It cannot be overstated how integral non-cash payments are to the global economy, with the United States processing more than 174.2 billion of these payments in 2018 alone for a total of $97.04 trillion. Cash payments are quickly falling to the wayside, with only 26 percent of all U.S. consumer purchases made with cash.
Digital payments are fraught with obstacles, however. Slow compliance checks and sluggish processing times are commonplace, especially on the legacy systems still used by many banks around the world. All of these delays and slowdowns add to the costs of electronic payments and reduce their purported advantages over cash and checks.
It is therefore imperative that banks, credit unions and other financial institutions (FIs) modernize their payments infrastructures for a quicker, cheaper payments experience. The following Deep Dive explores the various hurdles that payments face as well as how automation and cloud-based systems can help FIs overcome them.
Automating Compliance
Compliance with oversight laws, especially those involving anti-money laundering (AML) or know-your-customer (KYC) regulations, is a perennial struggle for FIs of all sizes. Failure to comply with these regulations could result not only in fraudsters or money launderers infiltrating banks or payment providers’ systems but also in hefty fines for noncompliance. FIs were fined more than $17 billion in penalties between 2009 and 2019 for improper AML procedures, for example, including major players like Commonwealth Bank of Australia, Deutsche Bank and Goldman Sachs.
Automated compliance systems can help FI staff ensure that their AML and KYC compliance is up to code, as these systems can perform thousands of security checks in the time it takes a human staffer to handle just a few. A recent survey found that only 46 percent of audit teams currently automate their compliance processes, and those that lack these systems pay the price in terms of man-hours. Regulatory requirements have largely remained the same year over year, but 67 percent of organizations found that the number of hours spent on compliance had increased by more than 10 percent. Many organizations are learning from these lessons and plan to deploy automated systems in the near future, with 48 percent saying they intend to do so in the next two years.
Automating Dispute Resolutions
Another common frustration that can be improved through the use of automation is dispute resolution. Payments disputes and chargebacks are on the rise, and 61 percent of merchants expect to see increased dispute rates in the near future. Merchants in the travel and entertainment industries are especially concerned, with 94 percent saying back in April that they anticipated an increase in chargebacks and disputes due to the then-nascent COVID-19 pandemic.
Most of these chargebacks are legitimate requests — especially in the travel industry, where the pandemic canceled an untold number of travel plans — but some consumers might come up with elaborate excuses to avoid paying for something, like claiming fraudsters used their credit cards to book plane tickets when they just want to score free flights. Most customers bypass dealing with merchants entirely when trying to stage chargeback fraud, with 76 percent of cardholders going directly to the payment card issuer.
Automated systems can give merchants an edge in these disputes by compiling every piece of data they can possibly find about a customer’s ordering history, such as address, email and phone matches as well as proof of delivery, among countless others. Some advanced systems that harness machine learning (ML) even leverage device fingerprinting and behavioral analytics from past orders to prove the initial purchase was legitimate. This gives merchants the evidence they need to dispute chargebacks when credit card companies approach them to recoup their losses.
Cloud Payments Integration
Another burden to efficient payment processing is outdated core banking systems, which can tie up vast amounts of money and manpower in their maintenance. Banks can spend up to 80 percent of their entire IT budgets on maintaining legacy technology, with large banks spending up to $300 million a year on updating this software to meet regulatory requirements. This is to say nothing of the mental toll these constant frustrations can exact on IT staff — the perpetual maintenance of legacy systems can negatively affect employees’ job satisfaction, error rates, loyalty and even their customers’ satisfaction.
Updating legacy systems to accommodate cloud infrastructure can cut IT costs anywhere from 50 percent to 90 percent, according to HSBC’s chief architect, David Knott, not to mention the costs it can save by reducing employee burnout and turnover. This shift to cloud banking systems is often easier said than done, however. Performing the necessary core system upgrades to improve payments digitization efforts is a massive and expensive undertaking that many banks can barely afford. They face a catch-22 in this regard: Either devote vast sums to massive digital pushes or stick with the payment methods they already have and risk falling behind their more-digitized competitors.
The decision to upgrade is ultimately one that every bank will have to make for itself. The payoffs of cloud banking, however, along with automation of compliance and dispute resolutions, could ultimately make the entire modernization initiative worth it.
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