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Payment Switches of the Future

July 9, 2024

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Unlock Tomorrow's Transactions: The Next Gen Payment Switch

Foray into the future of transactions with Payment Switch. Learn how technology will revolutionize payment processing and enhance financial transactions.

Executive Summary

A payment switch is a component of electronic and digital payment processing systems that facilitates the efficient routing of payment transactions between the parties involved. It is responsible for routing the payment to the appropriate destination post authentication and authorization in a secure manner.

This blog provides an in-depth overview of Payment Switch and its future. The blog will explore how AI/ML will influence the new generation of switches. We will also delve into some of the advanced features that the Next-Gen Payment Switch will possess.

What is a Payment Switch?

Payment switches play a critical role in digital transactions by routing the payments from the point of sale to their destination. The transactions are routed between various entities, such as merchants (shops and e-commerce websites), banks, payment processors (like Stripe or Paypal that processes credit card transactions), and card networks (such as Visa, Mastercard, and Amex).

Online payment will continue to play an ever-growing and significant role in the development of e-commerce as well as the stimulation of consumer demand.


– Lucy Peng. (Co-founder & CEO, Ant Financial)

A payment switch also authorizes a transaction by validating details such as cardholder information, available funds, and account status.

In today’s digital world, online payments are on the rise, and FinTech organizations are exploring the possibility of modernizing their switch systems. We are seeing many large-scale transformations across the industry to re-write, re-platform, and digitize existing switches. These efforts are imperative primarily due to the multi-fold increase in digital payments but are also needed to support new IOT channels and alternate payment methods.

Features of Next-Gen Payment Switch

The future next-gen payment switch will be an amalgamation of the traditional switch with modern features. While it will still do the actual job of routing payments after authorizing them, it will also incorporate additional facets to enhance its operational and functional offerings. Let’s look at some of the key evolutions we are witnessing in the switch ecosystem.

Real-Time Payments: Switches are adapting to support real-time instant payment processing, enabling instant fund transfers. This capability is still evolving to operate round the clock to accommodate payments 24/7.

We want our money safer than our selfie.


– PayPal.

Security: The digital landscape is always under constant threat,  and hence security is very crucial in the payment ecosystem. Switches are now integrated with advanced encryption and tokenization techniques to protect sensitive information and protect from fraud. Biometric authentication has become a key security practice of modern platforms. Building biometric authentication capabilities within a switch for authorizations is also being explored now.

Open Banking: Traditional switches have always leveraged a point-to-point connection using TCP/IP protocol. The next-gen switches are embracing Open APIs to enable seamless payments to enable interoperability within the financial ecosystem.

Blockchain: Organizations are exploring the possibility of integrating blockchain with switches. This will ensure secure and efficient transaction processing. Switches will need to implement smart contracts to enforce automated transaction terms for blockchain-based transactions.

Cross-Border Payments: The world has become smaller now with the advent of globalization. Multinational companies are seeking efficiency in cross-border payments. The switch needs to provide reduced cost and latency when processing an international transaction. Switches also need to be able to convert currency during transaction processing, thereby eliminating 3rd party dependencies and reducing the transactional cost.

IoT Integration: I want to pay for my coffee by asking a virtual agent on the dashboard panel of my car.  This is the demand of the tech-savvy consumer, and hence, IoT integration is one of the most important features of the Next Gen Switch. Switches should be able to accept and process payments from different channels.

Performance:

The solution must be scalable and resilient, capable of handling increasing transaction volumes over time without compromising security.

AI/ML:

Organizations are alluding towards using AI/ML to improve transaction efficiency. We will discuss this more in the next section.

How AI/ML is Going to Revolutionize Payment Switches

“The key to artificial intelligence has always been the representation.” Jeff Hawkins

AI is changing our world. Switch ecosystem is no different. There are many aspects of AI/ML that are perceived to change the way a traditional switch operates, making it more robust, intelligent, and powerful. AI/ML’s mantra of “learn, adapt, and act” will be applied to these switches in the future. Let us discuss some of these key features in detail.

