Transforming Consumer Trust and Merchant Relations in the Digital Payment Landscape

Transcription:

Kate Fitzgerald (00:08):

We have here. I'm Kate Fitzgerald, Senior Editor with American Banker, and I'm here with James Anderson who has the title of Head of Paze. That's me. Or is it Managing Director?

James Anderson (00:20):

Both.

Kate Fitzgerald (00:21):

So, you've heard of Zelle also. Zelle is owned by Early Warning Services, the consortium of, it's a bank operated network and early warning services. Last year announced Paze is a new service, PAZE. You see it here and James is going to tell us about how, give us a brief introduction of elevator pitch. What is Paze?

James Anderson (00:46):

Okay, so the objective of Paze is to fix a whole bunch of problems that continue to exist in e-commerce. So it's 2024 e-Commerce has been around for about two and a half decades, and yet it still is in many respects, the least sophisticated part of how people pay each when they buy things. They're still entering data into little white boxes and they still have, therefore the curse of a whole bunch of bad outcomes Paze is designed to fix all those problems and the fix comes to consumers from their financial institutions. So we'll talk about it more.

Kate Fitzgerald (01:26):

You said e-commerce has been around for two and a half decades. A lot of people have proposed solutions over the years. We've had all sorts of secure remote commerce has been proposed. Certain retailers got together and tried to create a single checkout. There have been one click checkouts. PayPal has thought they were going to solve it through a super app while does it Paze even exist?

James Anderson (01:53):

Yeah, so I mean many of those initiatives have addressed parts of a problem. I think the players that have really not been present is the players that are present in Paze, which is a financial institution. So if you think about how consumers get access to financial services, primarily it's from a financial institution, a bank or a credit union, that's where people's paycheck goes. That's where they get access to those funds through a debit card, and if they need credit, they get access to a credit card. Primarily it's from a financial institutions that's really kind of the raw material which powers e-commerce. Without those cards, they really wouldn't be any kind of e-commerce. But the missing piece has been making it easy for consumers to use those cards at checkout and also making it safe and secure and also bringing the values that the financial institutions have to offer to that experience, and that's what Paze does. So we totally respect the efforts that those other companies have made. Many of them have built the infrastructure layers, some of which we're using. But we think that the missing piece, the missing ingredient is really the financial institutions, again, that issue, those cards that hold onto your funds, that extend your credit, those are the players that have been missing from e-commerce in delivering better outcomes.

Kate Fitzgerald (03:08):

One of the things you've said before is that Paze, which by the way is in the midst of being developed. It is in a pilot stage right now. Is that correct?

James Anderson (03:17):

Yeah, so we can talk a little bit about how it works, but yeah, we are basically at the end of development, we are just ramping up to nationwide launch, which will happen by the middle of this year. So you'll see it if you have a relationship with one of a thousand institutions that is participating in Paze, you'll receive notification that your card has been added to Paze. So it'll happen by middle of this year.

Kate Fitzgerald (03:44):

Among the solutions problems you're trying to fix are existing friction in checkout where you have to type the number, which is it creates potential for errors and also fraud to some degree.

James Anderson (03:58):

Yeah, so look, I think we talk about it in terms of e-commerce outcomes and we think about it very much from a merchant and the consumer perspective. So the consumer perspective, of course, there's too much hard work. I mean, I think about it and nobody ever signed up for a bank account and said, what I really want to do is unpaid data entry for the bank. Nobody ever said that. That's not like a framework that people, but actually when you go on and do e-commerce, a lot of time you're doing unpaid data entry first, you enter your 16 digit number, then you enter your CVV venue, enter your billing address, your shipping address, blah, blah, blah, blah, blah, blah. And so that's not what consumers want. That's not what they experience in the physical world. Why should they experience it in e-commerce? And if they want a better experience right now, they generally have to introduce, bring it in a third party, and they're trying to figure out why does that third party even get an invitation to the party?

(04:48):

Why can't it just be done easily from the institutions who give me those instruments? Why can't it just work better? So there's an opportunity for better outcomes on the consumer side, but on the merchant side, they're looking for conversion. They're looking for approval rates. They're ultimately in the business of selling whatever they're selling and they want to sell it to legitimate consumers. They don't want to sell it to illegitimate consumers because that results in a chargeback which costs them real money. And so those are all the drivers of bad outcomes that Paze is about fixing.

