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Letter from the CEO: 2019: Revolutionary Change or More of the Same (MAG Quarterly- Volume Seven, Issue Four)


By John Drechny, CEO, Merchant Advisory Group

December 5, 2019

As we wrap up 2019, it is a good time to look back and discuss the changes in the industry. Some of the changes involved the biggest players in the market, while others struggle to gain significance. In looking at these changes you can categorize them into four buckets: Collaboration, Payment Rails, Tools, and Customer Experience.

Collaboration
Let’s start with the collaboration bucket. In this space we had large merchant acquirers combining with large bank processors. Worldpay is now Worldpay from FIS, First Data is now Fiserv, and Global Payments is now Global Payment +TSYS. In addition, the collaboration between Bank of America and First Data, known as Bank of America Merchant Services, will be ending.

So, what does all of this mean? While it is still too early to tell where this will go, there are a couple of things we know for sure. First, it’s about the connections, which now includes the ability to link banks and merchants directly together. With a significant number of merchants and banks now processing through the same entity, one could see the possibility that direct processing could happen at a level never before imagined. Envision the power of connecting thousands of banks directly with millions of merchants. The cost of transactions could see a significant reduction, as the number of participants required to complete a transaction decreases.

While this could be an ideal solution for the merchants by creating transparency and competition in the payments space, there are items which need to be evaluated. For instance, what reaction would the networks have regarding the transactions which don’t flow through the traditional four-party model? Based on history, there would be an attempt to increase the network fees on those transactions, unless the merchant commits to a significant volume of transactions. One should also consider these transactions would now be a three-party transaction which has different implications under Reg II that could benefit a bank.

The second big play for the collaboration is around data. These entities now have the combined data of both the merchants’ and the banks’ transactions. That access gives them an unparalleled insight into the flow of the transaction from the beginning to the end. If leveraged correctly, one can see better approval rates with lower fraud, as identifying fraudulent patterns becomes easier. Experts have said data is the new oil of the economy, and these entities now have more data available to them than ever before.

Payments Rails
The two big announcements this year centered on faster payments and stable cryptocurrencies.

Let’s first look at faster payments and the announcement of FedNOW. Faster Payments is the ability to send both the information regarding the payment and the payment itself in real time. Faster payments leverage a new payment standard know as ISO 20022, which has the ability to carry a substantially large amount of data along with the payment. It also is generally thought of as a push payment in which the initiator is the payment sender versus the current model in which the receiver asks for the payment. In general, this type of payment is thought of as both more secure and more efficient. 

The MAG has supported the Federal Reserve’s effort to stand up a new payment rail as a way to add transparency and competition to the market place. Currently, the only significant Real Time Payment system is that created and owned by The Clearing House. The Clearing House is a collaboration of the nation’s largest banks. As such they have specific use cases which benefit those banks but not necessarily the whole payments system.  Having the Fed become an operator of a real time payments system allows for more banks to have access and more use cases to be supported.

The second big announcement is the collaboration known as Libra. Libra was developed by a group within Facebook to become a stable cryptocurrency which could be used more efficiently to move payments. Several additional corporations originally joined Libra in the hopes to help shape its future. But as the regulatory pressure mounted many stakeholders backed away. 

At this point it is hard to tell if Libra will ever make it over the regulatory hurdles, but it has pushed blockchain technology further in to the light. There are many benefits of having a new technology become more available to help move money. Merchants would likely support any new competitor in the payments space which had greater fraud controls and a more efficient method to move value between entities. For now, though, it seems the use of blockchain is getting greater traction among merchants in the supply chain area. 

Tools
The third area of change in the industry is around tools available in the payments. Most of this change centers around machine learning and robotic automation. We have seen improved tools to identify and stop potential fraud in machine learning. Massive amounts of data can now be reviewed and patterns recognized without human intervention. As more data becomes available to these tools, the ability to reduce fraud will increase. The introduction of EMV at the point of sale made it clear to many merchants that fraud doesn’t stop but concentrates at the weakest points, so merchants should remain concerned and vigilant because the fraud may shift.

If you don’t already have an initiative around cleaning and using your data to help protect against fraud, now is the time to seek help. Machine learning gets better with more data and time, and if you fall behind it will become harder to catch-up.

In robotics, drones are front and center. They can identify out of stocks to self-delivery pizza vehicles. For payments robotics specifically, the basic functions of answering questions has been transformed with voice recognition which can assist most of the basic needs of the customer. As job markets get tighter, expect automation to grow. 

Customer Experience
Finally, this is all translating into providing the creativity merchants seek to service the customer through the creation of new experiences. No longer do merchants look for just one way to service the customer, but instead they support multiple iterations in both the choosing and delivery of products.

If one was to walk into a physical location today chances are you would see a combination of kiosks, cameras, mobile devices, both merchant and customer owned, self-checkouts, robotic pick-up points, and traditional manned checkouts. Each one of these plays a different role in delivering a better customer experience. The value of time has increased in the customers perception, and merchants are working hard on delivering this value.

We also have a combination of ways products get delivered to customers. From pick-up in store, lockers, drones, drive thru pick-ups, and automated cars, the expectation on flexible options has increased dramatically. You can now get your McDonald’s delivered to the beach via Uber or have your Domino’s pizza delivered via self-driving vehicles. All of these new methods of delivery are causing merchants to rethink how the items are purchased. 

What has lacked behind in all of this innovation is the set of rules which determines how the transaction is treated by the brands. Now is the time to not just innovate on the delivery of products but also to reassess the archaic rules in place which govern payments. In most cases the merchant has more information available on a delivered transaction or mobile order than ever was available at POS, yet it is still being treated as a riskier transaction. We should move forward with creating a new framework which realigns the risk and cost of the transaction and helps fuel the innovation taking place. 

One thing I am confident about is that we will see even more change and innovation in 2020. Those who find ways to better serve their customers will continue to grow. It is an exciting time to be in payments, and the voice of the merchant is getting stronger with your support.