The next step in the payments revolution

The next development in payments technology is likely to take a bottom-up rather than top-down approach and the incumbents could end up on the losing side of the equation.

Innovation in payments has historically been slow, with incumbent players often investing heavily in new services and then launching products to the mass market over the course of several years. Central to this has been a top-down approach: development occurs at the top before the product is launched in the market.

However, the digital commerce market has different demands, and developers now seek both simplicity in implementation and greater control over their payment systems, something for which they are willing to pay a premium. The unusual business models being launched often need new forms of payments services, which are not yet widely available, and new players are emerging to meet this need.

For existing payment providers, traditional approaches combined with defensiveness over disintermediation means a major opportunity may be missed.

Merchants and developers seek control over payments

In recent years, the market for digital commerce has exploded. Services that were not imagined even three or four years ago, including taxi apps, such as Uber, and short-term apartment rental services, such as Airbnb, are now commonplace, with investors valuing them in the billions of dollars. In addition, consumer-facing brands of all sizes are delving into omnichannel strategies aimed at creating a seamless, “on message” customer experience regardless of the channel being used.

Innovative services and seamless user experiences are central to this growth, and although payments for such services run on existing infrastructure, developers are not content for payment incumbents to launch long-gestating digital wallet services. They are now pressing ahead with payment implementation in ways that complement their overall designs and help remove user frictions, rather than adjusting their systems to comply with the stipulations of payment providers.

This element of control over how payment systems work to make them as seamless as possible means there is a growing appetite for services that provide control and flexibility to merchants and developers alike. Older, top-down models that are strict on branding, authentication methods, and transaction types will struggle to gain traction in a market where merchants, and their developers, are exerting greater control with emphasis on the overall omnichannel customer experience.

Simplicity is increasingly held at a premium

The desire for control over payments and the goal of creating a seamless experience are illustrated by the fact that emerging payment providers are now able to charge higher rates to merchants by offering increased simplicity and ease of implementation. Payments are becoming more complex through diversification and greater regulatory requirements, so the need for simplicity is extending beyond small-scale merchants and start-up digital providers.

Some of the highest-growth payment providers, such as Square, Braintree, and Stripe, charge rates that exceed most gateway service providers. More providers that follow similar models are now emerging: Australia-based Pin Payments, for example, charges a rate of 3 per cent $0.30 per transaction. The ability to accept payments “out of the box” and, in the case of digital developers, to accept payments and enable card vaulting services directly in-app without the need for exterior branding or diversion to a third-party payment site, are key.

The wider payments industry would do well to imitate this combination of simplicity and control. Even though larger merchants have the resources to devote to payments, and will continue to pressure interchange rates, greater levels of control and simplicity are likely to be well received. In an environment where interchange rates are under extreme pressure from industry bodies and regulators, it could be an effective means for established payment providers to help maintain revenue streams.

Opening up payment APIs to developers is an opportunity, not a threat

Digital culture has led to a shift in business demands in a number of ways, and opening up payment APIs to developers will help spur wider payments innovation. However, many payment providers throughout the value chain have been reluctant to open up this access to developers; in many ways, they are standing in the way of innovation.

For several years now, major providers, including PayPal, MasterCard, and Visa, and newer players, such as Google Wallet, have provided APIs to developers to allow them to insert payments into their wider platforms essentially as a payment gateway. For many of these payment providers, maintaining the brand and customer relationship remains integral as they try to avoid becoming “dumb pipes” that exist in the background of the payment ecosystem.

Newer gateways such as Stripe have since emerged, however, and these provide developers with a broader range of API features, allowing them to experiment and innovate with payments more widely and develop new payment methods. In the case of Stripe, the brand itself is unimportant – it is invisible to consumers as they make payments – and this gives developers a greater degree of control over the experience and the opportunity to innovate.

Even though, for many payments incumbents, disintermediation and becoming a dumb pipe has been the nightmare scenario, an overly controlling approach that aims to place them front and center of the experience may ultimately backfire if it means they end up failing to meet merchant demands. These providers risk missing out on the next development in payments, which is likely to take a bottom-up rather than top-down approach.

Gilles Ubaghs is a senior analyst in the Financial Services Technology team at Ovum.