We know you’re not looking for problems. But they are looking for you. Here’s our annual catalog of the ones causing the most headaches.
If adversity breeds strength, as the old saying goes, then payments professionals may have plenty of opportunity to develop their strategic and tactical biceps. The industry no sooner recovered from all the ill effects of the pandemic than it found itself enmeshed in a slew of other issues, some old and familiar but some others quite surprisingly fresh.
Herewith our annual catalog of the problems we think are most alarming for payments professionals right now, ranked in order of their impact—or potential impact—on the industry. “Impact,” of course, can be a matter of degree. Some of the matters ranked below, however, may be no less pressing for being still more or less in their larval stage.
So, what do we mean by “pressing”? The term refers to the sense of urgency the issue arouses in those it affects, not so much to the size of the market that must deal with it. Some issues, on the other hand, are pressing for a substantial segment of the industry. Take our number-one issue, the Credit Card Competition Act. The bill proposes to control merchants’ acceptance costs by requiring a wider choice of networks that can carry transactions. That means merchants, networks, and banks are all affected—no small constituency.
The ranking was done by our staff editors, who cover this industry day by day. You may agree or disagree. Either way, let us know what you think the big issues in payments are, and we’ll take up the matter with our 18th annual ranking next year. You can reach me at email@example.com.
- The CCCA’s Long Shadow
The Credit Card Competition Act, which was reintroduced in the Senate earlier this year, has been generating a lot of buzz lately, yet many unanswered questions remain concerning the bill’s potential impact on the card industry.
The bill, whose lead sponsors are Senators Dick Durbin (D-Ill.) and Roger Marshal (R-Kan.), would require all banks with $100 billion or more in assets, essentially the largest card issuers that control more than 90% of the credit card market, to offer acquirers a choice of two unrelated networks for routing. If one network is Visa, for example, the other can’t be Mastercard.
Key questions concerning the bill include which networks would serve as alternatives to Visa and Mastercard, how likely are issuers to support networks that may significantly lower their pricing structure as alternatives to Visa and Mastercard, and what kind of teeth the CCCA would the law have?
While the debit networks such as Pulse and Shazam, are considered good bets to be low-cost alternatives to Visa and Mastercard should the CCCA pass, they remain mum about their plans. Plus, the debit networks’ history as low cost-alternatives is likely to prompt card issuers to support networks with fee structures similar to Visa and Mastercard, such American Express and Discover. It also remains to be seen how effectively regulators would be able to enforce the CCCA, as debit routing rules haven’t always worked so well, payment experts say.
Co-sponsor Marshall has publicly stated there is a commitment among supporters to vote on the bill in the Senate this year. Meanwhile, proponents of the bill cite growing bipartisan support as reason to be optimistic the bill will become law.
- The Fed and Real Time Payments
A much-ballyhooed newcomer to real-time payments, FedNow, is spurring more interest in instant payments despite its chief competitor, The Clearing House Payments Co. LLC’s Real Time Payments network, entering its sixth year of operations.
With FedNow and RTP vying for attention, what’s next? The hope is that with two players educating merchants about real-time payments and selling similar capabilities, the number of banks and credit unions offering it will grow. To do that, however, RTP will have to enjoy continued success and FedNow will need to convince financial institutions it has a viable and valued service.
FedNow already has found some traction, having grown from 35 financial institutions at its July launch to 108 as of early October. “For instant payments to be successful in the United States, the networks need to have as many participants as possible,” Scott Anchin, a vice president at the Independent Community Bankers of America, a Washington, D.C.-based trade group, told Digital Transactions in October.
Getting more FedNow users involves getting the word out and educating financial institutions, especially smaller ones that may not have explored real-time payments options before. “The key concern on everyone’s mind is time—how long will it take to get to ubiquity or at least significant volume,” Miriam Sheril, head of product at Form3, a London-based payments provider, said in October.
Front and center for many FIs will be use cases. Examples include disbursement of urgent funds, bill payment, and money movement, such as for real-estate transactions. First, though, is getting a good portion of the approximately 9,000 U.S. banks and credit unions to enroll in one or both real-time payment options.
