale operations with staff endlessly filling in CAPTCHA forms to add the human touch and smarts in what are otherwise highly automated ATO attacks. This is human farming to get around CAPTCHA and other rudimentary defenses.

Financial institutions and retailers aren’t the only targets. In this age of stay at home orders, streaming services have become targets of opportunity. Parasitic use of streaming service accounts has risen as the fraudsters sell streaming service account credentials.

The Defender’s Balancing Act

There are dedicated professionals working on both sides. But the defenders have the harder job. Besides having to protect every door and window, they also have to keep it simple for good users to transact. Adding friction to a transaction flow increases the shopping cart abandonment rate. That’s bad for the ecommerce merchant and insults the customer. It’s a tough balancing act.

Part of that balance is handled by “step up” authentication based on the level of risk. A bank might let a session proceed to a balance inquiry without asking for further customer input. But if a new payee is added to the account, the bank might insist on sending a one time code to the customer via email or SMS.

Getting to Good ASAP

Providers of authentication services see activity from a lot of devices. Building profiles based on these devices and the many variables surrounding each transaction, they use the profiles to efficiently track the behavior of each in order to separate the known good profile from the questionable.

A technique to “get to good” faster is to pool that profiling information in anonymized form from across all of the clients who agree to participate.

COVID Impact

Robert discusses the shifts in fraud given the pandemic. As a percentage of transactions, fraud increased substantially in the travel segment. And for those retailers operating in the physical world the shift to e-commerce was sometimes overwhelming. That’s a story we’ve heard a lot at Glenbrook. Check out our COVID Series book.

Podcast transcript

Take a listen as George and Deluxe’s President and CEO Barry McCarthy discuss how the company continues to adapt to and prosper in the digital age. Barry talks about the journey the company has taken, in recent times shifting from a conglomerate model grown via acquisition to today’s streamlined and focused small business focused organization.

The Journey from Paper to Digital Services

In Glenbrook’s Payments Boot Camps® we make the point that fintechs rarely invent new functions out of whole cloth. What they do excel at is reimagining and reengineering the processes that incumbent players have been locked into for years.

It’s the incumbent’s inability to adapt that puts them at a competitive disadvantage.

As Charles Darwin put it:

“The species that survives is the one that is able best to adapt and adjust to the changing environment in which it finds itself.”

We make this point in our training. Incumbent firms, no matter what the industry, survive and succeed over decades only if they have the ability to adapt to change in their environment. You only have to glance at the moves Visa and Mastercard have made over the last five years – the acquisitions of Plaid and Vocalink (among many) come to mind – and it’s obvious adaptation is at the core of their respective strategies.

In this episode, we speak with a company that has over 100 years of adaptation behind it. Starting with the invention of the checkbook a century ago Deluxe Corporation has expanded and adapted its offerings to the digital needs of its customers.

Take a listen as George and Deluxe’s President and CEO Barry McCarthy discuss how the company continues to adapt to and prosper in the digital age. Barry talks about the journey the company has taken, in recent times shifting from a conglomerate model growing by acquisition to today’s more streamlined and focused organization.

Open banking. It’s a term we started to hear about at the end of 2016 and since 2019 interest has remained high. That’s according to Google Trends. Along with those searches, the related hot topics were PSD2 and APIs.

Regulation and technology is opening up access to bank accounts for payers, billers, and service providers. But the state of that openness varies by region and country with important consequences for billers, merchants, and their payment providers.

In this wide ranging discussion, George and Duncan Barrigan, Chief Product Officer at GoCardless, cover a range of topics, all through the lens of the company’s primary value proposition, the use of direct debit from bank accounts to enable recurring and one-off payments across 30 different countries.

As you’ll appreciate, stitching together a network capable of using the domestic low cost rails (think ACH and BACS) in 30 different countries to provide both domestic and cross-border recurring payments is no easy task.

Topics discussed include:

• The definition of open banking
• What the impact of open baking has been
• Where open banking is taking off, and where it isn’t
• Recurring payments defined and use cases
• APIs and integration
• How a biller or merchant can move customers from one payment method to another
• Cross-border direct debit
• And, of course, the GoCardless value proposition, something its financial backers believe in given its recent $95 million raise.

