Smooth, quick, and secure: these are three bywords that financial transactions and artificial intelligence have in common – so it’s no surprise that AI in payments is tipped to change the finance industry forever.
The explosion in AI technologies is old news, but we are yet to see a significant impact on the payments industry. Innovative AI language models may be able to answer any question under the sun, but how can AI help us create a new world of financial services?
Frank Monaco believes that we’re about to find out. As CEO of payment provider Tua Financial, he’s had over 20 years of experience implementing the latest technology to offer flexible payment options to its customers.
Rather than simply upgrading our payment systems, he thinks that AI in payments is about to revolutionize every financial aspect of our lives.
“AI is a transformative force, a cornerstone of a new era in the industry, where innovation knows no bounds”, says Frank. “Financial interactions won’t just be quicker and smoother, but also intuitive and personalized for whatever the user wants to do”.
But what will this new era look like for financial institutions? What are the opportunities and dangers of embracing AI tools, and are there any use cases out there that can give us clues about what this brave new world will look like?
We sat down with Tua Financial’s CEO to find out answers to these questions and to get the insights of a payments expert helping to shape the future of AI in payments. Here is what we covered:
- The journey toward AI in the payments industry
- The benefits of AI in payments: A fairer and safer financial ecosystem
- The challenges of AI in payments: Data breaches and bias
- Current AI use cases in payments
- The future of AI in the payments industry
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The journey toward AI in the payments industry
Take a look at the last 50 years of payment processing history and you’ll see technology as the golden thread running through their development.
Credit and debit cards were primitive examples of this back in the 1970s. Each one had, and still has, a magnetic stripe containing encoded information like the card number and expiry date. When swiped, the card reader decoded this transaction data, verified it with the issuing bank, and then authorized it.
Fast forward to the internet era and we started to see the first digital payment methods, particularly in the e-commerce industry. The likes of PayPal made online payments possible without us sharing our financial information with the merchant. Cross-border payments, too, became more accessible thanks to the ease of paying online.
This was the start of the fintech boom which leads us to the present day. As payment tech has improved, real-time payment solutions have become more common.
Digital wallets, A2A payments, and mobile payment apps have displayed AI-like characteristics for several years with many using machine-learning algorithms to detect fraud and offer insights into spending habits.
The next phase of AI in payment processing is set to be not so much a step as a gigantic leap, and it’s one that excites Frank Monaco.
“AI in payments is set to drive innovation and address longstanding challenges, “ he states. “Financial institutions will be able to unlock new opportunities to create smarter, more intuitive products. In short, it’s going to be a game-changer”.
The benefits of AI in payments: A fairer and safer financial ecosystem
Everyone’s talking about the positives of this wave of generative AI in terms of ChatGPT editors, but the payment industry is not so well covered.
Perhaps the biggest attraction of payments in AI is the prospect of a fairer and safer financial ecosystem.
Identity fraud, for example, is costing banks big with over a quarter of banks reporting more than 100 incidents in 2023, according to a report by ID solution provider Regula.
These incidents cost on average $479,000 each, with every dollar a consumer loses to fraud costing the bank four times that amount. This situation hits small banks the hardest.
Fintechs have already shown a higher capability in fighting this problem, something that’s reflected in figures from Insider Intelligence that show a much lower number of fraudulent transactions.
How Fintech is helping reduce the cost of ID fraud
Source: Regula (Via Insider Intelligence)
The reason? Their openness to AI and machine learning (ML) technologies that read huge data sets to identify patterns and help fraud prevention.
These predictive algorithms are central to the imminent rise in AI fraud detection. Lightning quick and incredibly accurate, they’re set to slash the cost of fraudulent transactions, as we’re already starting to see.
Methods such as biometric authentication supplement these models leading to a safer environment and huge cost savings.
Their ability to predict trends will also provide businesses with useful insights into how they can improve decision-making and operational efficiency to provide a better customer experience.
Building on that, a greater power to create customized financial products can also give us the keys to a more democratized financial system that includes unbanked populations.
“AI tech will allow financial entities to extend their reach to previously out-of-reach markets”, says Frank Monaco. These tailored solutions will meet the needs of diverse consumer demographics”.
AI-driven educational tools that operate alongside these products will help to compound this positive effect.
“We’re about to see AI-enabled initiatives that empower individuals with the knowledge and skill to make informed financial decisions. “ he continues. “These include interactive learning platforms that offer personalized budgeting and saving recommendations. It will transform the way people engage with their finances.”
