This is the fourth episode in our series on Payments Performance Optimization, where Drew Edmond talks to leaders across the ecosystem who are tackling the same stubborn question from different angles: How can merchants maximize transaction approval rates and reduce failed payments?

Check out the previous episodes in the series for perspectives from other industry stakeholders:
Oban MacTavish at Spade
Brant Peterson at Worldpay
Rehman Baig at FlexFactor

This episode focuses on one specific card decline reason, Non-Sufficient Funds. You may hear it referred to as NSF, Insufficient Funds, or perhaps Credit Limit Exceeded. Whatever you call it, merchants know that this is one of the most common decline reasons you will see in your data.

You may be wondering, how can I even begin to optimize this transaction? Most of the typical payments optimization tricks don’t do anything for Non-Sufficient Funds, because how would they be able to put money in the account of the consumer?

In this episode, Drew Edmond is joined by Chanan Lavi, CEO and Co-founder of Kipp, to discuss solutions to this major problem as well as the implications for merchants, issuers, and consumers.

 

 

Drew Edmond: Hey everybody. I’m Drew Edmond, an Associate Partner at Glenbrook and your host for this episode of Payments on Fire.

Before we get started on today’s topic, I want to remind our listeners about our upcoming Global Payments workshop on September 16th and 17th. This is a live virtual workshop focused on global payments key concepts, payments activities and innovations in select markets, and the unique challenges of cross-border payment.

And we’re giving listeners a hundred dollars off with code POF2025. POF like Payments on Fire. Visit our website and save your spot today.

This episode is part four in our series on payment optimization, and today we will be focusing on one specific card decline reason, non-sufficient funds. You may hear it referred to as NSF, insufficient funds, or perhaps credit limit exceeded.

Whatever you call it, merchants know that this is one of the most common decline reasons you’ll see in your data. It can be especially problematic if debit cards are disproportionately more prevalent in your customer portfolio, but realistically, most online merchants see a significant amount of debit cards, and credit limits can be hit on credit cards as well.

At the end of the day, this is fundamentally a funds availability issue. If I’m shopping on an e-commerce store to buy some new shoes, and the card linked to my account only has $50 of available funds, and the shoes cost $100, then that transaction’s going to be declined.

The customer then has a bad experience because their payment’s declined. They don’t get their shoes. The merchant’s upset because they weren’t able to make a sale. The bank, which had to decline the payment, isn’t happy because it missed out on the interchange it would’ve received from the payment, and it could lose its position as top of wallet as the consumer may start using a different card or a different payment method going forward.

So given this is a series about payments optimization, you may be wondering how can I even begin to optimize this transaction? Most of the typical payments optimization tricks don’t do anything for non-sufficient funds because how would they? How can you put money in an account of a consumer that you don’t control? Network tokens, orchestration, authorization, message reformatting. These aren’t going to work here.

In the world of recurring payments, using retries at a later time can be successful here, but that’s kind of a topic for another day. Instead, today we’ll talk to someone who looked at non-sufficient funds declines and said, Just because you don’t have money in your account today, doesn’t mean you won’t tomorrow, or next Friday when you get paid.

So why don’t we figure out a way to manage the risk for the issuer? Let more transactions go through successfully at the time of the transaction, and the consumer will be happy because the transaction went through and the merchant gets paid as well.

In our conversation today, we will be discussing a solution called Kipp with its Co-founder and CEO Chanan Lavi, which has seen its merchants avoid up to 35% of their NSF declines with participating issuers.

Chanan, welcome to Payments on Fire.

Chanan Lavi: Hi, Drew. Nice to be here. Thank you.

Drew Edmond: Of course. Very excited about this conversation. Non-sufficient funds is a major problem for the merchant community and for banks and for customers and the like. But before we get into the details about that, let’s go back in time a little bit and learn about what brought you into the world of payments.

Chanan Lavi: Cool. So actually I, looking at your background, I saw that we have a more or less a similar journey in the payments world, just the opposite. So I saw that it started with an acquirer and then moved on to a merchant. I did the opposite. I’m very happy that I did it that way because starting by managing payments for a large merchant allowed me really to learn a lot.

So, when you’re managing a few billions of dollars for a merchant, you sometimes get confused that everyone wants to teach you because it’s yourself, but in practice it’s because the funds that they want to see tunneled through their direction. So that was a great school for payments. That was with 888, a large gaming operator.