- The Chargeback Challenge
Illegitimate chargebacks, known as friendly fraud, remain a nettlesome problem for merchants. A Chargebacks 911 survey of 300 merchants in May revealed respondents saw a 19% increase in illegitimate chargebacks compared to the same period a year ago.
Help may be on the way. Visa Inc. announced in September changes to its dispute rules and processes to give merchants more ways to show a disputed charge is valid and authorized, such as increasing merchants’ ability to provide more accurate data around a disputed transaction. The rule changes could potentially save small businesses globally $1 billion in chargeback costs over the next five years.
“The change we’ve made to our dispute process is an important part of our strategy for fighting all types of fraud on the Visa network,” Paul Fabara, Visa’s chief risk officer said in a statement. “The dramatic rise in first-party fraud rates necessitated this change.”
The merchant community welcomed the changes. Kaseedee Pilarz, owner of PilatesBKLYN, a Brooklyn-based fitness studio, said the impact of friendly fraud can be devastating for her businesses. “I have been in tough situations where legitimate membership charges have been disputed. If I lose the dispute, not only do I lose the membership fee, I also get a penalty,” Pilarz said in a statement. “That can be the difference between making payroll or not. This change will help ensure I have a fair shot during those disputes.”
The Merchant Risk Council also supported the changes, noting that small businesses are significantly more at risk for friendly fraud. MRC chief executive Julie Fergerson added that Visa’s rule changes signify “historic progress” in combatting friendly fraud.
- Slow Checkouts Are Killers
With an average e-commerce conversion rate ranging from 2.5% to 3%, according to Shopify Inc., online retailers look to the checkout flow to capture more sales and not impede purchases. As e-commerce sales picked up during the pandemic, especially among those who had not shopped online before and among those using their smart phones more often, the impetus for a better checkout experience ballooned.
The goal has been to increase the conversion rate—the percentage of Web visitors who purchase from an online store—and thereby boost revenue. Among the approaches many retailers and e-commerce platform providers have taken is to reduce surprises and provide customer choice in payment method. The goal is to eliminate as many disruptions as possible in the checkout process.
One tactic along these lines is implementation of accelerated checkouts. Think Apple Pay, Google Pay, or PayPal, where not only is the payment information stored but shipping details, too. Accelerated checkout is a trend now, but will gain broader use, Alex Hoffman, senior vice president of payments at BigCommerce Pty. Ltd., says. A one-page checkout is closely tied to accelerated checkout use.
How effective might this be? In a BigCommerce conversion report released in July, a test group of sites that offered both PayPal and Apple Pay had a conversion rate of 61.9%. Offering these advanced payment methods gives consumers choice without impeding their intent to purchase.
Paze, the upcoming digital wallet from Early Warning Services LLC, is another accelerated checkout example. Though Hoffman had no announcement regarding Paze and BigCommerce, he called it the equivalent of Zelle for e-commerce. Early Warning also created Zelle, the person-to-person payment service.
- Abandoned Carts Are Everywhere
From too many steps in the checkout process and unexpected fees to a lack of personalization, there are numerous reasons for consumers to abandon their e-commerce shopping carts.
The average cart abandonment rate is 70%, according to user-experience research firm The Baymard Institute. Key reasons why cart abandonment is so high include higher than expected shipping fees and taxes (47%), ecommerce merchants wanting new customers to open an account (25%), a long or complicated checkout process (18%), not being able to see or calculate the total cost of the order upfront (17%), and not enough payment options (11%), according to Baymard.
Reducing friction at checkout can increase conversion rates by 35%, which translates to about $260 billion in purchases e-commerce merchants in the United States and Europe might otherwise lose, Baymard says.
One way e-commerce merchants can improve checkout is by offering more payments and customizing those options for the consumer. Stripe Inc., for example, recently introduced a so-called Payment Element that uses algorithms trained on billions of data points to present consumers with what it determines to be the most relevant payment methods from more than 40 options.
