Hayden: Welcome to this episode of Cents Chat with Jason and Hayden. Let's jump right in and make payments make sense. Happy Wednesday, Jason.

Jason: We have another scorching hot day here in Southern California. And if I'm being honest, if the AC wasn't on high in here, I'd probably need a change of clothes by the time we were out of here.

Hayden: It's so funny when you California natives talk about scorching hot. I spent five years in Arizona. People used to ask me what it is like during the summer. I said, get your hairdryer out, put it on high, and blast yourself in the face with it. That's Arizona in the summer.

Jason: I've spent a little bit of time in Arizona this summer, and I think your analogy there is pretty much spot on.

Hayden: So, Jason, let's jump into today's stories. As fintechs are feasting on open banking, how should FIs fight fraud? Next, reserve requirements are on the rise as merchants struggle to survive. And last, contactless conversions continue with insight from our expert guest, Sesie Bonsi with Bleu.

Jason, last week we discussed how FIs and fintechs, who used to be competitors, will potentially start to partner up due to COVID-19. These FIs that are adopting open banking allow fintechs to integrate with their APIs to provide management and payment apps that check the bank customers' data. But why is it important to partner up with a fintech that has effective security in place?

Jason: Hayden, absolutely. Open banking solutions are on the rise. And for banks that have not implemented it yet, it is one of the hottest topics we are having. I think it is important, as banks are considering opening up their core banking platforms, that they remember they cannot sacrifice security for functionality.

FIs, regardless of what services they are offering, need to continue to satisfy know your customer and anti-money laundering requirements. The last thing a bank wants is a gap in their account opening process that allows money to be laundered under stolen or fictitious identities, or for their customers' funds to be stolen.

Automation is key in these types of solutions. Banks need to develop and deploy out-of-wallet identification solutions and use trusted third-party databases to validate the identity of the individuals and businesses opening new accounts.

As the industry continues to move faster to real-time payments and remittance solutions, there is less time for fraud to be stopped. We live in a world where wire transfers used to be what criminals used to steal funds once they compromised an account. Now that there are so many alternative payment methods, the number of attack vectors is on the rise. The cross-channel risk between payment instruments is more extreme than it has ever been.

For banks, the security of their infrastructure, customers' data, and customers' funds has to be at the forefront of their partnership decisions.

Hayden: Fintech partners that monitor customers' accounts for signs of money laundering will seem to have an advantage in gaining a bank's trust. The speed of open banking can be as much of a problem as it is an improvement, since there will be less time to stop fraudsters from sending funds. But Jason, how can fintechs catch these criminals before they have a chance to transfer these funds and stop fraudsters in their tracks?

Jason: I think it is as much on the fintechs as it is on the banks. Banks need to make sure they are dealing with security-savvy partners. Prior to the open banking revolution, most fintech revolved around card payments. The card processing space has the PCI Security Council, which does a fairly good job of enforcing a minimum level of security. However, other payment rails are significantly more lax.

I have seen banks that have a one-page checklist for onboarding new ACH customers, and that is the type of thing that is going to get them in trouble. I am all for open banking and faster payments, but the entire supply chain is only as strong as its weakest link. Banks that are going to play in this banking-as-a-service space need to make sure they have the proper security knowledge in-house to vet their downstream partners.

They need safeguards in place so that if a downstream fintech solution is compromised, the FI has mechanisms in place to ensure customer funds do not vanish before their eyes.

Hayden: Well, on the topic of safeguards, the economy is slowly beginning to thaw from its freeze-up due to COVID-19. But most card-accepting merchants are struggling with chargebacks caused by canceled trips and non-delivery of goods. Some are also struggling with demands from their merchant acquirers for more cash to fund reserve accounts.

Jason: I have seen this in many industries, Hayden, travel and entertainment being one of the hardest hit. First, let's cover what a reserve account is. Often, third-party payment providers and banks will require higher-risk merchants that have a delay from the time they accept the payment to the time they provide the service to post a cash reserve to cover chargebacks and business risk.

Let's face it, the world was not prepared for anything like COVID. Consumers wanted refunds for trips they could not take. Merchants wanted to hold on to the funds for future delivery. It became a cash flow nightmare for the whole industry.