And then on I moved to an acquirer named Finaro that was acquired by Shift4. And in both roles, I dealt a lot with really payment optimization. Anything that has to do optimization right, starts from main focus is really approval rate, which is important for me and the merchant that I was working on behalf, but also as an acquirer.

At the end, I think this is the first reason why merchants are choosing to work with a certain acquirer. Today, in some cases, it’s even not the payment manager that is choosing, it’s actually a machine that is choosing where to route the funds. It becomes even more important for acquirers really to optimize the payments. I dealt there with all sorts of things that have to do with optimization, cost optimization, could go into FX, et cetera. But really I think the most important piece is really the payment optimization itself.

Drew Edmond: Yeah, absolutely. And I think you’re totally right. It’s a slightly different mindset, maybe similar tactics and strategies along the way, when you’re thinking about it through the lens of a single merchant, because you’re really focused on your own card portfolio, your customer portfolio, what providers you might be using, those types of things versus on the acquiring side where it’s more broad, especially you if you have different types of merchants and things like that. So it’s, how do you do that? How do you segment your optimization strategies across that portfolio?

So you have been immersed in this world for a long time. You are now focusing in on a very specific problem with non-sufficient funds. Can you just paint the picture for us a little bit about how big of a problem this is for the ecosystem?

Chanan Lavi: Generally speaking, I’d say that, start with issuer decline. So, issuer declines is currently the biggest decline out there, and I’m putting aside the declines that the merchants are doing themselves, they should see it as a problem as well. But this is a way to tackle it with their fraud engines, et cetera.

But everything that is out of their control, it should be around 99% of the declines come from the issuer, not from the PSP or the acquirer. They shouldn’t decline anything. When you look at the issuer declines, it’s definitely the number one decline reason. So with some merchant it could be around 50, 60%, so it would be maybe a little bit less, but definitely the biggest one, and I will say it’s the biggest one that is not tackled.

So yes, merchants can do all kinds of strategies, which we can go into, right, or rerouting, et cetera. But in essence, you can see it through the way that merchants are analyzing their declines. In many cases, they simply remove the NSF declines because they’re saying, Okay, there’s nothing much I can do with that. Let’s just analyze the real declines that we can do something with.

So it’s a big problem that needs a solution.

Drew Edmond: Yeah, absolutely. And I think it’s one of those decline reasons where there are some, I think, interesting factors that can affect it, right? It’s not just on the individual level. It’s macroeconomic cycles can impact how often people run into not having enough funds in their bank account or how they’re maybe managing, performing their cash management as individual consumers and where they need to move money to put food on the table the next day to pay rent. Those types of things. It’s so out of the hands of the merchant in so many cases that it’s a remarkable problem.

Chanan Lavi: going back to making some collaboration because they’re really kind of blind when, when they’re getting this decline as a surprise.

Drew Edmond: Yeah. And such a lack of transparency into the rest of whatever that consumer is using, right? All you’re getting is some signal that they don’t have money in this particular account right now. So I don’t want to bury the lead too much because I think the Kipp approach to solving this problem is incredibly creative.

And typically we actually don’t focus a lot of time talking about specific products on this particular podcast, but we’ve been kind of breaking the rule a bit lately because I think we’re just seeing some really unique businesses emerge in payments that are solving really hard problems. And it’s unique to the business itself which just requires us to talk about it.

So happy to do so, and I’m really excited to hear you give the explanation of the business. So can you just walk us through how Kipp works today?

Chanan Lavi: Sure. So I’ll start in high level, how we’re trying to solve it, and then I’ll go into the details, maybe elaborate a little about the transaction flow. In high level, we’re trying to fix a market failure that that exists today.

You have on one side the merchant that really wants these transactions. Like you said, he doesn’t know that what’s the situation of the card holder? One of the reasons he wants this transaction badly is that he has a very high margin to gain out of that transaction, could range between 20, 30% and up to 100%. So definitely paying another few percentages on top of what he pays to the acquirer. Not that they like to do that, but he’s willing to do that in order to change the result of the transaction.

On the other side, you have the issuer that knows what’s the situation of the card holder. He’s being compensated only around between 20, 30 basis points in Europe and up to 2, 3% maximum to cover his risk while he’s the only one that bears the risk. So I’m speaking about financial risks, so put aside chargebacks and fraud. Financially, once they authorize the transaction, they need to pay it out to the networks and to the merchant. So it creates this failure.

