Payments Orchestration 2.0 Value Model Creation Method
How Payments Orchestrators 2.0 are creating new opportunities through Strategic Alignment.
In this newsletter, I will share the concept of Value Model Creation in Payments Orchestration and how it impacts the Payments Industry.
The Payments Orchestration market is hot, as they are one of the few categories in Payments that can still attract multi-million investments.
By understanding the differences in their Value Model, you can determine whether your company is going in the right direction or could align by being a partner.
The challenge for most Payments Service Providers is that the threat of Payments Orchestrators is coming from multiple directions, forcing them to decide in which direction to grow and innovate.
“Payments Orchestration Value Model Creation helps companies identify opportunities for innovation and improvement and drive competitive advantage in the rapidly evolving payments industry.”
In this newsletter, I will address:
What is a Value Model Creation?
Why does Value Model Creation Matter?
What is driving Payments Orchestration 2.0?
How are New Payments Orchestrators Developing Value?
How will Payments Orchestrators Impact Existing Payments Companies?
Let me explain…
What is a Value Model Creation?
In business, the word Value is used in many contexts and with various underlying meanings. But when discussing Value Model Creation in the context of Strategy, we are referring to the three components an organization needs to take action on and achieve results for it to be perceived as valuable, which are;
Value
Effectiveness
Efficiency
Value is a value exchange between the company and its customers/clients.
In other words,
What do you offer the world, and what do you get in exchange?
The value will, therefore, mean different things to different organizations. Still, applying it to the Payments industry could mean many things, including global processing capabilities, secure transactions, customer insights, fast settlement times, and much more.
Value can, therefore, be seen in three ways:
a. Value describes, in general terms, who benefits and how.
What is the purpose of your actions?
Why are you doing it?
Who are the beneficiaries?
Who are the secondary and third beneficiaries who may benefit from your actions?
b. Impact sits between effectiveness and value – how much value you can deliver using your product/service.
Do you enable your customers to get jobs done?
Or make people’s lives easier?
Or contribute to a more sustainable world?
It is your ‘ultimate effectiveness’ (the sum of all your operational effectiveness).
c. Residual value sits between efficiency and value – by making good use of your resources, the cost of delivering value to the world doesn’t use up all the value you receive in exchange.
It is the value you receive minus the cost of the value you deliver. This is not just profit – it could be reputation, expertise, recognition, staff well-being, etc.
It is your ‘ultimate efficiency’ (the sum of all your operational efficiencies).
Effectiveness is how you deliver value to your beneficiaries and how well you deliver value. It can be defined as ‘doing the right thing.’
Operational effectiveness involves doing lots of different ‘right things.’ You must know what you need to do, be able to do it all and do it in a way that achieves your purpose.
Effectiveness is typically measured in terms of outputs or the benefits arising from those outputs.
What would it take to have excellent effectiveness?
What about world-class effectiveness?
Efficiency is how you make good use of resources. It can be defined as ‘doing the thing right.’
Was the action undertaken in the best possible way, or was time, energy, or money wasted?
How do you make good use of resources?
When does it need to be done?
What do you have to ‘spend’ (what resources do you need) to deliver value?
How could that be improved, and what would world-class efficiency look like?
Operational efficiency ensures you ‘get more out than you put in’ across various tasks. It is about cutting waste, reducing costs, compressing timelines, or increasing return on investment.
Efficiency is usually measured using rates, ratios, or comparisons with benchmarks – authorization rate, customer acquisition cost, time to deploy new software, percentage of calls answered within 30 seconds of calling, etc.
Why does Value Model Creation Matter?
Value Model Creation matters because it provides a framework for businesses to understand and optimize their customers' value. It considers not only the direct benefits that a company provides but also how effectively and efficiently these benefits are delivered.
This holistic view allows businesses to better align their operations with their strategic objectives, leading to improved performance and greater customer satisfaction.
In the context of Payments Orchestration, Value Model Creation can help companies identify opportunities for innovation and improvement and drive competitive advantage in the rapidly evolving payments industry.
What is driving Payments Orchestration 2.0?
While Payments Orchestration isn’t a new concept, several Payments Startups have made Orchestration the core of their offering in the last few years.
Many of them are thriving because these new payment orchestrators, through the increased diversity and opportunities in the e-commerce and Payments industry, have had the opportunity to create a Value Model that Strategically aligns with any of the important players within the Four-Party Model.
I have categorized them as being;
Merchant-Centric
Technology-Centric
Acquirer-Centric
The Merchant-Centric Value Creation Model is based on the relationship between the Payments Orchestrator and the Merchant.
