August 19, 2016
Q&A with Nuno Sebastiao, CEO, Feedzai
As a supplier of cutting-edge fraud prevention technology to the payments ecosystem, Nuno Sebastiao, CEO of Feedzai, has been front and center as the industry begins to leverage mobile technology to evolve past the traditional credit-card/banking infrastructure.
Feedzai is riding the wave of Big Data, providing fraud protection to retailers and payment providers based on the real-time processing of exponentially increasing volumes of data. The San Mateo, Calif.-based company’s technology creates consumer profiles based on a constantly updated transaction and information history that can be compared to each new transaction.
Experts and observers like to talk about “disruption.” From his ringside seat, Sebastiao says it looks more like evolution. Regardless, it’s change. Merchants have been increasingly adversarial with the card networks and issuing banks because they feel the costs of card acceptance are spiraling out of control.
Sebastiao says alternative payment providers (APPs) are using the mobile-enabled infrastructure to “rewire” the connection between consumers and retailers, with the ultimate goal of bypassing issuers entirely. Is it possible? Feedzai says that is the way the payments industry—especially the card-not-present payments industry—is moving.
In a few short years, Sebastiao has tracked payments providers as they have changed. Traditional ISOs selling credit-card acceptance expanded their capabilities and began offering mobile network-based devices, but such companies still needed an acquirer to connect to the payment network. The advent of PayPal, and more recently Square, found alternative payment providers—also known as PSPs—establishing a direct relationship with consumers through technology like digital wallets. PSPs, however, still rely on the traditional payment networks to fund the accounts. Then companies like Klarna and Affirm began assuming payment risk and the era of bypassing banks had begun. They are eschewing acquiring business models because better merchant underwriting means increased ability to insure settlement risk.
Finally, he says—and a few have gotten there already—most will begin offering online and offline processing resulting in one provider that can deliver a true omnichannel experience to merchants.
CardNotPresent.com sat down with Sebastiao to get his take on the evolving—and disruptive—world of alternative payment providers and their effort to remake the payments system.
CNP.com: How would you define “alternative payment provider”
NS: Well, according to Wikipedia, “alternative payments refers to payment methods that are used as an alternative to credit card payments.” But, this isn’t quite accurate since some APPs do use credit cards. PayPal users, for instance load funds into their accounts via credit cards.
Suffice it to say, there are many variations of APPs and that’s exactly my point. The entire category was born out of necessity—created to meet markets where traditional systems weren’t adequate. Thus, my definition of an APP is less about the technical aspects, but more about the attitude APPs bring. This attitude is about seeing a need in the market and then driving to create a better customer experience, not settling for status quo.
For example, the other day I was instructing my kids to hit the credit button on a POS terminal when they were using a prepaid gift card they got for Christmas. That led to explaining the difference between the debit and credit buttons, and as you can guess, I found myself down the rabbit hole having discussion with a seven-year old about payments. Imagine if our iPhones worked the same way, if you had to select CDMA or GSM before making a call.
CNP.com: What steps have disruptive APPs taken already to disintermediate banks?
NS: I think the ultimate goal for providers is to have as complete and direct a span of control over both the buyer and seller side, as much as possible. The merchant acquiring and underwriting function addresses the needs on seller side. To address the buyer side, consumers need a transaction-based credit-intermediation function which traditionally has been the role of banks and related entities. But, disrupters like Klarna allow merchants to provision credit using the one asset merchants already own, their inventory. So truly disruptive payment providers establish direct relationships with consumers and merchants and create a marketplace environment where the two can interact. As these disrupters scale, the currency being exchanged between the buyers and sellers stays within their respective ecosystem as the participants participate in the commerce cycle. Some of these networks have amassed or have the ability to amass funds rivaling that of a bank’s depository assets. When these funds stay within the marketplaces that the disrupters have built, it’s like having a private currency that, in some cases, is equal to the money supply of some small countries. That sounds like a game changer to me.
CNP.com: At what point in the evolutionary process do most APPs find themselves right now?
NS: I think this depends on the market. We have clients on three continents and see radically different solutions working in each. If the goal is to have a better consumer experience, then providers that have the most complete control over their ecosystems are in the best position. The payment ecosystem is a two-sided network, a B2C side for buyers and a B2B side for sellers. Thus, the ones I watch are eBay/PayPal, Square, and Klarna for the reasons I mentioned above.
CNP.com: If a company that grew up as a traditional ISO wanted to become a PSP and compete in the world of alternative payment providers, how long does it generally take?
NS: What is most important is the time it takes for APPs to develop an effective ecosystem. It took decades for Visa, 14 years for PayPal and four years for Square. Cycle time is decreasing.
CNP.com: What benefit accrues to merchants working with the most disruptive APPs?
NS: The primary benefit of working with innovative payment providers is not about payments. eBay, Square and Klarna aren’t solving for payments, they’re driving customer traffic to participating merchants, increasing conversion and sales. They’re creating better relevancy mechanisms and curating products or services that consumers want. Payments is a means to an end, and disruptive payment providers are in fact, marketing companies. That’s why Square’s valuation is that of a Groupon-type business and not a payment company.
CNP.com: In your evolutionary process, would the card networks become obsolete?
NS: Not at all. The disruption that allows non-banks to do what banks traditionally have done is a result of better risk management, which is available to anyone. With Big Data and modern machine learning, both merchants and banks have access to better tools to do advanced risk modeling and build fraud engines that act and react faster than humans can. That’s the hard-science part but there’s also an art to this. This involves democratizing the Big Data with a human-friendly interface and clear, readable explanations so merchant and banks don’t need an army of data scientists.
CNP.com: Is there a company among the three you mentioned that could win the category?
NS: The three leading disrupters all have the same essential building blocks: a two-sided network and free-flowing commerce within each of their respective ecosystems. I don’t think that there will be a disrupter that will control it all, the market is just too diverse and fast-changing. I think the winners will be those that stay consumer-focused while balancing that with better risk management (which means managing data). The consumer now has so much control—enabled by the mobile device—that the word “consumer” is ill-fitting. After all, consumers now produce data, for example, such as search terms that signal intent, social graphs, geolocation, purchase history, etc. Thus, the winners are the ones that can manage data better and maintain this at scale, not just during initial startup years, in order to deliver a winning customer experience.