Like I said, the merchants want the transaction, they’re willing to chip in. There’s no way for them to do that. So that’s exactly what we try to change by allowing them, not changing how the interchange mechanism, et cetera, but we’re allowing them to collaborate kind of directly through us as a platform and influence the decision of the issuer, helping him actually giving better service to their customers.

The way it works is that the merchant doesn’t need to integrate with us. There’s no communication in real time. They just need to sign up and configure on our portal, on our platform, what their willingness to pay is in case we manage to authorize that transaction. The heavy lifting, if you’d like, technically is on the issuing side, so we need to be integrated with the issuer. We allow the issuer on one side new revenue opportunity from the merchant network. But in addition, we allow the issuer to make a decision on a transaction level, which is again, something new from an issuer perspective.

So maybe in a way similar to the way they think about fraud in this case as well. They make a decision on the fly, on a transaction level based on the risk characteristics associated with this transaction. They price it on our platform in real time and if the price they’re asking for is less than what the merchant is prepared to pay, then we would advise them to authorize the transaction.

We’re not a payment company, we’re not involved in the payment flow, in the settlement. We simply help facilitate this collaboration of the merchant paying a little bit extra and the issuer gaining more to authorize the transactions that could be authorized. Right?

Drew Edmond: The bank’s essentially saying, Hey, we know our customer. Maybe they’ve seen transactions from this particular merchant in the past. It’s underneath some transaction size threshold where they maybe wouldn’t be concerned about future repayment.

They know that their customer gets paid every two weeks and they know how much they get paid and it’s coming tomorrow or two days, three days from now, whatever it might be. And so they have some confidence level score and you help them understand that to say, Okay, these are the types of transactions that if they come through and they meet the commercials that they’ve set up on the platform, let’s push it through.

That way the merchant’s happy they made the sale even if they paid a tiny bit more. The issuing bank gets the interchange plus the customer experience is better. The customer’s happy because they get what they paid for. Everyone wins.

Chanan Lavi: Exactly.

Drew Edmond: Yeah, that’s great. I often differentiate a bit between subscription or recurring merchants and merchants that typically have more kind of one-off payments.

It seems like this should work for either, is that true?

Chanan Lavi: Sure. It works for either. First of all, I think there’s a difference in, one, the willingness to pay. So on one side, for recurring merchants, they are willing to pay even much more because they want to win this specific transaction without reaching out to the customer, asking them for a different payment method, and maintain the lifetime value. So when they’re looking at this single transaction, it’s not just a single transaction.

On the other hand, for recurring payments, they have other, strategies today that they can utilize like retrying a couple of transactions, a couple of times for every transaction. And what we’re doing with these merchants, and we have very good analytics done by the merchants, is that they compare the performance with us to the performance just by retry.

So, it may be cannibalizing some of their success rate with the retries, but in essence, we always outperform by at least 30% over what they do from the retry, which makes sense, right? Because we’re creating a new area of approval by the issuer. So the issuer suddenly creates more funds for the cardholder, and therefore more transaction will go through.

Drew Edmond: That makes sense. Especially with kind of the retry logic on the recurring side, it’s like everyone’s battling to get to that 3:00 AM when Bank of America releases these funds from the direct deposit that this customer received, and everyone’s trying to get there at the right time to get their funds out.

Chanan Lavi: So in this case, you can pay to be first in a way.

Drew Edmond: Exactly. Exactly. So you mentioned the implementation effort. We both come from merchant backgrounds. You know and I know that anytime that you’re talking with a potential new vendor, a new solution, part of that question is, What’s the effort involved?

If I’m talking to Kipp and I want to get set up, what are those steps in terms of setting that threshold, what do you see them ultimately doing on the backend from a maybe an operational standpoint of, All right, we’re inserting this new capability into our stack. The upfront effort sounds like it’s light, but we also want to maybe adjust our retry logic or make sure that our reporting is tracking our success rates on these particular decline reason codes, et cetera. So maybe just expand a little bit more on what merchants end up doing to make sure that they are seeing the benefit that you can provide.

Chanan Lavi: So maybe like you said, because I came from the merchant side and the acquiring, we wanted to avoid the integration on that side. Not that the issuer side is easier. We’ll speak about that as well, maybe later.

Really from a merchant perspective, like I said, it’s zero integration. Typically they don’t need to involve the product side, even though sometimes they do want, because maybe they want, like you said, maybe to put some analytics and reconciliation, et cetera. But from an integration perspective, no influence. No influence on the way they route transactions.

