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Is AI Transforming the Payments Industry for the Better?

November 16, 2023

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Artificial Intelligence Transforming the Payments Industry

With rising demand for real-time payments, the finance sector is increasingly adopting AI tools for payment innovation. But is that good news?

The future of the payments industry lies in digital payment innovations. This is evident from the 2023 McKinsey Global Payments Report, which reveals that electronic payment volumes have outpaced overall payments revenue growth consistently over the five years to 2023, at 17% versus 6%, respectively. Cash usage has declined globally at a significant pace, losing 20 percentage points over the same timeframe.

In the era of rapid digitization, payment transactions need to be efficient, secure, and seamless.  This can be achieved by incorporating Artificial Intelligence (AI) in the payments ecosystem. Some of the biggest names in the industry are already leveraging AI to gain a competitive edge. For instance, Mastercard is using AI to help banks predict and prevent payment scams in real-time, while US Bancorp has added AI capabilities to its business travel payments.

Organizations that do not move with agility to embrace the latest AI innovations in payments are likely to lose the race in the intensely competitive financial landscape.

ACI Worldwide

Image Source: ACI Worldwide

The Evolving Payments Ecosystem

The total digital payments transaction value is projected to witness a CAGR of 11.8% from 2023 to 2027 to reach a whopping $14.78 trillion. This growth reflects broader technological and societal changes, with two-thirds of the world’s adults preferring digital payments. However, the rising demand for real-time digital payments brings challenges associated with user experience, security, and operational resilience for banks, credit unions, and third-party payment providers.

Customer experience is a key focus for both regulators and financial service providers. For this, businesses need to adopt a more dynamic operating environment that addresses:

  • Rising digital transaction volumes
  • Increasingly sophisticated cyber-attacks
  • Intuitive and seamless payment experiences.

Evolution of Payments

AI is the natural answer to all these needs, with the potential to not just solve existing challenges but also ensure business readiness for new opportunities. With the power of machine learning (ML), natural language processing (NLP), predictive analytics, and more, AI holds the promise to enhance payment processes for efficient, secure, and seamless transactions.

Applications of AI in the Payments Industry

Integrating AI technology into payment systems can transform how transactions are carried out and monitored. Some of the most prominent areas where AI is already making a difference include:

Know Your Customer

With AI, the KYC process becomes much more accurate and efficient. Identity verification, risk assessment, and document authentication can be automated. In addition, the ability to analyze large datasets quickly helps raise red flags if anomalies or suspicious activities are detected. This ensures easy compliance while saving time and effort.

In addition, NLP can ease and accelerate the KYC process by:

  • Extracting relevant data from raw text during document processing.
  • Check whether business descriptions provided by customers match their website information.
  • Search for illegal keywords and identify product types of business categories while monitoring customer websites.
  • Determine best-fit customer categories from the business description provided in the intake form and website information.

Predictive Analysis

The ability to review and analyze massive transaction data volumes helps identify customer behavior patterns. For instance, detecting spending patterns can help financial institutions personalize payment options. The ability of AI to continuously learn ensures that the accuracy and efficiency of predictive analytics and other applications constantly improve. Such analytics can also determine the right time to send out email campaigns and what information will be most relevant for each customer.

Customer Experience

Apart from personalization of payment options, AI can help identify the needs, interests, and spending habits of customers to make recommendations for financial management, budgeting, minimizing transaction costs, and much more. This adds value for customers, much beyond payments. It also enhances the ability to upsell and cross-sell products and services, based on the customer’s financial situation, risk appetite, etc.

Fraud Detection

Implementing AI/ML for fraud detection has proven to be a game changer in ensuring security for both financial services providers and customers. ML/NLP algorithms analyze massive data volumes in real-time to identify and flag suspicious activities and anomalous patterns. This helps security teams act quickly to prevent fraudulent transactions and other cybercrime. Using AI for fraud detection can also help decrease false declines by determining the accuracy of information and legitimacy of transactions. The end result is improved customer experiences.

Risk Assessment

Real-time risk evaluation is especially useful for lending decisions, from short- and long-term loans to Buy Now Pay Later (BNPL) approvals. AI can analyze data from multiple sources and touchpoints for faster and more accurate risk assessment, supporting quick and better-informed lending decisions. Plus, AI can be deployed for credit scoring, using numerous data sources to establish the creditworthiness of businesses and individuals, and facilitating the provision of credit to under-served populations.

Compliance

Perhaps the most important role of AI in the finance sector is to ease compliance in a constantly evolving regulatory environment. The technology also proves invaluable in ensuring compliance across jurisdictions, providing the right foundation for financial service providers to fulfill their global expansion aspirations. In addition, the ability to strengthen cybersecurity also facilitates compliance with data privacy and protection regulations.

Improved Productivity

From automating customer services via chatbot support to automation of routine tasks, businesses can ensure lesser need for human intervention, greater cost savings, and higher customer satisfaction. This also frees resources that can be better used for business growth, while reducing errors and streamlining and speeding up operations.

Challenges of AI for Payments

While artificial intelligence brings multiple benefits for the payment industry, it is not without its challenges. Addressing these issues can help maximize the advantages of implementing the technology.

Initial Costs

Migrating operations to any new technology involves an initial investment that could prove to be a financial burden, especially for startups and SMEs. The key is to find an experienced technology partner who can ensure a smooth, on-budget transition with minimal disruptions to operations and continued support.

Data Security

Digital touchpoints and the rising interconnectedness of the financial ecosystem have increased the attack surface for cybercriminals. AI needs to collect and analyze large datasets from various sources, which raises concerns regarding the protection of sensitive customer data. It could also make complying with data privacy regulations across jurisdictions complex.

Human Oversight

While automation is a crucial benefit of AI in the payments sector, it does not eliminate the need for human supervision to ensure ethical practices and handle unexpected issues. It is, therefore, important to ensure the right balance of technology and human intervention. This means employees need to be trained to function in conjunction with AI technologies.

Integration and Scalability

Integration can be difficult and expensive, especially for businesses that rely on legacy infrastructure incompatible with the rapidly evolving AI technology. Using short-term solutions, such as migrating only a specific part of the tech stack, might lead to further challenges down the road, particularly in terms of easy scalability.

Ethical Considerations

AI has long been accused of potential biases, which can raise ethical concerns in service provision. This makes it crucial to follow best technology practices, while ensuring fairness, transparency, and compliance. Payment providers, banks, and credit unions should also consider policy and procedural changes to uphold ethical standards.

The Future of AI in Payments

The Future of AI in Payments

A Promising Future

Integrating AI in the payments sector can open up a plethora of new opportunities while clearing the path for innovation. From enhanced customer experiences via hyper-personalization to faster and safer transactions, artificial intelligence is well on its way to transforming the payments industry. Businesses that act quickly to harness this power stand the best chance of staying ahead of the curve.

Opus Technologies specializes in providing cutting-edge technology solutions for the financial services, FinTech, and payments sectors. Committed to bringing the latest innovations to the industry, we ensure seamless integration of AI and its associated technologies so that your business sustains its competitive edge. Talk to our experts to learn more.

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