Financial inclusion for the poor is a global challenge. In this episode, we dive into the story of Mojaloop, a platform that enables interoperability and transaction routing between mobile money system operators, banks, and other providers. It’s a fascinating, and evolving, story. Take a listen.

= = = = = =

Individual Benefits, Nation Building Impact

Financial inclusion for the poor is a global challenge. Over two billion adults lack access to financial services. While that number is declining – and in no small part because of the work done by this episode’s guests – that level of digital disenfranchisement and cash dependence suppresses well being at multiple levels:

• Individuals must spend significant time to pay bills when they must travel to the biller or its agent, never mind travel to acquire cash. Carrying cash, of course, comes with its own set of risks
• Families suffer as time away from work and home reduces family income
• Entrepreneurs and small businesses face the same time penalty, high transaction costs, and uncertain credit access
• Entire countries experience diminished GDP because of productivity losses and transactional friction. Cash-based transactions also fuel the shadow economy, making audits and taxation very difficult

While Kenya’s M-Pesa is the most well known exemplar, there are hundreds of systems around the world offering digital payments, bill pay, savings accounts, microlending, and other services to their accountholders.

Not Without Concerns

Financial inclusion efforts are not without downsides as some credit extension services, riding the e-money rails laid down by the provider, charge usurious rates. Gambling services are similarly problematic.

With success, e-money systems become systemically important to a country and, therefore, pose a level of systemic risk should the operator go offline for technical or security reasons.

And as with every digital activity that touches money, there is the problem of fraud.

But these are not insurmountable challenges. Some are candidates for regulation-based cures. Others can be addressed by providers themselves.

The Network Effect Matters

Another challenge to the growth and health of mobile money systems is interoperability among those systems. In many countries, multiple e-money systems compete for accountholders but do not interoperate. A user on one system cannot send money to a user on another. That condition adds friction, reducing the e-money value proposition for all stakeholders.

The challenge becomes even more acute, and costs rise, when the sender and receiver are in different countries.

Ecosystem Enablement

A thriving digital ecosystem and economy requires the right conditions:

• Regulation that encourages innovation while also protecting the end user
• Low cost enabling infrastructure, and
• User-focused services that meet real needs

The Bill & Melinda Gates Foundation has taken on financial inclusion for the poor in multiple ways, through support of:

• Development of guiding principles for the delivery of financial inclusion through the Level One Project
• Creation of guidance for regulators to speed accountholder onboarding while limiting fraud and risks concerns
• Support for the development of open loop software designed to speed system interoperability. Called Mojaloop, this open source effort’s goals include the development of a reference platform

In this episode, we dive into the Mojaloop story with two leaders of the work:

• Paula Hunter, Executive Director, of the Mojaloop Foundation
• Kosta Peric, deputy director, Financial Services for the Poor at the Bill & Melinda Gates Foundation

It’s a fascinating, and evolving, story. Take a listen. And, if financial inclusion for the poor in developing markets is important to you, get involved with Mojaloop. It’s quite a team.

For a front row seat on payment innovation you have plenty of choices. Yes, Stripe and Square are based in the tech hotbed of the Bay Area and it’s tempting to stare at their success. But a look around the world reveals the evolutionary breadth of how payments are made, regulated, and brought to market. India and China alone reveal how remarkably different approaches can scale to enormous dimensions.

There’s no better guide to what’s happening in payments around the world than Glenbrook’s own Carol Coye Benson. In this episode, Carol and George discuss her new book Global Payments and the Fintech Innovations Changing the Industry.

Carol spent much of the last decade traveling throughout the world consulting to organizations on the impact of technology and business models on national payment infrastructure. The book is informed by the scores of discussions she’s had with tech executives, the leadership of development banks, government agencies, and fintech start-ups.

Take a listen to why she wrote the book, some of what she found, and her take on some of the big questions still to be answered.

VIDEO: here’s how Carol introduces the book:

Listen to the Payments on Fire® podcast:

2020 has been an active period for payments innovation. COVID-19 has been a forcing function for digital payments across multiple payment domains. “Touchless” and “contactless” payments are now common themes of retailer advertising.

And, of course, many other trends have accelerated this year. Fintechs, mobile wallets, the expansion of open banking initiatives, and point of sale lending are trends with impacts spreading across the market. 2020 has also seen the increased legitimacy of blockchain-based payments as demonstrated by central banks around the world consider and even pilot digital fiat currencies.

These are the topics Russ Jones and Yvette Bohanan will present in Glenbrook’s Innovation in Payments Insight Workshop coming up December 8th and 9th. If keeping up with the changes in our industry and developing real insight into the key trends is important, you won’t find better guides than Russ and Yvette.

Take a listen. Check out the agenda.

COVID is a forcing function for digital channel growth across the world as consumers and businesses reduce their reliance on physical interactions. We’ve seen usage shifts in how bank accountholders in Peru transact – from branch to digital – as well as big shift in payment behavior.

We outlined a lot of this in our own COVID series on Payments Views.

Many merchants have turned to online as a matter of survival. Many restaurants, for example, have added order ahead and curbside pickup as standard offerings just to stay in business.

Our assessment is that, even with an effective vaccine and adequate immunization rates, we’re never going to return to the same point. E-commerce transactions have increased, yet again, permanently. How much volume returns to the physical point of sale domain once COVID is behind us is unknown. But it’s not going to go back to previous levels.

That shift is an opportunity for many in the payments industry, including fraudsters, those unwelcome stakeholders. They are taking advantage of merchants who weren’t prepared for their new or increased online payment volumes.

We’ve spoken with a number of fraud management firms on Payments on Fire®. In this episode we speak with Eyal Raab, VP of Sales, at fraud management company Riskified about his firm’s expanding approach to fraud management for merchants whose goal is to maximize authorization rates.

Fraud management is complex. Merchant needs vary considerably. And what the fraudsters are up to constantly changes. Payment fraud management and fraud are both growth industries.

You’d have to be aggressively disinterested in the payments industry not to be aware of its attraction to investors. The COVID-19 pandemic has done nothing to dampen the interest, if not outright enthusiasm, for the payments industry among investors of all stripes.
Actually, the pandemic has lit a fire under key industry segments like the e-commerce domain, digital banking, and disbursements.

The dynamics of change pushing the payments industry ahead are only increasing.

Incumbent Consolidation

The payments industry has been dominated by networks and processors. While networks have remained largely independent, the processing industry has undergone tremendous consolidation over the last decade, accelerated recently by the giant acquisition of First Data by Fiserv. Scale really matters in processing.

But that scale comes at the cost of agility because the incumbents must rely on the systems they already have and the ones they’ve acquired. Consolidation onto just a few platforms is hard. And that means incumbents don’t benefit as clearly from newer technologies based on cloud computing and APIs.

Start-ups Abound

While investor interest in what are typically public companies remains strong, it is interest in start-ups and young companies demonstrating early success that drives early investors. These companies need cash to grow and equity financing is a primary source. It could be an individual with cash looking for a higher return on a portion of her portfolio. Family and friends as well as wealthy individuals are typical of “angel” investing.

Venture capital is another source that often fuels the shift from proof of concept to the first minimum viable product and, often beyond, through multiple rounds of raising venture capital.

Fueling the Next Incumbents

Fueling the growth from business teenager-hood to young adult are growth equity firms that bulk up the business’s overall capabilities. While a cool technical idea can form the core of a new business, it takes business infrastructure like a global salesforce, enterprise-grade financial controls, and more to build a company that can execute on its potential.

In this Payments on Fire® podcast, George talks with Steve Sarracino, Founder and Partner of Activant Capital, a growth equity firm based in Greenwich, CT. Steve’s firm is an investor in Finix and Bolt, companies that precisely fit his investment criteria. And he loves the payments industry for its past and, of course, for its potential.

(Listen to Payments on Fire® Episode 106 with FInix’s Richie Serna)

Like those of us at Glenbrook, Steve sees lots of change ahead for the payments industry. And, like us at Glenbrook, he wants his company to influence and prosper from its evolution.