It’s simply really signing a contract, providing their merchant IDs so we can identify the transaction when it comes in from the issuer, and setting up, configuring their preferences on our control center, the portal where they put their rules, basically what is their willingness to pay. Definitely, like any merchant, they would want to analyze the transactions.

One, they want to see the uplift in approval rates. So they would want to look on a BIN level on a, they would know we update the merchants which bins we are live with. It’s a network place. So the issuers that we have live in the network, they would know what are these issuers, what their BINs are, and then they can analyze the approval rate and expect to see an uplift in the approval rate, or at least to look at the reduction in the decline rate when it comes to insufficient funds. So this is basically the effort that they would want to do, but which they do anyway. And this is part of the optimization play,

Drew Edmond: Yeah, makes sense. And so let’s talk about the banks then, because obviously that’s a major part of your platform is expanding the number of banks that you work with. Let us know what it’s like to integrate with banks and I think there’s probably things that you’ve learned having worked more closely with them about how they just think about the approval rate problem in the first place.

But how do they manage it? Is it something where they are, Okay, now that we have this integrated, we have a product manager that has some responsibility over ensuring that our commercials are set at the right level, our risk isn’t getting out of hand, that type of thing.

Chanan Lavi: So first of all, I’d say that the integration makes it pretty simple for them to manage it because they manage their models on our platform. So an integration is really just, it’s an API integration where they share data on the transaction parameters that, one, can identify where the transaction belongs to, who the merchant is.

And second is really identify the profiling of the cardholder. Now, we don’t hold any PII data or PCI data, but it’s, like I said, it’s a profile of this transaction, so we know that this transaction belongs to a customer with this and this credit score, or this amount of overdraft created or any parameter basically that the issuer wants to manage.

And then they manage their preferences and the risk on our platforms. So it’s not much that they need to do on their end. It’s really just the integration piece, which is, again, it always requires effort on the issuer side as long as the issuer is doing that directly. Today, that we’re integrated also with processors, specifically with FIS in the US, that allows really issuers that want to join through issuers that are using FIS as their processor, allows them even to join without any technical effort.

So it’s really just creating this program to make sure that they know how to support it, that they present it as they should to the customers. If it’s a debit card, present to them the overdraft and make sure that they’re covered in terms of the terms and conditions, et cetera. Doing the analytics, making sure that the rules that we advise them or that they want to choose on our platform, they put that in place the way really that meets their risk, reward appetite. But that’s pretty much most of the effort.

Drew Edmond: Got it. You started to touch on kind of the consumer experience there, so I’d love to learn more about that. I think as consumers, we’ve all grown up with the notion of overdraft, so that’s not like a foreign concept to most consumers. But it’s also had some negative connotations, I would say, over the years with how banks maybe have applied fees to overdrafts and maybe just a lack of transparency about when it’s being used, in which order transactions are being processed, when fees are applied, those types of things.

So what is the consumer experience here? Are there changes to what I see on my statement? Does it change my available funds limit? Like how does it kind of work in practice for the consumer?

Chanan Lavi: So to be honest, there shouldn’t be much changes, but I’ll explain a little bit more into detail. I think we need to separate between credit cards and debit cards and I’m speaking out specifically about the US.

With debit card, yes, it creates an overdraft. And now the negativity that you’re speaking about in overdraft is typically when there’s an overdraft fee, overdraft fee is around $30, right? So consumers don’t like it, and in many cases, for that reason, they’re not opted in. And we’re seeing that trend in the market where some neobank challenger banks are either removing these fees and not charging them, or even giving free overdraft to their customers and that is something that suddenly is being taken very positively.

And our product, in a way, that’s the direction that it pushes the banks, or even I would say enabling the banks to give away free overdraft, which is a good customer experience without charging them anything, put aside our regulation for a second, just because it’s a good experience for the card holders, but still they can mitigate the risk by being compensated by the merchant.

In terms of regulation, it really creates a huge new opportunity both for the banks and for the cardholders because once there’s no fees attached, being taken from the consumers, the consumers don’t need to opt in. Maybe some of the issuers may still want to ask whether they want to opt out. But from a regulatory perspective, the consumer doesn’t need to be opted in as long as the issuer doesn’t charge them any fees for this overdraft. They just need to make sure that they are covered from the consumer to repay that negative balance. But besides that, there’s no need from a regulatory perspective.

