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1、Digital Payments ControlLessons parties in the payments value chain can harness to scale their digital payments processesA report from Kapronasia in collaboration with SmartStream November 2022ContentsIntroduction 3Key Findings 5Challenges Around Increased Contactless Payment Volumes 6Lessons And Be

2、st-Practice Processes 9Conclusion 11Methodology Kapronasia conducted both primary and secondary research in Asia Pacific to obtain the most relevant insights from the industry around the exponential in digital payment transactions and need for better payments insight and control.Primary Research:Int

3、erviews were secured from relevant players across the ecosystem,including financial institutions,fintechs,and industry experts.Secondary Research:Sources included but were not limited to,market intelligence reports and studies by industry experts and professional services networks,white papers,educa

4、tional materials,media articles,and marketing collateral.2Digital Payments ControlIntroductionThere has been an exponential increase in contactless and online payments,driven by new technology.Cashless transactions,of which there were already 1,035 billion worldwide in 2020,are projected to increase

5、 nearly triple by 2030,with Asia-Pacific growing the fastest as cashless transaction volumes are forecasted to increase by almost four times between 2020 and 2030 (Figure 1).Regulatory requirements and customer expectations with regard to a variety of new payments experiences,such as e-wallets,weara

6、bles,and NFC-sticker,among others,are evolving equally rapidly.An exciting time for digital payments though it may be,it is an era marked by heavy competition and fraught with complexities,costs,and risks that are only exacerbated by ever-increasing payment volumes.Indeed,Roland Brandli,Strategic Pr

7、oduct Manager at SmartStream Technologies says,“the adoption of contactless payments during the past three years has increased significantly.”According to him this means that banks are processing many more transactions,especially low value transactions.He says,“this raises key risks around handling

8、the volume of disputes,either through failed processes or through genuine chargebacks,leaving banks with the choice of higher write-offs or a higher cost in handling disputes.”In addition,as parties in the payment value chain(issuing banks,acquiring banks,third-party acquirers,fintechs)seek to get o

9、n top of increasing contactless payment volumes and infrastructure requirements such as incorporating ISO 20022,the correlating increase in data they will be required to handle poses a significant burden to legacy infrastructure and a strain on existing processes and controls.New technologies and ca

10、pabilities must be implemented to decrease the burden from complexity,fraud,regulatory requirements,and revenue leakage risks.That will also include introducing automation,especially for smaller payment companies where manual processes are lengthy,a strain on limited resources,and introduce human er

11、ror.Proactive players in the payments value chain must,however,do three things make the individual transaction(as opposed to the aggregate)the foundation of payments control,employ artificial intelligence and machine learning(AI/ML)to analyze data,and overhaul legacy backend systems in preparation f

12、or the processing of unprecedented data volumes.Overall,that should lead to greater visibility into transaction processing and exceptions management.3Digital Payments ControlFigure 1:Cashless Transaction Volume will more than double by 2030Number of cashless transactions(billions)4941,0321,818591051

13、7222937552273111165180258349202020252030Asia-PacificAfricaEuropeLatin AmericaUSA/CanadaTotal:1,035Total:1,882Total:3,02682%Growth61%GrowthNote:Cashless transaction totals for 2025 and 2030 are projections Source:Kapronasia analysis,PwC Strategy&global payments model,20214Digital Payments ControlKey

14、Findings1.There has been an exponential increase in contactless and online payments,driven by new technology.2.The increase in contactless payment transaction volumes is raising key risks around the handling of the volume of disputes and the reconciliation of net settlement reports with credit card

15、schemes.3.The strain on legacy systems will only increase with the implementation of ISO 20022.4.Banks must put proper controls and processes in at the transaction level rather than the bank level.5.Such a bottom-up approach centered on the transaction level can reduce effort and cost involved in ex

16、ception management(as well as the cost of the exceptions,themselves).6.Banks can further enhance their processes by implementing artificial intelligence and machine learning to deliver real-time control,greater visibility into payments processing and rapid detection and investigation of exceptions.7

17、.Banks will also need to invest in upgrading their legacy systems to handle increasing data volumes.5Digital Payments ControlChallenges Around Increased Contactless Payment Volumes1 Chargebacks911,“Chargeback Costs,”Feb 2022,https:/ Costs Associated with ChargebacksChargebacks represent the crux of

18、an increasingly expensive problem facing companies in the payments value chain.Expensive to handle already at the individual level,costs add up fast in the aggregate,even more so with rapidly increasing contactless payment volumes.Chargebacks are projected to cost a total of US$117.46 billion in 202

