Hayden: Welcome to this episode of Cents Chat with Jason and Hayden. Let's jump right in to make payments make sense. Good morning, Jason, and happy Thursday. It was nice to wake up to clear skies this morning as ash has finally parted from the fires in California.

Jason: Yeah, Hayden, we had a few days where it was really dark in the sky. I'd like to wish all of our first responders and everyone that's been displaced by the fires the best of luck, and we're keeping them in our prayers. There we go.

Hayden: All right, Jason, let's jump into today's stories. First, stand-in processing gets smarter. Cardholders rejoice. Next, customer chargeback claims chaos, sorting fact from fiction. And last, faster funds for employees, introducing Square's on-demand pay. Jason, as you know, in order to get transactions done, you need a seamless flow of card-level data between merchants, their payment provider, card networks, and issuers.

But when part of that ecosystem goes offline, you will see service interruptions that need to restart in order to process any given transaction. Visa has always had simple stand-in processing, but after being refined for over 18 months by Visa's data scientists, they have announced their invention of the smarter STIP, which will help leverage AI to help Visa act as a backup plan if there is a connectivity issue between a link in the ecosystem.

Jason: Hayden, with big data comes big power and big innovation. This is just one way that Visa is leveraging their massive data set to make sure the entire ecosystem is more stable. We've all had this happen. You pull up to a gas pump, your card declines, you know there's available funds, log in to confirm, but to no avail, it just won't work. There are several points of failure where something could have gone wrong.

It's actually mind-boggling if you think about the number of messages that get sent every time an authorization happens. In its most simplistic form, a device talks to a payment processor, which relays the message to the card networks, who then route the request to the bank that issued the card. And then that message has to make it all the way back to the device. And to think that all of that happens in less than half of a second when everything is online is awesome.

Stand-in processing has been around for a long time, but up until recently, it has been based on the issuing bank setting limits in advance. In other words, if the transaction is less than $25 and the issuer can't be reached by Visa, Visa can be instructed to approve that transaction. With the new enhancements, these limits could be more flexible and more dynamic.

And Visa can make decisions based on various characteristics about the transaction, such as the merchant type, location, amount of the transaction, and whether it fits the cardholder's normal buying patterns.

Hayden: Jason, Visa announced that Smarter STIP is just the first of many new innovations to come featuring AI capabilities through VisaNet, the company's electronic payments network. Smarter STIP can approve or decline a transaction without the issuer because it can take into account behavioral patterns of the cardholder in order to mirror what the issuer would have done if they were not offline.

But Jason, does this pose any risk to the issuer? And as you mentioned above, there are many points of potential failure. What happens if there's a problem in a different piece of that chain?

Jason: Hayden, great questions. Stand-in processing has always posed a degree of risk to the issuing bank because if they use stand-in processing, they're responsible for the transaction if Visa approved it on their behalf. That's why traditionally issuers have relatively low limits set. If stand-in processing gives a merchant an approval, the issuer is responsible for funding that transaction, even if the customer's account was overdrawn.

The idea with the new solution is that by leveraging the data Visa has, they can make the limits dynamic based on the cardholder and minimize disruption while improving cardholder satisfaction. And you're completely right. There are several other points of failure. The merchant's internet could be down, the payment processing company could be having an issue. There are lots of things that could go wrong. There are other solutions that exist to combat this as well.

Nothing is more frustrating for the cardholder than their card declining when it shouldn't due to some sort of outage. Stand-in processing solves this from the issuing bank perspective, thus reducing the chance the cardholder gets frustrated with their bank.

On the merchant and processor side, there's a similar concept known as store and forward, meaning if the device can't talk to the processor due to an internet outage, for example, it will store the transaction details, approve the transaction, and then when connectivity is restored, settle those transactions.

You'll find this type of solution often with restaurants, where the customer satisfaction is more important than the $10 lunch order, and the business is willing to risk a declined transaction later rather than having 20 customers in line that can't pay for their order.

Hayden: Jason, on the topic of cardholder satisfaction, as you know, the ongoing pandemic is outlasting everybody's expectations. And because of that, CNP, or card-not-present transactions, continue to be on the rise. Fraudsters are taking advantage of this by slipping their own criminal purchases in among the series of legitimate CNP transactions. Due to this, FIs allow cardholders to file their own chargebacks in order to get money refunded.

Now, not all shoppers are honest, and some are just inattentive of the purchases they do make. This is called friendly fraud. A study taken over three years showed that retailers gave wrongful chargebacks 50% more often than they did chargebacks that were in response to criminal activity. That is an insanely high number. So, Jason, with numbers like this, how can FIs fight to ensure that customers are educated and protected as well as being honest?

Jason: Hayden, this is really a systemic issue in the entire ecosystem. And it's one where the pendulum continues to move back and forth. Let me explain. Many years ago, probably when you were still in diapers, if a consumer called their bank to dispute a transaction, the issuing bank would listen to the cardholder, determine if it was fraud, a problem with the product, or that they never received the product.

And then they would actually conference call the merchant on with the cardholder and attempt to resolve the dispute. Those days, unfortunately, are long gone. As you can imagine, this process is very time consuming for the issuing banks. And because the card network rules favor the cardholder over the merchant, the burden of proof is on the merchant and the acquiring bank.

So as cardholders became more tech savvy and online banking products more robust, the process of disputing a transaction became as simple as clicking a button. Now we live in a world where it's easier for a consumer to dispute a transaction than attempt to contact the merchant and resolve it. And that's exactly what they do.

