The Disintermediation of the Payments Service Provider.

Why It is Inevitable, and Why Making a Choice Is Crucial for Survival.

In this newsletter, I will share why I believe the “traditional” Payments Service Provider will get disintermediated in 2024 and beyond.

In the hyper-competitive Payments space, there has been a seismic shift going on in the last ten years that has reached a crucial point, where those who have adapted to the new ways will end up on top, and those who didn’t will most likely be swallowed up by well-funded scale-ups looking to grow their Merchant book.

By understanding where the Payments industry is going, you can help steer the Strategic direction of your Payments company or determine for yourself if your current employer is headed in the wrong direction and if you should start contemplating jumping ship.

The challenge for most Payments Service Providers, desperately clinging to the old ways, has much to do with the difference between being Sales-focused or Product-focused.

Payment companies that lean too much toward Sales often fail to realize that it will impact their ability to grow in the long term.

It leads them to focus more on price-focused Strategies, continuously re-vamping their Sales Teams, and continuing to complain about the increasing costs of the Interchange and Scheme fees, putting pressure on their margins.

“If Payments Service Providers Don’t Choose a Direction, They Will Get Outcompeted by Those Who Do.”

The disintermediation of Payment Service Providers is not a guess or prediction but is based on what is already happening.

Which can be summed up by three major trends:

1. Growth of Payments Orchestrators

2. Merchants Preferring Platforms with Embedded Payments

3. Rise of Infrastructure-as-a-Service

Let me explain…

The Payments Industry’s Pivotal Change

The meteoric rise of the Payments industry in the last twenty years is closely tied to the growth of the E-Commerce and Software-as-a-Service industry.

Where Point-of-Sale Terminals in Retail had no incentive to innovate between the early 1990s and 2010, the same couldn’t be said about the Payments Service Providers who focused on serving upcoming E-Commerce businesses.

These e-commerce-focused Payments Service Providers, quickly had to develop products and features that allowed these merchants to process transactions online, and as new business models were created, developed the capabilities to handle them.

As these e-commerce and SaaS merchants grew, they noticed that Payments were increasingly becoming a bottleneck in their highly optimized and engineered processes.

By applying a data-driven approach, these companies identified three major topics, namely:

• Authorization Rates

• Pricing

• Fraud & Chargeback Levels

Topics that most PSPs didn’t have any answer to, as their products were not built with Data-Driven capabilities and the agility to improve them as new challenges arose.

This created the first wave of stand-alone Payments Orchestrators that provided mostly Enterprise Merchants with a Technical Integration Layer, allowing Merchants to select one or more PSPs to fit their needs. At the same time, providing them with a single Integration and a Portal to configure settings to optimize their performance.

Payments Orchestration 2.0

As the E-Commerce and SaaS industries continued to grow, the number of companies that process more than $1 Billion in Annual Revenue also rose, often referred to as Enterprise Merchants.

However, the original Payments Orchestrators, whose sales, onboarding, and integration processes were tailored to the traditional Enterprise Merchants, continuously struggled to convince this new wave of Merchants to utilize their technology.

This led companies like Google, Facebook, and Amazon to develop internal teams that created in-house Payments Orchestration Infrastructure with newer technology stacks and data-driven decision engines.

As a result, Engineers and Product Managers who helped work on these “2.0 versions” of Payments Orchestration Infrastructure started creating startups to sell this solution as a stand-alone product, creating a new wave of Payments Orchestrators.

Fueled by ambitious goals, these new Payments Orchestrators have matured and are looking for new ways to expand.

Besides directly integrating with large established Acquirers, they are actively partnering and integrating with Unbundled Payments companies, including Fraud Prevention, Chargeback Management, Conversion Optimization, and Tokenization.

Where the bulk of the volume used to go through the Payment Service Provider, economies of scale are now created, as multiple high-volume Merchants are leveraging their technology, bringing down costs for the merchant while providing a higher margin and larger vendor-lock-in with the Payments Orchestrators, disintermediating “traditional” Payment Service Providers.

A Threat Most Payments Didn’t See Coming

While the Large and Enterprise Merchants have embraced payments as another layer in their technology stack, the Micro to Medium Merchants have created an even larger gap between them and Payments Service Providers.

Where E-Commerce merchants used to select their own Payments Service Providers as they built out their custom environments or chose e-commerce platforms like Magento and Big Commerce, SME merchants nowadays expect their platform to come with Payments already built in.

With eBay’s acquisition of PayPal, it was clear that to have a thriving e-commerce platform, Payments would have to be a big part of ensuring trust between buyer and seller.

