The 10 Most Pressing Issues in E-payments

We know you’re not looking for problems. But they are looking for you. Herewith our annual catalog of the ones causing the most headaches.

Each year in the fall, as the grass turns brown and the trees shed their leaves, the editors of Digital Transactions start their deliberations over an equally gray and shadowy subject: what’s cramping the style of payments players these days? What obstacles are they confronting, and how? Which ones are pressing harder than the others, and why?

If adversity breeds strength, as the old saying goes, then payments professionals these days may have plenty of opportunity to develop their strategic and tactical biceps. The industry no sooner recovered from all the ill effects of the pandemic than it found itself enmeshed in a slew of other issues, some old and familiar but some others quite surprisingly fresh.

Herewith our annual catalog of the problems we think are most alarming for payments professionals right now, ranked in order of their impact—or potential impact—on the industry. “Impact,” of course, can be a matter of degree. Some of the matters ranked below, however, may be no less pressing for being still more or less in their larval stage.

So, what do we mean by “pressing”? The term refers to the sense of urgency the issue arouses in those it affects, not so much to the size of the market that must deal with it. Some issues, on the other hand, are pressing for a substantial segment of the industry.

Take our number-one issue this year, merchant interchange. There’s nothing new about this issue. Card-accepting merchants have griped about acceptance costs for decades. It has inspired lawsuits and legislation, as well as a good deal of animosity toward banks and allied entities. Yet never has the issue been hotter than it is now. For that reason alone, it has climbed to the number-one spot in this year’s ranking.

Speaking of the ranking, it was done by our staff editors, who cover this industry day by day. You may agree or disagree. Either way, let us know what you think the big issues in payments are, and we’ll take up the matter with our 19th annual ranking next year. Meanwhile, you can reach me with your comments at john@digitaltransactions.net.

1 Merchant Interchange

It’s hard to think of an issue in digital payments more contentious than interchange. The subject can be complicated, but it essentially refers to the fee merchants pay to acquiring banks whenever they accept a card for payment. The fee is typically expressed as a percentage of the transaction amount, plus a dime or two. So a $100 card transaction might cost the seller in the neighborhood of $2 or $3.

So the merchant in this case gets $98 or $97 on the $100 transaction, and walks away pretty sore. Acquirers, on the other hand, point to the services they provide—including processing connections and transaction guarantees—as justification for the fee.

The latest example of the contentious nature of this issue has emerged in Illinois, where lawmakers passed a bill earlier this year exempting the tax and tip portion of a bill from interchange calculations. In return, the law limits what merchants can earn from the state for collecting sales tax at $1,000 per month. The Illinois Interchange Prohibition Act has attracted national attention as card interests sue to overturn it and merchant groups battle to keep it in place.

In any case, what happens in Illinois is not likely to stay there. Interest groups on both sides are filing briefs in the case and watching closely, while merchant groups hope to duplicate the law in other states and perhaps nationwide. Ultimately, merchants would like to see interchange rates themselves controlled nationally, something another piece of legislation, the Credit Card Competition Act, proposes to do by requiring more competition among networks for each transaction. This bill, which has languished in Congress since it emerged two years ago, has stoked furious advocacy among merchants and equally stalwart opposition from interest groups representing banks.

Whatever happens, the ancient dispute over interchange only grows more heated, making it number one in our catalog of pressing issues.

2 Data Breaches

Even though the number of publicly reported data breaches declined 8% during the third quarter from the previous quarter, these intrusions remain a perennial problem, according to the Identity Theft Resource Center.

Financial-services providers are the perennial leading target for criminals looking to steal personal data, with 141 breaches reported during the third quarter, according to the IRTC. While 2024 is unlikely to see a record number of breaches, the finally tally for 2024 will be close to 2023’s record number.

So what’s fueling these breaches? One factor is the emergence of new technologies that make it possible for anyone without any real technical skills or coding expertise to hack into a data base. “If you can operate a mobile phone, you can operate these tools,” says James Lee, chief operating officer for the IRTC. “Just about anybody can be a data thief now.”

Artificial intelligence is another new tool criminals are adopting. AI lets them write flawless scripts for phishing scams to obtain log-in credentials. These log-ins allow them to gain access to a server and launch an attack against a database.

“Automation helps criminals become more efficient in their attacks, and AI is a tool that makes criminals more efficient through automation,” Lee says.

3 Antitrust Pressure

A 71-page lawsuit filed late in September against Visa Inc. by the U.S. Department of Justice has once again ushered into the payments business the specter of antitrust enforcement. The case, in which Justice contends Visa controls 60% of the nation’s debit card transactions, has put the national card network under the glare of a regulator’s klieg light and ushered the fear of antitrust into an industry that had for years happily set aside such concerns.