Kate Fitzgerald (05:19):

So, you mentioned merchants, they're a big piece of the puzzle. We've seen how merchants try to initiate a solution this time we're bringing banks in with merchants. You've also said in the past that Paze hopes to declare war on guest checkout. I have to admit, I've never understood guest checkout. Who does it benefit and why are you declaring war on guest checkout?

James Anderson (05:42):

Well, so I spent a number of years at one of the major payment networks and during my tenure there, they declared a war on cash, which was really genius because actually cash never fought back. It was really a genius move. So declaring a war on cash was beautiful and guest checkout has some similar characteristics. It's kind of the lowest common denominator way of doing a checkout. If you don't have anything better do guest checkout, it doesn't really benefit anybody. Nobody really likes it, but it's just there because it's always been there. It's how online payments started 25 years ago and then various points in time. It's been eroded, but it's still extremely common. Our data shows that 70% of people often use guest checkout. So it's kind of a default option in the absence of anything better. And so we just think its time has passed, it's served us well. We can move by it, we can declare war on it, we can let it go into the past in the industry.

Kate Fitzgerald (06:35):

But is there something that merchants want to hang on to with guest checkout that you are going to displace?

James Anderson (06:41):

We don't really think so. I mean, at the end of the day, they want to sell whatever they're selling and they want to generate the revenue and then they want to have a complete transaction settle and not charge back. What's the vehicle to achieve that? There's different vehicles we think Paze is a part of that solution and merchants are keen in our experience to get to that answer. It's a little bit hyperbolic to declare a war on it, but it's just kind of, I think that it speaks to the fact that in payments, I always used to say, well, I always say one of the most powerful forms, the most powerful force in payments is inertia. Whatever is being used today is the most powerful thing and sometimes it needs a lot of energy to overcome that inertia to get rid of, to actually change something.

(07:28):

And people just think guest checkout is inevitable and intrinsic. We don't think so. We think we can do without it. And part of it is because we have this ambition in Paze to achieve ubiquity. So we are not just looking to serve a few percent of people or a few percent of merchants or a few percent of financial institutions. Our objective is actually ubiquity. We want every card issued in the US to be usable through Paze and we want every merchant that accepts cards to be able to accept them through Paze. And we've built our program, we've built our tech, we've built our business model premised on ubiquity, and once you have an aspiration of ubiquity, you can start to at least dream of replacing things that we believe are inferior and which we can do better

Kate Fitzgerald (08:13):

Overcome the inertia.

James Anderson (08:14):

And fight the inertia.

Kate Fitzgerald (08:16):

Let's walk through what the user is going to see, if that's a good way to describe how pay is going to work.

James Anderson (08:23):

Yeah, for sure. So a couple of things that are different about Paze. When we looked at the marketplace and we acknowledged we're not the first to market to try and solve these problems, we do recognize that people have come before us. What we saw was really three points of three moments of truth in the experience of getting a better e-commerce outcomes. The first one would generically be described as building a wallet or creating a wallet. The second one is using it and then the third one is managing it. And we think we can do better than the existing solutions on all three points. So on the first one, when you're actually building a wallet, actually consumers don't really enjoy that process. They don't really see a logic for it. And so part of what we decided to do is we actually build the wallet for the consumer because again, we are owned by financial institutions.

(09:13):

We actually have access to the data as a result of our relationships. So we're actually able to take an individual's relationships that they have with bank A, bank B, and bank C and bring them into a wallet that will have the cards from bank A, bank C, bank B, and bank C, all there ready to go. So we make it very, very easy. We also take the data, the billing address, the shipping addresses or all the addresses that banks know about, and we bring that into a wallet and essentially build it for the consumer. So that's kind of the bill part of the process where the consumer will see that or be introduced to it is through their financial institution. So they will be hearing from their FIS that your card has been added to Paze.

Kate Fitzgerald (09:55):

 Hearing how through?