Third-party payment providers with concentrations in travel and entertainment verticals are also feeling the pain. As chargeback rates rise, third-party payment processors often land on their bank's radar for increased chargebacks, which often makes the banks ask questions, and rightfully so.

We are all going to have to work together throughout the whole supply chain to review the increase in chargebacks and deterioration of financials in order for everyone to survive.

Hayden: I understand that anticipated or actual transaction losses can make processors demand more cash for reserve accounts. Traditional practice has been for acquirers to give the merchant three to five days to come up with the cash. Usually, as a failure to supply the cash, the processor might hold back settlement proceeds. So, Jason, what do you do as a merchant if you are not in a position to fund more into the reserve accounts?

Jason: First and foremost, my advice is for merchants to talk to their payment processing partners. Be upfront about the issues you are experiencing, and in most cases, they will work with you.

Payment processors are really going to have to look at the underlying reasons. Was the business in trouble before COVID? What are they doing to satisfy their customers now? Just like many banks froze mortgage, card, and auto payments, the payments industry is going to have to accommodate merchants and work with them to resolve these issues.

As we discussed in the past, chargeback mitigation companies are not the solution for this type of issue. Understanding the merchant's challenges and putting a plan in place is what needs to happen. Most merchants that were not having chargeback issues before COVID are most likely good merchants that got unexpectedly hit just like everybody else.

It is important for payment processing partners to remember that merchants need access to their cash to pay employees and vendors, and putting additional burden on them makes their chances of recovery harder.

Hayden: Let's talk about a trend that continues to be on the radar: contactless payments. Jason, I know you have been working with Bleu on a number of initiatives over the past six months.

Jason: Yeah, absolutely. Sesie Bonsi and Bleu have been some of my favorite people to work with, primarily because they are about as close to being on the bleeding edge of payments technology as possible. We both share a passion for creating disruptive and exciting technology.

Sesie, I will turn it over to you. Why don't you tell us a little bit about yourself and Bleu?

Sesie Bonsi: Thanks for that, Jason. I made the foray into payments about 13 years ago. I was practicing as an attorney, working with different companies in the Bay Area and down here in Los Angeles as well on their payment strategies, both domestic and abroad.

I really found a huge gap between what I saw happening from the mobile payment sector and the online payment sector, and what was happening at the point of sale or merchant acceptance. It did not really make much sense to me why there was such a lack of innovation, and that is how the formation of my company, Bleu, came about.

We are really focused on driving new and innovative technologies into the merchant acceptance space and driving contactless or touchless transaction experiences where you do not need anything besides a mobile device or a wearable to complete a transaction.

From the merchant's point of view, you need as little hardware as absolutely possible in order to run your entire business. That is really the foundation of where we see the market moving from now and into the future.

Hayden: Awesome. Well, Sesie, in previous episodes, we have discussed how it is no surprise COVID-19 is driving the push to contactless and online payments. As an expert in the space, how are payment companies helping small businesses convert to the new normal of online and contactless payments?

Sesie Bonsi: This is really exciting for me because this is something that we have been pushing for the last several years. Unfortunately, it took a global pandemic for people to understand how valuable having an omnicommerce payments experience for your customers is.

We see a lot of companies in the payment space being able to provide online retail shops or e-shops, online gateways, pulling inventory, and quickly trying to get merchants onboarded to sell their merchandise online. Before COVID-19, the majority of transactions were offline or face-to-face. With COVID-19 and social distancing restrictions, being able to transact face-to-face could be an absolute business killer for a small business.

For us in particular, we saw the ability to stand up an online gateway or online e-shop for a merchant as a primary means of continuing their business during this crisis. It is not an easy process. A lot of merchants are not familiar with how to do that, how to create an online platform, what shopping cart to use, what gateways to use, how to process payments, or what Apple Pay, Samsung Pay, and Google Pay are.

All of these things are new to a lot of small businesses that are used to just taking transactions on a hardware terminal. There is a large educational curve, a large learning curve, that has to happen for small business merchants. And for technology service providers, the onboarding experience has to be almost seamless, where it does not take much work for a small business to get their online processing business growing.

