The Modernization of Payments Infrastructure
How Reinventing Legacy Payments Infrastructure Creates New Opportunities for All Payments companies.
In this newsletter, I will share what Legacy System Modernization is, how it is creating the second wave of Payment Infrastructure companies, and show what kind of opportunities it creates for Payment companies open to adopting it.
That systems need to be updated is obvious; however, deep into the 2020s, most of the top 150 Acquirers and Payments companies are still operating on technology developed in the 1970s and 80s.
By understanding what that entails and knowing why this is holding the Payments industry back, you can determine whether this is sustainable.
The challenge for most Payments companies is that updating their core systems is extremely hard, but not doing so creates an even bigger threat in the future, as innovation and, therefore, competition is now coming from multiple directions.
The Weakest Link in the Payments Chain is the Archaic and Monolith Card Acquiring Infrastructures responsible for processing over 80% of the Global Cards Acquiring Volume.
As exploring the entire Payments Infrastructure would be too much for a single newsletter, I will only focus on Cards in this edition, as it provides us with enough understanding of what can and needs to happen.
In this newsletter, I will address:
What is Legacy System Modernization
Why do Systems need to be Modernized
Why do Legacy Payments Infrastructure Systems still excist
What Payments Infrastructure 2.0 entails
The Opportunities for Payment Companies Going Forward
Let me explain…
What is Legacy System Modernization?
While the words legacy, system, and modernization might already have a meaning to you, combining them at least requires some context and explanation.
When referring to legacy systems, it refers to an old system, technology, computer system, or application program that continues to be used, typically because the user (typically an organization) does not want to replace or upgrade it.
These systems may not be fully compatible with newer systems and may lack the features and capabilities of modern systems. They often require high maintenance, and the knowledge to manage them is increasingly rare.
While modernization alludes to updating or transforming outdated systems, processes, or technologies to more current, efficient, and effective versions, this process often involves adopting new technologies, methodologies, or approaches that enhance an organization's operational efficiency, customer experience, and innovation.
Therefore, when we discuss Legacy System Modernization, we refer to updating and transforming outdated systems to more current ones.
Why do Systems need to be Modernized?
We have all heard the age-old phrase, “If it’s not broken, don’t try to fix it.” while it sounds nice, there are only a few things that haven’t been changed, while everything else continuously gets disrupted.
This is because as the needs of the environment change, the first level we see innovation tends to be at the outer layer between the User and the User Interface while leaving the core system intact.
However, all systems must be modernized to keep up with technological advancements and changing business needs. This is because, over time, outdated systems lack the flexibility and scalability necessary to handle increasing volumes of interaction and evolving customer expectations.
Why do Legacy Payments Infrastructure Systems still exist?
Similar to the demand for innovation and Systems Modernization in other fields, we now see the almost 50-year-old Payments Infrastructure, especially for Cards Acquiring, failing to keep up with the rapid innovation around it.
While everything from Point-of-Sale terminals to E-Commerce Gateways, Fraud Prevention, and Analytics has gone through multiple innovation cycles, the underlying Cards Acquiring Payments Infrastructure that powers most Acquiring Banks worldwide hasn’t been updated.
The closest we have come to updates have been the emerged Full-Stack Acquirers, who, with sufficient capital and solid Enterprise Merchant books, took a risk and developed their proprietary Cards Acquiring Infrastructure.
However, even for them, that has been well over ten years ago, a period in which Blockchain, Cloud Computing, and advancement in AI have changed how modern infrastructures should and will be built.
But the reason Legacy Payments Infrastructure Systems have been able to continue to exist is because the complexity of the processes they encapsulate hasn’t changed in the last 50 years!
The truth is that Card based payments at its core haven’t changed at all, and until now have had no reason to change, as the process of Authentication, Clearing, and Settlement, as well as the surrounding processes such as Refunds, Chargebacks, and Fee collection, haven’t required it to.
What Payments Infrastructure 2.0 entails
However, the big change that has opened the door for a new wave of Payments Infrastructure (Payments Infrastructure 2.0) players is the continuing shift from ownership of Banking to FinTech and Enterprise Merchants.
Like new Card Issuing platforms, such as Marqeta, Galileo, or Highnote, which got their adoption from fast-growing Startups and required Cloud-Native, API-focused technology, Cards Acquiring is seeing a similar movement of ownership demanding Payments Infrastructure that does the same.
