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Riding the Rails of the Digital Payment Revolution

This week I’ve been at FICO World, our company’s annual customer conference, where I had the honor of exploring the future of payment fraud with CEB TowerGroup senior research director Brian Riley and Ori Eisen, Chief Innovation Officer at 41st Parameter/Experian.

At my Wednesday panel discussion, “Protecting the Digital Payment Revolution,” the spirited discussion started the minute the session began – although we got a full eight minutes in before ApplePay was mentioned.

“The rails” of the payment system infrastructure

One point was crystal clear – that no matter how revolutionary new digital payment methods may seem, all of the current crop (with the notable exception of Bitcoin) have traditional payment cards as their foundation. As such, all of these transactions are conducted on the “rails” (payment network infrastructure) built more than 40 years ago.

“It’s like MS-DOS and Microsoft Windows,” Ori analogized. “You can put a fancy GUI on top of command-line MS-DOS, but underneath, it’s still MS-DOS.”

“In today’s card world, the top 12 banks control 80 percent of the volume,” Brian added. “When you look at how ‘alternative’ payments are defined, these new payments are still running on the old rails.”

Payment cosmetics

So, until there is some radical new network that challenges the status quo, the vast majority of entrants in the digital payment revolution will be evolutionary, at most.

That includes ApplePay, which puts a cool, cosmetic interface on top of traditional card-based payment technology. And EMV chip-and-PIN technology, since payments transacted with these cards are conducted on “the rails.” Brian noted, “You’re still dealing with the endpoint here, and an additional, different layer of risk with EMV.”

Specifically, the panel was talking about the rise in card-not-present (CNP) fraud that has followed EMV adoption in regions all over the world. While total fraud losses today run at about six basis points globally, per Brian, fraud loss rates for CNP transactions are at least three times higher.

New networks can emerge

Ori’s theory is that two things may happen that could radically change the payment network, and thus make “the rails” obsolete. First, “it’s like when AT&T discovered that building out a network was no longer an asset – VoIP companies like Vonage came out of nowhere and forever changed telecommunications.” Since anyone can build a robust global network cheaply using resources like Amazon Web Services, the rise of a new payments network is a real possibility.

A second, more remote possibility is that telecommunications providers could somehow connect their knowledge of customers’ geo-location with payment networks, eliminating a major fraud flag.

Falcon evolves to protect new payment methods

Both Ori and Brian agreed that the safety of new digital payments will rely on proven fraud protection technology like FICO Falcon® Fraud Manager, with capabilities that look at a multitude of characteristics beyond the basic transaction facts that travel over “the rails.” I’ll discuss some of the analytic enhancements and new data sources like TrustInsight in a future blog.

As for Bitcoin? Neither Brian nor Ori was optimistic about its longevity. Brian made the important point that Bitcoin is not backed with a sovereign currency, greatly reducing its long-term viability. Ori said that while Bitcoin is “technically brilliant – full stop,” but the speed and anonymity with which this currency can be transferred creates huge money-laundering potential.

To see more about what happened at FICO World, search #ficoworld on Twitter. Also check out Ori’s recent article in WIRED, “The Future of Fraud.”

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