This post has been sitting in my drafts to write for some time now but the news I read this week about Formance raising a $3.1m seed round from Hoxton Ventures and others provided the nudge to actually put my thoughts down on paper and write it. I am by no means a payment expert so please feel free to reach out if you disagree with any of the below as I would love to learn more.
Whilst the payments space is by no means “solved”, there are many problems still to be addressed and new ones created all the time, it does seem as though accepting and making payments has definitely got a lot easier recently. From Stripe’s 7 lines to POS terminal providers like Square, businesses have a lot of options for payments. Accepting payments has become table stakes and while this has become easier, it has also made a merchant’s payment stack more complicated. The technology underpinning all of these modern payment providers is the humble Application Programming Interface, or API. An API is the piping that allows two applications to talk to each other. With many payment options available for merchants from payment service providers through APIs, what is next?
This is a theme I have seen increasingly more of recently and when I dug into the data, I found 21 companies operating in this space, mostly in Europe but also in the US, India and Latin America.
What is payment orchestration?
Payment orchestration involves giving merchants a single place to manage their global payments stack, allowing a single view of transactions, authorisations and settlement across all payment service providers (PSPs). Payment orchestrators fintechs offer merchants the ability to route transactions based on merchant defined logic to maximise authorisation rates.
Payment orchestrators provide a single integration into underlying PSPs who have expertise in particular geographies or payment methods for payment acceptance. Although some payment methods like card are effectively global, consumers in different countries may prefer to pay with a local payment method which requires additional integrations. Payment providers like Stripe, Adyen and Checkout do offer a range of payment methods across many countries, they do not cover every country and every payment method, as alternative payment methods are cropping up all the time. So rather than a merchant having to integrate with a large number of PSPs across the globe so they can accept payments in every country they want to sell their product in, they integrate with one orchestrator and get access to a number of PSPs all at once and their underlying payment methods.
What value do payment orchestrators provide?
Clearly, the speed to market and reduced cost from having a single integration is a key benefit for merchants. Not only initially, but on an on-going basis, maintenance is likely to be much simpler due to the less complex infrastructure, making it quicker and cheaper to maintain. Orchestrators could potentially drive down PSPs costs for their underlying merchants due to volume discounts as well as smart routing rules to the lowest priced PSPs. These reported cost savings benefits must be balanced with the orchestrators own costs (SaaS fee or per transaction costs) which can add up for a merchant.
In addition to cost savings, orchestrators give a merchant control over their payment stack. This provides them with flexibility to change PSPs, change checkout options and to make a unified omnichannel shopping experience for consumers. By having all transaction information in one place, it also provides finance teams the control they need to create reports, audit payments and run general analysis.
A single point of integration also means merchants have more visibility to track payments with a single source of truth for payments. This provides a much easier way to reconcile payments across multiple PSPs as well as providing visibility into authorisation rates allowing them to optimise rates with smart and dynamic routing rules (see above from Primer). A single integration allows enhanced risk management through the use of universal network tokens which coupled with 3DS, could help to reduce fraud.
The ultimate benefit for a merchant of these is to increase conversion rates through optimising the PSP on a per transaction basis for the best chance of authorisation and allowing retries with backup providers. One orchestrator even claims to increase acceptance rates by 15% and reduce payment fees by a similar margin. I was a little surprised to not find more claims or data about how much orchestrators can improve authorisation rates, given that would be the best metric to prove their value.
Given that orchestrators make a payment stack more simple with one integration, they are only useful for companies that have, or need to have, many PSPs. There probably isn’t as much value orchestrating two PSPs, which inevitably means they often target enterprise style merchants with complicated, often cross-border needs, or marketplaces with complex needs. With merchants operating internationally, setting up local entities, local bank accounts and figuring out the tax implications make this challenge incredibly difficult. These enterprise style merchants often will have slower sales cycles given how large they are and how crucial payments are to their businesses.
With that being said, with the acceleration of online and mobile shopping and the availability of platforms to ship products globally, orchestrators can help smaller merchants grow by offering them the ability to sell their products into new countries much quicker than ever before. Merchants often think global from day one.
Out of the 21 orchestrators that I came across, 12 were in Europe which makes sense. Europe, contrary to popular belief, is not one large homogenous market. It is made up of nearly 30 smaller markets with consumers that all have their own payment preferences. Local debit networks are an important payment method in France (Cartes Bancaire), Germany (Girocard), Denmark (Dankort), Italy (Bancomat), Netherlands (iDEAL) and more. There are also different local tax considerations and rules that, despite having a single currency, make Europe an obvious market for orchestrators because of the many different payment methods required to cover the continent.