With the credit card. I’ll just add, it’s simply like any other shadow limit that exists today in the market. Maybe not all issuers, but many issuers already do that. They set the limit. They tell you that your limit is $5,000 and still they may authorize transactions up to $5,500. So they’re using our platform to increase that a little bit, again, managing the risk, making sure that they only do that for consumers that can afford it, and being compensated not by the consumer, but by the merchants.

Drew Edmond: Yeah, I mean, it sounds like a win for them. They get to kind of recoup those overdraft fees that they, like you said, have gotten rid of or reduced, or I’m sure many customers have opted out, and now they can see that revenue stream and have a better customer experience overall.

Chanan Lavi: Exactly. So it’s also the top of wallet that they’re concerned about. One the revenue, less declines and maintain top of wallet, which is a big thing for the issuers.

Drew Edmond: Yeah, certainly. Speaking of top of wallet, it used to be that we’d do our Bootcamps and we’d ask around and ask people how many debit cards they had and it was like everyone had one card. They had one checking account, they had one debit card associated with it because they got it from their bank when they signed up for a checking account, which is still true. You’re still getting that particular card.

But now there seems to be a kind of a proliferation, right, of other debit cards that are linked to not necessarily even bank accounts, right? It could be just like a Venmo account or a Cash App account, kind of those more neobank style accounts, Apple Cash card, maybe you have one because you’re using Robinhood. A lot of different places where you can get a debit card.

So I think this certainly has many implications across the payments ecosystem. One of which I would say is that balances, your total cash is now being spread across these different accounts and cards. For some customers, not for everyone, but there’s a increasing percentage of folks that might be just managing their cash differently now.

What are the implications, of this fragmentation? I would posit that it almost makes your solution even more important, because there’s going to be lower balances, especially in certain demographic profiles of different consumers out there that. Merchants might say, Oh man, I’m actually running into non-sufficient funds more often now, and as a result, I need something like Kipp to help me mitigate this problem.

Chanan Lavi: So first of all, we totally, from the issuer side, we totally feel that this supports us. Saying it’s not Kipp, it’s just the lack of information. Right. If everyone had, in a utopic world, everyone had all the information in the world and you would know, as a neobank, you know exactly what’s the situation of the cardholder. You wouldn’t need anything, you would know exactly in what transactions to authorize.

The problem is that the more fragmented it becomes and the more cards a consumer has in his wallet, the less the issuers know when to authorize, and that’s why they become even more conservative and therefore there’s more declines and everyone suffers from it.

So at least by allowing them, one, to manage it on a more detailed level to begin with on a merchant level, which is something they don’t look at today, and then be compensated based on the risk. They learn a lot from this. We learn a lot from that and know how to improve ourselves and improve the models and actually better authorize in a lower cost.

Eventually it allows the issuers really to authorize more and also for the consumers to get better experience.

Drew Edmond: Yeah. So one thing I’m, I’m always curious about, when talking to someone that’s grown a business and continues to grow a business, especially in the world of payments, where two-sided marketplace, multiple parties, two-sided marketplace. So like where do you even start? Do you go talk to merchants first and say, Hey, like we have this idea.

Is this something you would be interested in? Go to the banks and say, Hey, we’ve talked to a bunch of merchants. They would like this. What do you think about, joining our platform and, being a part of it? Like, I’m sure that’s, that’s always a struggle when you’re, building this two-sided world.

Chanan Lavi: First of all, yeah, totally. We are a real chicken and egg. We’re building something similar to Visa and Mastercard, so definitely a challenge still, even though we’re getting now closer to the scale point. But at the beginning, what we did is, I can say that we had to test more on the issuer side because on the merchant side it was pretty clear to us that the merchants would want that.

I knew it myself as someone that was working for a merchant and acquirer, but still had very good relationships with merchants that said that they would want it. We had to maintain these relationships. None of them would say, We’re signing before there’s an issuer. So that’s always the challenge, but at least I knew that we have several merchants that are waiting for this issuer to go live.

Then we had to go and test the water with the issuers. We learned that really issuers are keen to such a solution for all the reasons that we spoke of, the top of wallet, reducing decline, even avoiding calls through their call center, avoiding the decline fees that they’re paying to Visa and Mastercard. So there’s many reasons why they really wanted it and got excited about it, but still they didn’t want to be first as well. So what helped us a lot is bringing them together.

What we did is we brought very large merchants to a open conversation, sometimes we were attending, sometimes without, for them to speak one with each other, for them to hear from the merchant that he’s really prepared to pay more because what they hear all the time is that the merchants are complaining about the interchange.

