Numerous posts in this blog have noted the conventional wisdom that the less friction there is for a consumer in making a payment, the likelier it is that the consumer will have a good experience. Merchants, especially ecommerce retailers, point to studies consistently showing that when customers are required, for stronger authentication, to enter more information than they're used to during a payment, the cart abandonment rate increases and merchants lose sales. I have learned from my own conversations with merchants that some have backed away from adding more risk management tools because they would rather take the financial loss from a fraudulent transaction than discourage an otherwise legitimate sale. This balancing act between reducing friction for the customer and reducing fraud risk to the merchant or payment card issuer is a constant challenge.
Many merchants have incorporated mobile devices' biometric authentication features into their mobile apps to keep the customer from having to provide additional authentication data. Some other vendors have recently developed risk mitigation and authentication tools that work completely in the background and give them more confidence that the individual conducting the transaction is legitimate. These tools range from behavioral analytics that rely on patterns of previous transactions—whether they're based on a specific customer or on a group of customers with a similar profile—to electronic device information, called device fingerprinting, that validates that the device being used is actually the customer's. The customer is unaware that these tools are being used, so experiences lower friction.
A new term being used for what is regarded as an improved payment experience is the invisible payment transaction. This happens when a payment is triggered automatically without any customer intervention at the time of the transaction. The best examples of invisible transactions are in the sectors of subscription or card-on-file services. Subscription services include any service where the customer has provided, for example, a payment card or deposit account for a transaction and authorized the merchant or service provider to make future payments using that account. Online retailers, rideshare services, and recurring payments for health clubs, parking garages, utility companies, and charitable organizations are all types of businesses that use subscription services. A relatively recent entrant in the invisible payment segment is the computer/camera monitored shopping experience at some retailers.
So do invisible payments mean we've achieved nirvana? While they certainly provide the lowest level of customer interaction, they also have some possible disadvantages. Consumer advocates are concerned about the impact such payments might have on an individual's budget management. What if they forget about a subscription payment, and when it's deducted from their account, it creates an overdraft or insufficient funds return? Will invisible payments result in increased spending by the consumer? And then there is the bother of updating a bunch of subscriptions if the consumer changes the funding account.
While research has shown that consumers see convenience as a positive factor, they also want to be confident that there is a security process that will make them less likely to be victims of fraud. Will we ever reach the place of total payments peace and happiness with the right balance of security and convenience? Please let us know what you think.
By David Lott, a payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed