By Daniel Banta, Payments Journal, this article was originally published by Payments Journal.
For the payments industry, 2019 was a busy year defined by mergers, big announcements, new technologies, and shifting consumer expectations and preferences.
In terms of mergers and acquisitions, the year got off to hot start in January, when Fiserv announced a $22 billion deal to acquire First Data. Soon after, in March, FIS bought Worldpay in a deal valued at $43 billion. More major deals occurred throughout the year, including a merger between Global Payments and TSYS (another megadeal valued at over $20 billion), Mastercard’s acquisition of Nets, and PayPal’s acquisition of Honey.
The year also brought a series of important announcements regarding new payment rails and new players in the payments space. The Federal Reserve made waves in August when it announced that it will launch FedNow, a real-time payments platform. Currently, The Clearing House operates the only real-time payment rail in the United States.
Another major storyline of the year was big tech’s entrance into financial services. Facebook, Apple, and Google all unveiled plans to enter the financial services space or further expand upon already existing financial products.
With so much going on in the payments industry, it can be hard to keep track of everything. Below are three major trends of 2019 that are likely to define 2020 as well. While it is by no means exhaustive, what follows is a helpful guide of what to keep an eye on as we enter the new decade.
The rise of contactless
When contactless cards were first rolled out in the early 2000s, they didn’t really catch on.
“There simply were not enough merchants that would accept contactless,” said Sarah Grotta, director of Debit and Alternative Products Advisory Service at Mercator Advisory Group. In a PaymentsJournal podcast, she explained how this started to change in 2019.
“Thanks to the migration to EMV chip technology, we now have a solid base of acceptance locations,” said Grotta. This is because terminals that support EMV cards also have contactless capabilities built in. Major national retailers, including Target and CVS, now support contactless payments. As a result, 60% of purchases are made at a terminal that supports contactless transactions.
Many major cities have also deployed contactless payment terminals for their mass transit systems. For example, passengers in New York, Chicago, Nashville, and Portland, Oregon can pay for fares with the tap of their payment device.
Also underpinning the rise of contactless are shifting consumer preferences. Consumers increasingly desire and expect quick and efficient services and products. Contactless cards enable a quicker checkout process, as the customer simply needs to tap their card instead of inserting it and waiting.
Some of the major issuers have taken notice. Major banks, including Bank of America, Wells Fargo, and Chase, have announced plans to offer contactless options, as have tier-one banks and credit unions.
“We certainly think that the number of contactless transactions will pick up,” said Grotta.
The ever growing sophistication of fraud
While fraud has always been an unfortunate feature of the payments industry, the nature of fraud is changing. As more merchants have adopted EMV chip technology, it has become harder for criminals to commit payments fraud in the physical world. Instead, fraudsters are going cyber to steal personal information, money, and other valuable material.
One alarming fraud vector that was particularly salient in 2019 was synthetic identity fraud. Synthetic identity fraud is when a criminal combines a real person’s information, such as a social security number, with fake information, such as an imaginary name. By combining real and fake information, the criminal is able to create a “synthetic identity.”
In July, the Federal Reserve published a white paper detailing the causes of synthetic identity fraud, noting that it was the fastest growing fraud segment. With over 4 billion records stolen in the last decade, large scale data breaches have armed hackers with the information needed to commit both synthetic and traditional identity fraud.
Then there’s issue of account takeovers. An estimated 96% of adults in the United States engage in online shopping, primarily using tablets, computers, and smartphones to do so. Millions also utilize online banking tools. Hackers often try to force their way into these valuable accounts.
NuData, a Mastercard company, estimated that almost half of all login attempts in 2018 were high risk for being fraudulent, and, on average, nearly 1 in 5 of new accounts created in 2019 were likely fraudulent.
With fraudsters becoming more high-tech and sophisticated, merchants and issuers need to embrace more robust solutions. In an approach termed Connected Intelligence, Mastercard combines active and passive biometric data with machine learning algorithms to determine the probability that fraud is occurring.
Other companies, including Forter and GIACT, are likewise deploying fraud prevention services that leverage machine learning and a bevy of data points.
“Machine learning has greatly enhanced the ability to detect fraud and all of the major payment networks are applying this technology through a combination of internal R&D as well as through investments and acquisitions,” said Tim Sloane, VP of Payments Innovation at Mercator Advisory Group.
In 2020, expect this trend to continue. If only a static password is what separates a company’s customers from the fraudsters, that company is in for a rough year.
Big tech is coming to financial services
From social media to smartphones, giant technology companies have fundamentally changed society. Now, big tech has set its sights on the payments industry.
In June, Facebook revealed that in conjunction with many of the world’s payment players, it was developing a cryptocurrency named Libra (however, this plan has since run into a series of issues). The social media giant also rolled out Facebook Pay, a consistent payment experience across Facebook, Instagram, WhatsApp, and Messenger.
In August, Apple unveiled the Apple Card, a credit card issued by Goldman Sachs. Although Apple does provide a shiny, physical titanium card, the product is primarily designed to be used with the mobile Apple Pay app.
For its part, Google will be offering checking accounts, in partnership with Citigroup and Stanford Federal Credit Union, beginning in 2020. Similar to Apple’s approach of offering the service through its branded mobile wallet, Google’s checking accounts will be available through the Google Pay wallet.
All of these developments should put the traditional players in the payments space on notice. While it is unlikely that big tech will take over the payments industry completely in 2020, financial institutions should be wary of being left behind.
The big draw of big tech is that these companies know how to create a seamless, consumer-centered product. In contrast, banks have struggled to create banking apps which appeal to consumers, largely because the apps are too clunky and confusing to use.
In the past year, consumer satisfaction in their mobile banking apps has declined by 15% because “consumers were challenged in completely understanding all features,” according to a survey from J.D. Power. This is likely to only get worse as big tech starts offering its own banking apps.
Based on this, it is clear that financial institutions need to develop cleaner and more intuitive applications. Mercator Advisory Group’s Tim Sloane noted that consumers use apps to accomplish a specific goal. Whether it’s making a deposit, doing a money transfer between accounts, or any other banking activity, “getting them to that solution quickly is critical, he said.
In 2020, expect companies to invest more in better digital experiences to stay competitive.
The payments industry underwent a number of consequential developments in 2019 that will continue to play out in the coming year. Customers want faster and more seamless services and products, which is giving rise to contactless cards and faster payment products.
Fraud is becoming more complex than ever before, meaning that fraud solutions need to keep up. And with major tech companies offering sleek, intuitive digital financial services, traditional players in the payments space need to enhance their digital offerings.