The pandemic led to a profound shift in the payment industry, forcing the financial services sector to seek innovative payment solutions in a limited time to meet the changes in how customers shop and pay. At the same time, the shift resulted in increased fraud, complex regulatory restrictions, and constantly evolving consumer expectations. Every industry, including the payments sector, is exploring artificial intelligence (AI) to navigate these challenges. Adopting and implementing AI carefully is imperative to avoid negative or disruptive consumer experiences.
At a November 2023 J.P. Morgan NBFI Leaders Forum in Sydney, Australia, the company noted that rapid advances in AI capabilities will boost productivity and cut costs across non-bank institutions such as asset management and insurance firms. A June 2023 McKinsey report estimates that generative AI could add the equivalent of $2.6 trillion to $4.4 trillion annually to the global economy. As technology evolves, more innovative applications will become available. To fully realize the benefits of AI, it’s vital for payment organizations to continuously evaluate, research, and invest in data infrastructure, talent acquisition and training, and ethical considerations.
Keep Up or Be Left Behind
Staying ahead of the curve in the payment industry means navigating the continuous changes and demands regarding convenience and security. Today’s savvy consumers understand the difference between secure and non-secure payments, particularly with digital payments via mobile wallets such as Apple Pay and Samsung Pay. The use of security-enhancing biometric fingerprints or facial recognition is now expected and demanded by consumers.
It’s not enough, however, to simply onboard these technologies. It’s essential for companies to invest time, resources and training into discovering how AI, smartwatches, blockchain, the Internet of Things (IoT) and other emerging technologies can be embedded into digital payment systems and keep consumers engaged.
Swarup Pogalur, Wells Fargo’s head of digital and AI capabilities noted in May 2024 that AI technology is “going through a phase of rapid innovation and has opened up a wealth of opportunities to reimagine how we engage with our customers and employees by enabling personalized and intuitive experiences.”
How AI can Help
The payment industry is already embracing AI innovations. AI and predictive analytics support fraud prevention and detection. AI also improves organizational environmental, social and governance (ESG) scores by analyzing ESG-related data from multiple sources, including reports, articles, social media, employee feedback and surveys, and then auto-generating performance scores. Unlike traditional ESG ratings updated annually or every six months via spreadsheets, AI dynamically generates daily ESG scores. AI also helps the industry overcome hidden risks and highlights potential opportunities by detecting patterns and correlations in ESG data easily overlooked by the human eye.
OpenWay’s software platform for Card-as-a-Service providers allows any type of card to be issued digitally. Some of its clients use these card solutions with embedded sustainability features that link their purchases to environmental footprints.
To implement these changes, it’s essential to understand that the industry is an ecosystem comprised of merchants, acquirers, banks, credit unions and financial institutions, and each sector needs to be trained effectively. The payment networks (Mastercard, Visa, Discover, etc.) sit between the financial institutions and the merchants (e.g., Target, Walmart). Finally, the core technology providers and the payment-based startups bring new ideas into the industry.
Addressing Challenges
The success of AI-enabled digital payments depends on addressing core data quality, security and privacy challenges. Ensuring high-quality data is crucial for accurate predictions and decisions. This involves filtering out erroneous data, eliminating bias and aligning it with ever-changing regulations. This is a perfect example of how AI systems can track and implement regulatory changes, especially regarding cross-border payments, where transactions are initiated from a different country than where the card was issued.
Still, money laundering, security breaches and fraud continue to rise. In 2023, there were 3,122 publicly reported data breaches in the United States, affecting 349 million people. Building robust security frameworks to handle sensitive financial data can reduce vulnerabilities and mitigate the risk of breaches, ultimately maintaining customer trust. By analyzing vast quantities of data, AI can identify and predict fraudulent patterns in near real time. In addition, when trained correctly, AI goes beyond analyzing data at rest and enables real-time data monitoring in transition. This means it can immediately analyze data moving from one place to another, detect if something is wrong with a transaction and decide whether to decline it. In fact, in February, the U.S. Treasury Department announced it recovered over $375 million by using an enhanced AI process to mitigate check fraud in near real time, after implementing the system in 2023.
The rapid evolution of AI technology in the financial industry creates a pressing need for specialized talent. In addition to AI expertise, teams require a deep understanding of financial regulations and security standards. Overcoming the talent gap involves upskilling existing staff and attracting data scientists, engineers, and compliance experts. It’s also essential to establish cross-functional teams that work together to ensure AI models align with overarching business objectives.
A strategic approach to AI implementation also involves establishing key performance indicators (KPIs). Key success metrics include false positives, patterns in customer satisfaction ratings, time to resolve issues, operational cost savings, processing times, and error rates. Additionally, indicators defining precision learning methods, audit findings, and their impacts on regulatory compliance are also critical to improving AI model accuracy.
Embracing the Future
AI is a transformative force that brings the payment industry to new heights because of its high potential to improvise and drive operational efficiencies in a constantly changing regulatory world. While there are concerns that AI may result in job losses, the net gains are greater. Embracing AI can lead to the long-term success of organizations in the payment industry because humans cannot manage and catch everything in this rapidly changing environment.
The industry may fall behind other organizations or startups if it doesn’t adopt AI. If it is willing to explore new AI products and position itself for long-term growth, the payment industry has the potential to succeed in an exponentially increasingly competitive and dynamic marketplace.
