This is Part 1 of a two part webinar recap on ‘Turning Payments Complexity Into a Competitive Advantage’. As #paymentsgeeks, we know how complex payments can be and how that complexity is continuing to grow. In a recent webinar, Modo execs, Brian Billingsley and Lynn Holland, walked through how to explain growing payments complexity to stakeholders in your company. Part 1 of the webinar recap lays out the payments ecosystem and gives a history of payments complexity.
As your company grows and scales, there is a need to grow your payments operations right along with it. This growth dramatically increases complexity with each new integration. While #paymentsgeeks see this complexity first hand, sometimes the need to optimize payments can be difficult to explain to the broader organization - especially when it’s a newer movement to optimize payments. We want to arm you with the tools you need to explain payments complexity throughout your organization, and to turn that complexity into a competitive advantage.
How Payments Used to Be
In the Distant Past: The “Simple” Payments World for Enterprises
“Businesses didn’t set out to become payments companies.” - Lynn Holland
Let’s start in the very beginning.
Back in the day, merchants took checks and cash at a cash register or over the phone, and the world was a simple place. In most cases, your bank was your only third party payments provider, and they provided card acquiring, merchant banking, treasury, cash management, inventory financing and capital financing services. There were no PCI or regulatory pressures. The concept of cards was novel, but merchants saw that if they accepted credit cards they could increase sales, so they did. Everyone was happy with that for a while because the value in increased sales and revenue offset the cost of accepting credit cards. Unfortunately, it didn’t stay that way for long.
Mounting Payments Complexity
In the Past Decade: The “Not So Simple” Payments World for Enterprises
The merchant payments ecosystem changed significantly with the addition of credit cards, but really took a dramatic turn with the advent of the internet.
The three major things that began to change:
- New channel: Merchants had more ways to interact with the customer because of the Internet. As consumers started embracing the internet, it became a commerce channel very quickly.
- New services/products: Once a digital connection was made, companies began to look into credit offerings, private label prepaid solutions, electronic checks, etc.
- More complexity in the back office: Merchants started dealing with more third parties, like processors and payment methods, in addition to their banking relationship.
The third change caused a surge of new third party providers in the payment mix. As your bank provided less of your payments stack and focused on banking services, third parties supplying processing, acquiring, instant financing, ecommerce platforms, and alternative payment methods were born. These third parties became deeply integrated into your core customer facing platforms and back office systems.
Even with the growing complexity and a slower time to market, there was still enough value brought to the equation in incremental sales and revenue than the associated costs.
Today’s Complex Payments World
Today: The Complex Payments World for Enterprises
Today’s payments world has introduced even more complexity into the equation. There are more payment types, evolved smart devices, new technologies like the Internet of Things, and an increased number of third party relationships. Banking relationships have also become more complex. Banks are dealing with different currencies and more complex back-office links into merchant CRMs, loyalty, ERP, treasury operations, etc.
Additionally, the internet enables different types of fraud that had never been seen before in the industry. Data breaches and security compromises are a top concern and new technology, rules, and regulations regarding data security - EMV, contactless payments, the Durbin Amendment, GDPR, PCI, and point-to-point encryption - have formed. The impact of a security breach on a brand is substantial. Although these measures are required to keep customer data secure, they still contribute a tremendous amount of complexity for merchants.
There is an ever-increasing number of third party payment partners. Globalization has meant more banking relationships, an increased number of currencies to deal with, along with new acquirers, processors, PSP gateways, and PayFacs. Additionally, none of the traditional payment types go away as the new arrive, so you add digital wallets, market specific payment methods, peer-to-peer methods, immediate payments, instant financing, and more to your list of needed integrations. Fraud prevention, credit scoring companies, alternative payment providers become necessary.
Each third party you integrate into your core becomes more deeply integrated into your system and demands changes to your customer journey and back office processes. Because of these deep integrations, changing a third party becomes harder, which in turn lessens your position in negotiating with providers.
What was once a mutually beneficial payments relationship now becomes a battle to increase sales in order to offset the expenses associated with this complexity.
The Current Payments Ecosystem
The Complex Payments Ecosystem
Now that we’ve walked through the reasons behind the growth of the payments landscape, let’s meet the players.
There are a lot of third parties involved in payments. And we mean A LOT. The first thing to think about when looking at the payments ecosystem is the breadth and the complexity that comes with the number of providers and the products and services that are required for your payments business.
The sections on the left side of the ‘Payments Ecosystem' chart (payments hub, switches, and gateways) are focused on securely managing initiation and processing payments. On the right hand side, you have ever-evolving companies that touch the entire ecosystem - companies addressing fraud and compliance - that are looking to manage risk and comply with the regulatory environment. In the middle are the partners that offer payment products, processing, and financial services that businesses need to offer. These are payment service providers, acquirers, payfacs, and payment methods.
PSP vs Processor vs Acquirer vs PayFac
The lines between processors, PSPs, Acquirers and PayFacs have continued to blur, but for now we wanted to arm you with some important distinctions.
Payment Service Providers (PSPs) evolved from the explosion in digital commerce. Many of the traditional providers and processors struggled to innovate fast enough and PSPs quickly filled the void. They continued to evolve and move into other areas - driven by the need for high-speed innovation in the digital world. PSPs found that not only could they start offering alternative payment methods (APMs) ahead of the larger processors and some of the acquirers, but they found out that in order to do so, they needed to offer collecting services. They started to acquire banking licenses and bank sponsorships that allowed them to hold and move money and bring that same level of capability to APMs that the traditional acquiring processors were bringing to cards. When merchants began searching for optionality on their acquiring services, PSPs started to work with banks to provide BIN sponsorship in order to do card settlement and became an underwriter of risk which allowed them to manage the entire merchant payment relationship.
Acquirers and PayFacs both underwrite the risk as well as hold and move funds for their customers. The PayFac typically requires a bank sponsorship to deliver these services while an acquirer most likely has their own banking license. Many PayFacs provide APM and collection services on top of traditional cards, which distinguishes them from traditional processors and acquirers who do not offer those services.
Hub, Switches, & Gateways
These terms are thrown around a lot in the industry - many times interchangeably.
A payment gateway is usually the core technology of a PSP or processor’s offering in the digital world. They have a gateway, they have a network of connected payment services, and they have a way to bring a merchant on board and process those transactions. Payment gateways are traditionally remote-services accessed through a network. They are not software running on-premise.
A payments switch is similar to a payments gateway, but they may have a different model on how they’re deployed. Sometimes a company may have their own switch running in their own datacenter. Payment switches typically have support for more channels - broad support for the physical face-to-face commerce as well as the digital side. They also offer the accompanying encryption and security services you might need.
A payment hub is similar to a switch, but they have typically been more focused on payment scheme messaging and routing transformation capabilities. We have found that hubs have specialized in things like SWIFT messaging, wire transfers, real-time gross settlement systems, and other systems serving the corporate, wholesale payment world instead of consumer and retail payments.
Explaining Payments Complexity
As you can see, the introduction of new channels brought the need for an increased number of third party payment providers. The increased number of third party providers in turn increased the complexity of payment operations. Today, most companies have multiple third party payment providers that are all deeply integrated into their core business systems. We see this as a weakness of many enterprise payments stacks. Part 2 of this two part webinar recap article will dive deeper into what your company can do to manage payments complexity to your advantage by employing a Payments Orchestration Platform.
Watch the Full Webinar
If you have any additional questions about Modo’s enterprise payments orchestration platform, we’d be happy to answer them. Reach out to us at www.modopayments.com/contact!