In this blog we ask what is an alias? What does an alias mean in banking and why use an alias for payments? We explain how the use of aliases – or proxies – enables a much better customer experience by making international payments as easy as sending a text message, and how they help banks and Payment fintechs to remove friction, errors and costs from the payments process.
When someone wants to send a payment across borders, the capture of a beneficiary’s account and other details is perhaps the most difficult step from a customer experience perspective. It can be daunting to figure out the right BIC code, branch name, IBAN, BSB code, IFC code, etc.
Moreover, the pain is not limited to the sender.
The recipient must know all these relevant banking details, be certain that they are correct, and then share this sensitive information via the channel of their choice (such as by email or text).
Payment service providers face the challenge of handling any exceptions and investigations if something goes wrong – such as one small piece of information has been provided or input incorrectly. Unfortunately, things do go wrong quite often; and at a significant cost to the industry.
Failed payments cost the industry US $118.5 billion in 2020Accuity, 2021
A study by Accuity, provides eye-opening insights into the true cost of failed payments because of incorrect financial details. The cost to payment service providers comes from:
- Fees for payment repair
- Labour costs for manual intervention to correct data
- Customer attrition due to poor user experience
Accuity’s research found that the average bank spent more than $360,000 in 2020 on failed payments and that the total cost to the global economy amounted to $118.5 billion in the same year.
The study highlights that two third of payment delays or failures are due to incorrect beneficiary details or account numbers.
Bad data is a big problem for compliance
In addition to increasing operational costs and the burden on businesses, the poor quality of beneficiary information makes it more difficult for sanctions screening software and compliance teams to segregate ‘true’ hits against sanctions lists from the ‘false positives’ generated by incorrect data.
According to another study from LexisNexis Risk Solutions, the total cost of financial crime compliance was expected to exceed $200 billion in 2021. This makes access to better quality payment data and the reduction of the number of false positives two major priorities for compliance teams.
Providing payment data must be easier
As well as eliminating inefficiency and repair costs, the need to improve customer experience means the industry must find a better solution for capturing beneficiary details.
“Imagine that when you sent an email you needed to enter the full postal address of the beneficiary. It would seem very complex now that we have become accustomed to the ubiquitous email address system, but in some ways the world of payments is like that. We are forced to use the old address system when better alternatives are available.”William Artingstall, Emerging Payments and Business Development Director, Citi, illustrates how cumbersome and outdated the payment experience is by comparing it to how we use email.
Looking at payments through this lens, it becomes clear that payments can only be simple, painless and frictionless if customers are able to pay beneficiaries based on a piece of information they already know. What do they know? Typically, this is a phone number or email for individuals, or a unique reference number or QR code for businesses.
These identifiers are also known as proxies, or aliases.
Proxy-based payments: the new norm for domestic payments?
Payment providers like PayPal, WeChat Pay, M-Pesa and Mercado Pago have built their businesses on the ease and convenience of alias or proxy-based payments. Because they were the first players to do this, their ‘closed-loop’ proxy payment solutions quickly gained traction and became successful.
However, closed-loop solutions have inherent limitations, not least that both the sender and the recipient of the payment must each join the same payment system before they can transact with each other. This is just not feasible and for regulators would be seen as anti-competitive.
This constraint has not gone unnoticed by regulators, who, at the same time, have been pushing for change in the payments markets to support economic growth. Regulators have so far focused on improving payments infrastructure, including building real-time domestic payment systems and, currently, more than 50 countries enjoy real-time payments in their home markets. Now, many are realising the importance of adding proxy solutions that can be used by all payment providers in their respective countries in order to drive adoption and enable competition.
“Without a proxy feature, allowing payers to send payments to others using only what they already know about them, like a cell phone number, the growth of real-time payments is seriously hindered. In addition, proxy enables many more use-cases and makes things like account switching, or interoperability between bank accounts and wallets much easier.”Jan Pilbauer, CEO of BankservAfrica, says that the adoption of real-time payments around the world is tightly coupled with convenience, simplicity and the removal of friction.