19、3,with merchants and banks alike both taking heavy losses.1 According to Mr.Brandli at SmartStream Technologies,the challenges faced by banks today are multiple,beginning with ensuring that the transactional data is available either at the bank level,or in the case of an outsourced process at the pa

20、rtner level.He says,“monitoring this at a transactional level means that the data has to be available at all levels,which involves multiple systems.”He says,“traditionally banks have not fully implemented standards like ISO 8583 and have still a lot of data in structured but non-standardized formats

21、.This means in order to achieve proper transaction control there is still a lot of effort involved by the Bank IT to retrieve the appropriate data.”Mr.Brandli adds,“without the proper controls in place it is not possible to identify where the process is failing and even more problematic it leads to

22、revenue leakage.”As client expectations are moving rapidly to an instant world this will also be a source of higher reputational risk,he adds.According to one expert we spoke to,who is Head of Merchants and Acquiring,Cards,and Payments at a well-known bank based in Singapore,discrepancies such as ch

23、argebacks are passed on to exception management,which remains a manual process.This takes time,as this expert explained,“From the system itself we can tell that there is an exception,but it will take us one business day to be able to identify where the mismatch is.”This is where having that automati

24、on and greater visibility into transaction processing and exceptions management will be increasingly needed.As long as total chargeback costs stay within a certain threshold,the issue will not attract special attention,and individual low-value chargebacks are easily brushed off.This,however,is an un

25、sustainable position to be in with increasing transaction data volumes which are only set to increase further with the mandatory implementation of ISO 20022 even if costs do not frequently breach the threshold.There are multiple reasons for this,the paramount of which being that chargeback costs,due

26、 to systemic issues,could be brought down significantly,perhaps even to nearly zero,with proper controls.Increased Risk of Erroneous Card Scheme ChargesReconciliation of net settlement reports with credit card schemes are performed by banks at the net/balance level.While the capability to analyze do

27、wn to the transaction level is there,it is not done by default and requires manual intervention,“From the system itself we can tell that there is an exception,but it will take us one business day to be able to identify where the mismatch is.”6Digital Payments Controland banks tend to write-off small

28、er discrepancies.Aggregate reconciliation may be easy enough if balances tally up but is quickly a nightmare scenario if they do not.According to Shubhredu Khoche,ex-MasterCard and Co-Founder and Chief of Strategy and Product at Miti Ventures Inc,banks hesitate to establish control at the transactio

29、n level because of the effort and cost involved in this reorganization of processes.This hesitation could be expensive,however,as the issue of mismatching net settlement reports will only become more painful as volumes increase.The cost of writing off card scheme reconciliation mismatches will quick

30、ly outweigh the hurdle that is the additional effort required on the part of banks to get down to the transactional level in 2 Finextra,“MasterCard pays out US$61 million to settle Tesco interchange suit,”Jul 2015,https:/ of the data.This hurdle is also more imagined than real at this point,as the d

31、ifficulty in assessing transactions at a granular level is the result of a failure to implement the newest technology and processes,rather than the lack of their existence.The lack of granularity makes reconciliation difficult,and the risk involved in incorrect settlement goes beyond mere revenue le

32、akage,as incorrect,and often overcharged,net settlement reports waste time,effort,and resources and can hurt businesses and lead to massive fines for card schemes.Both Visa and Mastercard have been on the receiving end of litigation over incorrect or inflated fees.Mastercard in 2015 paid out US$61 m

33、illion to UK retailer Tesco for“using its rules to artificially inflate fees and of over-charging retailers for purchases made by non-EU cardholders.”2 Such problems in reconciliation would be avoided or vastly reduced if banks and card schemes approached net settlement reports from the bottom-up an

34、d had the proper automated controls in place to identify anomalies and use a fully audited trail to correct for them.The Strain on Legacy Systems Will Only Increase with the Implementation of ISO 20022 One of the most crucial pain points for digital payments players today is the strain on legacy bac

35、kend infrastructure,which now requires near-constant,expensive overhaul and upgrading to be capable of processing and consuming ever-increasing data volumes.Rising transaction volumes alone were putting significant strain on legacy systems.Systems were often architected with a few payment types in m

36、ind and a certain level of payment volume.7Digital Payments ControlFinancial institutions,often loathe to deal with the replacement costs,have tended to stay with legacy infrastructure which does not scale well to higher payment volumes,a challenge only exacerbated by ISO 20022.While the need to upg

37、rade these systems represents a high level of effort and expense,players stand to gain at the other end of the tunnel.According to IBM,“If data is the new oil,ISO 20022 is the new gasoline.”3 ISO 20022 provides“richer,better structured and more granular data,”in greater volumes,boasting a variety of