Similar to the old Payments Orchestration Model, this relationship is based on the need of a Merchant to simplify the integration of multiple Payments Service Providers to improve Performance, Costs, or Fraud. However, the new Payments Orchestrators benefit from Merchants who see the value in Rebundeling independent Payments APIs, including Alternative Payment Methods, Fraud, and Analytics, and leveraging their technology to do so.
The Technology-Centric Value Creation Model is based on the “Cloudification” of especially Software-as-a-Service, Gaming and other Digital Only Merchants.
While the advanced technical capabilities exist in these merchants, they have identified that their core focus should not be on developing a new Payments Technology Infrastructure and, therefore, choose to integrae with a similarly Technology-heavy provider who provides them with the tools and APIs they need, using the latest best-practices and Cloud infrastructure.
The Acquirer-Centric Value Creation Model is based on the Market Re-Entry of Banks and Financial Institutions, who have lost significant market share in the last decade to FinTech Payments companies.
Instead of trying to outbuild, outmarket, and outperform the existing Payment companies, Banks and Financial Institutions with Acquiring Licenses are partnering up with new Payment Orchestrators to recapture market share in domestic markets and leverage their network effect to attract Global Merchants seeking domestic Acquiring and ancillary services.
How are New Payments Orchestrators Developing Value?
Based on what we have learned about Value Model Creation and the categorization of the new Payments Orchestrators, we can now answer How New Payments Orchestrators are Developing Value.
The Merchant-Centric Payments Orchestrator
A Merchant-Centric Payments Orchestrator develops value by streamlining the integration of multiple payment service providers, thereby improving performance, reducing costs, and managing fraud.
The benefit is primarily enjoyed by the merchant, who can access a diverse range of payment options through a simplified process.
The Orchestrator generates residual value through the fees paid by the merchant for this service after accounting for the costs of maintaining relationships with multiple payment providers and managing the integration technology.
The impact of the Orchestrator's service is measured by the increased efficiency and effectiveness with which the merchant can offer various payment options to their customers, thereby enhancing the customer experience and potentially increasing sales.
The Technology-Centric Payments Orchestrator
A Technology-Centric Payments Orchestrator develops value by providing cutting-edge tools and APIs that enable digital-only merchants, such as those in the Software-as-a-Service (SaaS) or gaming industries, to optimize their payment processes.
These merchants benefit from the Orchestrator's technology, which allows them to focus on their core business instead of developing new infrastructure layers.
The Orchestrator's residual value is derived from the fees paid by the merchants after the costs of developing and maintaining the technology have been accounted for (increasingly variable fees are foregone in exchange for all-in platform fees) .
The impact of the Orchestrator's service is demonstrated in the enhanced efficiency and effectiveness with which the merchants can manage their payment processes, thereby improving their overall business operations.
The Acquirer-Centric Payments Orchestrator
An Acquirer-Centric Payments Orchestrator develops value by facilitating partnerships with fintech companies, enabling them to recapture market shares in domestic markets and attract global merchants seeking domestic acquiring and ancillary services.
The beneficiaries are the acquirers, who can leverage the Orchestrator's network effect to expand their reach and provide a more attractive option to merchants than the competitors who lured them away in the first place.
The residual value for the Orchestrator comes from the acquirer's fees after the costs of developing and maintaining partnerships and technological infrastructure are accounted for.
The impact is seen in the value delivered to acquirers through increased market share and the ability to offer more diverse and efficient payment solutions.
Efficiency is achieved by optimizing resources and reducing waste through the use of cutting-edge technology, while effectiveness is demonstrated by the Orchestrator's ability to strengthen and expand the acquirer's market position.
How will Payments Orchestrators Impact Existing Payments Companies?
Unlike other categories, Payments Orchestrators will have multiple winners, as Merchants' needs have changed quickly in the last decade. Different enough that there is no one solution to cover all scenarios.
But what is clear to me is that traditional Payment Service Providers will continue to be pushed to the background or even be entirely disintermediated as payment orchestrators will continue to take over the Merchant relationship and develop direct integrations with Acquirers, APMs, and Value Added Services on behalf of their clients.
The opportunity for Merchant and Technology Centric Payments Orchestrators is already a multi-billion dollar industry. Still, the Acquirer-Centric model, which requires more in-depth knowledge and longer sales cycles, will continue to grow, as its characteristics are based on local opportunities and cross-selling existing Banking products, including Capital, Banking, and Credit Cards.
In other words, there is a lot of opportunity for those who create the markets instead of standing on the sideline, hoping things will never change.
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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, unfortunately, I will close this down from the 1st of February as I will focus more time working with existing Startups and Clients. So book a call now.
However, if you would like to work with me in a larger capacity, such as Advisory, send me an email or DM.