There will be benefits for existing customers, too. AI-powered customer support will solve queries in real time and also offer personalized product recommendations based on the vast troves of payment data available to them.
Customer satisfaction will also be enhanced thanks to these smarter, more intuitive products that streamline the payment experience. Automation in budgeting and financial planning will make managing your money a quick, efficient task rather than the arduous effort it can be.
“It will pave the way for a more accessible, equitable, and resilient financial ecosystem”, claims Frank Monaco, “but there’s still work to be done to make sure we’re ready for these impending changes”.
The challenges of AI in payments: Data breaches and bias
Any major tech advancement will always present new dangers. Cybercrime grew out of the internet, for example.
Frank Monaco urges financial entities to do more in preparation for this new AI-powered world.
“While many companies have been proactive in exploring AI and its potential applications, others may be lagging due to a lack of resources, expertise, or organizational inertia”, he says.
The need for action is clear, he believes, due to impending challenges that could cause huge damage for those unprepared.
“AI frameworks rely heavily on vast datasets to function, but this also increases the chances of potential breaches”, stresses Frank. “Complying with new stringent regulatory standards is going to be essential when building trust with consumers”.
This concern is reflected in recent news. Already U.S. senators have introduced the Artificial Intelligence Advancement Act (2023) which aims to regulate AI in payments and requires financial entities to produce reports on AI usage.
The type of AI that we use is another critical issue, with potentially thousands of models set to become available. This leads to another major concern in Frank Monaco’s eyes.
“Addressing algorithmic biases is another critical issue that requires careful consideration. AI-driven decision-making must be fair and transparent; if not, we risk discrimination and unfair practices“, says the Tua Financial CEO. “We must ensure that all of our AI applications promote fairness within the payments industry.
The good news is that legal experts are already taking steps to spell out how financial firms can do this.
Ernst & Young recently set out an action plan, which we can summarize as follows:
1. Understanding data sources (i.e. AI models) thoroughly to identify potential biases.
2. Testing data labeling and proxies to ensure fairness and equality.
3. Analyzing results to detect bias, involving human review where needed.
4. Independently verifying fairness in modeling through third-party assessments.
5. Using synthetic data to improve model strength and eliminate discriminatory variables, while safeguarding sensitive information.
If businesses can follow blueprints like these to meet major challenges, then the opportunities afforded by AI, according to Frank, are “immense and far-reaching”.
So much so, that we’re already starting to see some of them.
Current AI use cases in payments
For those wondering how AI is useful in payments right now, then the answer is that they’re already starting to make an impact.
Go to any major banking website, for example, and the chances are that you’ll be greeted by a generative AI chatbot. These already use natural language processing and deep learning to provide real-time answers and personalized support. Already 48% of US banking executives plan to use genAI in 2024, according to a Google Cloud survey.
Financial advice has also stepped up a few gears. Robo-advisors are an emerging trend that analyzes consumers’ financial goals and habits to give smart personalized guidance.
The likes of Betterment, SoFi, and Vanguard all top a recent Forbes list of these AI-driven platforms that are designed to optimize financial planning.
Finally, the democratization of financial services we looked at is already underway thanks to a new wave of AI-driven credit scoring.
Lending barriers like credit reports and bank statements will become less important as lenders increase the use of AI algorithms to perform a deep search of the applicant’s history. These will include a wider range of data points, such as bill payments, incoming sales, and even social media activity.
These tools have set the wheels in motion for a promising paradigm shift; more specifically “greater financial inclusion and economic empowerment for marginalized communities”, according to Frank Monaco.
The future of AI in the payments industry
When we think of AI in finance, we might get the image of friendly chatbots popping up on websites, but the likelihood is that it will change the way we interact financially to an almost unrecognizable level over the next decade.
Instead of navigating through websites and mobile apps, for example, users will just voice their queries to AI assistants at any time of day and get an instant response. AI will assume the role of primary advisor for the average customer.
Financial institutions, therefore, must adapt by restructuring their workforce to focus on providing specialized human expertise that complements AI capabilities.
Future human banking teams will be leaner, more skilled, and attuned to guiding consumers through much more complex financial tasks than they currently do. AI, after all, will be taking care of the easier stuff.
“Forward-thinking companies that invest in AI-driven solutions and prioritize innovation will be well-positioned to thrive in the digital economy of the future.” says Frank Monaco.
The alternative scenario for those that don’t may not be something that banking leaders wish to contemplate.
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