38、 benefits.4 Namely,more advanced data that allows financial institutions to provide value-added services,analyze customer behaviors and create tailored products,and reduce reliance on manual intervention in exception management.3 Paul Hannily,IBM,“If data is the new oil,ISO 20022 is the new gasoline

39、,”Feb 2022,https:/ SWIFT,“What is ISO 20022?,”https:/ takeaway for digital payments players is clear:the data is coming are you ready to consume it?Unfortunately,many may not be ready as a result of insufficient investment in systems upgrades.Players who have shirked overhaul on legacy systems will

40、not only be unable to leverage these specific advantages they will lack the foundation to implement new automation,analytics,controls and processes entirely.This will leave them overwhelmed by transaction volumes and playing catch-up with better prepared competitors who are accelerating onwards with

41、 new,more efficient capabilities.8Digital Payments ControlLessons And Best-Practice Processes Approach Transactions from the Bottom Up With increasing digital payment volumes leading to higher and higher revenue leakage,and new payment methods and flows leading to novel,unexpected errors,the need fo

42、r efficient payments control has never been greater.Payment players need clarity,transparency,and access at the most granular level.The best way to achieve this is to make the individual transaction,rather than the aggregate,net,or balance,the basic building block and starting point of control.In cu

43、rrent top-down processes,assessing problem transactions and handling exception management,such as in the case of chargebacks,is a laborious,expensive,manual process.The ability to assess individual transactions certainly exists,but is done inefficiently,especially in light of current technological c

44、apabilities.A bottom-up approach beginning with control at the transaction level,even before implementing something like automation,eliminates much of the difficulty in exception management.Pratyush Prassana,SVP Merchant Payments at GoTo Financial,explained how transaction level monitoring was a boo

45、n to their process when dealing with the unknowns and the unexpected of digital payments.New payment flows,like BNPL,varying merchant dependability in E-commerce,and additional complications from new payment methods and promotions all lead to previously unencountered(and therefore un-prepared-for)er

46、rors.According to Mr.Prassana,“with transaction-level monitoring if there is a new payment method,especially payment methods running promos,we had deeper insights into,Hey,is this transaction potentially fraudulent?”From a strategic perspective,control at the transaction level also makes it easier t

47、o adapt to the rapidly changing regulatory and business landscape.For instance,in the event of new regulations requiring anti-money laundering(AML)checks on individual digital mobile payments,a bank which has already implemented transaction-level control will have in place the foundation that others

48、 must scramble to establish.While institutions have been hesitant to get so granular as it requires an upfront effort and cost,the manual interventions required in top-down processes represent a significant(and constant)effort of their own,and represent a large,unnecessary,and expanding cost in the

49、face of rapidly increasing volumes.Indeed,according to Mr.Brandli at SmartStream Technologies,based on the numerous issues around fees and billing it is to be expected that more and more regulators will involve themselves in this topic.Digital payments are constantly evolving,and new products are be

50、ing offered on the back of these transactions.He says,“As these“card”backed products are also increasingly being used for direct payments it can also be assumed that more controls will be imposed around subject such as AML.”Adding,“As these subjects are constantly evolving it will be important to ha

51、ve granular controls in place to provide banks with the capability of adapting to these requirements,present and evolving.”The difficulty in adapting to regulatory and business landscape changes alike comes from the same source:a lack of proper controls and processes at the transaction level-impleme

52、ntation of which is necessary to reduce costs,time,and effort associated with ever increasing volumes of payment transaction data,to comply with regulations that increasingly require this level of control,and to provide a competitive customer experience.9Digital Payments ControlImplement Artificial

53、Intelligence and Machine Learning to Efficiently Process and Analyze DataAs technology and methods such as straight-through processing have developed,payment controls have evolved from being fully manual to largely automated.Automation alone has improved payment controls efficiency dramatically but

54、is no longer enough in this rapidly changing operational landscape.AI and ML are key for the next evolution in payment controls but are yet to be employed at scale.While switching to a transaction-level,bottom-up approach can reduce the effort and cost involved in exception management as well as the

55、 cost of the exceptions themselves,the implementation of AI/ML can further those same ends by delivering real-time control,greater visibility into payment processing and rapid detection and investigation of exceptions;it can also prevent exceptions,precluding the need for intervention,manual or othe

56、rwise,in the first place.AI/ML is a powerful tool.If harnessed correctly,it can be used to both analyze and process data and do systematic checks,seeing if and where there are anomalies.Indeed,Andreas Burner,Chief Innovation Officer at SmartStream Technologies,says,“Although the volumes are rising r

57、apidly,monitoring and controlling every transaction detail is key.ML technologies are perfect for this,because they can easily process and analyze big data volumes.”Beyond having the ability to highlight the likely cause of errors after they occur,AI/ML tools can be used to preempt them.While it wou

