Mastercard using AI, open banking to manage faster payments risk

Up to one out of every 50 ACH transfers fail, an issue that Mastercard contends can be addressed through a mix of new data-sharing techniques and machine learning.

"With ACH payments there's a latency in how they are processed; it can take two to five days," said Silvana Hernandez, senior vice president of digital payments at Mastercard in New York. "Things can happen, including a decline because of a balance."

The card network is using technology from Finicity, an open banking provider Mastercard acquired in 2020 for $825 million, to improve performance for account-to-account transfers. Mastercard is reducing overdraft risk through faster processing, as well as increasing its ability to serve consumers, issuers and merchants beyond card transactions — an important move as card networks attempt to become less reliant on the fees they collect at the point of sale.

One new Mastercard product, called Payment Success Indicator, relies on bank account information provided by the consumer on an opt-in basis. The product was developed through open banking, or a process for sharing bank account information with third parties.

A merchant, bank, digital wallet or payment service provider uses this bank account information to access a consumer's balance and historial behavioral risk pattern for each transaction. That informs the Payment Routing Optimizer, which recommends the right day and payment rail (such as same-day ACH or next-day ACH) that strikes a balance for cost, speed and risk.

Mastercard's machine learning is designed to improve the behavioral analysis and recommendations over time so the Success Indicator and Routing Optimizer become more accurate.

"AI allows us to predict if a payment will be successful when it's settled. A merchant may have been planning to run a transaction through ACH, but could find it better to run through same day ACH," Hernandez said.

Mastercard is attacking the portion of ACH payments that are returned to consumers — estimated to be 2%, according to the Minneapolis Fed, which attributed the failure rate to insufficient funds, incorrect account information or lack of authorization.

"There are trillions of dollars in ACH payments. And there are huge pain points for consumers and merchants," Hernandez said, adding Mastercard's own research found merchants maintain staff to manage failed electronic transfers.

Mastercard's digital payment products will be widely available later this year, and are being deployed early for rental payments, which Hernandez said heavily use ACH transactions. Mastercard plans to focus on education, health care and insurance in future deployments.

Finicity has been an open-banking catalyst for Mastercard. It is also powering Mastercard's buy now/pay later platform by connecting consumers to banks and pre-qualifying borrowers for zero-interest installment loans. Mastercard additionally plans to use Finicity's application programming interfaces to facilitate bank connections for loan and mortgage processing and personal financial management apps.

"Finicity removes the friction of setting up bank account details," Hernandez said. "It's just a couple of clicks for a consumer to link an account."

The Finicity-powered deployments are part of a plan at Mastercard to add new business products that build on top of payment acceptance or are value-adds for its merchants and issuers.

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"Digital consumers are used to having a mobile experience, which highlights the complexity required to accept payments," Hernandez said, adding it's Mastercard's plan to provide as many payment options as possible.

Visa has a similar strategy, which it calls its network of networks, and includes services such as security and consulting. Both networks are preparing for a future that does not rely as heavily on card payments.

And other payment companies are deploying open banking, including the Swedish fintech Klarna, which is known for BNPL lending but also offers payment processing. Klarna in late March launched an open banking business unit, which is designed to help financial institutions, fintechs and merchants connect with each other and develop financial services apps through Klarna's API. Klarna and Visa did not return requests for comment by deadline.

Mastercard's moves provide another way to tap into a trend that uses expedited transaction processing as a way to combat fund shortages. A growing number of banks, including JPMorgan Chase, PNC Financial Group, Bank of New York Mellon and U.S. Bancorp, are also using real-time settlement through the RTP rail to help consumers and merchants manage overdrafts by timing payments based on when the payer has sufficient funds.

These growing digital and faster-processing options will create more transaction rails, and a way for the card brands to use their existing networks to streamline the shopping and payment experience, according to Marco Salazar, director of payments for Javelin Strategy & Research in Chicago.

"For the card companies it is an effort to diversify the capabilities and ensure the networks and their services are future proof," Salazar said.

As open banking becomes more widespread, payment options will become more fragmented. That provides an opportunity for Visa and Mastercard to provide services that can address the increase in payment choices, according to Salazar.

"This pushes them away from a consumer brand and more into a business-to-business world," Salazar said.