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Evolution in Payments & Commerce: 2018 Success in Payments - What Does that Look Like? (MAG Quarterly- Volume Six, Issue One)

By Laura Townsend, SVP, Operations, Merchant Advisory Group

March 8, 2018

2017 claimed a significant milestone in the evolution of payments.  The public admission of signature as a meaningless authentication method could be a strong signal the payments model of the past half a century is ready to move on.  So, what’s next?  Where do we go from here?  What else is brewing and how is MAG working to foster positive progression?   

Many trends in payments will continue to evolve over the next three to five years.  The payment experience for customers will be a priority for everyone.  Consumer expectations will continue to evolve while, at a minimum, consumers will expect a balance of simplicity, convenience, and value exchange. Patience for friction or any outcome besides an approval for purchase will dissipate and those retailers or payment providers that don’t deliver will fall to the bottom of the preference list when shopping decisions are made.  

The future requires active coordination among parties in the ecosystem, new entrants and seasoned players, to leverage collective information and data available to deliver on the expectation of a seamless and convenient experience.  To the extent a payment experience can refrain from requiring a user to do anything incremental beyond deciding which Louis Vuitton bag to buy, the lower the likelihood of abandonment and a lost sale. Those parties that deliver comprehensive tools to support the ability to “know the customer” and more effectively evaluate risk through passive data will become critical partners while those that don’t will become unnecessary parties in the middle to be eliminated over time.   Finding ways to share knowledge of trust among stakeholders for purposes of delivering a positive customer payment experience and solve the growing problem of fraud will be important to remain relevant.  

Mobile Commerce proliferation will continue to be led by merchants.  Walmart, Target, Starbucks, and Nordstrom (to name just a few) offer customer convenience through improved cross-channel integrations and value through unique capabilities and features.  Payment is a priority feature within the experience for these retailers that delivers on the promise of simplicity. The Internet of Things (IoT) and new innovations such as voice commerce will help deliver unique and meaningful enhancements to commerce experiences that merchants can deliver to the customer.  The next several years will continue to be a period of experimental trial between merchants, financial institutions, and technology leaders to learn about the financial, technical and operational aspects of these new innovations.  

Authentication methods to support cross-channel shopping that are critical to a seamless customer experience will continue to evolve.  New authentication methods such as voice and PIN on glass (consumer PIN entry on mobile phones) have been introduced and others will follow. Multifactor authentication for higher risk transactions across channels leveraging biometrics, geo-location, and digital data points to identify, verify, and “know the customer” will become more prevalent.  The market availability and deployment of 3DSecure 2.0? over the next several years may deliver additional means of sharing data between issuers and merchants to enable better authentication decisions which, in turn, should help improve the customer experience reducing false positives and increasing approval rates while also reducing fraud losses. 

Availability of technologies such as robotics processing automation, software that is used to perform tasks normally performed by a human operator, and machine-learning, the ability for software to learn and make data-driven predictions, will increase which offer incremental opportunities to mitigate fraud. Technology innovations such as IoT and block chain, a type of distributed ledger technology, will create additional disruption to the payments landscape.  Financial institutions offer Fintech’s distribution channels while Fintech’s provide banks with the necessary investment in innovation.  As a result, we will see continued cooperation, coordination, collaboration, and/or acquisitions among these parties to strengthen bank capabilities or, otherwise, risk obsolescence. 

Efforts around security will continue, including EMV deployments for physical face to face payments and the use of tokens for digital and remote payments.  Merchants will continue to primarily leverage security tokens while payment networks will continue to push the use of payment tokens.  Regardless, the transmission of PANs will diminish and the use of encryption will grow.

All of these trends will progress over the next several years.  

However, fragmentation in the industry, inadequate merchant involvement, lack of transparency, and the imbalanced antiquated payment rules that still exist in this modern age will continue to challenge meaningful progress around better authentication, reductions in remote commerce fraud, and the best customer experience possible.  

Until these barriers are overcome, advancement and progression will be slower than necessary. Gross aggregate fraud will continue to rise until all stakeholders have equal access to the tools and technologies available to minimize risk and enable better authentication and authorization decisions.  And ultimately, the payment experience will retain friction if parties don’t find ways to share the right amount of data and knowledge of trust for the same purposes of making smarter decisions.  

In pursuit of advancement, the MAG is focused on efforts in four primary areas.  While ongoing collaboration and support from our payment partners will be critical to our success across all our efforts, I do feel our partner relationships are well-positioned to deliver incremental progress on these areas of opportunity.

Industry Engagement & Influence

MAG and our merchant leadership across the Board, Operations, and Digital Commerce Committees are actively pursuing discussions with payment companies to collectively solve challenges.  More specifically, we expect to increase merchant representation and participation earlier in the design of payment solutions that impact their customers’ payment experiences and back office operations.  

Historically, merchants have been merely engaged in the implementation and deployment of payment products and solutions which is too late in the process to be most effective and often times negatively impacts the customer experience or back office operations.  There is no party that knows the customer better than the merchant and no party that can directly deliver on the experience for a customer more effectively than the merchant.  We are adamant that merchants’ engagement earlier in the product and solution design cycle will define better solutions that support the commerce experiences impacting their customers and operations.  

