Originally published in The Paypers
Bruce Parker, Modo, explains why gateways and switches fall short of working with “unhappy” payments and how merchants must change their tactics when going global
By Bruce Parker, CEO of Modo
As the number of digital payments continues to rise, there isn’t much disagreement that merchants need to be connected to as many digital payment methods as they can. Add a global market into the mix and the number of endpoints grows tremendously as do the complexities in between the connections. Those complexities mean that merchants have to know how to accept a variety of currencies and support a variety of methods to send or receive funds from traditional Visa or Mastercard to digital wallets like PayPal or Alipay, from technologies like Klarna to Brazil’s cash-to-digital workaround, Boleto.
Okay, so merchants should jump in and just get to integrating, right?! I like your enthusiasm, but no. The integration assumption means many merchants are getting off track before they even start thinking about specific currencies and payment methods.
Integration is often seen as the only solution to connecting between the myriad payment options in today’s global economy. Merchants believe that a payment gateway or switch will provide the one stop shop they need to connect to all global customers. However, integrations take a lot of time and money, and don’t support merchants through the entire payments lifecycle; neither do traditional gateways or switches. What’s really needed is interoperability between payment systems.
In the (somewhat edited) words of Tolstoy, “All happy payments are happy in the same way, but all unhappy payments are unhappy in different ways.” Merchants need solutions that address not only how to manage payments when everything goes right, but also highly automated ways to deal with payments where something goes wrong. Here’s why gateways and switches fall short of working with those unhappy payments – and how merchants must change their tactics if they wish to go global.
Enabling customers to pay with different types of cards is easy: no matter the card, it has 16 digits, an expiration date, and a CVV code on the back. Merchants are used to collecting the name and address info along with this card data.
However, for the customer who wants to use PayPal, it’s no good asking for 16 digits and a billing address – in this case, the merchant needs an email address and password. If the customer chooses to pay by bank transfer, they must be redirected to log into their bank account, while cash-paying customers in Brazil must be given a Boleto that they can print and take to the nearest bodega, along with their payment in cash.
A gateway is a one-stop shop for processing all these different forms of payment, but it only solves part of the problem because gateways don’t help the merchant surface the appropriate interface for each method, and also doesn’t help with collecting, sending, or securing the critical customer information alongside the payment data. That missing piece means there can be context around the payment that is getting lost.
A traditional switch is a piece of software that handles the routing of payment data between processors who all handle the same kinds of payments and not much else. A switch simply passes the baton, handing off payment data from merchants to processors.
Like gateways, switches solve part of the problem. They don’t help capture and secure customer information alongside payment data, nor do they do anything with payment data when it comes back after the transaction. It still falls on the merchant to reconcile orders placed, processed, shipped, or returned with recorded profits every day.
Oftentimes, these reconciliation files don’t add up as they should, which means teams of people armed with Excel spreadsheets, chasing virtual pennies as they roll under the proverbial couch. That costs time and money and leaves back office workers chained to their desks.
An ideal solution must solve not only transaction routing itself, but the activities before the money movement and the settlement afterward. Switches can make up a piece of the puzzle but, because they aren’t creating interoperability throughout the entire transaction, lifecycle traditional switches don’t help much with those “unhappy path” payments. In this case, the back office remains a mess.
Integration vs. interoperability
Integration may appear to solve the problem but, for each integration, the merchant still has to deal with all of the different methods of authentication and interaction on their website. Merchants also must account for the differences in good funds models, risk and liability management, and settlement process.
Interoperability, meanwhile, accepts the differences on each side and translates the payments data and transaction behavior so that it looks, walks, and talks the same from the merchant’s point of view. If a merchant is most comfortable handling payments by card, then interoperability says “let them all be cards”, so that all payments appear to the merchant’s ecommerce and ERP systems as if they were card payments, even if the customer actually used Klarna, Boleto, or a bank transfer to pay.
Now, instead of reconciling a dozen different spreadsheets at the end of the day, merchants can just look at one. They don’t have to understand how each payment method is uniquely crazy; that challenge becomes a service in the cloud, freeing up merchants to focus on other aspects of their business.
If you’re sold on interoperability, reach out to us here at Modo. We can help get you connected to the myriad of digital payment methods around with world without having to worry about the plumbing.
About Bruce Parker
Bruce Parker has been a visionary and strategist for some of the largest payments technology companies in the world. He has created new products, built partnerships and shaped strategy that has moved the payments industry, and continues to do so through his payment technology startup, Modo.
Modo is a payments technology company based in Dallas, Texas. Modo's tech enables interoperability between payment systems and allows quick connections to alternate payment methods like eWallets, loyalty programs, proprietary payment methods, and more. They are working with some of the largest financial institutions in the world including Deutsche Bank, Bank of America, Etihad Airways, among others.