kyiv, UKRAINE – 2018/11/12: In this photo illustration the logo of the company Adyen E-commerce is visible … [+]
Ask any financial technology or payments analyst and they will tell you: all eyes are on Stripe and Adyen. But with a continually delayed, but still “imminent,” IPO of Stripe and a recent 40% drop In Adyen’s stock price, we have to ask ourselves: is the future of payments really elsewhere? My money is on the ground.
In 2011, Marc Andreessen wrote: Why software is eating the world. Fast forward to 2022, when Tim Chiodo, senior payments analyst at Credit Suisse (now UBS), and his team released their comprehensive report on all things Payments, Processors and Fintech where you can see the evolution of this trend and its extension into the world of payments with their new release “If Software Eats the World… Payments Takes a Bite”. Yet while cloud computing and API services have exploded in recent years, making a distributed systems architecture approach the norm for most leading organizations, payments have remained largely centralized – until ‘now. We are about to enter a critical period in which individual payments-related services will be unbundled and when, where and how they are bundled will determine the future of the payments ecosystem.
Accepting payment (i.e. being able to get paid for your goods or services) is rightly one of the first steps in building your online business. Unfortunately, it’s also usually one of those check-off things that, like your roast chicken, becomes “set it and forget it” (shout out Ron Popeil). Kudos to Stripe for catching this tiger by the tail; It’s not unreasonable for an organization to choose an all-in-one solution and then put payments on autopilot because it “just works.” But it’s a very risky proposition if they lose sight of the fact that their business is really about two things: 1) producing and selling goods or services, and 2) collecting money from your customers for these goods or services. Accepting payments is fifty percent of the equation! So if your single payment partner experiences an outage or decides to change their mind about your business and shut you down, you’re SOL. Or, even worse, you continue to limp along with your partner by paying above-average processing fees and getting below-average acceptance. rates.
This lack of redundancy and optionality will undoubtedly return as an issue as the business grows. Page 71 of Instacart S-1 filing specifically highlights how their reliance on third-party payment processors, and the associated costs, constitutes a major risk, but specifically “If we are forced to migrate to other third-party payment service providers for any reason Either way, the transition would require significant management time and resources, and may not be as effective, efficient or well received by consumers, retailers or buyers.
Payments 2.0: integrated payments
Many associates at Andreessen Horowitz, Marc’s Silicon Valley-based venture capital firm, have taken similar approaches in making grandiose claims via pivotal blog posts. Let it be Angela Strange proclaiming Every business will be a Fintech business or Alex Rampell’s take on Distribution vs innovation – they are always thematically very relevant, even if the end result is not always exactly as expected.
Shopify Payments is the perfect example of integrating payments into a software platform – it’s powered by Stripe and distributed by Shopify – which should make Angela and Alex smile. There is an entire industry catering to this type of project, known as payment facilitation, and dozens of venture-backed startups are trying to modernize the independent software vendor model for the modern digital economy in this context. It makes sense, however, it’s just smart distribution and monetization of a single, centralized, bundled payment services solution, with all the value going to the payment company and platform – and not individual merchants – and the results speak for themselves: merchant services, or payment processing, counts for almost 70% of Shopify revenue and all that Shopify volume represented about 25% of Stripe’s transaction volume in 2022!
It’s important that we take a step back and think about this from fundamentals and each trader’s perspective. While these modern acquiring and processing platforms allow a business to get up and running quickly by accepting payments, what the merchant or equally modern platform really wants is the ability to run a personalized payments stack, specific to their individual business and their customer base. Our industry’s money, attention and focus has been devoted to creating payment solutions for software companies when in reality we should be focusing on building software solutions for the future of payments architecture.
Payments 3.0: personalized and distributed
As of October 2023, Stripe lists 24 distinct different products on its homepage, not including bundled custom solutions and integrations. And even though Stripe has managed to deliver value to its customers for over a decade now, there’s no way they’re best-in-class in 24 different components of the overall stack.
In this new paradigm, there is a growing desire to choose the individual partner best suited to one’s needs. your business. This might involve considering a solution like Sardine Or NeuroID instead of Radar (Stripe’s in-house anti-fraud solution), or a local acquiring platform in Latin America or Southeast Asia instead of a single global provider, or a third party like Pages Or Butter for intelligence and routing, etc. Reconciliation is also becoming an important challenge in a world where alternative payment methods proliferate and there are companies like Fragment And Appropriate create an accounting system as a service. An additional consideration is to decouple services such as 3-D Secure, account updating and network tokens in a multi-processor approach that may require direct network connectivity for a single source of truth. We’re even starting to see independent chargeback management platforms to complement it all. It can get complicated quickly, of course, but the aforementioned risks associated with relying on a single partner make the trade-off(s) between simplicity and redundancy to future-proof your business an attractive proposition for most.
Key themes of this independent PSP future include freedom, flexibility, independence, redundancy and control. With approximately 50% of your business operations at stake, these tools are quickly becoming must-haves.
It is now. It happens. As evidenced by a recent study of ACI worldwide
ACIF