Due to the effects of recent global crises, consumer wallets stretched while many small businesses were forced out of the market. The payments sector endured its most recent revenue shrinkage for the first time in nearly a decade. Undercuts resulting from many businesses’ attempts to stay afloat are still present along with new outside issues pressuring them even more. How can risk allocation help?

Currently, the waters are looking better for businesses as marketplaces are revived and spending increases. However, many analysts question this so-called “return to normal” and wonder if it is enough to elicit economic growth back to pre-COVID levels. Before the decline, the payments industry was accustomed to yearly growth of about 7%. Some wonder if this level of growth can be indirectly achieved again. Others wonder if it should be the limit of an economy’s growth aspirations?

Consider the Risk

Many believe that rising interest rates or over-regulation are the barriers to growth in capitalist economies such as ours, but there is another hurdle that has always been present; This is, of course, risk. Fixing risk may not only help the payments sector return to pre-pandemic levels, but will also pave the way for more growth.

Financial institutions such as banks, marketplaces, and emerging fintechs are faced with several issues when regarding risk. Firstly, they are confronted with extraordinary levels of fraud which, more often than not, lead to crippling financial losses. Globally, losses from fraudulent payments more than tripled from 2011 with $9 billion to $32 billion in 2020. These losses are expected to increase by more than 25% from now to as early as 2027. This is detrimental to a business population that wants to increase trade and facilitate more transactions faster than ever before. No one can place blame on financial service providers for being opposed to risk, but now, when our business economy is ready to advance again, the timing is far from ideal.

Risk managers at financial institutions completely understand how challenging the tasks they’ve been given are. Balancing growth with its risk while dealing with increased pressure to advance our growth past points we’ve never reached is the definition of difficult. One of the problems that contributes to this is that for many risk management strategies affairs usually come down to binary options; Coming to “yes” or “no” decisions on whether to authorize a transaction based on manual assessments and predetermined algorithms. The process is vulnerable to groupthink and bias, not to mention slow and inefficient as well. As it stands, risky transactions are easily processed while perfectly normal transactions have the potential to be blocked.

How Fintech Partnership Strategies Affect Risk Allocation

Partnering with third parties to increase risk-processing capabilities is how banks, marketplaces, and other financial service providers combat these barriers. More than a third (38%) of banks worldwide consider fraud and risk management as “very important” in their fintech partnership strategies according to McKinsey’s Global Payments Report.

These partnerships let payments providers graduate from binary box-ticking when assessing fraud risk to a progressive risk model that’s faster, more nuanced, and more accurate with up-to-date intelligence. Instead of processing transactions as safe or unsafe, providers can onboard businesses and accommodate customer transactions using risk-tiered rules, policies, and flags that provide a better understanding of the risk itself and control over the amount of risk taken. Payments providers will be able to set their own risk levels and permit machine-learning algorithms to assign risk to every individual transaction based on real-time intelligence. There is also a possibility to introduce customized flags and policies based on which approach to risk they choose. Of course, this depends on the nature of their industry and/or the size of the transactions being processed.

The migration to a more progressive and continuous risk assessment is the key to allowing faster growth within our economy because it removes a majority of the friction associated with payments processing. Payment providers like RevitPay are able to automatically authorize or decline transactions in a matter of milliseconds securely with the knowledge that their risk parameters are being followed. This creates a chain reaction of benefits for businesses and consumers who will receive faster, friction-free transactions without the use of endless checks, holds, and other barriers.

Removing the rules around risk allocation or fraud prevention mechanisms isn’t how growth can flourish in our economy, instead it’s what financial industries like RevitPay have always been very good at – the thing that makes life endlessly easier and more safe – innovation.