For example, a French consumer shopping in Japan can be shown Cartes Bancaires, a payment option native to France, while local payment options are suggested to Japanese consumers. Stripe offers merchants access to more than 100 payment methods.
Offering digital wallets, such as Apple Pay, Google Wallet, and PayPal, can also increase conversion rates by allowing customers to shop online without surrendering their credit card information, and offering Buy Now Pay Later, according to e-commerce platform provider BigCommerce.
- Fraud’s Ugly Permanence Online
Since the Covid pandemic, which pushed consumers to shop online at unprecedented levels, online fraud has become a larger problem and shows no signs of slowing down.
Online merchants accounted for 58% of all fraud and breach investigations, according to Visa Inc.’s Fall 2023 Biannual Threats Report. In comparison, brick-and-mortar merchant fraud made up 20% of fraud and breach investigations, while ransomware/[other] fraud schemes made up 7%.
Since the pandemic, the scams cybercriminals run on consumers—and merchants—have gotten more sophisticated. One consumer scam is directing consumers to favored merchant Web sites that appear to be legitimate, according to the Visa report. In reality, these sites are masterfully created counterfeits that capture consumers’ order and payment credentials, but do not deliver the goods.
Another favored attack strategy is cybercriminals targeting known vulnerabilities in an e-commerce merchant’s platform. One known vulnerability allows cybercrooks to create new customer accounts on an e-commerce merchant’s site, then inject the data fields at checkout with digital skimming code during order placement. Once the order is approved and an email confirmation sent, criminals can release backdoor commands that can give them remote access to the merchant’s e-commerce platform.
Once inside a merchant’s platform, cybercriminals can try to obtain any information they want, be it a consumer’s personal or payment credentials or a merchant’s payment credentials, according to Visa.
Cyber criminals are also employing so-called bust-out schemes, which occur when a cybercrook establishes a legitimate merchant account and processes a small number of legitimate payments to establish credibility, then submits numerous fraudulent transactions and vanishes after obtaining payment, the Visa report says.
- The Regulators Strike Back
With the possible exception of the Consumer Financial Protection Bureau, the nonbank payments industry until recently hadn’t been much of a focus for Washington’s regulators. 2023 may go down in the industry’s history as the year that changed—or certainly began to change.
Consider just some of the actions Uncle Sam’s various agencies took this year. Start with, of all places, the Securities and Exchange Commission. With digital currency gaining, well, currency in the payments business, the SEC decided to take a closer look at two of the industry’s biggest players.
Take the Binance crypto exchange. The SEC this spring filed 13 civil complaints against the Cayman Islands-based conglomerate and linked entities, alleging among other things that it operates unregistered exchanges. Binance responded that the suit was “baseless.” The company had earlier announced it would stop activity in dollar transactions and move to being a crypto-only exchange.
Then, without missing a beat, the SEC sued the U.S.-based cryptocurrency exchange Coinbase, this time alleging the company operates as an unregistered broker. Coinbase vowed to fight the suit, which came after the agency had vowed to force crypto companies to abide by federal securities rules.
The litany of regulation doesn’t end there. The Federal Trade Commission in March issued a proposed rule that would require sellers to offer a “click to cancel” button that customers could use to more easily stop subscriptions and recurring payments. And, in April, the FTC accused chargeback-resolution provider Chargebacks911 of allegedly using multiple techniques to prevent consumers from winning chargeback disputes, accusations the company denied.
But no agency was more active in payments than the CFPB. Among other notable actions, the regulator in September released a report raising questions about the part restrictions imposed by big technology firms like Apple Inc. and Alphabet Inc’s Google subsidiary may play in hampering innovation, consumer choice, and the growth of open and decentralized banking and payments in the U.S.
And, in June, it fined payments provider ACI Worldwide Inc. $25 million for erroneously debiting from nearly 500,000 homeowners a total of $2.3 billion in mortgage payments through the automated clearing house network in 2021.