So it was kind of odd for them. So it created trust for them to hear that, yes, merchants are willing to pay a lot more if you would really approve more and vice versa. So the merchants had to hear it from the issuers. That is really, I think, was the key point in getting started. To be honest, we’re still using these tactics and I think it’s important for both sides.

So merchants like to speak with issuers, everyone’s speaking about issuer outreach and doing these collaborations, and we’re learning a lot from that as well. So, trying to learn all the time what other things we could do for merchants and issuers around this area of collaborating.

Drew Edmond: On this podcast and especially in this kind of payments optimization series, we’ve been talking a lot about merchant issuer communication, data sharing, collaboration, the various ways of interacting between the two sides because, frankly, I think there is still kind of a wall between the two sides and my hope is that that wall continues to break down in a lot of ways because I think that the overall issue of declines won’t be solved in a vacuum on either side, right. This has to be solved through collaboration across the ecosystem, including the networks, including PSPs, merchants, everybody involved.

When it comes to enhanced data sharing to improve approval rates, NSF is less of a data sharing problem, right? The data is mostly clear in that there’s no money available right now at this moment in time. So how do the issuers then make that decision to approve? I know you, how closely do you work with them on setting the model for risk exposure and transaction limits and which premium makes sense for them? Is it really on them to form that model? Or is it informed by discussions with the Kipp team?

Chanan Lavi: Yeah, so I’ll just start by saying that our vision is across the board creating collaboration between merchants and issuers, including data sharing. Our platform, by the way, supports that. So we do have a merchant API that knows how to share data. We’re simply today focused on the insufficient funds because it does not require integration on the merchant side and helps scale.

It’s really very limited, but I like to see the fact that the merchant is communicating with us how much he’s willing to pay as a piece of data. Yes, it’s not the data that really supports the issue in his decision, but it is, in essence, right. That’s the reason that he got into this place, because now he knows that the merchant is prepared to pay more. The actual decision is really related.

Now going back to insufficient funds is really related to the assessment of what is the probability of a default at the end, what is the risk? The issuer wants to approve transactions for the consumers that can afford it, and they’re trying to assess that. So we’re supporting them with their own data, but simply analyzing it in a different way.

So today, if a consumer has, let’s say in a credit card, $5,000 limit, right? It doesn’t matter what he purchases, what type of product, what type of merchant, any other aspects don’t really matter. As long as he doesn’t meet that $5,000, it will be approved. If he goes beyond, in most cases it will be declined, right? Here we’re allowing them actually to make another decision, but on a transaction level.

Typically would use parameters like credit score, affordability score, or any other scoring that the issuer manages on the card holder. It could be age of account, right? How long is this customer with the bank? How much this is over the limit, how much in percentage? There could be many, many different parameters that the issuer would want to share with us and any parameter that they share with us, they can control for our portal and the rule management tool.

Drew Edmond: Got it. And you touched on something earlier saying, right now obviously you’re focusing on the NSF piece of this puzzle, but you’re already in the banks now, right? Like you’re already in whatever banks you’re in integrated with. You have these relationships with merchants. You’ve got to be looking to the future and saying, what other declines can we help solve for?

Now all of a sudden, if we can, like you said, collect more data from the merchant or even get that from a third party to enhance it or whatever triangulation you can do to just provide more information to let the bank make a better decision about that, combined with the fact that we know that merchants are willing to pay a little bit more to push transactions through that are failing.

Chanan Lavi: And by the way, it could be the opposite as well in some cases. Maybe if the data that the merchant shares is so valuable, maybe the issuer would be willing to pay a little bit to the merchant. Think about SKU level data, for example, which issuers really want.

Drew Edmond: Yeah, because I think about things like a trusted MID right? Pros and cons, and we don’t have to go super deep into trusted MIDs, but I think the concept behind it ultimately is the same in that the merchant is saying, I’ll take the liability for transactions that you push through that end up being fraudulent.

Is that any different than saying, I’ll pay more for these transactions to go through? That’s fundamentally, at the core, the same psychology for the merchant.

Chanan Lavi: I mean, I think both sides want more, right? The merchants, as you’re saying, they’re willing to do a lot more, right. Splitting into different MIDs, sharing more data like they’re doing today with Capital One that is allowing merchants to share more data. Everyone wants it, but the challenge is that they don’t have really a centralized platform that really allows to do that, right?

You can argue that it should have been through a Visa and Mastercard, maybe. I don’t know. They do allow some sort of data sharing today, but not an all transaction, it really depends. At the end, yes, we do see ourselves playing in that field.