It's become so mainstream and so well known by cardholders that even people who aren't in the payments industry exploit the system to avoid uncomfortable conversation with the merchant. I recently had to educate a friend that I was out to dinner with who didn't like the quality of the service. And rather than asking to speak to a manager, they just said, "I'll dispute it with my card company later." And that's the problem.

Issuing banks have trained cardholders at this point that if they don't like something, they can just dispute it and get their money back. And that's not what the intent of the dispute system was. Issuers need to do more to ensure that a dispute is legitimate and meets the card network criteria before filing it.

Hayden: Well, Jason, 27% of consumers say that they realize the transaction was legitimate after speaking to their FI. Now that cuts the original 50% basically in half, but the other 23% are still a costly issue for merchants who rarely are able to furnish evidence in order to successfully dispute the claims. On top of that, FIs must spend time and money investigating a transaction that was never fraud in the first place.

Jason, there is some talk about customers being more comfortable if they are able to view receipt images when viewing purchase history, as well as using AI to help analyze data for the legitimacy of transactions. So, Jason, how can an FI leverage these kinds of tools in order to drop the $1 billion that is projected this year alone to be lost from card issuers due to chargebacks?

Jason: I think a big part of the problem is that the FIs, in many cases, are allowing cardholders to pick the dispute reason. There's a lot of different reasons with different criteria. What everyone needs to understand is that if a cardholder disputes a transaction, even if the merchant does provide the evidence and wins the representment, the merchant still incurs the chargeback cost as well as the operational cost.

The idea of making receipts available online to the consumer is great in theory, but we're a long way from being able to do that. In order for that to become a standard, there would need to be either a new set of specs or modifications to the existing authorization and settlement specs to allow for this additional image data to be transmitted.

We could potentially repurpose the Level 3 data fields that already exist, but this would still require major overhauls to the online banking platforms, payment gateways, and shopping carts to enable them to pass this additional data along with the transaction. I think the more realistic solution is threefold.

First, the card network should penalize the issuers for frivolous disputes when the merchant wins the chargeback. If the issuer stands to lose something by enabling consumers to make these disputes, they'll tighten up their process to prevent these penalties.

Second, payment service providers need to equip their merchants with the best tools possible to prevent chargebacks via fraud detection and encourage merchants to use solutions that shift chargeback liability to the issuer, such as EMV in retail environments and 3D Secure in e-commerce environments.

And finally, payment service providers need to get on the bandwagon with new tools the card networks are rolling out, such as VMPI, Visa Merchant Purchase Inquiry, which allows the merchant to provide evidence before the chargeback occurs with the hope of preventing it altogether.

Hayden: Jason, on the topic of new tools, Square announced on Tuesday that they will be launching two new features that will make payroll easier for employees and employers. The first of the two is called instant payments, which lets employers fund payroll in close to real time, which in turn allows less lag on when the money leaves the employer's accounts and arrives in the employees', which normally takes up to four business days.

Instant payments allow Square Payroll customers to fund their payroll using the balance in their Square account where sales processed via Square are stored. Square receives the confirmation of payroll funds instantly, which allows them to initiate payments to employees immediately.

Jason: Hayden, what Square's doing here isn't anything new, but they're capitalizing on their ability to link payments with payouts. Let's for a minute dissect why traditional payouts take so long and what the difference is here. For the vast majority of small and medium-sized businesses, their payment processing solution is completely separate from their payroll service.

This means they have money coming in from one vendor and money being paid out via another vendor, both utilizing different payment rails and neither having any insight into what the other is doing. When a business traditionally wants to send a payment to an employee, contractor, or vendor, their payout vendor needs to first collect that money before sending it out. In most instances, this is done via an ACH debit to the business's bank account.

And with the ACH network, there's a couple business day window in which the bank can return the transaction for a variety of reasons, most commonly insufficient funds. If the payroll vendor were to fund the employee at the same time they tried to collect from the business, the payroll vendor would be taking the risk that the debit could be returned, unless they're floating the money for a few days.

More often than not, what they do is debit the business's bank account, wait a few days to make sure the funds are good, and then send out the deposits. What Square has done here is, because they serve as both the payment processor and the payout vendor, they're able to fund these payments in real time from the balance they have on hand from the merchant processing activity, thus eliminating their risk that the funds are not available in the business's bank account.

Hayden: Square's second unveiled product is called on-demand pay, which gives workers faster access to wages than they would normally have using direct deposit. General manager of Square Payroll stated that they created this to allow employees to access their earnings as soon as their shift ends, which is pretty incredible. There is a limit of $200, and that money can be transferred to Square's Cash App for free.

Jason: Hayden, this is awesome, especially for lower-income jobs where people need to put food on the table. What Square is doing here is taking the concept from the gig worker apps such as Uber and Postmates and adapting it for traditional jobs and payroll services. Ride sharing, delivery, and other gig-based apps have been doing this for a while, allowing the gig worker to get funded in real time when they're done for the day.

This is made possible primarily by two card network products under the hood: Visa Direct and Mastercard Send, which allow the app to push funds to a debit or prepaid card in real time and the consumer to have immediate access to spend or withdraw the funds.

As payment processing solutions continue to evolve and look for other opportunities to generate revenue, I expect we'll see more and more of these types of solutions, where the processor allows the merchant to pay employees, contractors, and vendors in real time with money they already have on file from their payment processing activities.

Hayden: Alrighty, Jason, you know what time it is. It is time to make payments make sense. Give me those takeaways.

Jason: ISVs, follow Visa's lead. Develop solutions that provide continuity for your merchants when something goes wrong. Card networks, it's time to level the dispute playing field. It's favored the issuer for far too long. Processors, look for opportunities to enable your ISVs to build end-to-end payment solutions.

Hayden: Thanks for joining us today. And if you've got 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.