The real-time payment systems that have really taken off are those which incorporate the proxy or alias feature. We only have to look at the rapid growth of Zelle in the United States, UPI in India, PayNow in Singapore, NPP in Australia, FPS in Hong Kong, PromptPay in Thailand, or PIX in Brazil, to see that the user experience of these systems is integral to their success.
We should note that proxy payments do not mean that money is actually sent to a phone number or email address. It is a feature underpinned by a technology called an addressing service, which uses the proxy information to retrieve the banking details that are required to complete the transaction. In this way, the addressing database removes friction from the payment experience by bridging the ‘data gap’ between multiple reference databases and payment systems and the participants act both as a data consumer and data contributor in the transaction.
The three main benefits of proxy payments
- It is just much simpler and easier to use!
Customers can make a payment based on what they know about the beneficiaries without the sender having to know or the payee needing to provide financial details they may not be familiar with. This has helped to drive take-up and usage of proxy-based payments in many markets. .
- Confirmation of beneficiary identity and details before execution.
Pre-validating payment details in this way also eliminates many of the failed payments and reduces operational costs, as we highlighted earlier. Moreover, customers feel more confident about executing a payment when they see the validated name or nickname of the beneficiary before they press ‘send’, which greatly enhances the user experience.
- Beneficiaries decide where they want to get paid.
Businesses have multiple bank accounts and may also regularly change provider as they expand their business. In the retail sector, the growing number of new financial service providers and wallets means that consumers are also starting to have multiple accounts and to change providers more frequently. The downstream impact of this on their collection processes can be very painful, with the need to update details on invoices, inform multiple suppliers and make other changes. Proxy solutions enable beneficiaries to pair their proxies with the account of their choice and to manage the pairing as they wish, making account switching painless.
What is the best proxy?
What are the benefits and disadvantages of each type of proxy or alias when used as an alternative identifier for making payments?
Until we each have a unique identity that is only used in the digital world, the truth is that multiple identifiers will co-exist, and each have their pros and cons. Their successful use in proxy payments will therefore need to balance their convenience and verifiability.
The solution to the issue of verifiability is provided by banks and financial services providers. Banks are trusted and highly regulated operations. Their businesses are based on knowing their customers and verifying their identity. They must constantly prove that they do so to regulators and will be fined if they do not. Additionally, banks already maintain proxy data about their customers in order to conduct their daily banking business and, increasingly, as a participant in the addressing service of the local – domestic – real-time payment system.
A recent initiative calls for financial institutions to use this as a foundation for taking a leading role in digital identity. The initiative calls for the creation of the Global Assured Identity Network (GAIN) which could enable users to log-in online with their banking credentials instead of managing hundreds of passwords or using their Facebook or Google credentials.
Still, that is some way off and for the moment, no proxy is perfect. In the meantime, banks are an ideal way for customers to manage their proxies and link them to the accounts where they want to get paid.
How iPid is bringing the missing piece in international proxy payments
We can see that proxy payments have been a great success for domestic payments. It is time to bring this experience to cross-border payments. This is why iPiD was born.
Cross-border proxy payments cannot be executed in a closed-loop environment in the same way as many domestic payments because the world is too fragmented. It is not feasible to expect every person in the world to belong to the same payment service or network. And in the same way that each shop and service provider increasingly has its own app, there are a multitude of proprietary and disparate payment systems, reference databases and other platforms across the world.
Here is where iPiD fits in. We make cross-border proxy payments possible thanks to API orchestration – a route finder – between payment providers and beneficiary banks. We bridge the ‘data gap’ between multiple reference databases and payment systems. We do this at the same time as ensuring data privacy and complying with data sovereignty regulations. We do not access the account data, we do not own the data, we do not harvest the data. We orchestrate information flows, globally, between institutions sending payments and institutions receiving payments. This means that customers can use the institution of their choice to pay, and get paid, based on their proxy or alias.
Join with us and be part of the proxy-based, cross-border payment future.