58、ld be impossible to eliminate all errors before they occur,properly implemented AI/ML tools are able to learn to identify transactions that are likely to be fraudulent or to fail and flag them.In doing so AI/ML lessens exception management costs and has the potential to significantly improve the cus

59、tomer journey,currently often soured by incorrect or failed transactions.Invest in Upgrading Legacy Systems to Handle Increasing Data VolumesWhile the previous two lessons may still be points of some debate among digital payment players,there is one lesson on which consensus appears to have been rea

60、ched:legacy systems must be overhauled and prepared to handle the imminent,massive volumes of payments data.As volumes increase and demands for new capabilities such as real-time data monitoring appear,the ability to process and consume this data is paramount,and those without proper IT systems will

61、 be left behind.Handling this data is not merely a matter of conforming to a standard such as ISO 20022,but is a means to unlock vast analytical potential using the information on customer behavior that exists at the individual-transaction level.One individual we spoke to,a Director of Payment Gatew

62、ay Solutions at a major Australian card scheme,made the point succinctly.He said,“It is all about data.Whoever has the largest amount of data and can use that to draw insights to make proactive decisions is going to be the winner.If you are not upgrading your systems to consume that data,thats a big

63、 gap.”Implementation strategies will vary depending on the company,but the takeaway here is universal:payments players must be able to scale their systems,processes,and controls to ensure that they can process and capitalize on the“tsunami”of rich data that is coming while avoiding the potential for

64、 increased costs and opacity.Mr.Burner at SmartStream Technologies says,“using todays cloud technology,modern systems are designed to scale elastically and can handle enormous amounts of data.”He says,“the beauty is when the business is growing,the TCO Total Cost of Ownership scales simultaneously,w

65、hich reduces the complexity of business.”10Digital Payments ControlConclusionIn the midst of an incredibly fast-paced and ever-changing payments landscape,players across the digital payments value chain are facing serious challenges as the volume of digital transactions increases.For some firms,the

66、challenge is fraud.As transactions move online,so do the fraudsters.Being able to manage and control fraud is a critical element in maintaining profitability.For others,chargeback costs,though,as we discussed,may not be increasing as a percentage of revenue,are increasing in the aggregate,and are th

67、e key challenge.As market participants work to stay on top of the increased volumes and regulatory requirements including ISO 20022,the correlating increase in data they will be required to handle poses a significant burden to legacy infrastructure and a strain on existing processes and controls.Tec

68、hnology may be the answer,but only if used in the right way.Players in the space need to take onboard the three lessons that we have outlined in this report.Namely,they need to:1.Approach transactions from the bottom up aggregate level reconciliation and exception management is simply too costly and

69、 inefficient with todays volumes and fraud threat.Making the individual transaction the basic building block of payments control is critical.2.Implement AI/ML Artificial intelligence and machine learning is needed for the analysis and processing of the incoming tsunami of data and must also be emplo

70、yed to flag likely fraudulent or erroneous transactions before they happen.Doing so will further reduce revenue leakage and improve customer experience.3.Upgrade legacy backend systems Legacy systems are not capable of handling the volume of data that is coming,especially in light of new standards s

71、uch as ISO 20022.Players without the ability to efficiently process,consume,and use data will perish.With increasingly fierce competition,tight margins,and high customer expectations,processes which continue to rely on manual intervention that were already uneconomical before the explosion in digita

72、l payments must be replaced.By incorporating these three lessons,parties in the payments value chain will be able to effectively expand their business while scaling their processes and reducing avoidable costs.11Digital Payments CKapronasia is a leading provider of market research covering fintech,b

73、anking,payments,and capital markets.From our offices and representation in Shanghai,Hong Kong,Taipei,Seoul,and Singapore,we provide clients across the region the insight they need to understand and take advantage of their highest-value opportunities in Asia and help them to achieve and sustain a com

74、petitive advantage in the market.Please visit https:/ 2022 Kapronasia Singapore Pte.Ltd.All rights reserved.SmartStream is a recognised leader in financial transaction management solutions that enable firms to improve operational control,reduce costs,build new revenue streams,mitigate risk and compl

75、y accurately with the regulators.By helping its customers through their transformative digital strategies,SmartStream provides a range of solutions for the transaction lifecycle with AI and machine learning technologies embedded which can be deployed in the cloud or as managed services.SmartStreams digital payments solution delivers a highly scalable,real time,integrated control layer-automating reconciliation,settlement,fee calculation and dispute management processes.It supports all payments players,irrespective of size.For more information,visit:http:/www.smartstream-