How digital payments became politicized

Visa, Discover, Apple Pay and PayPal have all cut off or limited their payments services to so-called hate groups in the wake of violence that erupted when white supremacist and neo-Nazi groups protested the removal of a Confederate statue in Charlottesville, Virginia.

After learning that PayPal played a key role in raising money for the white supremacist rally, PayPal said it would bar users from accepting donations to promote hate, violence and intolerance. Apple disabled payments via Apple Pay on websites that sell white supremacist and Nazi-themed merchandise. Discover said it would end merchant agreements with “hate groups, given the violence incited by their extremist views” while Visa and Mastercard said they were cutting ties with a number of sites they “believe incite violence,” don’t comply with their acceptable-use policies or engage in illegal activities.

It’s fair to say that in the fraught political atmosphere of 2017, even payments have become politicized.

Some say it’s a private company right to take that kind of stand, others say it infringes on First Amendment rights. While it’s arguably not the place of payments companies to be making moral determinations, it’s also not illegal for them to do so. And whether or not they “should,” companies in payments and beyond have made the decision to respond. The question is what the repercussions are for the payments system if they keep acting as de facto watchdogs who will inevitably experience pressure from customers who threaten to take their business to another payments firm.

“Payments are necessarily neutral,” said Jason Oxman, director of the Electronic Transactions Association. “They don’t take a political position, they don’t prefer any company or any consumer over any other. They’re a tool and they’re a very helpful tool in driving commerce but also ensuring consumers have the necessary ability to save for the future, make investments, retire comfortably and protect their resources.”

Commerce in the U.S. takes place over electronic payments systems, which processed $6 trillion worth of payments last year, according to Oxman.

“Electronic payments drive commerce and make commerce possible,” he said. “Sometimes those tools are used by people whose behavior is illegal or unliked. It’s important not to blame the tool of the activity of the people who have used the tool.”

Is it PayPal’s job to play watchdog?
The whole idea of payments and electronic transactions is built around two concepts: identity and risk. Payments companies need to know who has access to their services, who their customers are, and if the account holder’s digital identity matches his or her physical activity. And when it comes to money movement, merchant acquirers and processors are there to mitigate some of the risk involved.

But just by nature of payments being digital transactions, payments companies have found themselves in a position to track payments and to be able to understand things like how people are using their money and what kinds of things merchants are selling.

“A lot of these companies are responsible for connecting with these previously unseen people are being put in a position of being the de facto watchdog. They can’t be in the position to allow certain things to happen,” because of Know Your Customer and anti-money laundering regulatory requirements, said James Wester, research director for IDC Financial Insights’ global payments practice. “There are a lot of these companies now being asked to do. Because they’re at heart about mitigating and limiting risk, their default position might be that they’re not going to allow certain types of consumers, merchants, transactions to take place because it’s not in their best interest.”

Many of these decisions can be traced back to Operation Choke Point, a 2013 Department of Justice initiative that requires U.S. merchant acquirers to submit the types of merchants they provide electronic payments for. Many acquirers won’t work with certain types of businesses that are perfectly legal but risky from a regulatory perspective — pronography, firearm sales, even “racist materials” for example.

Many acquirers choose not to do business with these types of companies for a big reason — and it’s not because of their moral compass. It’s because the chargeback rate — the rate at which a merchant returns funds to a customer — on those transactions tends to be really high; if someone receives a bill for a pornography order, people often say they didn’t buy that and ask for their money back. That high chargeback rate makes it particularly difficult from a risk perspective to underwrite these transactions, Wester said.

“They just say ‘we’re not going to do that, it’s too much of a risk, it’s hard for us to model it, it’’s hard for us to make money on it.’ It’s not out of any moral or ethical decisions, it’s a business decision,” he said.

For those companies who do choose to underwrite risky businesses, Operation Choke Point set intentionally higher regulatory requirements for them to be able to accept those payments — effectively intimidating those merchant acquirers from doing business with them. The point was to make it troublesome to the point that it was hard for companies to find partners that would want to process the payments.

Earlier this month the Department of Justice shut down Operation Choke Point, but it’s not clear all other agencies have too. If companies keep taking political stands they run the risk of the regulators stepping in to “choke” them again — not by forcing them who and who not to do business with, but by “pressuring them to curate it in a certain way,” said Brian Knight, a senior research fellow at the Mercatus Center at George Mason University.

Oxman said he’s hopeful that kind of “intimidation” happens less from now on.

“Payments companies shouldn’t be held responsible for criminal behaviors,” Oxman said. “It’s bad for business.”

Payments companies could cut off the underserved
Perhaps the biggest impact digital payments has had on the world is their ability to bring financial access to previously unbanked individuals and new businesses and consumers into the economy.

Governments want financial inclusion for all too: they want to be able to recognize tax revenue and protect people, which is easier for them to do when everyone’s financial transactions have a digital footprint.

But as companies like PayPal and Visa take political stands and declare where they stand on different issues, they risk shutting people out of the financial system when they exist to bring them in.

