This is the fourth episode in our sequel explaining why iPiD was born.
The capture of beneficiary details for remittances is the step that creates the most friction from a customer experience perspective – see episode 3. Even for seasoned cross-border payment professionals like iPiD co-founders, it remains a daunting experience to figure out the right BIC code, Branch name, IBAN, BSB code, IFC code, etc.
The pain is not limited to the sender.
The receiver must provide the banking details, ensure that they are correct, and then share this sensitive information via the channel of their choice (email, text, etc.).
Payment Service Providers also face the challenge of handling the exception and investigation when something goes wrong. And things do go wrong quite often, at a cost.
Failed payments cost US $118.5 billion in 2020
A study byAccuity, a LexisNexis Risk Solutions Company (True cost of failed payments – 2021 Global Research study) provides eye-opening insights on the true cost of failed payments due to incorrect financial details. The cost to payment service providers comes from:
- Payment fees for payment repair;
- Labor to manually intervene on the payments;
- Customer attrition due to a poor customer experience.
Accuity research found that the average bank spent over US $ 360,000 in 2020 on failed payments and that the total cost to the global economy amounted to US $118.5 billion in the same year.
The study highlights that two third of payments delay or failure are due to incorrect beneficiary details or account number.
Bad data produces false positives, which are the #1 headache for Compliance teams
On top of the business and operational aspects mentioned by the study, the poor quality of beneficiary details makes it much more difficult for sanction screening software (and compliance teams) to segregate true hits against sanctions lists and false positives.
Another study from LexisNexis Risk Solutions Company predicts the total cost of financial crime compliance to exceed US $ 200 billion in 2021.
As far as transaction screening is concerned, reducing the percentage of false positive thanks to better payment data quality and advanced technology is a major priority for compliance teams.
In short, be it for business, operational, or compliance reasons, the financial industry is in a dire need for a better solution for beneficiary details.
Beneficiary details solutions: customer experience imperative brings the industry over the tipping point
William Artingstall provides a brilliant comparison:
“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
Payments can only be truly simple, ubiquitous and invisible, if customers can pay beneficiaries based on what they know about them. That is typically 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, Mercado Pago have built their remarkable success on the convenience of proxy-based payments. Because they were the first movers and thanks to a winner-takes-all market dynamic, their closed-loop proxy payment solution had sufficient scale to work.
However, closed-loop solutions have inherent limitations, and regulators around the world consider frictionless payments as an essential public goods. Hence, they have been building real-time payment systems at a fast pace – more than 50 countries enjoy real-time domestic payments today. Further, many have realized the importance of adding proxy solutions that can be used by all payment providers in their respective countries in order to drive adoption.
“Adoption of real-time payments around the world is tightly coupled with convenience, simplicity, and removal of friction. 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, BankservAfrica
Real-time payment systems have really taken off thanks to the proxy or alias feature. Let us mention some well-known examples: 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.
It is important to stress that proxy payments are not a new payment product – it does not mean that money is actually sent to a phone number or email address. It is merely a feature, consisting in an addressing service that enables the retrieval of the banking details in exchange of the proxy. The participants act both as a data consumer and data contributor for their customers.
There are three main benefits of proxy payments:
- It is just much simpler to use!
Customers can pay based on what they know about the beneficiaries. In many markets, this has enabled the less tech-savvy segments of the population to start using digital payments.
- Confirmation of beneficiary identity and details before execution.
Customers feel more comfortable to execute a payment when they see the validated name or nickname of the beneficiary before they press “send”. Returning the validated details matched with the proxy also enables to remove much of the reasons and costs of failed payments highlighted earlier.
- Beneficiaries decide where they want to get paid.
It is not new for businesses to have multiple bank accounts and to change banks. However, the downstream impact on their collection process can be incredibly painful – change details in invoices, inform suppliers, etc. With the growing number of neo-digital banks and wallets, retail customers are also starting to have multiple accounts and change providers.
Proxy solutions allow beneficiaries to pair their proxies with the account of their choice, and to manage the paring as they wish. Hence, account switching is made painless to payers.
What is the best proxy?
A proxy or alias is essentially an alternative identifier. Many debates can be had on what is the best identifier. We could argue that each individual should have a unique and universal digital idea to engage in the digital world. Until that happens, multiple identifiers will co-exist with their pros and cons. Their success in proxy payments will depend on their convenience and verifiability.
The solution to the verifiability issue essentially comes from banks and financial services providers. Banks are trusted and regulated operators. Their business is based on their ability to verify that their customers are the person that they claim they are, and/or have the credentials that they claim they have. Banks also maintain proxy data about their customers to conduct their daily banking business, and increasingly, as a participant of local addressing service of the real-time payment system.
A recent initiative from 150 co-authors even calls for financial institutions to take a leading role in digital identity. They call for the creation of the Global Assured Identity Network (GAIN) which essentially could allow users to log-in online with their banking credentials instead of managing hundreds of passwords – or using their Facebook or Google credentials.
The conclusion is that there is no perfect proxy, but banks are an ideal conduit for customers to manage their proxies and link them to the accounts where they want to get paid.
International payments: how iPid is bringing the missing piece in proxy payments
Proxy payments have been a phenomenal success for domestic payments. It is time to bring this experience of Payments2.0 to cross-border payments. This is why we are here. This is why you are reading this piece. This is why iPiD was born.
Cross-border proxy payments cannot be executed in a closed-loop environment because the world is too fragmented. Cross-border proxy payments cannot be made possible by a central addressing database like it is done for domestic payments, because data sovereignty is an imperative.
iPiD makes cross-border proxy payments possible thanks to an API orchestration between payment providers, and beneficiary banks. We do not access the account data, we do not own the data, we do not harvest data. We orchestrate information flows, globally, between institutions sending payments, and institutions receiving payments. So that customers can use the institution of their choice to pay, and get paid, universally, based on their proxy or alias.
Follow us and be part of the cross-border payment future.