While Cloud-Native isn’t a benefit in itself, the ability to scale the infrastructure using microservices architectures, allowing any peaks in processing to be managed much easier, is.
In addition, with the advancements made in Analytics, Machine Learning, and AI, having an infrastructure that can provide an underlying infrastructure that can enable the development of new features and create greater insights based on the Acquirer’s own data is essential in today’s data-driven business environment.
But most importantly, as Payments have been unbundled, hundreds of independent providers can provide best-in-class services for KYC/KYB, Onboarding, POS Terminals, Gateway Technology, Analytics, and Machine Learning for Fraud & Risk.
Services, which are all API-first and share a similar philosophy and agility as the new Payments Infrastructure providers. Allowing for faster development and release times, which becomes a benefit in today’s rapidly evolving Commerce and Technology landscape.
The Opportunities for Payment Companies Going Forward
But you might wonder, where does that leave you or the Payments company you work for?
I think that the improvement of the underlying Payments Infrastructure can benefit multiple parties, including;
Maturing New Age Payments Service Providers
As the margin and competitive pressures increase for Payments Service Providers, Card Schemes backed with case studies of highly successful PSPs, have already been selling the idea to PSPs of becoming Acquirers.
Similar to how Domino’s or McDonalds used to only sell franchises based on exclusive territory per city, the growth of eCommerce and global adoption of Card based payments has allowed Schemes to give out more (smaller) licenses, increasing their total number of franchisees, which gives them higher margins (as these acquirers will be hitting the lower tiers), and the ability to sell more of their bolt-on services such as Consulting, Open Banking, Analytics, Fraud Prevention and P2P.
To adopt a more “Full-Stack” approach quickly, New Age PSPs are choosing to lease instead of build their Cards Acquiring Infrastructure, allowing them to capture more value, revenue, and profit from their Merchant book.
Ambitious Payments Orchestrators 2.0
As I mentioned in my previous newsletter titled The Disintermediation of Payments Service Providers, the growth of Payments Orchestrators has also opened the door to Card Schemes.
While having learned a lot about payment optimization and being able to identify the demand from the Merchants they serve, Orchestrators can leverage the data in their position to develop use cases to Distintermediate the PSPs they are integrated with by directly offering Acquiring services to the Merchants they now have close relationships with.
An opportunity Payments Orchestrators can leverage in multiple ways, as they will be able to meet the needs of their Merchants while simultaneously also opening up the door to servicing other PSPs, ISO’s, and Platforms directly.
Allowing them to lower the barrier to work with Micro-Merchants (below $250K annual revenue), all the way up to Enterprise Merchants.
Electronic Money Institution-Backed Enterprise Merchants
The final category is Enterprise Merchants, who, if they have sufficient volume ($1B+) and ambition to pursue an Electronic Money Institution, have been more frequently eliminating unnecessary parties in between and plugging directly into the Schemes by implementing Cards Acquiring Payments Infrastructure providers straight into their Technology layer.
And because the Payments industry has grown so much, managing this infrastructure is easier than ever. Payments Professionals who have worked on managing Card programs at Banks and FinTechs are seeing the benefit of managing this on the side of an Enterprise Merchant, as their demands are more focused and long-term, while their partners do the implementation and innovation.
Conclusion
In conclusion, while the desire and need for the Modernization of the Payments Infrastructure, especially when it comes to Cards Acquiring, is at an all-time high, chances are that it will still take a while for new startups to be good and big enough for existing Acquirers to switch, or new Acquirers to capture the volume.
While Payments Infrastructure 2.0 embraces Cloud-Native, API-focused technology, enabling scalability through microservices architectures, the decision to adopt it comes from humans. Humans who would rather choose comfort and familiarity and avoid as much risk as possible.
There is no denying that the opportunities arising from the current trends in Payments and these transformations are vast. It will require a similar wave of ambitious entrepreneurs and startups to lead the path toward modernization and innovation, similar to how other industries have done in the past.
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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.
If you would like to work with me in a larger capacity, such as Advisory, send me an email or DM.
Hi Dwayne, thank you for this article. Are you aware of any new companies offering flexible acquiring processing platforms?