“As we build out financial inclusion, we start adding more people, more merchants into the financial system, so there’s more oversight,” Wester said. “What does that mean when it comes to how much oversight organizations can do and in terms of shutting that off?”

Wester said it’s a trend that’s only going to grow the more we bring individuals and merchants into the financial system and that while it’s not necessarily good or bad, it’s an inevitable truth that needs to be understood. “For a company like a bank or a PayPal or Square, is their job to be in a position where they have to be making moral decisions?”

A perilous path
Even without Choke Point, companies acting as the de facto watchdog will always run the risk of regulatory intervention, Knight says.

“If you see firms being pressured to take a political side… those firms may be getting regulatory pressure because they’re seen as being too powerful,” he said.

And while firms have a lot of choice in who they’d decide to do business with, or not, and many criteria they can use to make that determination, political world view is not one of those classes.

“Big players have a disproportionate share of the market,” Knight added. “If they all get together or independently decide they aren’t going to do business with group X, Y or Z, that runs the risk of effectively cutting those groups out of the payments system.”

The most visible and most global brands will continue to be pressured by their constituencies and special interest groups to show their value by, in some cases, choosing not to service entire markets, says Dorothy Crenshaw, founder and CEO of crisis communications firm Crenshaw Communications.

“The public is looking to business leaders [for moral leadership] because they respond,” she said. “They have a board of directors and all kinds of red tape but they can act and they have acted. Its up to brands to decide which side they’ll choose.”

The state of bank innovation in 5 charts

Major banks have been doing more work with the startups that once tried to displace them. Most other banks, with fewer customers and less capital, are still figuring out their long-term digital strategies.

In the last two to three years, banking giants have invested in fintech startups and partnered with them, they’re opening expensive new innovation labs and digital hubs and creating C-suite roles dedicated to leadership in innovation. Smaller institutions have been thinking about a digital overhaul for just as long, but without the resources to invest in fintech initiatives or the massive customer base to test pilots, they’ve been slower to move.

Below is a look in five charts at where banks are focused and what’s challenging them on the innovation front in 2017.

Banks care about improving their digital experiences
Of the more than 100 banking executives surveyed for industry strategist Jim Marous, 71 percent cited improving the digital experience in their top three priorities for 2017; half also identified enhancing data analytics as a priority and 41 percent cited reducing operating costs.

Just 10 percent, most likely those from major institutions, indicated that investing in or partnering with a third-party fintech startup is a priority.

Mutual opportunities
The relationships between traditional banks and startups is getting cozier. The initial intent of so called fintech startups was to disrupt old banking institutions and an old way of doing things. For the small number of banks actually partnering with and investing in these startups, the areas in which they see eye-to-eye are all crucial to the development of banking as a platform: with APIs, data analytics and automation, banks can actually act as home plate for a host of other financial services and applications.

Both traditional banks and fintech startups goals and perceived opportunities aligned closely in the areas of creating open APIs, automating and digitizing operational processes and consumer experiences, utilizing data analytics, exploring new business models and developing the mobile channel, according to the ACI 2017 Fintech Disruptors Report.

Mobile will continue to be an important channel for both sides of fintech, especially as the industry moves more in the direction of contextual experiences and commerce. However, outside of the giants that have the means to fund and scale different initiatives, most banks don’t even have a sturdy mobile strategy in place yet.

Partnering for a better customer experience
Companies that participated in the ACI survey indicated payments (68 percent) and banking infrastructure (43 percent) are the areas they’re most interested in working on with startups. Some 40 percent indicated they’d like to partner for e-commerce opportunities, 37 percent for remittances, 32 percent for security and fraud management and 29 percent for core consumer banking operations.

Many banks don’t have an innovation chief
The biggest challenge for banks seems to be hiring and retaining innovation talent and leadership with the specialized skills necessary to lead an increasingly digital bank, according to a new report by Celent, Innovation Outlook 2017: Making Progress.

“Typically those have to do with things like managing an innovation program,” said Michael Fitzgerald, Celent’s senior analyst who authored the report. “Classically these roles have required project management or business analyst skills. It’s different in these innovation programs because unlike the IT programs insurers and banks usually have, things are shorter in duration in terms of frequent deliverables and therefore require more discipline.”

Just 20 percent of the innovation practitioners surveyed indicated they had a chief innovation officer inside their organizations, although Fitzgerald noted existing leaders could assume other titles, particularly in earlier efforts.


Someone needs to manage the budget
One of the biggest problems with not having an obvious innovation head is the use of funds for innovation projects can be a little disorganized. The source of the funding doesn’t matter as much as the need for it to be managed comprehensively, Fitzgerald said.

Most innovation budgets are taken out of an organization’s technology budget, according to Celent. Of some 30 innovation program leaders surveyed, 67 percent indicated they pulled innovation funds from the technology budget, 43 percent from individual business units’ budgets, 30 percent from a separate venture capital type fund for early ideas. Some 30 percent of organizations have a centralized innovation department budget and 10 percent indicated innovation isn’t part of the budgeting process.