By the way, our integration with the issuer supports already the data sharing. When we’re doing an integration with an issuer, it already puts us in a way that tomorrow we could support him with other decline codes. What we need to do is really to collect the data. Collecting data in real time from merchant is more powerful than trusted MID. I think trusted MID is a great way to improve, to optimize your payments, as long as you really support that split into trusted MID, and you need the issuer to trust you really on what you put in the trusted MID.

By sharing data, it creates probably more value, right? The issuer can gain from that data. Maybe if he has very good models by the combined data, he can even get to better performance. So there’s probably more that you can do from a vision perspective. I think sharing data in real time, again, both sides from merchant to issuer and maybe the other way around. Everyone can value from that.

Again, the problem is the chicken and egg probably. How do you get to a critical mass that really everyone wants to join and puts this on their roadmap to start being part of it. But I would say you need to start somewhere. So calling all merchants.

Drew Edmond: Yeah. One thing that comes up a lot when I talk to folks in the industry about, you mentioned the Capital One data sharing API, American Express has their enhanced authorization. We have these channels where folks are able to share more data with specific players, specific issuers to hopefully lead to those better approval rates.

But what I do hear is, we have a lot of banks in the US, right? We’ve got thousands of them. And many of them don’t have many resources. Let’s say we were able to turn on the pipe and start sending tons of data about all these consumers and consumer behavior to all these. Banks would be like, We can’t even do anything with this. We don’t have the resources, we don’t have the model, we don’t know how to model, outsource the model to the issuer processor. Like, We don’t know what to do with this data.

You’re already kind of playing a bit of that role today with your bank partners in that you’re helping inform them or working with that data to help them make decisions about transactions. What’s your perspective on bank capacity to handle more data, where Kipp fits in, how we can solve this particular problem? Because I think it’s a bit of a bottleneck issue that’s going to stop us from the acceleration of solving this issue.

Chanan Lavi: You’re touching upon exactly the way we’re looking at it. Capital One had to do a lot in order to get this data through an API. So it’s not only API that they expose, which is one thing to develop that, like you’re saying, not every bank would develop that by itself, but they had to do a lot of business development to go after the merchants.

And, suddenly from an issuer, they’re playing a merchant play. They go to conferences of merchants, meeting merchants, convincing them to share data. And then they need to model it, right? So today they model on every, I wouldn’t say maybe on a merchant level, but definitely on a provider of a merchant, they need to model it separately. So they really have also a team that models that.

Now, it doesn’t make sense for every issuer in the United States and globally to have such a team in place. And for that reason, the way we’ve built it, the way we looked at it, is that we’re creating the box that Capital One created in one place and the issuer integrates with us through an API. He doesn’t need to do the analytics and the modeling. So the model works on our platform. It takes the data from both sides. So we get more data from the issuer. We analyze the data combined and we come back with a response.

So meaning we doing kind of a normalization of the scores, for example, that we get from the merchants. So we don’t need to do it every timeframe. We do it once for every merchant, just like Cap One does, but then we do it once for all the issuers. So they gain from the network.

It’s like the reason why don’t every issuer issue their own network? Why do they use Visa and Mastercard and Discover, right. So the same way, I think there needs to be a centralized platform that really puts minimum effort on the issuer. It could be even minimized more if it’s through their processor. But even if you go down to the issuer level, just connecting to an API is much less than really the modeling and creating merchant relationship, et cetera.

Drew Edmond: And how do you see things like 3DS data only fitting in? Is this something where it’s like completely separate, you don’t even look at it? Is it something like in the future, maybe that’s part of the data stream that you would consume to help your issuers make decisions or help them make decisions on other types of transactions?

How do you see that particular tool?

Chanan Lavi: So today, we’re not playing in that because we’re not part of the transaction flow. I think that it goes back to what I just said before. I think it depends on the issuer, whether the issuer knows what to do with that. So if this is a small issuer and does nothing with the data, it doesn’t really help him to get that data.

I think from a merchant perspective, yes, merchant need to do, that’s the play of optimization. And any stores that you can play with, don’t look for a solution that would solve all your problems, right? So if you can do both, share data through a data only, integrate with Cap One and then integrate with platforms that can give you a solution to other issuers as well. I think you should do all, all in all.

Drew Edmond: Yeah. That makes sense. As you well know, there’s no silver bullet.

Chanan Lavi: Exactly.

Drew Edmond: It’s like a constantly evolving set of tools that you have to try to play with and see what works for your business.

