Embeddification of Payments: The Threats and Opportunities Explained.
How Vertically Integrated Platforms Are Turning Payments Into a Feature, and Why It Matters To You.
In this newsletter, I will share how Vertically Integrated Platforms are turning Payments into a feature using Embedded Payments, explore their opportunities, and discuss the threat to existing Payment Service Providers.
By understanding what is happening, you can determine whether this is a good or a bad thing for the Payments company you work in and create a strategy to capitalize on or defend against it.
The challenge for most Payments companies is that they act passively to any opportunities or threats, often leading to the first movers capturing most of the market share.
“Despite the $865 Billion Total Addressable Market for Embedded Payments, There Will Only Be a Few Companies, That Will Capture It.”
- Dwayne Gefferie
The Embeddification of Payments, which has been underway for a long time and will continue to increase in 2024 and beyond, the big question will be how Payments companies will deal with it.
In this newsletter, I will address:
The Evolution of Vertically Integrated Platforms
The Concept of the Embeddification of Payments
The Benefits of Vertical Integration in the Embeddified Payments Landscape
The Threats for Standalone PSPs in the Embeddified Payments Landscape
The Opportunities for the Evolving PSP
Let me explain…
The Evolution of Vertically Integrated Platforms
The financial industry, particularly the payment landscape, has been experiencing a paradigm shift in the last decade.
Especially in E-Commerce, there has been a dramatic evolution from simple transactional processes to more sophisticated, integrated solutions.
This transformation has been largely driven by the 'embeddification' of payments, which refers to integrating payment functionalities into broader business platforms and processes.
The impact has been so big that to diversify, new startups have been creating Vertically Integrated Platforms, which, instead of providing just one service to a customer or business, are now bundling several services together and providing it as a platform.
While original Vertically Integrated Platforms like:
Shopify started as an E-Commerce Platform and has evolved into a Hub of Services for Merchants, including Payments, B2B, Marketing, Analytics, Shipping, and Capital.
Square started as a Payments company, turning any iPhone into a Point-of-Sale device, and has now evolved into offering Banking, Invoicing, Payroll, Marketing, and CRM.
Had a more natural progression, newer Startups skip these steps and immediately offer a Vertically Integrated Platform focused on specific niches such as:
Squire, a Barbershop Management Platform, combining CRM, Calendar, Payments, Inventory, and Loyalty.
Toast, a Restaurant POS and Management Platform, combining POS, Payments, Marketing, Capital, and 3rd Party Delivery Integration.
Santé, a Liquor Store POS Management Platform combining POS, Inventory Management, 3rd Party integrations, and Payments.
And many more.
Now that we understand what Vertically Integrated Platforms are, let’s delve into the concept of Embeddification of Payments, its implications, and the distinct growth opportunities and threats for Payments companies.
The Concept of Embeddification of Payments
Embeddification of Payments refers to incorporating payment functionalities into broader, non-payment-related platforms and processes.
This trend has seen many organizations, from small startups to multinational corporations, embedding payment systems into their products or services, effectively making payments an integral part of the customer experience.
This shift enhances the user experience by making transactions more seamless and opens up new revenue streams for businesses.
As seen with leading companies such as Google, Meta, and Uber, integrating payments within the product or service significantly reduces friction, increasing customer satisfaction and loyalty.
While standard now, when ride-hailing applications like Uber or Lyft started, they focused on integrating payments into their platforms, allowing users to pay for their rides within the app without needing to handle cash or manually process credit card transactions.
This has greatly improved user experience and increased efficiency and security, which has become the standard nowadays.
The Benefits of Vertical Integration in the Embeddified Payments Landscape
In the Embedded Payments landscape, companies focusing on vertical integration have a larger opportunity to thrive than those who don’t.
Because Vertical Integration combines multiple essential services into a single platform, it allows businesses to have more control by having all the tools needed for their business under one platform without having to worry about data, clients, or orders falling through the cracks.
This control often directly leads to cost efficiencies as the number of application subscriptions is reduced to a single payment, increased customer loyalty as there is a better insight into customer's behavior, and more robust data collection provides the business with ways to experiment in marketing and sales channels.
Furthermore, Vertical Integration allows businesses to differentiate themselves in an increasingly commoditized market, including standalone Payments Service Providers, who have had to deal with increasing price sensitivity and a lack of new features and services to entice merchants to switch.
The Threats for Standalone Payment Services in a Commoditized Landscape
While the benefits of Vertically Integrated Platforms are clear, companies solely focused on providing payment services face several challenges in the current payment landscape.
As payments become more commoditized and price-sensitive, these companies will find it increasingly difficult to differentiate their offerings and sustain profitability.
The emergence of tech giants and agile fintech startups presents threats from both sides of the aisle.
While agile fintech startups have a steadier ground as they provide various products such as processing, acquiring, capital, and issuing.
Tech giants such as Google, Amazon, and Apple continue encroaching on their space by offering Infrastructure-as-a-Service, which enables similar services directly to these platforms, essentially disintermediating the PSP (as described in the previous newsletter).
The Opportunities for the Evolving PSP
To stay relevant, PSPs must evolve to adapt to the changing landscape by expanding their services.
While expanding geographically often seems like the most straightforward strategy, the global nature of Payments has created. It will continue to create more local and international competition, who, through their first-mover advantage, will be even harder to vend off.
Instead, PSPs should evolve by offering Niche-Focused, Vertically Integrated Platforms or through Technical Downward Innovation by adding Acquiring and/or related value-added services that strengthen their position while increasing the control and margin they earn on the volume they process.
The added benefit of the latter is that their Total Addressable Market will increase, as they now can also provide services to platforms, orchestration layers, and larger merchants in demand of more control (a.k.a. Direct Acquiring relationships with the Schemes).
In other words, evolve or be commoditized.
Conclusion
In conclusion, the Embeddification of Payments has instigated a significant shift in the payments landscape.
It offers a plethora of opportunities for companies focusing on vertical integration. By integrating payment functionalities into broader business platforms and controlling more of the services stack, these businesses can differentiate themselves in an increasingly commoditized and price-sensitive market.
Conversely, companies solely providing payment services face escalating challenges and must adapt to survive this rapidly evolving landscape.
Therefore, the embeddification of payments changes how businesses operate and significantly reshapes the competitive dynamics in the payments industry.
It is a trend that will likely continue, and companies must be prepared to adapt to reap the benefits.
Thank You for Reading. Feel free to Like, Comment, Share, or Post on Your Socials.
P.S. Whenever you're ready, this is how I can help you:
1-1 Video Call: If you are struggling with developing a Payments Strategy, or would like to discuss the Strategy of your Payments company.
If you would like to work with me in a larger capacity, such as Advisory, send me an email or DM.