James Anderson (09:57):

Through email and also through the online banking channels and also some physical banking channels. So it's going to be something the second through the first half of this year, second quarter, more and more people will becoming aware that Paze exists and that it's something that they have access to. So then there's a process that the consumer claims their wallet. The best way for them to claim their wallet is through one of those financial institutions. So essentially if you are fully authenticated into your bank, you'll see a promotion for Paze, you'll click through it, you'll land in Paze. We'll know that you are fully authenticated to the bank, you'll accept terms and conditions and then your Paze wallet will be available to you as a consumer. So that's kind of the first part, which is the create part. We think we are better than anybody else at that point just by virtue of relationships we have with the world's the USFI's.

(10:45):

The second part is about using it. The main thing that consumers told us was they don't want to have to remember any more usernames on any more passwords. It's just not acceptable. So we built a solution for authentication that doesn't leverage any usernames or any passwords. You identify your wallet with an email address and then you authenticate essentially using your mobile phone. So that's really the essence of the experience and consumers told us that that's easy. They're very familiar with that experience. It's something that they understand. They like the little bit of friction, but they like not having to remember anything. They don't want the cognitive load.

Kate Fitzgerald (11:24):

Let me ask, is there any crossover between how Zelle works and how Paze works from the user experience and maybe the trust that they could have? Or will the consumer not even recognize that it's the same from the same organization?

James Anderson (11:39):

Yeah, we don't expect the consumer to recognize that. I mean, early warning is not a household name. It's not something Zella has become a household name. We hope Hayes will become something that people find familiar with, but we're not trying to affiliate them and create some kind of super app in the consumer's mind. I think what's common about them though, which is very relevant, is that both of them come to consumers through their trusted fi. So that's really the common element is that visa solutions delivered to consumers by the financial institutions where they send their paycheck, where they get credit. That's really the difference maker. They happen to both be delivered by early warning, but we don't expect consumers to want.

Kate Fitzgerald (12:16):

So it is interesting, if you've been watching this over the last 10 or 15 years, we've seen great efforts from the card networks at different times and the merchants to try to have this trusted one click checkout, it never caught on. Now, we heard about Zelle coming in 2017, it was launched and I remember thinking, and a lot of people had doubts about whether it was going to catch on. Some of my colleagues ridiculed the name, who's going to use this name Zelle bit Zelle will give you money that's never going to work. Well, it did.

James Anderson (12:47):

It worked up to the tune of about 800 billion last year.

Kate Fitzgerald (12:51):

So we have to admit that Zelle did catch on because it was delivered to people through their mobile banking app, which people have come to trust. That's why I have a feeling that Paze has a great opportunity. However, you have talked about ubiquity, which is a very, very challenging mission. Now let's talk about the merchant side because what good is all this going to do if I can't use it anywhere?

James Anderson (13:14):

Yeah, so for sure. So one of the things that when we started this initiative inside early warning, one of the things early warning did not have until recently hasn't had is an understanding of the merchant world and the relationships with the merchant world where we primarily focused on the FIS. And so that was really the net new that my team brought to the table in terms of launching a merchant sales effort. But fortunately a number of our owners and do have significant merchant services businesses. So we were able to partner with them to get going and then we're going to be expanding well beyond those entities because they have reach, but they have obviously.

Kate Fitzgerald (13:53):

You're talking about giants like Bank of America?

James Anderson (13:55):

Yeah, bams, bank of America, merchant Services, chase Merchant Services, Elon from US Bank. Those are all entities that have substantial merchant relationships and they introduce Paze to those merchants. So we've got a good roster of day one merchant clients, we've got some tier ones. We've also got a couple of relationships. So right now we're live on about 80,000 websites that will grow very quickly as we launch and expand out. But again, our objective is ubiquity and part of that, when your objective is ubiquity, you have to think very carefully about the business model. And so there are no fees on the merchant side at all. So it's absolutely freely available to all merchants with no economics at all. So essentially, obviously they're accepting cards. So there's economics associated with accepting cards, but there's no incremental economics for accepting merchants.

Kate Fitzgerald (14:43):

What do merchants have to do in order to connect to it?