The DoJ’s contention is that Visa uses pricing power to induce merchants and networks to flow their debit transactions to the San Francisco-based network giant. Indeed, it wants the court to prohibit a range of pricing, fee, and incentive tactics it says the network uses to control the share of debit transactions it gets from merchants and to win fealty from debit issuers. And while the 2010 Durbin Amendment requires issuers to offer a choice of more than one debit network, Justice contends Visa defeats that requirement with volume incentives for issuers that leave the banks with little incentive to send transactions to competing networks.

At the same time, the suit argues Visa fends off potential competition from major players like PayPal and Block by offering incentives amounting to hundreds of millions of dollars to avoid developing competing debit services.

This is not the first time the DoJ has gone after Visa, In 2021, the network dropped a $5.3 billion offer to acquire Plaid, on open-banking platform, in the face of opposition from the antitrust enforcer.

4 Checkout Friction

Cart abandonment during checkout remains a big problem in e-commerce. On average, just three of every 10 online shoppers complete their purchase, according to industry studies.

The reasons cart abandonment is so high vary from non-payment-related issues, such as taxes and shipping costs that make the overall purchase price too high, to such requirements as making consumers manually fill in their payment and shipping data at checkout.

In the latter case, if the payment process isn’t handled with a card-on-file or a digital wallet, the customer must manually input their data. “That can be a hassle, particularly if the transaction is being done on a mobile device,” says Thad Peterson, a strategic advisor for Datos Insights.

Another payments-related reason online shoppers abandon their carts at checkout is that merchants offer too many payment options, Peterson adds. That creates the so-called NASCAR effect in which a Web site, clothing, or object has so many logos and ad images that consumers become overwhelmed and tune out the messages.

“As payment ecosystems continue to increase in complexity, cart abandonment at the point of purchase will remain a challenge for consumers and merchants,” Peterson says.

5 AI Control and Fraud Issues

Artificial intelligence is one of the latest buzzwords floating around the payments and every other industry, but it isn’t new to payments. Long part of fraud prevention and other elements, and known by many as machine learning, AI is now quickly being adopted by the adversaries of payments integrity and security.

Criminals are using AI to create better synthetic identities to trick organizations into seeing their attacks as legitimate. Data breaches are a prime source of valid personally identifiable information that criminals can pour into AI tools to generate synthetic identities. How much of a worry is it? Seventy-four percent of those in an Abrigo survey in August said AI’s use in fraud is a concern.

Yet, payments organizations can put AI to use, too, to fight fraud. Mastercard Inc. says it uses generative AI to help predict when the full card details of a compromised credit or debit card can be used to more quickly block a fraudulent transaction. It’s using AI to reduce false positives, too. FIS Inc. uses AI tech from fintech Stratyfy in its SecurLock service to better identify fraudulent card transactions.

Inversely, AI can make phishing scams more effective because the phishing emails may do a better job of getting individuals to reveal sensitive data, a Datos Insights report notes. Another concern focuses on when these models are used for phishing scams to collect consumer data. On these occasions, the scams bypass traditional fraud-detection technologies. “Generative AI is used further upstream in the scam to deceive consumers,” says Trace Fooshee, a Datos strategic advisor for fraud and anti-money laundering.

6 Debit Routing in E-Commerce

For years, banks got away with routing online debit card transactions, almost automatically, to Visa and Mastercard for processing. The practice may have made for efficient processing but it happened to violate a key feature of the 2010 Durbin Amendment and subsequent Federal Reserve rule, both of which required that issuers observe merchant choice of network for debit processing, There was no exception for e-commerce.

Better late than never, the Federal Reserve in 2021 issued a clarification of its routing rule that made it plain the rule applied as much to card-not debit transactions as it did to in-store ones. No excuses. The rule clarification went into effect July 1, 2023.

That may have been a much-needed—though also much delayed—clarification, but it introduced a conundrum for banks and processors that had grown accustomed to flowing transactions to the Big Two networks. Some are still wrangling with internal procedures to ensure network choice for transactions they had formerly considered beyond the scope of other networks. These other networks beg to differ, and now they—and merchants that stand to benefit from competition for their transactions—stand to benefit.

Cyber criminals are also employing so-called bust-out schemes, which occur when a cybercrook establishes a legitimate merchant account and processes a small number of legitimate payments to establish credibility, then submits numerous fraudulent transactions and vanishes after obtaining payment, the Visa report says.

7 Practical Use Cases  for Real Time

Real-time payments have been available in the United States since 2017, when The Clearing House Payments Co. LLC’s RTP network launched. It got a boost in 2023 when the Federal Reserve’s FedNow network debuted. While commercial real-time payments use cases were easy enough to develop, the case for them in retail payments is a little more challenging.

