Consolidation is just the start, even bigger change is coming for payments

July 23, 2018

Alex Schoonkind

Alex Schoonkind is VP Global Partnerships at Dimebox, and has an extensive background in the payments industry with years of experience in merchant facing positions in the global payment provider arena. We interviewed him to discuss the ongoing consolidation streak in payments and the problems that established merchants and providers are facing. Alex explains how the current signs imply that even further change is coming as payment institutions are forced to change their game to remain competitive.

The payment landscape is rapidly consolidating and payment processing is starting to become a commodity. What is the next step for payments?

I’ve witnessed the transition first hand while I was working on the provider side of the payment industry. Merchants used to be happy as long as their payments were being processed, no matter what fees were involved or what additional services were available. These days merchants are more savvy about what they want and what they are missing to make the most of their payments. They’ve outgrown the mentality that simple payment processing is enough and are challenging providers for more control and transparency. Meanwhile, the providers have grown too, and the current consolidation of the market is making the playing field smaller and smaller. To stay competitive, companies must be smart in how they innovate and become even more client-focussed. It’s up to them to determine how they want to do that, and the consolidation streak shows different approaches through which companies are expanding their reach in the payments chain.

First of all, there is the choice to buy or build. Stripe is a great example of a company that develops additional auxiliary products to help any merchant do business online, almost reducing payments to a feature which is just part of seamlessly doing business. Decreasing their dependency on payment processing broadens their tie-in with merchants and allows them to avoid the processing price wars. Then there are companies like PayPal that are adding value by expanding their current payment offering, such as with their acquisition of iZettle, moving into offline and POS payments. Finally there is the option of simply buying competitors and absorbing their market share to strengthen your position in a market you already operate in. Klarna has done that with SOFORT for example, and we’re seeing other local payment methods getting absorbed almost every day. Paypal investing in PPRO is another example of defensive consolidation. As they try to move from being a payment product into a provider role, Paypal has secured a stake in PPRO’s cross border connectivity offering.

The consolidations are supposed to future-proof companies as the landscape changes. Does it solve all problems for payment companies and financial institutions or is more action needed?

As they absorb different positions in the value chain, most large companies still have trouble innovating their complex legacy systems. To be fair, this is mainly due to the fact they have to maintain an expected revenue stream. Most of them can’t just put all their resources into developing new and unproven technology to replace all their old systems, and newly acquired systems only add complexity to the overall infrastructure, creating more pain points and room for error. Increasingly the sentiment is coming through that expanding your offering through consolidation also means your technology has to be consolidated internally. Ideally all systems should connect seamlessly into one layer, replacing disjointed services with a single API, for example. This is not an easy step, as such a move is expected to be complicated and not profitable in the short term. But at the rate things are changing now, the patchwork legacy systems are only going to hurt more and more, and their complexity is increasing every day, making it only harder to do what is inevitably necessary down the line.

PSD2 provides a good example of this problem. At first, banks were reluctant to adopt the idea of open banking, but they are now making a very good step towards accepting new technology as the solution to problems that have been brewing for years. These large institutions have to get up to date to maintain their position in the market or risk losing it to young companies that are able to leverage new and scalable technology. They already created their own monsters in the form of PSPs, and recently companies like Adyen, Klarna and now Worldline are moving into their banking territory.

Why are established companies struggling to make their internal systems future ready?

The platforms they currently use were built back when ecommerce was a lot simpler. You bought a physical product from a seller directly and he’d only ship it if he had received the funds. The seller often dealt with a smaller selection of similar products and only sold domestically in one single currency. Compared to that, today’s marketplace constructions for example bring a lot more complexity to the table. They involve a lot more diversity in money streams while additional financial considerations come into play. Ecommerce models have grown rapidly in the last decade and consumers now expect all sorts of payment options, and merchants expect added services from their providers. The established players are trying to keep up while lacking the time to develop new systems. They had to adapt to new needs and emerging offerings from new flexible competitors, even though their systems were not built with these services in mind.

The consolidation you mentioned is shaking up the established chain of payment processing. Are we going to see even more change or is it going to stabilise into a new status quo?

More change is definitely coming, and it’s going to come from areas that most people are not expecting. Companies that are in danger of losing their place in the chain are trying to branch out and absorb other parts of that chain, but the new players are hungry and ready to do things themselves. Young companies throughout the ecommerce and fintech world are in the position that Amazon was in twenty years ago, ready to expand their reach into areas that nobody is expecting them to compete on. Merchants are interested in owning the PSP part themselves and PSPs want acquiring capabilities. Even tech companies like Shopify and Amadeus that used to focus on building vertical-specific business solutions for merchants are getting into the payment space. From the other side of the spectrum, banks want to reach consumers directly, so they will also pursue PSP capabilities with the added benefit of providing banking services. These institutions need everything consolidated into one system that they can control.

Dimebox has developed such a system. It acts as a rough diamond that any user can cut and polish to fulfill any specific need: whichever part of the chain a player is looking to absorb, they can use the Dimebox platform to accomplish that goal. By putting the power back into their hands they can match the flexibility of younger companies while offering a broader service. With our technology at the core, our clients can expand cleanly and remain scalable in the future.

Large merchants that want to service their customers without intermediate players handling their funds and processing for them can also rely on the Dimebox platform. They’re looking for a consolidated platform that’s fully under their control, that automates payment features such as master tokenization, smart routing and on-demand connectivity. We’ll soon start to see global super-merchants like Uber (who recently acquired a banking license) moving to full in-house processing in the near future. If a merchant is large enough to match the transaction volume of some providers, they’ll eventually realize they should just cut out the middleman and skip the processing fees. Dimebox gives them the technology to realize those aspirations.

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