“One of the things we see in these successful programs is human resources plays an active part in all sorts of different points in the program,” Fitzgerald said. “In practice though, innovation leaders are pretty reluctant to get HR involved. The perception is that HR is about layoffs.”

Inside Regions Bank’s new digital UX

Regions Bank, the bank arm of Regions Financial Corporation, has UX on its mind. Having revamped its online and digital user experiences in Fall 2016, the bank has a clear vision of what the ideal UX should be and do. Andy Hernandez, Regions’ head of eBusiness services, and Matt Brunsman, user experience & design svp for Regions eBusiness, gave Tradestreaming an inside view into the bank’s UX guidelines.


The bank sees a number of trends setting the course of its UX trajectory, such as simply listening to the customer, or the use of AI to anticipate the customer’s needs. However, the central driving force of Regions Bank’s digital playbook is the need for consistency and integration throughout all of the bank’s channels.

According to Hernandez, this is something they bank has pursued across the spectrum, “from updating our content management systems to shifting our development model to one that is agile – and from working within silos to shifting to a needs-based architecture that better reflects what is most essential to our customers.”

The perfect digital banking experience

Regions wants its UX to inspire trust. Data from the Millennial Disruption Index suggests that this is easier said than done. However, the bank has some tried and true strategies for cultivating trust, including solving a problem before it takes place or meeting the financial needs customers didn’t know they had. “You establish trust by being proactive rather than reactive,” Hernandez explained.

The perfect digital banking experience has implications for the bank as well — if its customers are making more money, the bank is too.

Keeping employees onboard is critical

The robot uprising may be just around the corner, but until then, Regions Bank relies on human employees to keep the UX on track. Hernandez cites the bank’s move from waterfall to agile web development model as transformative, with employees eager and excited about the new model. The bank has also shifted some forward-thinking employees to focus on innovation, which helps the bank stay ahead of the UX game, instead of scrambling to catch up with existing trends.

Another important component of Regions Bank’s approach to bring the best out of its employees comes down to a shared workspace: “The front-end developers sit next to our back-end operations team in the same room on our agile teams, and that co-development and shared goals are a very powerful and successful combination,” explained Brunsman.


Of course, there are hurdles on the road to UX paradise, of which one is choice. In a world populated with an ever-increasing amount of shiny new fintechs, deciding which technology and approaches will be most beneficial to customers takes time. As one of the largest financial institutions in the U.S., Regions can’t decide to make changes simply on a whim.

And though customers may be getting increasingly vocal about what they need and want, these needs and wants don’t always gel with with the bank’s needs. “So we always have to weigh business needs and customer needs together in any equation,” said Hernandez.

Keeping pace with technology: How Payoneer is setting up payment infrastructures for SMBs

The digital age has knocked down borders and allowed companies to go global, but these same companies still lack affordable cross-border payment solutions.

“We see technology as leveling the playing field, allowing remote businesses to get involved in the global economy,” said Scott Galit, CEO of Payoneer. “Tools and infrastructures that used to be open to only large enterprises are being opened up for SMBs. Payment infrastructures were created for bigger banks and financial institutions, but they suck at working with small businesses.”

Galit has some experience in digitizing new markets as a member of the investment banking team that took eBay public. The idea of creating a global digital garage sale was a game changing idea, but, at the time, there wasn’t a good payment method to facilitate transactions. He recalls how big of a mess it was: In the beginning, the eBay founders used to receive checks in the mail from buyers with a request to forward the money to the sellers. The need for a payment infrastructure led to the acquisition of PayPal, and the rest is history.

Galit believes that B2B marketplaces are in the same situation as eBay was in before its PayPal acquisition.

“Broadly speaking, the pace of tech for businesses finding each other is changing faster than the payments infrastructure,” he said. “Marketplaces all over the world, from used medical equipment to pallets of electronics, don’t have payment capabilities. We’re trying to build an infrastructure to make those markets transactional.”

Payoneer’s technology enables SMBs to accept and send payments. Using banking APIs, Payoneer is able to directly connect companies in two different countries and facilitate payments between the two.

The New York-based company claims 3 million users and has raised hundreds of millions of dollars in venture backing since its inception in 2005.

Payoneer’s cross border mass payout service allows SMBs to pay suppliers in 200 countries in over 150 currencies. The platform also enables marketplaces, like Amazon, Airbnb, and Getty Images, to make automatic distributions to the vendors who sell on them.

Payments are moving faster every day. Payoneer has the ability to do free instant payments if both parties are registered on its platform. But technology can only speed things up so much. To Galit, the breakthrough isn’t creating a faster method of payments or forcing everyone to move onto distributed ledgers and blockchains. It’s about regulation.

“There is a systematic overestimation of the value of technology in financial services. The last mile of digital payments is regulation. Banks don’t get fined because of technology — they get fined because of compliance,” he concluded.