This editorial was first published in our Online Payments and Ecommerce Market Guide launched on 1 November 2017. The guide features several important thought leadership editorials from ecommerce and payments industry professionals, which makes it a top-reference source for anyone involved in the payments ecosystem.
Non-cash payment process
The actual process for a merchant to accept a non-cash payment from a customer is actually fairly straightforward. It consists of four steps:
Acceptance – The merchant can accept the type of payment that the customer wishes to use.
Authentication – The customer is identified as the individual actually responsible for the authorisation.
Authorisation – The issuer of the payment instrument confirms that the customer is good for the funds.
Reconciliation – The transaction is completed; the customer’s account is debited, and the funds are credited to the merchant’s account.
If there were only one type of payment instrument, the entire processing industry could pretty much go away. However, customers want to pay with credit cards, debit cards, pre-paid cards, private label cards, and other forms of payment. It is also important to reduce the risk of fraud or theft and regulatory institutions must keep track of that, so a layer of regulation adds yet another layer of complexity. Finally, some payment types are either limited in usage (cheques), or are designed for a specific use case (online payments).
The complexity of the payments landscape
The complexity of the payments landscape has spun off into entire different industries that are now components of the ecosystem. These industries established themselves as robust entities and found new ways to differentiate offerings, increasing the overall complexity.
Historically, the functions necessary to process card payments have been segregated into different units. For online/mobile channels, there are shopping cart providers, payment gateways, payment facilitators, and digital wallet providers. For the physical world, there are POS hardware and software providers, processors and acquirers. Besides, there is an army of resellers and distributors, including ISOs, MSPs, and ISV/VARS that can serve merchant payment needs, and, for both online and physical payments, the networks are the link to the issuing side.
And this isn’t even all of it. Increasingly, alternative payment organisations are emerging to address specific merchant and customer requirements for specific regions or activities. And mobile money offerings, like PAYTM in India, are creating new payment ecosystems completely independent from traditional card based payment systems.
For a merchant, this complexity is a major hindrance to make the right business decision regarding payments. There’s clearly a great opportunity to offer a simpler, more comprehensive solution to the market. However, that also carries economic risk. The Dutch computer scientist Edsger Dijkstra summarised the problem: “Simplicity is a great virtue, but it requires hard work to achieve it and education to appreciate it. And to make matters worse: complexity sells better.”
The first step in offering a simpler payment solution is the one-stop shop model, where each and every aspect of payment is theoretically provided by a major player, be it a processor, a gateway, or a payment facilitator. This kind of approach is generally a “bolted together” aggregation of function and organisations that mask the complexity with the appearance of an overall solution. Nothing is really gained in terms of efficiency. From a merchant perspective, this is an answer that can be appropriate for a lot of organisations but, in the long run, it only delays the inevitable consolidation of the space into a simpler ecosystem. So, who is going to take the challenge to attack the complexity of the payments ecosystem and create a simpler, more holistic approach?
The new role of the payment facilitator
Over the past few years, the payment facilitator (PayFac) has dramatically simplified the process of accepting payments in the online/mobile world. By becoming the merchant-of-record for their client merchants, they eliminate the complexity of the payment space and its concomitant fraud and chargeback issues with a predictable pricing model. A simple piece of code or an API connects the merchant to the PayFac, and payments are enabled in a matter of hours or days. Merchants can focus on their offering and operation knowing that the payment function is efficient, reliable and fully integrated into their offering.
PayFacs garner an increasing amount of the online/mobile payment business, taking out a share from traditional payment gateways and larger payment processors, which are offering “integrated” services.
The PayFac model eliminates the complexity of the payment process for merchants. The difference between an online transaction and a physical payment is the variety of different interfaces enabled in brick and mortar. Once the payment information is entered into the terminal, the process is essentially the same as an online transaction. If a PayFac can be agnostic about the way the information enters the system, then they should be able to replicate the simplicity of their online model.
There are PayFacs at work developing physical solutions that will enable this vision, and the concept is beginning to gain momentum in the market. The initial clients will be merchants with a significant online presence already using PayFacs. For these companies, it is a small and simple step to incorporate physical payments into their payment solution.
The complex, confusing and expensive world of payment processing that has dominated the space for years will continue to process the vast majority of card based payments, but there’s a new vision, simpler, cheaper, more comprehensive and flexible, a holistic view of the space and its purpose for commerce. And that vision is being driven by Payment Facilitators. It’s the future of payments.
About Thad Peterson:
Thad Peterson is a senior analyst with Aite Group, focusing on the evolution of the payment space, the customer payment experience, and merchant acquiring. Prior to joining Aite Group, Thad led the mobile commerce practice at inCode Consulting and was managing director of Maritz Real-Time Rewards.
About Aite Group:
Aite Group is an independent research and advisory firm focused on business, technology, and regulatory issues and their impact on the financial services industry. With expertise in banking, payments, wealth management, capital markets, and insurance, Aite Groups analysts work with clients as partner, advisor, and catalyst.
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