- The Hard Edge of SoftPOS
More merchants are adopting technology that lets them process card transactions on an ordinary mobile phone equipped with nothing more than the software necessary to run the payment—no dongles necessary. And the technology lets merchants save on acceptance costs since the payment is a card-present rather than card-not-present transaction.
But while softPOS may cut acceptance costs for merchants while spawning new opportunities for acquirers, its emergence is creating some complications, as well, some experts caution. Much of this lies in its complexity, said Bohdan Myroniw, sales director for the Americas at Preludd Payment Services, a France-based terminal company, during an August panel discussion on softPOS at MPC23, a payments-industry conference.
“There’s no magic—it’s just as complex” as installing traditional terminals, said Myroniw. Indeed, “complex” was a term that occurred several times during the discussion with respect to the adoption of mobile payments on commercial off-the-shelf devices (MPOC, for short), offsetting some of the virtues of the move to softPOS. “MPOC is card-present and fully secure, but complex,” acknowledged Thad Peterson, a senior analyst at Datos Insights who moderated the panel.
- Super Apps – Myth or Reality?
For years, banks and nonbanks alike have sought the magic formula for creating not just a popular financial app, but one that can handle a wide array of financial—and even some non-financial—tasks. It’s called a super app, and it’s wildly popular in part of Asia, particularly in China. Indeed, in China, it’s said you could manage your entire life with a super app.
But in the U.S. market, financial apps have stuck pretty closely to payments, a vital function but maybe not one that the average consumer finds compelling enough to use regularly. There’s plenty of competition on that phone for the user’s attention, after all.
Even so, there have been efforts by U.S. companies to introduce a super app in the true sense. One of the earliest entrants was PayPal, which a few years ago launched what it explicitly called a super app that featured a raft of shopping and payments features. Not much is heard of it now.
But for all their obscurity in the 50 states, super apps in one form or another remain an ambition for at least some payments networks. There are few more compelling opportunities, after all, than capturing the constant attention of hordes of phone-bearing consumers.
The key is finding the right formula, and this is where the payments industry has struggled. Some observers are hopeful the upcoming Paze wallet from the major banks that back Early Warning Services LLC may find success and lay a foundation for an eventual super app. Set for introduction early next year, the wallet will give users the ability to make online purchases from a wide variety of merchants. Early Warning expects issuers representing 150 million cards to be participating ultimately in Paze.
- The In-Car Payments Quandary
A few years ago, some carmakers championed the idea of paying for gas, coffee, and donuts from the dashboard. While wallets were developed and tests completed, the idea of a car as a payment vehicle—payment device?—stalled out.
But now, in 2023, new implementations are available and they’re beyond testing. In use is Mercedes pay+, an in-car payment app that uses tokenization to virtually turn the car into a secure token. Available only in Germany for now, the service uses a fingerprint sensor in the dash to enable payment authorization. Fuel-payment and parking-payment capabilities are available now.
By contrast, Hyundai Pay, announced in September, is available in the United States in the 2024 Kona, a small crossover. To access Hyundai Pay, car owners download the MyHyundai mobile app and activate the Bluelink subscription agreement. Bluelink is Hyundai’s connected-car app, which buyers receive free for three years. Bluelink enables Hyundai owners to remotely start their vehicle, lock and unlock its doors, locate it in a parking lot, run a full vehicle diagnostic check, and map routes to a destination.
Hyundai owners will be able to access Hyundai Pay through the Bluelink app. Card data stored within the Hyundai Pay wallet is tokenized.
It’s not just automobile manufacturers developing in-car payments. Car IQ Inc., which creates payment platforms for vehicles, is working with Visa Inc. to enable acceptance of its Car IQ wallet across the Visa network. Even Apple Inc.’s CarPlay service can be used to order and pay for pizza and food using the stored payment method in the user’s merchant account. P97 Networks also is working with Visa to deploy its token technology to reduce friction for in-car payments.
Now the question is, are these developments enough to add horsepower to the long-stalled efforts to turn automobiles into rolling payment devices?