To execute on this, we expect to further engage our partners in dialogue this year on plans to bring merchant engagement earlier in the solution design for products, processes, rules, and strategies being contemplated.  To progress go-to-market more effectively and efficiently, cross-industry engagement is imperative. 

In parallel, MAG will leverage the opportunities afforded merchants to be at the table alongside other stakeholders through representation in organizations and forums such as X9, W3C, US Payments Forum, EMVCo, Federal Reserve Faster and Secure Payments Task Forces, and the Federal Reserve Mobile Payments Industry Workgroup.  However, merchant direct representation in these forums is imperative as well.  We will continue to seek participation from our members, our acquirers, and other sponsors that can offer a merchant perspective in these open forums to make sure the merchant voice is represented.

Convergence of the physical and digital channels

The omni-channel experience is challenging the industry to adjust its paradigm away from the traditional card present and card not present structure.  The customer journey can begin on one channel or device (e.g. mobile) and end in a different channel (e.g. in-store or on-line).  The payments industry must focus its energy towards authentication strategies that can cross channels effectively in order to improve the customer experience by increasing approval rates and reducing false declines.  MAG and our merchant members expect to explore ideas and trial solutions including more direct interaction between merchants and issuers for sharing risk indicators and overall knowledge of trust around a transaction which could eliminate unnecessary parties in the process while improving each party’s ability to assess risk and make decisions whether or not to approve or accept a payment.  As a result of better authentication and authorization decisions, we expect to see reductions in gross fraud benefiting all stakeholders.  Finally, it is only natural that with increased approvals and reduced overall fraud the shared liability and cost among stakeholders will be forced to be more balanced than the traditional and antiquated card present and card not present cost and liability models. 

While the MAG will continue to pursue merchant engagement earlier on in the design of future payment products and solutions, there are current payment products and solutions that have been announced or introduced into the market which do have implications on the merchants, their customers’ experience, and/or their back-office operations.  It is clear in some cases what the implications are and specifically what needs to be solved.  However, it is unclear in other cases what the implications may be.  Either way, the MAG and our merchant leadership will continue to pursue transparency and address ambiguity around these existing and emerging products and solutions.

For example, EMVCo recently announced the Secure Remote Commerce Framework and will publish a supporting specification later this year.  Most of you reading this probably have never even heard about this framework which has been in design and development for the past year at a minimum.  Frankly, there is a significant amount of ambiguity around the intent, purpose, and ultimate implications of this framework across the ecosystem. Most importantly, there is a lack of clarity around the ultimate implications to the customer experience.  The lack of transparency here is not acceptable.  The MAG’s objective this year is to increase the transparency around this framework, its specification, and the implications overall with specificity to product implementations such as 3DSecure which has not been deployed fully to the marketplace and payment tokenization which has significant implications on merchants including debit routing rights. 

Another example is the lack of transparency to merchants and acquirers around mobile wallets being presented at the point of sale for payment.  Currently, the identity of a mobile wallet at the point of presentment is not available.  There are a number of use cases where the identity of that wallet would benefit the merchant, acquirer, issuer, network, or most importantly the consumer.  MAG has brought forward these use cases and will continue to pursue some form of wallet identifier be developed and implemented to solve these challenges.  In addition, the availability of biometric authentication data is not available to all parties involved in a mobile payment transaction since that cardholder verification method is not available to the Common AID.  This puts parties - including issuers - at a disadvantage with potential risk to authorization decisions and ultimately the customer experience due to a higher risk of decline.  Transparency includes access to available information by all parties to make better approval decisions.  After all, who benefits from the lack of transparency here?  Not the issuer.  Not the acquirer.  Not the merchant.  And not the consumer.

Finally, we commend MasterCard who has published publicly available provisions that digital wallet operators who support MasterCard transactions must follow with regard to the allowable use of merchant and consumer data.  However, they are the sole network to have done so.  As background, retailers that accept NFC must accept all certified NFC-enabled mobile wallets according to network rules.  Yet, mobile wallet operators are parties that historically have never been a part of the three or four party model.  Commercial arrangements have been introduced with these mobile wallet operators for which merchants have no insight into. Transparency into the provisions for how a digital wallet operator can use the customer or merchant data it gains access to is a very fair and reasonable expectation - an expectation that the MAG will continue to pursue on behalf of its merchant members.

Alignment & Consistency

Finally, there are several areas of opportunity to streamline back office payment operations and ultimately improve the customer experience.  Payment networks introduce products and solutions at different times in different ways with different rules or best practices for implementation.  Retailers have competing priorities for financial resources and often times are unable to justify implementation of these fragmented solutions due to cost (e.g. various timelines or completely different implementations by network), compatibility issues with merchants’ back office operations for some network solutions, or inconsistencies in the in-store operations and customer experience one or more network solutions may cause. 

In order to most effectively leverage these capabilities and ultimately improve the customer experience, merchants seek some level of consistency and alignment among the networks on best practices.  The MAG is looking to encourage dialogue with the objective to build a foundation of alignment and consistency among payment networks for processes and practices that are not competitive in nature.  A few capabilities we will focus on include certification processes, real time refunds including release of the open to buy, support for split shipments, use of chargeback reason codes, and fraud monitoring practices.

The bottom line is that increased collaboration of ecosystem players can solve real problems.  

Let’s get this done.