Ask any fintech or payments analyst and they will tell you: all eyes are on Stripe and Adyen. But with a continually delayed, yet always ‘just around the corner’, IPO for Stripe and a recent 40% decline in stock price for Adyen we must ask ourselves – is the future of payments actually somewhere else? My money is on the field.
In 2011, Marc Andreessen famously wrote Why Software is Eating the World. Fast forward to 2022 when lead Credit Suisse (now UBS) payments analyst Tim Chiodo and his team published their comprehensive report on all things Payments, Processors & Fintech where you can see the evolution of this trend and its extension into the world of payments with their fresh take “If Software Is Eating the World…Payments Is Taking a Bite”. Yet while cloud computing and API services have exploded in recent years making a distributed systems approach to architecture the de facto for most cutting-edge organizations, payments has remained mostly centralized – until now. We are about to enter a critical period where individual payment-related services get unbundled and when, where, and how they get rebundled is going to shape the future of the payments ecosystem.
Payment acceptance (i.e., the ability to get paid for your goods or services) is rightfully one of the first steps in setting up your online business. Unfortunately, it’s also typically one of those check-the-box things that, like your rotisserie 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 really boils down to two components: 1) produce and sell goods or services, and 2) collect money from your customers for those goods or services. Accepting payments is fifty percent of the equation! So if your single payments partner suffers an outage, or decides to change their mind about your business and shuts you off, you are S.O.L. Or, even worse, you continue to limp along with your partner paying above average processing fees and getting below average acceptance rates.
This lack of redundancy and optionality will undoubtedly resurface as an issue as a company grows. Page 71 of Instacart’s S-1 filing specifically calls out how their reliance on third-party payment processors, and the associated costs, is a major risk but specifically “If we are forced to migrate to other third-party payment service providers for any reason, the transition would require significant time and management resources, and may not be as effective, efficient, or well-received by consumers, retailers, or shoppers.”
Payments 2.0: Embedded Payments
Many of the partners at Andreessen Horowitz, Marc’s Silicon Valley based venture capital firm, have taken similar approaches to making grandiose statements via cornerstone blog posts. Whether it be Angela Strange proclaiming Every Company Will Be a Fintech Company or Alex Rampell’s perspective on Distribution vs. Innovation – they are always thematically very on point, even if the end result isn’t always exactly as predicted.
Shopify Payments is the perfect example of embedding payments into a software platform – it’s powered by Stripe and distributed by Shopify – which should make both Angela and Alex smile. There’s an entire industry that caters to this sort of blueprint, known as Payment Facilitation, and dozens of venture-backed startups are attempting to modernize the independent software vendor model for the modern digital economy in this context. It makes sense, however, it’s just clever distribution and monetization of a single, centralized and bundled payments services solution with all the value accruing to the payments company and the platform – not the individual merchants – and the results speak for themselves: merchant services, or payment processing, accounts for almost 70% of Shopify’s revenue and all of this Shopify volume accounted for about 25% of Stripe’s transaction volume in 2022!
It’s important we take a step back and think about this from first principles and an individual merchant’s perspective. While these modern acquiring and processing platforms make it super easy for a business to get up and running quickly with accepting payments, what the similarly modern merchant or platform really wants is the ability to run a custom payments stack that is specific to their individual business and their customer base. The dollars, attention, and focus of our industry has been on building payments solutions for software businesses when in reality we should be focusing on enabling software solutions for the future of payments architecture.
Payments 3.0: Custom & Distributed
As of October 2023, Stripe lists 24 distinct different products on its homepage, not including the bundled custom solutions and integrations. And as great as Stripe has been at delivering value to customers for over ten years now, there’s no way they are best-in-class at 24 different components of the overall stack.
In this new paradigm, there is an increasing desire to choose the individual partner that is best for your business. That might mean looking at a solution like Sardine or NeuroID instead of Radar (Stripe’s in-house fraud solution), or a local acquiring platform in LatAm or Southeast Asia instead of a single global provider, or a third-party like Pagos or Butter for intelligence and routing, etc. Reconciliation also becomes a significant challenge in a world with proliferating alternative payment methods so there are companies like Fragment and Proper building ledgering-as-a-service. One additional consideration is decoupling services like 3-D Secure, account updater, and network tokens in a multi-processor approach which may require direct-to-network connectivity for a single source of truth. We’re even starting to see independent chargeback management platforms to round it all out. It can get complicated quickly, to be sure, but the aforementioned risks associated with relying on a single partner makes the tradeoff(s) between simplicity and redundancy to future-proof your business a worthwhile proposition for most.
Key themes of this PSP-agnostic future include freedom, flexibility, independence, redundancy, and control. With ~50% of your business’s operation at stake here these quickly become must-haves.
The time is now. This is happening. As evidenced by a recent study from ACI Worldwide
ACIW
that showed 57% of merchants now work with multiple acquiring platforms with the sweet spot being somewhere between 2-5, and growing. 40% of merchants that still rely on a single acquirer today are looking to go multi-processor in the next 12 months. AWS now provides the cloud computing resources to make this possible but it’s not enough. It is important to remember that with as much hype as Stripe & Adyen generate they still only account for ~10% of the payment processing market. The big question is whether they will move to 20%+ and consolidation continues by merely a passing of the torch from the old guard to the new, or if it fragments further to individualized services operating in a truly free payments market.
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