Chanan Lavi: I think that’s optimization. Yeah.

Drew Edmond: That’s it. So you talked about earlier in the conversation the partnership with FIS. Congratulations on that. That’s obviously a big deal. And, when I saw that come out, I was like, Oh man, I love this because of just like the distribution angle, right? Like you said, when you’re doing chicken and egg, when you’re doing two sided marketplaces, if you can find some sort of distribution partner that touches all these different, if it’s either on the merchant side or the bank side, it’s a win for you. So that makes a lot of sense.

What does this unlock for you? How does it work in terms of how you fit into the FIS stack and how banks can take advantage of using it as a result?

Chanan Lavi: So definitely, it really, really helps us. Now it is strategic for us. It allows us to start scaling on the issuer side. And I will say, generally in this chicken and egg challenge, it’s clear to us who the chicken is. The chicken, no offense, is the issuer because, merchants, we have a long list of merchants that are saying we’re in, right now. If you don’t have an issuer in the region that I’m playing in, get the issuer, we’re on board.

And we know it’s true. They don’t need to do much. All they need to do is just sign up and start providing their merchant IDs and they’re live. So the fact that now FIS is giving us this trust and pushing this to the market very, very strongly to all their issuers, allowing the issuers to really, they minimize the effort on the issuer to really, really almost nothing.

The only thing they need to do is accept now the model and because they are the ones eventually that take the liability. So financially they still take liability. So they need to make the decision that they go live. But really, they’re pushing it through very strongly to all their issuers, which will really allow us to unlock it on the merchant side as well.

Drew Edmond: Yeah. I can imagine. Obviously since nothing’s been released, I don’t know how much you can talk about it, but the merchant side as well, there are also distribution partners on the merchant side. Right. I would love it if I was back in my merchant world and it was like, Oh, I used Worldpay or Stripe or Adyen or whoever and there’s just a nice little portal in there that I can just plug in my, what I’m willing to pay for these. And I can watch it in my analytics dashboard right there in my PSP’s dashboard to say like, This is the impact that this tool had on there.

I think that’s maybe a future world that would be beautiful.

Chanan Lavi: So, first of all, totally agree. That part of our go to market is, really going both direct after, definitely the tier one, the top tier merchants. Some of them are already clients of ours, but we’re already partnered with some of the acquirers and continuing to partner with the acquirers.

At the end, the acquirers can use it both as something just to present it, like you’re saying, a data plate to present it to their customers. In the vision moving forward, it could be for data sharing as well. But also some of the acquirers can use it as an edge to create, to maybe pay on behalf of their merchants and showing that they have better approval rate to their merchants.

So that’s another angle that they can play with and we’re having these discussions with some of the acquirers.

Drew Edmond: Love that. Love that. Great. So as we wrap up here, I think if we look beyond Kipp, you’re immersed in the payments world. You’ve been doing it for a while now. Like I said, we’re doing this whole series on optimization.

We’re trying to hit it from every angle, to try to really understand where we are as an industry on resolving these pain points for all the parties involved.

Beyond the Kipp work, what else do you see out there? There’s a lot going on with tokenization and passkeys and biometrics. We talked a little bit about 3DS data only, PSP, merchant issuer relationships. Where do you see some of the interesting things that are evolving in the space?

Chanan Lavi: I see my expertise as collaboration between issuer and merchants. And definitely this is evolving and we’re seeing more and more in that space. I think data sharing, that would be held in very specific areas like what we mentioned, Capital One and Amex. That could be an area.

But I’ll say a general thing. I think today, payment managers, if you sit with a payment manager of any merchant, they would know better than me. They hear more from the market. I will just say again that I think a payment manager at a merchant should try to do as many optimization projects as he could. You cannot, like we said before, there isn’t one silver bullet that solves all your problems. You need to really test the waters with all these different solutions. Eventually, maybe all of them will mature. At least some of them will really, really create a big value for you. Definitely, if there’s no big effort to implement them, then I would do that.

Drew Edmond: Absolutely. Great. Chanan, this has been a fantastic conversation. I wish you the best of luck because, well, one I want you to be happy, but I want the whole industry to be happy and I want this problem to be solved. And you’re doing it. And I appreciate that. thank you for joining me on the episode. I really appreciate it.

Chanan Lavi: Thank you so much. Was great.

Drew Edmond: All right, take care. And to all of you listening, thanks for joining us. Until next time, keep up the good work. Goodbye for now.