While Shopify originally didn’t have this lock-in and freely allowed PSPs to develop a plugin, they eventually created a joint venture with Stripe to create Shopify Payments, making them the first Platform that had truly Embedded Payments into their service offering.

Platform Embedded Payments

Embedded Payments, estimated to have a $865 Billion Total Addressable Market opportunity, have been the focus of many Payments Service Providers and Acquirers in recent years.

Putting tremendous time and effort into convincing existing platforms, such as AirBnB, Etsy, and Amazon, to integrate payments into the core of their offering fully. Many believe this will create new revenue streams and eventually see similar synergies, such as Shopify and Stripe.

Inspired by the success of platforms such as Shopify and encouraged by the ease of integrating Payments into a platform, new startups are focused on developing Vertically Integrated Platforms for specific markets.

Square, who grandfathered this on the retail side by offering a fully integrated Point-of-Sale device, Payments, Inventory Management, Payroll, and Accounting services, has led to startups such as:

• Squire, a Barbershop Management Platform,

• Toast, a Restaurant POS and Management Platform

• Santé, a Liquor Store POS Management Platform

• And many more…

As these platforms grow and acquire merchants, their volume becomes the leverage point in their relationship with the Payments Service Providers.

But as Gateway technology is readily available and often time fully white-label, we are seeing an increasing demand from these Platforms that “traditional” Payment Service Providers can’t meet, as they lack the capabilities or product depth to do so, leading these platforms straight into the arms of Acquirers and Alternative Payment Methods, disintermediating the PSP as again.

Those Who Can’t Do, Partner

While the relationships of Small to Enterprise Merchants have led to disintermediation, a third wave of change is also impacting the Sales-focused Payment Service Provider.

To explain, Sales-focused Payment Service Providers tend to focus on their ability to attract Merchants ranging from Small to Enterprise and sell them a fairly commoditized product offering, which could be as simple as Card Acceptance Online or via Terminal for the major card brands.

On the other hand, Product-focused Payment Service Providers invest more in the technical development of features that allow them to offer services that are much more aligned with the expectations of specific merchants. This could include Virtual Terminals, Pay-by-Link, Subscription Management, or Invoicing.

But both of these strategies have seen either increasing price sensitivity across merchants or a plethora of copy-cats taking their features and launching the same offering.

Infrastructure-as-a-Service

This is leading to a growing realization among Payment Service Providers that if they want to continue to grow, they need to differentiate by expanding their service offering to a more infrastructure level.

As a Payments Service Provider, it can only mean becoming a Full-Stack PSP by becoming an Acquirer for MasterCard and Visa.

But as many in the industry have already realized, building a proprietary Cards Acquiring Processing Platform is a challenging and large endeavor that requires attracting top-tier Engineering talent, a 24 to 36-month time frame, and millions in investment.

That is where new Infrastructure-as-a-Service providers come into play.

Previously, companies such as TSYS, OmniPay, and Pay-On provided their infrastructure-as-a-service capabilities to large financial institutions, which are currently responsible for processing more than 50% of all transactions via their platforms.

But similar to Payments Orchestration, a new batch of Cloud-Based Acquiring Infrastructure-as-a-Service providers have come to the scene.

Instead of targeting their platform to the large Banks, their API-first approach tends to attract Payment Service Providers looking to differentiate by expanding into Acquiring services.

Additionally, Enterprise Merchants, especially those generating more than $1 Billion in processing revenues focused around areas such as operating in large Europe, are also seeing the benefit of using these Infrastructure-as-a-Service providers by getting a relatively easy-to-get E-Money License to become their own Acquirer with MasterCard and Visa.

Will Payments Service Providers continue to exist?

They probably will.

However, disintermediation refers to a relationship in which the financial intermediary will eventually be cut out of the process.

Any Payments Service Provider who continues to focus on “just” being a middleman will have a much harder task going forward, as Small to Medium-sized Merchants are drifting towards Vertically Integrated Platforms, Enterprise Merchants are leveraging Payments Orchestrators to integrate with Acquirers directly, and Product-focused Payment Service Providers are graduating to becoming a more Full-Stack offering.

In other words, it is an exciting time for the entire industry.

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: Sometimes, you need someone to give you unbiased advice about Payments.

As it is the beginning of the year, you might want to discuss the Strategy for your Payments company to ensure you are on the right track.

Or you are running the Payments team for a fast-growing company and want to discuss improving your strategy or performance.

In both cases, I would suggest booking a call to discuss it.

Click here to Book a Call.