Two key questions I have around this space are;
Do orchestrators introduce a single point of failure risk for their enterprise merchants that is too big for them to stomach?
As PSPs like Stripe, Adyen and Checkout expand their coverage, will there be a need for orchestrators if one PSP can serve the global needs of customers?
I do not have the answer for these questions as I lack the perspectives of merchants, having never been one myself, and having never worked at a large PSP. I would love to hear others perspectives on these questions so please feel free to reach out.
As always the above is designed to be a somewhat unstructured stream of thoughts. I welcome being challenged on them as I feel like the best way to learn is to do so in public so feel free to reach out to provide any feedback/comments.
Fintech News Highlights
🇪🇺 N26 has streamlined its account top up process to provide card and digital wallet options for customers in addition to SEPA, with the help of Stripe.
🇪🇺 Stripe has released a new delegated authentication feature to improve conversation rates in Europe, with Wise its first customer. Stripe customers can allow their customers to authenticate purchases inside a checkout flow rather than kicking out to an issuer app.
🇬🇧 Revolut launches free USD transfers for its UK business customers. It is also the fastest growing fintech in Spain and is launching in Sri Lanka, Chile, Ecuador, Azerbaijan and Oman.
🇬🇧 Starling Bank has upgraded its Spending Insights tool to better help customers deal with the ongoing cost of living crisis. It is also acquiring a £500m mortgage book from lender Masthaven.
🌍 American Express has teamed up wit Abra to release the Abra Crypto Card that will give crypto rewards like traditional cashback.
🌍 Coinbase is cutting 18% of its staff, some 1,000 people. Bucking the trend is Binance, Kraken and OKX who are hiring.
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Nice post - and you've hit on many of the key value drivers behind "payment orchestration". But even though Primer has, by all accounts rejuvenated what was once an ailing space (payment orchestrators never really took off in a big way..) -- we do not see ourselves as a payment orchestrator, and feel "payments orchestration" is an exceptionally narrow worldview.
We would never have been able to gain the reach, traction and funding we have had we decided to build a "payment orchestration platform". As I said, totally dead category at the time. Now becoming all the rage, due to a misunderstanding of what we're building (IMO).
Payment orchestration is a feature. It would be like calling AWS a hosting provider.
The reason we started Primer was due to a lack of *any* technical infrastructure across merchants' payment and commerce stacks. This is a technology problem we're tackling, which certainly unlocks many of the challenges merchants face around optimising payments, but introduces with it many new and interesting opportunities to help merchants build better commerce experiences for their customers, gain greater reach and empower themselves with unique insights across the entire commerce lifecycle.
Our approach was to build the world's first automation platform for payments and commerce, which prior to Primer had never before existed (now being widely replicated). This provides many capabilities around optimising + orchestration payments -- and boosting payments success and conversion, but more importantly -- enables merchants to build comprehensive end-to-end commerce flows.
It's not about PSPs. As far as we're concerned, as PSP is no different to a fraud platform, or a card issuing service, or a KYC platform, or a payouts product, or even Slack. It's about decomposing the payments and commerce stack, and enabling merchants to build their ideal payments and commerce experiences in a unified way.
We're working on becoming the biggest enabler for all of commerce -- for third-parties as well as for merchants, and their customers. I can talk about this for hours -- but we envision a future in which PSPs are not the primary source of distribution for the products and services merchants need to create the best experiences for their customers. Merchants do not see the world in a "PSP-centric" way, and neither do we. We're an application framework, and PSPs, and hundreds of other third party tools, products and services are the libraries merchants need to build their ideal "applications".
Q: do the orchestrators also handle the red edges payout part or only the purple edges part in your diagram?
IF Yes they handle the payout part also; this part of orchestration is nothing but "implicit split payments" (v/s explicit split payments) > essentially one buyer payment split into multiple receivers for settlement (can be done via api level at time of processing or can be done at reporting level after processing). Also some niche PSP's offer this implicit split payments to their big merchant customers already.
Your merchant related questions are very valid - particularly the single point failure.
I don't know but wanted to ask;
- who would own the transaction data? is it the orchestrator or merchant or both?
- is there any ai/ml models that help optimize and / or route to cheapest processor and still have higher auth success rates? I have heard that for some big merchants, payment processing is the 3rd/4th biggest cost component, so can be beneficial.