James Anderson (14:47):

So merchants, so it is a new checkout mechanism. So there's a JavaScript SDK that we give to them. So it's a project if they're a large merchant and run their own e-commerce infrastructure. It's a project that takes a couple of weeks to implement and test just to connect to us. There's a couple of ways that the merchant can invoke it. They can invoke it through a button, a static button. We can also invoke it through a dynamic button. And then the third one is what we call the zero pixel version where the consumer enters an email address as part of a guest checkout flow, and then they ping us in the background and we offer them the option to check out leveraging Paze. So there's lots of flexibility on the merchant side. It's one of the principles we brought to bear was that, as I said, at financial institutions, we're not going to tell merchants how to manage checkout if they're successfully selling stuff in 2024 to consumers, they know a lot about what their consumers want. Well, we have a very big base of cardholders. It's going to be participating in this wallet, and we decided to expose that with as much flexibility as we could,

Kate Fitzgerald (15:51):

But there is an effort involved. What's in it for the merchant look?

James Anderson (15:55):

So the merchants, they want those better e-commerce outcomes, and for them that means high conversion, that means high approval and it means low fraud. Those are the things they care about. And so in our conversations it varies because the world of merchants is extremely nitrogenous. So not all merchants want the same thing, but they all want some one or two or three of those things. So that's really what we're selling, which is competitive conversion rate, certainly better than regular guest checkout, high approval rates and also reduced fraud.

Kate Fitzgerald (16:27):

Let's talk about that. The security element, I have just been immersed in the last couple of weeks in new details about new fraud scams, incredible scams. They are happening around the world. The UK is a little further ahead of the us. It's almost like what we see happening there happens here and they're seeing a lot of these same complex, even AI powered scams. How is Paze going to be protecting people in any sort of different way than the existing solutions or approaches?

James Anderson (16:59):

Yeah, so look, I think there's a couple of answers to that question. One of the fundamental answers is that we use cards and as cards are our settlement mechanism, and consumers understand that by virtue of regulation and by virtue of the card schemes practices, they have protections when they use a card either reg or Reg Z chargeback protections. The good thing about that is that not only are they there, but they're well implemented, well understood, their mature processes has been there for 50 years, they work and consumers understand that they work. So foundational element is the fact that we use cards to do the settlement beyond that. Early warning actually was actually created 30 years ago to prevent a very old set of fraud attacks, which were about account opening. We know a lot about bad actors, we know a lot about fraud. We bring that to bear into how we've built Paze from the ground up. There's too many details to go into right now, but we do understand the patterns. We understand what the attack vectors are, and we've built it in anticipation of those and we'll continue to refine it because as to your point, Kate, the fraudsters are extremely sophisticated. They're only getting more sophisticated and it's a very lucrative business for the bad actors. So we have to be super careful about that. But from a consumer point of view, the answer is really it's a card transaction. You get all the same benefits you're used to.

Kate Fitzgerald (18:25):

So if you're a bank, you ideally want to operate without the card. We have open banking. I would envision an e-commerce solution that doesn't have a card involved at all.

James Anderson (18:38):

Build about then if that's what you're envisaging, you should go build it.

Kate Fitzgerald (18:42):

I'm trying to dig deeper into the future role of cards and why cards probably will have a future in the open banking universe.

James Anderson (18:52):

So look, I think if you think about the whole range of payments, and obviously there's a payment show and we've talked about lots of different types of payments.

(19:00):

There are certain payments that are very well served by the card rails, which is kind of consumer payments. I talk about it as the foundational value of cards is creating trust between strangers. You don't know this merchant, they don't know you, but yet you are able to transact. That's the foundational value and that characterizes an awful lot of online payments. You don't know who you're dealing with and yet you want to make a transaction, you want to get those protections. There's lots of other transactions which don't have those characteristics, and those transactions are going to end up on different rails and maybe they should end up on different rails. I don't take a point of view of that, but I think e-commerce is actually, it's a reason why it got started on card rails and it's a reason why card rails continue to be the predominant way that people buy and sell online is because instant trust between strangers is extremely hard to create and it's extremely valuable and the card rails have built it. We get to benefit Paze, gets to benefit from that, and then basically make it easier to use more secure, deliver better outcomes.

