A Fintech’s Guide to Payments

What are Fintech Companies?

Fintech is a broad term (shortened from financial technology) that encompasses technologies aiming to improve, simplify, or modernize financial services. With the integration of AI and a host of new regulations, Fintech companies continue to grow, evolve, and expand in response.

Broadly speaking, Fintechs can be broken down into subcategories, which include:

• PayTech: payments technology
• LendTech: alternative lending solutions
• WealthTech: wealth management and investing technology
• InsurTech: insurance technology
• Blockchain & Cryptocurrency
• RegTech: regulatory technology
• PFM: personal finance management
• Open Banking: APIs in banking

Because of the breadth of this industry, Fintech is one of the largest tech industries, estimated to hit $600 billion by 2029.

Payments Needs for Fintech Companies

Compared to traditional financial institutions, Fintechs are often smaller with fewer processes, but that can also make them more innovative and nimble. Therefore, these companies require partners that move quickly, scale, and take security seriously - all at an affordable price. 

By their very nature, Fintechs seek to “disrupt”. The financial industry is one of the oldest industries, and many of the incumbents are centuries old with slow, archaic processes and systems.

Therefore, Fintechs often seek partners that have similar philosophies to their own and offer:

• Faster settlement to support real-time or near-instant transactions
• Scalability and flexibility to support rapid growth
• Interoperability with multiple payment partners, usually via API
• Strict data security and compliance
• Lower transaction costs to help with already tight margins

This makes them hesitant to choose the status quo “big name” payment providers that could slow innovation or cut into margins.

Latest Payment Innovations for Fintechs

Fintechs can benefit from choosing many of the new advancements in payments, including:

• Alternative and emerging payment methods
• AI-driven fraud detection
• Tokenization
• Embedded Payments
• Unbundled Payments

Alternative and Emerging Payment Methods

Emerging and alternative payment methods like digital wallets, cryptocurrencies, and buy now, pay later (BNPL) are growing rapidly in acceptance and consumers’ desire to use. 

Many full-service payment processors offer access to the alternative payment methods, which can make it seem like a no-brainer to simply sign up once and get access to the full range. However, while they can make it easier to expand the set of payment method options, they generally will not offer especially competitive rates, as they have standard pricing and fees across all payment methods.

High-risk payment processors, niche processors, and other processing innovators may offer these emerging payment methods at more affordable rates. However, this may require Fintechs to work with several payment partners to process payments, which is more cumbersome than an all-in-one payment processor.

AI-Driven Fraud Detection

A recent report found that an estimated $8.8 billion is lost yearly due to fraud - primarily card-not-present fraud. Because this problem will only continue to grow as fraudsters themselves leverage AI to scam at scale, fraud detection tools are fighting fire with fire - that is, fighting AI with AI.

Today, AI-driven risk scoring and chargeback prevention are building significant traction and catching some of the most sophisticated scammers. 

Pairing AI with automation and a multi-processor strategy is fundamental to protecting against fraud, as a multi-level security system can ensure Fintechs are not falling victim to scams. Using different services allows companies to layer in more sophisticated checks and balances (like limiting the amount a consumer can commit on a single card) as required.

Tokenization

Tokenization is a process by which sensitive data is exchanged for a unique, but completely different, identifier that can then be securely stored and used in place of the sensitive data. In practical terms, this means that Fintechs building secure, PCI-compliant payment mechanisms can have customers’ credit card details collected and stored by a third party, accessing a ready-made secure environment without having to build one within their own organization.

Generally speaking, Fintechs have three options for payment tokenization, each with notable pros and cons: delivery by card networks, by PSPs, or by third-party tokenization providers.

Embedded Payments

Embedded payments are payments that seamlessly integrate into a platform or application. Fintechs that offer financial services will often embed required services into their platform directly to create a nearly frictionless user experience. Embedded solutions that make this process easy for Fintechs can save on time, development work, and maintenance costs. Many embedded payment solutions also come with a built-in ecosystem that can plug-and-play into dozens of integrations and partners.

Unbundled Payments

In an industry filled with trade secrets and complicated processes, Fintechs have historically had little control over how they would accept and process payments. By unbundling their payments stack - that is, by switching away from an all-in-one payment provider and instead piecing together a payment stack - organizations can now hand-select the solutions and providers that best set them up for long-term success. This comes without the added headache of vendor lock-in, bloated tech stacks, and “decent enough” solutions.

What Fintechs Should Look for in Payments Partners

When choosing any payments partner, each Fintech should consider several factors to ensure the provider is the right fit.

In order to ensure that a provider's services meet the true business need, organizations should, among other factors, consider the provider's:

• Expertise - does the provider know your company’s unique payments needs?
• Experience - how much experience does the provider generally have and is it in the areas you need to leverage?
• Reputation - how well-regarded is this provider in the marketplace?
• Cost - does the price work with your budget and business needs?

Remember, however, that PCI compliance is an ongoing process. The right provider at a single point in time may not be the right provider in the future. Continue to monitor your security environment and continue to assess which providers can help your organization as your business model and customer base grow.

If you are interested in a fully programmable vault that helps you create engaging commerce flows, connect with any partner, effortlessly manage compliance, and keep control of your payments data, contact us to learn more.