As opposed to fiat currency, cryptocurrency is not connected to governments or central banks. Using a ledger system, cryptocurrency transactions are anonymous and decentralized. Bitcoin’s value, for example, is determined by demand and market supply at any given time, much like precious metals. Due to the fact that no government regulations apply to cryptocurrency and transactions are untraceable, there is a risk of abuse of the system for illegal activities including terror funding and drug trafficking.
Some advantages of using cryptocurrency for payments
Despite the risks, cryptocurrencies have several significant advantages as well:
When utilizing credit and debit cards, and handling transfers, foreign transactions, false declines and many other types of financial activities, there are fees involved. These fees tend to mount up and become quite costly. Cryptocurrency payment gateways charge only 0.5 to 1% per transaction. Most cryptocurrency accounts that take the form of a digital wallet are free.
One of the major banes of credit card use for payments is chargebacks.The cancellation of credit card transactions by purchasers can be extremely costly for merchants. But when it comes to cryptocurrency transactions, the basic rule is that they cannot be reversed.
Consumers are concerned about how retailers, service providers and financial institutions retain extensive amounts of sensitive personal data from an individual’s name, address and email to credit scores and net worth. When performing cryptocurrency transactions, data is converted into numbers, or cryptocurrency wallet addresses, so private information is not revealed.
Cryptocurrency payments are not classified according to countries. There are no cross-border fees, and no limitations on accessing funds. As banks and credit card companies are not involved, users can make payments, pay bills and shop independently.
More service providers and retailers are accepting cryptocurrency
Cryptocurrency acceptance is becoming more widespread among large service providers and retailers. AT&T recently became the first mobile carrier to accept bill payments in cryptocurrency. The Shopify ecommerce platform allows its merchants to accept Bitcoin payments through BitPay.
Microsoft permits users to deposit Bitcoin in their Microsoft accounts for the purchase of movies, games and apps in the Windows and Xbox stores. The large retailer Overstock has been accepting Bitcoins and other major cryptocurrencies since 2014. Paypal also allows merchants to accept Bitcoin through Braintree. There are many small businesses that are accepting cryptocurrency payments today.
What lies in the future for cryptocurrencies?
Cryptocurrencies like Bitcoin lack basic stability because they are not a pegged currency. By nature, they are more like a commodity asset for trading like precious metals. Some enterprises (like Facebook) are introducing stablecoins which are pegged to certain currencies, thereby securely anchoring cryptocurrency. But this would stand in contradiction to the decentralized (and uncontrolled) nature of cryptocurrency.
COTI recently developed the world’s first DAG (directed acryclic graph) protocol for creating decentralized payment networks and stable coins. Other technologies are expected to emerge and innovate cryptocurrency norms. Time will tell what form cryptocurrency payments will ultimately take.
Online and mobile transactions are particularly vulnerable to breaches, and passwords and codes can no longer provide adequate security against cyber attacks. Innovative technologies are being developed to meet growing fraud challenges. According to Capgemini, fraud detection systems using machine learning and analytics minimize fraud investigation time by 70% and improve detection accuracy by 90%.
Machine learning fraud detection
Machine learning enables the creation of algorithms that process large datasets with many variables. The system reveals hidden correlations between user behavior and the likelihood of fraud. Machine learning systems enable faster data processing and are less dependent on manual effort.
MasterCard has adopted machine learning to monitor variables such as transaction size, location, device, and purchase data. The system assesses account behavior and offers real-time assessment regarding the nature of the transaction. The system reduces the number of false declines in merchant payments. According to reports, merchants lose about $118 billion annually due to false positives, while customers’ losses amount to nearly $9 billion.
Blockchain for digital identity
One of the main problems related to fraud is that personal data is shared by a wide range of organizations, providing hackers with easy pickings. By definition, blockchain or Distributed Ledger Technologies (DLT) is decentralized. This factor enables a new approach to identity management. Data can be shared across different transactional channels while enabling robust protection of user identities. Users will have the ability to create encrypted digital identities, and the need for multiple usernames and passwords will be eradicated.
Behavioral biometrics for unreplicable authentication
Behavioral biometrics authentication is based on the principle that no two human beings share the exact same behavioral patterns. When it comes to the use of mobile phones, each user has their own typing pattern, swipe speed and finger pressure. Through machine learning and by analyzing behavioral patterns, smart algorithms can continuously authenticate user identity in the background of a session without interrupting the user experience.
User behavior analysis
One of the classic methods to detect fraud is to track deviations from usual customer behavior. A smart fraud system will pick up anomalies such as high values and unusual locations, new IP addresses, time of day, changed shopping patterns, and more. After detecting these activities, an advanced algorithm will raise a flag and assign a higher likelihood of fraud. The system will then send a verification request to the card owner in real time.
All of these methods constitute highly effective tools to fight sophisticated fraud. Small and medium-sized companies may find it more affordable to engage external data science experts or acquire third-party software rather than building an in-house team.
Our payment glossary is a great source for definitions, in-depth information and resources. Take a moment to understand the reasons for shopping cart abandonment and high fraud rates. Find out what open banking is and how it will affect your payment options in the near future. Read about ways you can overcome cross-border payment obstacles. Learn how Artificial Intelligence can jumpstart your business. And much more.
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According to the EU plan, by the end of 2019, charges for cross border payments in Euros will have to correspond to fees for payments made within a country using the local currency. In a nutshell, the resolution empowers EU member states to demand that banks apply the same charges for cross-border and domestic non-euro payments. Banks will also be required to make currency conversion costs transparent, in order to protect consumers from arbitrary fees charged for currency conversions.
