Turns out, phones are quite good payment platforms. This poses a challenge for traditional consumer payments. Debit cards, credit cards, and other legacy payment methods are making way for Apple Pay, BNPL, QR code payments, Venmo, and Zelle — and that’s just in the U.S. Outside the U.S., super apps are beating Visa and Mastercard to the punch. China is a prime example, where WeChat and AliPay process more USD equivalent volume collectively than Visa.
Payments industry, interrupted
Traditionally, Visa and Mastercard served a useful function for merchants by aggregating a large number of different consumer experiences (e.g. credit card, charge card, debit card) into one simple data and money stream. But the bounds of payment processes are expanding and demanding new solutions in terms of payment organization and orchestration. This poses a challenge for merchants, who now have to incorporate a myriad of different contracts, chargeback rules, reconciliations, and timing considerations into their payment processes. Essentially, merchants went from managing a single contract to 20 contracts, and that’s before they ever expanded their commerce into global markets, which many of them are.
The payments industry hasn’t been asleep at the wheel, though. First, we saw the unbundling that gave us the alphabet soup of MSP, PSP, PayFac, ISO, etc. This, in turn, gave way to re-bundling, as these services were aggregated into a single vendor for online and offline transactions.
Such payment gateways became known as acquirer-aggregators. They created an evolution which is now fronted by the popular Stripe (SMB-focused / US-heavy) and Adyen (enterprise-focused / Europe-heavy). The benefit of these solutions, as Rohit Sharma writes in Monetary Musings, is that “merchants have one best in class provider that works seamlessly across all their use cases. One provider to interface with, one provider to negotiate with, one provider to get reporting from.”
Payment aggregation, but at what cost?
There are, however, downsides to a future dominated by the acquirer-aggregator payment gateway. Consolidation and streamlining are great, but they often sacrifice technical flexibility. We think this will spur a new payment orchestration and optimization solutions and products.
What if your payment gateway doesn’t support a certain payment solution? What if the gateway is limited to certain geographical locations? What if you can negotiate better pricing directly for certain transactions, volumes, or geographies? What if your business has complex transaction rules or parameters, or necessitates data attached to the transaction, that the payment gateway does not support?
The convenience and universality of a single payment gateway comes at the cost of flexibility many enterprises need to meet their customer or reporting needs. Our conversations with some of the largest companies in the world show customers increasingly wrestling with these questions.
The Next Wave of Payment Orchestration and Optimization
We think this next generation of players will have these distinct characteristics as enterprise customers demand that vendors are capable of meeting their business needs:
- Unlimited integration flexibility: Vendors will need to have architecture that can react to a wide range of payment complexity without meaningful engineering with each iteration. The value in these new solutions will lie in their ability to reduce the complexity of engineering to business integrations. Customers are increasingly demanding the ability to integrate multiple acquirers to maximize approval rates. While players like Adyen have world-class APIs, what happens when a customer’s systems can’t handle APIs? Even if a customer can handle APIs, what happens if Adyen or Stripe’s risk management system isn’t tuned for specific geographies or industry types? As more old-world businesses modernize, these challenges are increasingly the reality in the enterprise space.
- Unlimited payment flexibility: Simplicity is the primary objective of modern payment technology. Acquirers – like Ayden – have evolved to aggregate many systems globally. But as new payment types explode, enterprises need the flexibility to integrate payment types that don’t go through an acquirer (e.g. QR codes, Affirm) as well as bi-directional payment types. It used to be that outbound payments were just checks, but today they come in many different forms with many different types, especially as you move across industries.
- Vertical focus: To deliver unlimited flexibility, vendors need to understand the industries they serve and their specific demands. While a horizontal solution is aspirational, our belief is that vertical vendors will have the edge on delivering the experience enterprise customers need. Vertical focus will allow for standard system and software integration. We are already seeing the emergence of vertically-focused players in e-commerce, marketplaces, financial services, and insurance.
- Flat fee payment models: The transactional fee is a cornerstone of the traditional merchant acquiring model and success of payment gateways thus far. This has multiple benefits, including alignment and transparency. The opportunity for this new generation is to position themselves as technology vendors sitting at the integration level, accessing new budgets and mitigating the risk of double-fee layering as enterprises may continue to work with transactional fee payment vendors.
So, who’s making noise?
It’s becoming clear that the “true democratization” of payments is no longer a discussion point but an inevitability. This will be achieved by optimization and orchestration solutions which offer new levels of flexibility and integration based on businesses varying needs.
No doubt, the frontline of this trend is being fought in e-commerce. Intuitively, this makes sense since e-commerce has the most sophistication in transacting online relative to other industries, frequently combined with a brutal conversion or margin structure that forces fierce competition on marginal innovation. Venture funding supports this insight: Primer out of the UK has raised over $75M, and Gr4vy and Pagos in the US have raised over $25M and $10M, respectively. While quite early, investors are speaking with their wallet.
Other verticals are more nascent, with Apexx Global doing well in travel, and Imburse landing early customers in insurance. This is probably a reflection of the evolution of the trend, and that players will emerge across a broader set of industries, you could see specialists in healthcare, real estate, or logistics in the future. While it would be nice for a single vendor could serve these industries, it is likely that the integration needs and payment habits vary widely enough to require verticalization.
Predictions for the world of payments
Our suspicion is that we will see these orchestration and optimization models demonstrate initial stronger growth outside the U.S., where fragmentation around payments is greater than in the U.S. We also suspect that the long-standing Visa and Mastercard reign may finally be seeing cracks. In terms of market share, consumer choice is becoming priority one and merchants are equipped to address the consumer where they want to be. The future of payments orchestration and organization is going to be increasingly focused on the outcome for the consumer, rather than trying to compact every payment process possible.
