16th Annual The 10 Most Pressing Issues in E-Payments

The payments business has moved on from the pandemic, but it faces a host of other issues. Here’s our annual catalog of the ones causing the most headaches.

Welcome to Digital Transactions’ annual catalog of headaches—the problems, pitfalls, and perils facing the business of processing digital payments. We review these issues not out of a sense of masochism but from a belief that problems defined and squarely faced are problems that are likely to be defanged.

Defining is our part of the puzzle. Solving is yours. But we can help by laying out, in brief, what constitutes the issues and how they rank in severity. Not all problems are equally pressing, after all, and not all players in the payments industry face the same ones. Best to identify the issues you’re struggling with and then attack them according to their severity.

You may take issue with how we’ve ranked these issues. For example, chip shortages are still a major hassle bedeviling a couple of significant sectors of the payments industry—point-of-sale equipment and chip cards. So why is this problem down there at number 9 on our list? The issue, while still very much relevant and not wholly solved, has been widely discussed for some time now. We couldn’t exclude it, but several other problematic trends—the Durbin-Marshall effort to control credit card routing, for example, not to mention the newly energized CFPB—are of more recent vintage.

Our purpose isn’t to ruin your day. Nor is it to cry out without purpose. If you have attacked some of these issues with success, please let us know. We’d be interested to hear about it. You can reach me at john@digitaltransactions.net.

 

1. Durbin-Marshall Legislation

The other shoe appears to have finally dropped. More than 10 years ago, U.S. Sen. Richard Durbin (D.-Ill.) got what is called the Durbin Amendment into law to regulate debit card transaction pricing and routing. Now, he is a principal sponsor of the Credit Card Competition Act of 2022. The bill—introduced in July—would require that all banks with $100 billion or more in assets offer acquirers a choice of two unrelated networks for routing. If one network is Visa, the other can’t be Mastercard. The hope is other networks, including debit card systems like NYCE, Pulse, or Shazam, will compete for the business, driving down transaction costs for merchants.

Unlike the Durbin Amendment, which imposed caps on debit card fees applied to card issuers with more than $10 billion in assets as well as ordaining routing choice, this measure only tackles routing choice. Another Durbin and Marshall amendment, more focused on fees commissary users pay, would require the Defense and Treasury departments to issue a report on surcharges some veteran classifications pay to use credit and debit cards. Its prospect for passage is uncertain, as it wasn’t added as an amendment to a defense spending bill, though it could be attached to that bill or another later this year.

Should it pass into law, some obvious implications surface, such as an issuer’s ability to fund credit card rewards programs. But others may not be so apparent. Some in the acquiring industry see little benefit other than for the largest of merchants. Merchant advocates argue it could open new opportunities for non-credit card networks that may want to offer credit card routing services.

 

2. BNPL Default Rates

The numbers don’t lie. With the explosive growth of buy now pay later loans, which are projected to grow 45% annually through 2030, many consumers are using the loans to spend beyond their means. That raises concerns that default rates, as well as delinquencies, may be poised to jump substantially.

A survey by Lending Tree found that 68% of BNPL users admit to spending more than they would if they had to pay for everything upfront. Millennials are the most likely to spend more with a BNPL loan than they would otherwise, with 75% acknowledging they overspend when using BNPL, followed by Gen Zers (69%) and Gen Xers (63%).

Consumers’ use of BNPL loans to purchase beyond their means is not the only indicator default rates may be poised to increase. A recent study by Achieve, a digital personal-finance lender, found that many BNPL users are apt to use BNPL as a way to stretch out their credit limits on existing credit cards and other accounts. Achieve customers with BNPL loans also have more open credit lines and lower average credit scores than those without BNPL accounts.

In addition, delinquencies continue to be a nettlesome problem. Lending Tree found that 42% of consumers who’ve taken out a BNPL loan have made a late payment.

“The ongoing expansion of the BNPL’s industry’s reach comes alongside a period of historic inflation and rising interest rates that’s putting a strain on household finances,” Achieve co-founder and co-CEO Andrew Housser said in a prepared statement. “Buy now, pay later can be attractive for consumers seeking an interest-free option to pay for purchases over time. But even without finance charges consumers can still get over-extended using these loans.”

 

3. The Regulatory Threat

After years of a relatively light touch, federal regulators are ratcheting up their scrutiny of the payments industry. According to payments experts, two trends driving the increased scrutiny are: a) innovation in payments in recent years has been outpacing regulators’ ability to keep up; and, b) the new regulatory activism under the Biden administration.

Leading the charge is the Consumer Financial Protection Bureau, which has requested Google LLC, Apple Inc., Facebook parent Meta Platforms Inc., Amazon.com Inc,, Block Inc. (formerly Square Inc.), and PayPal Holdings Inc. to provide information about their payment products, plans, and practices when it comes to collecting consumer data, how it’s being used, and whether their data gathering complies with data-privacy and -protection laws.

The CFPB has also looked at buy now pay later lenders and created the Office of Competition and Innovation with the aim of promoting competition in financial services and identifying stumbling blocks for new market entrants.