Kate Fitzgerald (20:09):

It's fascinating because if you see how these things have evolved in the next five or 10 years, I see the segmentation of payment types coming into their own with each of them with a very specially designed purpose for that scenario. And it looks like cards is moving. We just saw this big allegedly the interchange fee, swipe fee settlement, so that there might be some, I don't know, practical changes that will enhance the ecosystem for banks that are using cards and open payments and Zelle and all these other different types where Paze will have a role hopefully. And so speaking of the merchants, where are we in this rollout? I know this thing has been delayed somewhat.

James Anderson (20:58):

So we had a very ambitious timeline that was given to us and we were trying to get live by last shopping Christmas shopping season. The project was just bigger than that timeline allowed. So we decided to basically take a little, basically put the tap the brakes a little bit. What we've done so far is we've loaded all the cards from the participating FIS in the state of South Carolina, in the state of Arizona, and the next up, which is news is Texas, so we're going to load all of Texas. So it actually started.

Kate Fitzgerald (21:30):

When?

James Anderson (21:30):

It started yesterday.

Kate Fitzgerald (21:33):

Whoa, breaking news.

James Anderson (21:34):

Texas is live or getting live.

Kate Fitzgerald (21:35):

I didn't even know Arizona was live.

James Anderson (21:37):

Arizona is live. Yeah.

Kate Fitzgerald (21:39):

What's, when do you plan on having all the cards in all the states loaded approximately.

James Anderson (21:44):

End of Q2.

Kate Fitzgerald (21:46):

And how many cards will that represent?

James Anderson (21:48):

So our latest estimate, it's more than 150 million cards, which is a big number. It's actually, it's quite interesting that if you go through the owner institutions and you go to Nielsen report and say, how many cards of those institutions issued something like 600 million? The reason we are not loading all 600 million is because we want to make sure that when the consumer opens up their Paze wallet, they see the cards that they use online. And so we have a set of eligibility criteria for each card that we load that it has to have been used online recently. It has to have an email associated, it has to have a phone number associated with it. And so when you go from that 600 million, you end up at about 160, 150, 160 million. But what's interesting for the merchant side of it is those of the cards that people are using to pay at their stores so consumers understand, the merchants understand for those, that's extremely large number and extremely relevant to them in terms of purchasing power. So we are ramping up on the merchant side. We've got about 80,000, as I mentioned, live already news. We just launched Whataburger in the southeast, which is an iconic fast food chain in the southeast. So Whataburger is live, so you can go buy burgers. They're very creative burgers at Whataburger. We did a big promotion in Arizona at our headquarters are in Arizona. So we did a bit.

Kate Fitzgerald (23:16):

How do you figure the, we're talking e-commerce, but now you're talking fast food.

James Anderson (23:21):

Yeah, so I think that's one of those interesting things. So there's everybody thinks of as buying something that shows up in a cardboard box on a back of a brown truck. That's sort of iconic image for e-commerce or a blue truck or a blue truck or a purple truck or whatever color truck. But that's a big piece of e-commerce. That's not actually all of, we actually think of it as more about remote payments than we think about e-commerce. It's really about how the payment is made when the card is not present. And so now increasingly, every vertical, every industry is participating in card, not present payments, even food services people are buying online and obviously.

Kate Fitzgerald (23:59):

Even subscriptions.

James Anderson (24:00):

Yes, so especially subscriptions, but food, which 10 years ago was the classic card present use case. Nobody bought food online. How would you ever do that? How would you ever buy fast food? Well, now everybody does food delivery and everything, so the whole world of card not present is available to Paze. And so we are signing up people like Whataburger, we're signing up supermarket chains because they're selling online, they're selling to the regular consumers. They also, they start at point of sale. We're not doing point of sale payments, but a lot of their transactions now are disconnected physically from the delivery of the good, good or service. And they want to have the same protection and ease of use when the consumer goes onto their website or goes into their app as they would have at the point of sale. So

Kate Fitzgerald (24:47):

I just want to make sure, you said for a bank account to be eligible, when you flip the switch in these states like Texas, it needs to have, someone has recently shopped with a card. The bank or the bank has to have a phone number and mobile phone or any phone, mobile phone, mobile phone number. And what was the third thing?