Among the complicating factors are the ubiquity of entrenched payment methods and consumer and merchant affinity for them, as well as the sheer number of participating financial institutions. Jumping to the latter, more and more U.S. banks and credit unions are enrolling in one or both of the U.S. real-time payments networks. The U.S. Faster Payments Council, in an October report, predicted between 70% and 80% of U.S. financial institutions will be able to receive instant payments by 2028, with between 30% and 40% being able to send them.

Among the uses cases with the most potential for development and launch are earned wage access and domestic peer-to-peer transactions. But one of the most intriguing of the use cases to emerge so far is digital-wallet drawdowns, which enable funds to be moved from a digital wallet to a bank account in real time. The appeal of these drawdowns for consumers is that they can move money out of a stored digital wallet and into a bank account immediately.

The request for payment, a relatively new service, may be a driver, too. It enables a party to send a bill digitally to another party to trigger an immediate digital payment in return. Both FedNow and RTP have request for payment capabilities. Other practical use cases, such as for e-commerce purchases and point-of-sale transactions, will require more than four years to be made available, the FPC report says.

8 Embedded Payments’ Impact on Acquiring

A quick search for “embedded payments” on DigitalTransctions.net finds a few results from before 2020, with the number of posts on the subject ballooning in 2022, testament to the growing importance of integrating payments into software applications and Web sites. What’s boosting the popularity of this payment option? For merchants, embedded payments provide consumers the ability to pay without being redirected to a third-party site at checkout. But the impact on processors is a little more ambiguous.

The important thing about embedded payments—a term for payment solutions natively built into an app developer’s or fintech’s software—is that they are said to give merchants more control over payments flows. That’s because merchants can embed payment capabilities across a variety of digital touchpoints beyond the merchant’s app. Such touchpoints can include micro-stores on a social-media site, a marketplace, or within an email.

“By having embedded payments, the merchant has probably eliminated a penny or two or three on [the cost of] a transaction,” says Jeff Fortney, senior associate at TSG, a payments advisory firm. “It’s about what you’re selling to merchants today. You’re selling processing. [You’re] not technically selling embedded payments. [You] are selling the need to have a secure solution, a need to have something that will get you data quicker and help you sell faster.”

The data is a key component of embedded payments’ rise, says Don Apgar, director of merchant payments at Javelin Strategy & Research. “When we see embedded payments, there is power in the sharing of data,” Apgar says. “When you start talking about embedded payments, you’re talking about data sharing.”

9 Merchant Saturation

The prime, so-called greenfield, days of terminalization and large numbers of merchants ripe for accepting payment cards may have passed, but opportunities for savvy payments companies have not. “There’s not much greenfield opportunity left, quite frankly,” says Don Apgar, director of merchant payments at Javelin Strategy & Research.

Interchange programs for supermarkets and other large retailers, coupled with the advent of the debit card—which put card-based electronic payments into more wallets than did credit-constrained credit cards—were two big pushes toward convincing merchants to adopt card acceptance. Then the debut of Square and its payment-facilitator model—called aggregation when Square launched in 2009—was another push. Square “enabled the whole bottom half of the market,” Apgar says.

Today, property-management (rental payments) and business-to-business payments are attractive because cards have a small presence in them. But Apgar cautions there’s a reason for that. They are complex markets with unique needs that some acquirers may lack the expertise and financial means to effectively sell to. Jeff Fortney, a senior associate at payments-advisory firm TSG, doesn’t view this is as a saturation issue, but rather as one with changing merchant needs.

“The big challenge is, I can get this point-of-sale at Clover and it does all I need it to do,” he says. Clover is Fiserv Inc.’s POS system. “If you stop and look at these processors, they’re all looking for something to sell today,” Fortney says. “So, they’re getting creative.”

10 Beneficial Ownership Reporting Rule

Compliance with the Beneficial Ownership Reporting Rule (BORR) has perplexed acquirers and processors ever since it went into effect in January.

Developed by the Financial Crimes Enforcement Network, BORR requires businesses, regardless of industry, to report information about individuals who directly or indirectly own or control a company. The law, however, exempts some companies from reporting, a loophole that has helped fuel confusion about the rule.

The law was developed to help combat money laundering and to prevent criminals and corrupt officials from hiding their identities.

While acquirers and processors are well aware of the law, confusion about its application persists. “It is a complex law requiring interpretations of the rules and the [exceptions] of which companies are exempt from reporting”, says Scott Talbott, executive vice president for the Electronic Transactions Association.

The issue for acquirers and processors, then, is not a matter of lack of awareness, but rather one of “confusion by some individual companies about how to apply the law to their merchant base,” Talbott adds.

To improve compliance. the ETA has launched an education campaign about the law’s reporting requirements and implementation issues. The ETA also invited FinCEN to address members about the law at an annual conference in October.