In addition, the Federal Trade Commission is also looking at big tech companies, while Sen. Elizabeth Warren is pressing Early Warning LLC, operator of the Zelle network, about fraud on the P2P network.

“President Biden has been very vocal about prioritizing consumer protections and this directive has clearly spurred federal agencies like the FTC and CFPB into action,” Jeff Tassey, chairman of the Electronic Payment Coalition told Digitsal Transactions earlier this year (“Behind Washington’s Tougher Stance on Payments,” July). “It’s important for regulators and lawmakers to remember that one size does not fit all when it comes to regulating the industry and protecting consumers. It’s also important to remind them about how innovative payment technologies helped to keep small businesses open during the pandemic and fueled our economic recovery. We can’t afford to stifle innovation.”

 

4. P2P Fraud

Peer-to-peer transactions are growing increasingly popular, but unfortunately that popularity is high with fraudsters as well has honest folk. Lately, the issue has grown serious enough to catch the attention of Congress, as eight U.S. Senators this summer zeroed in on Early Warning Services LLC with a letter asking questions about “fraud and scams” on the company’s increasingly popular Zelle network. Zelle competes with systems like PayPal’s Venmo and PayPal itself.

One of the Senators—Elizabeth Warren, D-Mass.—later issued a report ripping into the seven major banks that own Early Warning for withholding data for a report she prepared concerning fraud and scams on Zelle. “At nearly every turn, most of the big banks have stonewalled, refusing to provide the information requested by members of Congress,” she said. Warren singled out Wells Fargo in particular, claiming its rate of fraud on Zelle transactions was almost twice as high as for “other banks.”

That was too much for Early Warning, which shot back with a terse release claiming “recent statements regarding Wells Fargo’s fraud and scam rates are inaccurate. Wells Fargo’s rates of reported fraud and scams are extraordinarily low and comparable to the Zelle Network as a whole.”

Part of the debate concerns the distinction between “fraud” and “scams,” and what entity should take responsibility for consumer losses in each case. Fraud is seen as outright theft of a consumer’s account—an action clearly not authorized by the consumer. Scams are cases in which a clever fraudster gulls a consumer into sending him money—the transaction, though fraudulent, is authorized. A draft bill this summer in the U.S. House of Representatives would amend the 44-year-old Electronic Funds Transfer Act to explicitly cover instances where consumers authorize transactions as a result of fraudulent inducement.

 

5. Shopping Cart Abandonment

The downside of the e-commerce boom has to do with cases where shoppers simply give up before, or perhaps even during, checkout—a phenomenon known as shopping-cart abandonment. A report from Coresight Research this fall estimated the overall abandonment rate for the broad e-commerce industry ranges from 74% to 77% of all carts.

A number of factors account for online consumers giving up before they check out. So-called extra costs, such as shipping costs, fees, and taxes ranked high as a reason among both the retailers and consumers polled by Coresight. Complicated checkouts also ranked high as a motivator to walk away. Merchants cited the need to create an account as a potent turnoff, while consumers rated an absence of alternative payment methods as a prime motivator to abandon a full cart.

In any case, that eye-popping abandonment rate is plaguing an industry that otherwise could be racking up even bigger gains in retail sales. Coresight’s recommendations to merchants? Simplify the checkout process as much as possible, with for example password-less logins and one-click checkout. Also, offer as many alternative payment methods as possible, including buy now, pay later, digital wallets, and prepaid cards.

 

6. Protecting Open Banking

Open banking has opened the door for fintechs to offer products and services that compete with those offered by traditional banks, along with new services that traditional banks can’t offer. Hence, consumers have been turning to fintechs to gain access to those services on their terms.

Large fintechs tend to share a portion of their customer base with banks, many of which lack the technology to adopt open-banking initiatives on their own, but which have the customer and account data fintechs need to adopt open-banking apps. So it’s not surprising fintechs are initiating partnerships with banks to build what they bill as frictionless experiences for different slices of consumers. Such partnerships allow banks to stay relevant to customers that use fintech products by making it possible for them offer such services as the ability for gig workers to receive auto-deposits from multiple employers.

Despite open banking’s bright prospects, there are concerns around data protection. That’s increasing calls for more open-banking standards. At the forefront of the standards movement is the Financial Data Exchange, which in late 2021 introduced version 5.0 of its API, which increases market standardization of consent, user control, and consumer dashboards for financial-data sharing. As of July, FDX had 32 million consumer accounts using its API to power open-banking applications.

“One of the most important ways we can accelerate major breakthroughs in open banking is to embrace new data-management technologies, standards, and protocols that place data ownership at the forefront of digital design,” Chris McLellan, director, operations, for The Data Collaboration Alliance told Digital Transactions earlier this year. “This way, data is managed as something with real value that shouldn’t be subject to unrestricted replication.”

 

7. How Not to Prevent Gun Violence

Amid the terrible toll of gun violence, many have called for the payment networks to do more. In September, American Express Co., Mastercard Inc., and Visa Inc. announced they would create a merchant code specifically for sales at gun shops. Such sales have been classified by acquirers as general merchandise. The move by the card networks follows a decision by the Geneva, Switzerland-based International Organization for Standardization to create a category code for gun-shop sales.

