In the wake of a global crisis last year, consumer wallets were stretched. Countless businesses were forced to go into hibernation. The payments sector experienced its first revenue contraction in more than a decade. Those turbulent undercurrents are still there, and there are new external factors putting pressure on purse strings. What about risk allocation?
The picture is now looking much brighter for businesses as marketplaces bounce back and spending resumes. Will this “return to normal” be enough to stimulate the growth needed to bounce back to pre-COVID levels? Before COVID, the payments industry was consistently enjoying year-on-year growth of around 7%. That level of growth may be passively achieved once again. Should that be the limit of an economy’s ambitions for growth?
Let’s Talk About Risk
There are many who believe that over-regulation or rising interest rates are the bottleneck to growth in a capitalist economy. But there is another bottleneck that’s been there all along. Fixing it might not only help the payments ecosystem bounce back to pre-pandemic levels, but also unlock further growth. We are, of course, talking about risk.
Financial service providers, such as banks, marketplaces and emerging fintechs, are facing an existential dilemma when it comes to risk. On the one hand, they have a business population that wants to increase trade. They want to process more transactions at a faster rate. On the other hand, they’re facing unprecedented levels of fraud which can lead to crippling financial losses. Global losses from payments fraud more than tripled from $9 billion in 2011 to $32 billion in 2020. Some have projected those losses to increase by a further 25% between now and 2027. Nobody could blame financial services providers for being risk averse. But it’s come at the worst possible time for a business economy that wants to run rather than walk.
Risk managers at financial services providers are walking a tightrope. They are balancing growth with risk while coming under increased pressure to favor the former. The problem for payments providers is that their risk management strategies are typically binary affairs. They are arriving at “yes” or “no” decisions as to whether or not to authorize a transaction. This is based on predetermined algorithms and manual assessments. Not only is this process slow and inefficient, it’s also vulnerable to groupthink and bias. Risk managers may wave through risky transactions while perfectly innocent transactions might get blocked.
The Importance of Fintech Partnership Strategies for Risk Allocation
Banks, marketplaces and other financial services providers understand this bottleneck, which is why many of them are partnering with third parties to increase their risk-processing capabilities. According to McKinsey’s Global Payments Report 2021, more than a third (38%) of banks worldwide cite fraud and risk management as “very important” in their fintech partnership strategies.
Such partnerships will allow payments providers to move on from binary box-ticking when it comes to assessing fraud risk, and instead move to a progressive risk model that’s faster, more nuanced and has access to more accurate, up-to-date intelligence. Instead of marking transactions as safe or unsafe, payments providers will be able to onboard businesses and accommodate customer transactions using risk-tiered rules, policies and feature flags that give a clearer picture of risk and afford more control over the amount of risk taken. Payments providers can set their own risk levels and allow machine-learning algorithms to assign risk to each individual transaction based on real-time intelligence. They might also introduce customized flags and policies based on their own unique approach to risk depending on the nature of their industry or the size of the transactions being orchestrated.
This move to progressive, continuous risk assessment is the key to unlocking faster growth within the economy because it removes much of the friction currently associated with payments processing. Payments providers will be able to automatically authorize or decline transactions in a matter of milliseconds. Adhering to risk parameters will give payments providers safety. This will have a knock-on benefit for businesses and consumers, who will enjoy faster, friction-free transactions without the need for endless checks, holds and other barriers.
The answer to growth isn’t de-regulation or removing fraud prevention mechanisms; instead, it’s what the payments industry has historically always been very good at – innovation.