This new regulation is likely to impact on cross-border payments worldwide and set new precedents in the financial sector.
New technologies for lower financial fees
Today, sending money from one country to another can be quite costly. Banks in one country often have no direct relationship with banks in other countries, making it necessary to involve an intermediary bank and invoke additional fees. Visakha Thongphetsavong, CMO of the Everex fintech company, notes that fees associated with international money transfer generally range between 5% to 20% of the cross-border transaction.
Among other emerging technologies, blockchain can be used to lower cross-border fees. Blockchain enables the encryption and storage of transactions in highly secure, decentralized ledgers. By eliminating the need for intermediaries or central authorities for financial transactions, blockchain enables enterprises to save on third-party fees. According to Thongphetsavong, the technology can significantly reduce the total cost of fees to about 2% to 3% of the transaction.
If you can’t beat ‘em join ‘em
Both banks and credit card companies stand to lose funds if third parties are cut out of cross-border processes. Some credit card companies are examining ways to use blockchain to their advantage. For example, MasterCard is currently studying how blockchain technology can cut costs, facilitate settlements, and improve customer experiences.
Microsoft and MasterCard launched Mastercard Track, a global trade platform that encompasses account-to-account and card payment solutions, fraud management and payment gateway services. This tool is expected to help reduce friction in the global trading system and promote exports, especially by small and medium-sized businesses.
Blockchain and banking
Banks initially viewed blockchain as competition, but some are now adopting the technology in various blockchain-based platforms. As a real-time, open-source platform capable of transmitting data and value securely, blockchain can become the basis for new banking products and a significant source of new revenue.
According to CEBNet, 12 banks have already adopted this technology for various use cases in China alone. Additional global banks that use the technology include ALFA Bank from Russia, Yes Bank from India, and LatiPay from New Zealand.
Creating a united front
The success of blockchain-based banking depends on collaboration among worldwide banks. This kind of cooperation will enable the establishment of a network capable of supporting global payments. Blockchain’s key attraction lies in its unique network features, but it is this quality which necessitates widespread cooperation among old-school financial institutions. Time will tell if they are up to the challenge.
The payments industry is highly dynamic and continuously disruptive. There is a common consensus on that. Looking back over the last couple of years, we have witnessed some dramatic developments: Veteran financial institutions are being forced to open their systems and alter their services to keep up with ongoing payment changes and demand for instant payments. New players are replacing traditional payment entities with rapid processing capabilities.
Here are some of the evolving trends that can we expect to see in the payment industry during the coming year:
Collaboration between banks, payment processors and other third-party payment providers
PSD2 European regulation, increasing competition and customer demand for personalized services have all induced banks to open their APIs to third-party payment processing players. While such regulation does not currently exist in the US and other areas, the model of open systems is expected to spread to other countries.
Increased competition, as well as greater cooperation between banks and third-party providers, will spur the development of a wider and less costly range of services for retailers and consumers.
With more than 60% of Millennial and Gen Z customers willing to share their bank account credentials with third parties, instant customer service will become a payment norm. Mobile apps will serve as the main user medium.
New collaborations among key players in the global payments industry, such as credit card companies, payment processing companies, fintech innovators, fraud detectors and others, are expected to lower the costs of cross-border transactions.
Blockchain technology will enable the creation of an international clearinghouse which would eliminate dependency on correspondent banks and other intermediaries in global transactions.
Distributed ledger technology will enable cross-border payments to become both more efficient, faster and less expensive for the retailer and end customer.
Blockchain technology stands to mitigate risk, facilitate the reconciliation process, and automate compliance issues.
The increased use of mobile phone apps for online banking, payments and other financial dealings has made the need for augmented security measures imperative. Traditional authentication methods like passwords and security questions can no longer meet the current sophisticated wave of cyberattacks. Machine learning is now being employed to ensure robust authentication capabilities.
By using behavioral biometrics, machine learning enables the study of many aspects of a user’s actions, from device swiping to typing cadence. These inherent behavioral patterns are impossible to replicate and are analyzed continuously in the background by a smart platform. As a result, the user experience remains both frictionless and highly secure.
Banks can use machine learning to monitor their processing systems for threats, examine previous cyber attacks and establish control centers to identify anomalies.
While the Internet of Things (IoT) is still in the development stages, it is expected to significantly impact not only the vehicular industry and city planning but also payments. Consumer demand for smart payments for various home services and products is driving the development of automated payment processes embedded in appliances.
Refrigerators can now compile a shopping list, do your shopping, order pizza and independently perform payments. Smart washers note when you’re low on detergent, automatically place replenishment orders, and make payments. Smart home appliances ensure an ideal customer experience.
With voice-controlled assistants like Google Home and Amazon’s Alexa, users can make a voice purchase request based on payment card and shipping information already on file. This payment mode transforms the old payment paradigm by eliminating the need for a mobile phone or the use of any kind of payment card.
Both banks and merchants accumulate large amounts of data about customers. Smart data can offer predictive analytics, fraud modelling, real-time business offerings, and more.
Opportunities for new services can be explored based on real-time predictive insights. By examining existing online banking patterns, payment entities can provide new products to meet evolving needs.
Smart data enables merchants to understand current customer behavior and develop personalized offers and customized consumer journeys to develop one-on-one relationships and inspire loyalty.
Evolving global payment dynamics are forcing financial players such as banks, payment service providers, fintech innovators and payment processors to consolidate, assume new roles, and collaborate with new bedfellows in order to survive. It will be interesting to see how it all pans out.
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