Though no action has been taken, there are questions about the utility of a new merchant category code, especially when a code traditionally classifies the type of business, not necessarily a type of product. “Correct and underlying product information is the major limitation,” says David Shipper, strategic advisor for retail banking and payments at Aite-Novarica Group. Currently, there’s no way to tell what products a consumer purchased based solely on the MCC. “Unless card networks mandate a separate card terminal for guns and ammo sales, there is no way to know if someone bought a gun or a canoe at a camping supply store, pawn shop, or other places that sell guns and other items,” Shipper says.

Other limitations are that the store can choose the MCC that fits most of the business they do, he says. “Without SKU-level data, there is no way to know what was purchased. Did they buy a gun or hundreds of dollars’ worth of ammo? Did they buy one $5,000 gun or ten $500 guns?” he asks. It’s also easy to open a merchant-services account. Says Shipper: “Merchant acquirers can perform due diligence to confirm the type of business, but there is still a risk that the merchant will not self-identify as a gun and ammo store.”

 

8. The Unattainable Goal of Zero Fraud

No merchant would pass up the possibility of having zero fraud in their payments, but realistically this is an impossible dream, especially as the volume of digital payments increases. Just as criminals followed consumers as they shopped more online in the past couple years, so too are they following them as in-store shopping volume increases.

That’s the summation from Visa Inc., which released data that showed skimming fraud increased 176% in the June-to-November period over the previous 12 months, with few signs of relenting since then. “The only way to have zero fraud is to have zero transactions,” Monica Eaton-Cardone, chief operating officer and cofounder of Chargebacks911, a fraud-mitigation services provider. “And even then there are no guarantees, because not all fraud schemes depend on actual transactions. Unfortunately, as long as there are thieves, there’s always going to be a risk of theft.”

A recent report from Juniper Research predicts that e-commerce fraud will swell to $48 billion globally in 2023, up from $41 billion this year. Drawing down fraud is a balancing act with identifying legitimate transactions and approving them. “When thinking about the notion of zero fraud, it is critical to think about its attainability. The idea, although compelling, is complex. This is because although fraud can be reduced and minimized, a level of error will always exist. No decision tool, either in technology, AI, process, or human decision, is 100% accurate just as no product is 100% risk-free,” says Rafael Lourenco, executive vice president of ClearSale, an online fraud-prevention provider.

Fraudsters themselves are a major unknown. “The reality is zero fraud is not attainable, because fraudsters always find new ways to operate, changing tactics with new payment trends, for example,” says Cynthia Printer, director of financial crime compliance at LexisNexis Risk Solutions. “However, a business can mitigate the risks of digital-transaction fraud by maintaining an effective anti-financial crime program and constantly re-evaluating its effectiveness.”

 

9. The Chip Shortage’s Ongoing Impact

Predictions that the chip shortage will continue for at least another year are starting to sound like a broken record. Pundits have been saying it over and over since 2020. The latest projections for when the supply of chips for payment terminals and cards will catch up with demand is late 2023, at the earliest. Because the chips needed for POS terminals and cards are more complex than those used in consumer electronics—they are more like microcontrollers than microprocessors—payment experts say they would not be surprised if the shortage lingered into 2024.

“There are some segments of the economy that rely on microchips that are seeing some relief from the shortage, such as consumer electronics, but manufacturing capacity varies by economic segment and not much has changed for the payments industry because of the types of chips used,” says Jason Bohrer, executive director of the Secure Technology Alliance.

Unlike microprocessors used in consumers electronics, which don’t contain any other components, such as memory, the chips used on POS terminals and in cards control a specific function. As a result, they are like having an entire computer on a chip, including the microprocessor, memory, and components needed to send and receive data.

While many chip manufacturers have stated plans to build additional capacity for this breed of chip, it takes years for such plans to come to fruition and increase supply, industry experts say. Not surprisingly, the shortage of chips has sent prices climbing. On average, chip prices have increased in the low double digits, a blow felt across the board in the payments industry.

 

10. Can Stablecoins Find Stable Ground?

It seems there is little stable these days about stablecoins—blockchain currency whose value is tethered to a national currency like the dollar. So its value doesn’t swing wildly up and down, like that of Bitcoin, making it, in theory, a much more likely candidate as a medium of exchange, unit of account, and store of value.

Yet doubts about stablecoins abound, including concerns about the potential for runs, money laundering, and terrorism financing. Federal officials late last year grew so worried they recommended that Congress regulate this relatively new species of cryptocurrency.

Stablecoin developers are supposed to keep reserves in hard currency equal to the value of the coins they have minted. In at least some cases, however, they have been found to have used some cash along with commercial paper, short-term corporate debt, or other such non-cash assets. Such investments can generate income for the stablecoin sponsor, which makes them more attractive than cash, but that kind of backing could prove problematic, to say the least, were there a run on any of these coins.

For the time being, sponsors are chiefly interested in developing use cases that can maximize stablecoins’ inherent advantages—a primary one having to do with enabling low-cost transfers in markets like remittances. The jury is out on how far the coins can go from there.