The DP Revolution

How the Digital Payments industry has transformed – and what AI has had to do with it

The world of finance, much like several other verticals, has seen rapid transformation over the last few years owing to developments in artificial intelligence and machine learning. Specifically in aspects such as digital payments, the emergence of technology that enables increased speed, flexibility and security is imperative in allowing untethered growth. Digital finance will soon become the primary cog in the wheel moving the economy forward.

Towards the end of 2019, data from the Bank of International Settlements (BIS) showed that India was among the fastest-growing countries in the world in terms of digital transactions, growing by almost 55% annually. With increased government spending on infrastructure to ensure financial inclusion, India was gradually making the transition from a primarily cash-based economy into a formalised one. The increased access to formal banking and financial services is evident from the fact that almost 80% adults in India now hold bank accounts. In order to further this agenda, the RBI also laid specific stress on developing the Indian digital payment infrastructure (facilities such as NEFT, IMPS or UPI) – something that assumed greater significance ever since the COVID-19 pandemic had struck the nation.

IMAGE SOURCE: ECONOMIC TIMES TECH

There is no doubt that COVID-19 has completely altered the face of supply and demand, sending shock waves down every aspect of the global economy. It is, therefore, not surprising that the digital payments industry in India took a huge hit amidst quarantine and social distancing enforced by the pandemic. With major online retailers unable to deliver, the ensuing consumption drought owing to plummeting demand pulled the volume of online transactions down by almost a quarter – from March to April, 2020. However, as the economy gradually attempts to return to a state of pre-COVID normalcy, digital payments have indeed started picking up once again.

Digital payments are the indisputable future of the financial world. In fact, industry heads within India are targeting almost 1 billion digital transactions per day – that’s almost a 1000% increase from the April 2020 levels. This massive transition – and the ensuing affirmation of digital transactions becoming the national benchmark – will be facilitated, of course, by none other than Artificial Intelligence.

AI will not only allow greater flexibility to banks and other fintech players, but also allow consumers to engage in virtual transactions whilst maintaining proper social distancing decorum – an indispensable tool in dealing with the pandemic.

• Hybrid Cloud: Around 87% of financial institutions adopting hybrid cloud technologies – i.e. a combination of private and public cloud services to hold data – has massively outperformed its competitors. The adoption of hybrid clouds has thus seen tremendous acceleration during the pandemic, and the marked improvement in risk mitigation strategies and overall performance offers an extremely lucrative option to many financial institutions.
• Chatbots: Among the AI-enabled technologies that will be changing the world in the coming years, chatbots – the primary point of first contact – will be crucial. In fact, Bank of America’s smart assistant, named ‘Erica’, served over a million customers within the first three months of its launch in 2018. Having disallowed physical interactions, the pandemic will encourage consumers to seek assistance from their payment providers through regularised AI-powered programs. Although current functionalities are rather limited, the future scope for diversification and development is boundless.
• Strengthening Security: The key to the success of the Digital Payments industry will be security: there’s no two ways about it. Protecting the ecosystem from criminals, especially at a time when cybercrime is peaking, will be the determining factor in whether this stays a viable option for the future. Advanced fraud detection and cyber-risk management techniques will require mass investment and rapid development. This is where AI and Machine Learning primarily come in.

To strengthen the time-tested 3D-Secure authentication gateway, a multitude of new e-commerce security developments are coming in. A service launched by PayPal – Simility – is a perfect example. By using AI and machine learning software to guarantee “a holistic, end-to-end fraud and decisioning platform to empower businesses battling to contain fraud in a digital-first world”, it aims to strengthen the current authentication gateway by adding a new adaptive platform as an additional security layer.

• Blockchains: In 2018, the Government of India backed investment in IndiaChain, set to become the world’s largest government-owned blockchain system in the world. It will not only provide a truly decentralised network with improved transparency, but also completely reshape multiple financial processes such as international remittances, contract management (through its digital contract platform), KYC, loans as well as digital payments.

Blockchains are already playing a critical role in the adoption of digital payment measures across the country. Prior to the COVID-19 outbreak, several IoT-based kiosks have empowered consumers to make chives regarding their financial needs without any intermediary agent whatsoever. The pandemic is just going to quicken this process, enabling greater transparency, improved financial knowledge and reduced cash dependency.

• Credit Scoring: Consumers’ credit scores are absolutely critical in determining the credit underwriting being carried out by banks. Analysing the creditworthiness of the borrower becomes imperative – and this is where data analytics and AI have a pivotal role to play. It is a marked improvement on the previous (more simplistic) means of using logistic regression-based models to formulate credit scores, using more advanced methods of analysing specific data points and odds of return on loans.
• Alternative Payments: Ever since banks have come into being, so have the need to replace them with easier alternatives. Financial Management firms such as Clarity Money are doing just that through AI. By carrying out detailed market analysis on how to make recurring payments cheaper, finding a card with lower fees, or improving upon existing saving habits – Clarity allows consumers just what its name stands for.

Decreasing physical cash-dependency is increasingly becoming a primary aspect of the post-COVID world. With increased government backing and hordes of new venture capital flowing in, the onus will now lie on the digital payments industry to strengthen its infrastructure and bring long-lasting transformation into the mainstream. As always, the potential for innovation is the only way to COVID-salvation.