Anomaly and Fraud Detection: Abnormal patterns, anomalies, and potential fraud indications will be identified during transaction processing by algorithms analyzing huge amounts of data via LLMs.

Analyze User Behavior: AI will be used to analyze user behavior and pave the way for biometric authentication, increasing security and agility in payment processing.

Dynamic Pricing: Modern switches will employ ML engines to optimize transaction fees and pricing models based on demand, market, and risks.

Real-Time Credit Scoring: This will be a game changer, ensuring accurate decision-making during transactions by assessing credit risks using AI/ML models.

Optimize routing decisions: Advanced models will optimize routing decisions at run time, reducing latency.

Predicting the future isn’t magic; it’s artificial intelligence..


– said Dave Waters.

Predictive maintenance on Infra: Anticipating potential failures and bottlenecks in the infrastructure is a feature a modern switch will leverage. Tools like Qritrim are already performing such tasks in the manufacturing industry.

Data-driven insights for new products: Switches will aid in the development of new products, services, and business strategies based on insights derived from payment data.

Automated Compliance Checks: Compliance checks will be streamlined by automating checks against regulatory requirements, reducing manual effort and errors during transactions using LLMs.

Personalized recommendations and offers: Much like Facebook, Instagram, and Amazon, modern switches will also analyze transactions and provide personalized recommendations or offers.

Support Chatbots: AI-powered chatbots will handle customer queries, improving user experience and efficiency.

Challenges and Considerations

AI/ML comes with its own set of challenges. The models are often biased based on the data fed into the system; hence, the accuracy and efficiency of a model only develop over time. Here are some of the significant challenges organizations will face in this regard:

  • Integrating AI/ML with legacy systems or switches remains a significant challenge.
  • Sensitive data handling will be a major challenge considering the large amount of data required to train models.
  • Adhering to data laws like the “On-Soil” requirement or PCI DSS compliance will remain challenging in the payment industry.
  • Manipulating input data to deceive models is called an adversarial attack, and payment switches will have to deal with those as they delve into the world of AI/ML.
  • The accuracy of decisions made by models will always be questionable.
  • As fraud patterns evolve, models also need to evolve to stay relevant and effective, which will add to the maintenance cost of the models.
  • Need to scale, and the talent pool required to incorporate AI/ML into the Switch Ecosystem is expensive.

Opus: Your Trusted Partner in Building Next-Gen Payment Switches

With over three decades of expertise in the digital payment domain, Opus understands the complexities of legacy transaction methods and the capabilities of emerging technologies to transform the financial ecosystem. Through advanced technology integration and data-driven decision-making, Opus enables globally standardized risk mitigation, multi-mode payment facilitation, and compliance. Through switch modernization services, Opus fosters innovation and expedited value extraction for both the financial organization and the customer.

Conclusion

Consumers expect a safe, convenient, and affordable globalized payment platform.


– Lucy Peng.

The quote above tells us clearly that you can delay but cannot stop the inevitable. The dawn of Next Gen Switches is imperative as customer needs are growing, their usage patterns are evolving, the markets are changing, security risks and attacks are constantly sprouting, and businesses are seeking new avenues to expand their spread and increase their revenues. AI/ML-based switches will be the future wherein a lot of decisions will be made in real-time based on data and trained models during transaction processing. These switches will open the doors for integrations with new-age IoT channels, support cross-border transactions, and provide crypto and blockchain options for transactions. The adoption of such advanced switches in an industry still heavily reliant on legacy technologies will be an interesting thread to follow in the next couple of years.

About the Author : Debashis Bhattacharyya

Debashis Bhattacharyya has over 18 years of experience planning and delivering technology solutions, specializing in Cloud, API, DevSecOps, and Application Modernization. He has been instrumental in Opus’ transformational DevOps initiative with FIS that won the prestigious DevOps Dozen Award for ‘Best DevOps Industry Implementation’ in 2022.

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