James Anderson (25:07):

Email.

Kate Fitzgerald (25:07):

An email.

James Anderson (25:09):

We actually add at the card level, not in the account level. So we're actually adding a card.

Kate Fitzgerald (25:13):

What does the bank have to do?

James Anderson (25:15):

So the bank, basically we have an API that all our participating FIS write to in order to provision the cards to us. And so they have to write to that API, and then they have to run essentially a filter that filters out from their whole card base, all the cards that meet the eligibility criteria. It's not a particularly onerous project, but it's a project.

Kate Fitzgerald (25:36):

Are you contacting the banks in each state telling them to do this or are you expecting that they will get a signal?

James Anderson (25:42):

Yeah, so we've got, obviously there's 10,000 deaf FIS is the headline number. So that's an awful lot. So we will not be dealing with, we can deal with people small FIS directly. Our expectation is that many of those will get access to Paze through existing relationships and platform providers that they work with today. So we're in discussions with all the likely suspects in that department and having very promising discussions. That's also how we distributed Zelle. A lot of our scale in Zelle came through those third party relationships. Zelle is up to about 2100. Financial institutions connect directly to us for Zelle. So we kind of know that. We know that space. We know how to fantastic.

(26:23):

We know how to get scale inside the financial industry.

Kate Fitzgerald (26:26):

Does anybody have any questions? We have a couple of minutes for anybody who's curious about this is the, somebody want to see a question back there? I can't tell.

James Anderson (26:38):

It's for sound of silence.

Kate Fitzgerald (26:41):

So James, is there there anything else Paze in the world? What's the closest sort of thing in Asia? Is there a checkout process?

James Anderson (26:52):

Look, I think the financial industry coming together in this way, are the banks coming together in this way is, there's obviously many examples of consortia around the world because banking is intrinsically based on interoperability and sometimes you're paying, sometimes you're getting paid. So it is naturally a space where consortia exists. I'm not aware of anything, anybody who's done this around the world building on card rails. I mean you see initiatives like PIX in Brazil and you see UPI in India, which are really more account to account based initiatives. I'm not aware of anything. I think I've heard that something's happening north of the border in Canada, but I think if you go around the world, the world of e-commerce has mainly been improved by non-bank actors. And so I think this is a little different. I think part of what we also feel is important is that we are a regulated financial institution who deal with other regulated financial institutions.

(27:53):

And so we are regulated by the OCC and the FTC and the CFPB. So we are a very mature organization in terms of understanding what regulatory obligations are, and we hold ourselves to a very high standard in which we think is kind of foundationally important for this kind of initiative to succeed because we do recognize that we are taking data, very sensitive data from financial institutions and about their most important relationships, which is their customers. So we take that extremely seriously as a company. Fortunately, we've got a 30 year track record of doing that because of our fraud products and because of, so it's not something that's in any respect foreign to us. The reason I mention all that is that it's a pretty high bar to do what we do at early warning. This is not three men and a dog and the Boy Scout troop. There's a lot of work that goes into putting ourselves in the position of being trusted by the largest financial institutions in the world with some of their most valuable and sensitive data. So it's a privilege we take very seriously.

Kate Fitzgerald (28:59):

See, as a journalist, as a skeptic, I have watched a lot of these things. I have heard the hype, I've heard the sales pitches and I've not seen them come to fruition. A lot of the one check solutions never caught on. Changing people's habits and payments is very difficult. But what have we seen in the last five years that radically changed everyone's payments overnight? It was Zelle. So this is the outfit that did it. There's still a lot of challenges ahead, but there's going to be a lot to watch in the next couple of months.

James Anderson (29:30):

I would also say that when you deliver it right, you can overcome inertia. You've got to be more convenient. You've got to deliver on trust and security, and then you do see people change behavior.

Kate Fitzgerald (29:42):

Well, a lot of pressure. James and I will be talking up to the task Kate in six months. Thanks everyone. I think it's time for lunch.

James Anderson (29:48):

Thanks everybody.