Hayden: Now that social distancing is here to stay, and with so many people worried about their health and safety, what does that mean for POS terminals and hardware that is touched by thousands of people in just one day?

Sesie Bonsi: I actually really love this. I do not love it because people are terrified of payment terminals, but I love it because this is something that we have attacked tirelessly. That hardware terminal sitting on the countertop in many different locations only needs to do one thing: route transactions. It just needs to be dumped.

The fact that we still have terminals around today where you have to slide your card, tap your card, or dip your card in order to complete a transaction is a legacy point of transaction, a legacy point of commerce. With COVID-19, people are becoming aware that this device can actually be dangerous. You have thousands of people touching it every day. You have merchants taking people's cards and inserting them into those hardware devices.

I think you are going to see a complete transition from these hardware devices to touchless payment technology, whether that is contactless or Bluetooth. For us, that is really the foundation of what we are trying to drive into the market, which is Bluetooth-enabled mobile payment transactions, whether from a mobile device or wearable.

I think QR code is also going to see a lot of uptake from the touchless commerce perspective. But we think Bluetooth payments will be the most ubiquitous way to avoid customers having to interact with those little legacy terminals.

Jason: Sesie, I know you and I probably talk every day at almost all hours of the day. One of the common themes of our conversation is routing payment transactions here domestically. Very frequently, you are talking to me about some of the exciting things you are doing with Bluetooth and contactless. I know you are also very focused on global markets and have deployed some of these solutions outside of the U.S.

What are some of the advantages of using Bluetooth for contactless payments? And what can you tell us about what you are seeing from an adoption perspective outside the U.S.?

Sesie Bonsi: Absolutely. I think Bluetooth is really exciting because of the ubiquity. We have 10 billion smartphones and wearable devices deployed around the world, and all of them have Bluetooth connectivity embedded within them.

When you are talking about the ability to route transactions or move transactions in a face-to-face scenario, most everyone has a device capable of transacting over Bluetooth, which is the exciting part for us. It does not require a significant hardware implementation on behalf of the merchant in order to transact. If you have a tablet or mobile phone that has Bluetooth, you essentially have all the hardware you need.

Second is choice. When you are routing transactions, it does not matter how you want to pay between the merchant and the customer. If I am in Africa and the primary means of value exchange is mobile money, I can exchange mobile money using Bluetooth. If I am in Europe, New Zealand, or Australia, where open banking is now the primary means of value exchange, I can move a transaction bank to bank between myself and the merchant in real time over Bluetooth.

Or if I am operating here in the U.S., where our primary means of value exchange is card-based using the card schemes, that value exchange can happen using the card schemes and the existing card infrastructure to process those transactions.

Across the board, it does not really matter what value type or payment type you want to use. It can be moved safely and securely over Bluetooth, whether you are a few feet away from each other, six feet away for social distancing, or a couple of feet apart inside a drive-thru location. Bluetooth still has the ability to move data over those short or longer distances.

It is a really versatile method of payment that supports all the different transaction methods we are seeing evolve around the world. We are really excited to be part of those discussions going on right now with different banks, acquirers, and telcos across the world.

Jason: That's awesome, Sesie. I know we have been collaborating on some really exciting projects and pilots that we are not quite ready to discuss with the world yet, but we will certainly have to get you on a future episode and go into more detail on how Bleu is reshaping contactless payments.

Sesie Bonsi: Absolutely. I cannot wait and I am looking forward to it.

Hayden: Sesie, thank you for joining us on this week's episode of Cents Chat. But Jason, I think you know what time it is. It is time to make payments make sense. Give me those takeaways.

Jason: Banks, do not sacrifice security for functionality. Vet your fintech partners like you would your own internal systems. Merchants, have open dialogue with your payment processing partners about COVID-related chargeback issues and have a plan for resolution. They will be willing to work with you. ISVs, pay attention to contactless technology coming through the pipeline and make sure it is on your roadmap if you want to stay relevant.

Hayden: Thanks for joining us today. And if you have a topic you would like us to discuss, follow and message us on social media at Cents Chat. And as always, we would love your feedback. Hayden out.