A Powerful Tool to Optimize Payment Processing

The increasing complexity of modern payments can be managed effectively through a relatively new entrant in the transaction chain.

Merchants have to deal with an increasingly complex payments ecosystem. Companies are looking for the flexibility to harmonize their payments processing, profit from local market conditions for better authorization rates and cost reduction, minimize operational risk (e.g., outages), and simplify acquiring relationships when possible.

Four global trends are driving this increased complexity:

• Consumers expect fast and seamless checkout experiences regardless of device or venue. The global usage of smart phones creates the means for consumers to make purchases wherever and whenever they choose.
• Consumers can only pay with the payment types they have, and merchants must offer those payment types or lose the sale. Merchants have to provide their customers with the payment alternatives they use and prefer. If they don’t, customers can jump to a competitor’s merchant site instantly, buying what they want in seconds.
• Merchants working across borders must offer local currencies and comply with local regulations. Commerce can be global, but payments are local. Acceptance of local currency is nonnegotiable, and regulatory compliance can be byzantine in many markets (like the United States).
• Payment management is becoming strategic. Payment expense can be a significant cost to a global merchant, and the information that payment transactions can provide about the customer and the transaction can deliver a strategic advantage if the data are in a usable format, informing every aspect of a merchant’s operation from inventory management to customer relationship management (CRM) input. Increasingly, merchants are looking to their payment operations to optimize sales and generate data about their customers at a manageable expense.

As a result of these trends, there is a business case for merchants to further optimize their payments processing by working with multiple acquirers globally. This provides critical redundancy in case of nonperformance or even the demise of an acquirer (as happened, for example, with the Wirecard scandal).

It also allows the company to deploy intelligent routing of payments to different acquirers to optimize cost and performance. The enterprise can be acquirer-agnostic and switch quickly among its acquirers. This way, it can achieve competitive pricing conditions and benefit from the best services that each acquirer can provide in a certain region or country.

In recent years, a new category of merchant-service providers called payment orchestrators has established itself to support merchants in their payments optimization journey.

Payment Orchestration Defined

Payment orchestration is the process of efficiently managing a diverse range of payment methods, providers, and channels within a unified platform to ensure seamless payment processing for businesses. My colleague Ron van Wezel and I recently completed a report on the space, “Datos Matrix: Payment Orchestration Vendor Evaluation,” and some of what we learned is included in this article.

With a payment orchestrator, merchants have one point of contact for their payments activity, avoiding the need to work directly with multiple integrations with different payment gateways. The result is cost savings, improved payment-success rates, and a superior user experience for customers.

Payment orchestrators provide independent and acquirer-agnostic platforms as a service to merchants. Merchants can connect to nearly any payment service provider (PSP), acquirer/processor, fraud-management system, or other third-party software available through the orchestrator.

These orchestrators manage multiple acquirer/processors and service providers, leaving the choice of provider and contractual arrangements to the merchant. Merchants can build resiliency into their payment processing by connecting to several different acquirer/processors in one region.

This enables merchants to quickly reroute payments in case of outages, or switch payment volume between acquirer/processors based on acquirer/processor performance or transaction cost. See illustration, right.

What’s the Value?

The value proposition of payment orchestration is that it enables merchants to easily connect with providers of payment services, risk management, and other services without having to manage multiple integrations. Payment orchestrators go to market directly to merchants, or provide services on a white-label basis to PSPs or acquirers/acquirer processors to allow them to provide orchestration services to their clients.

The direct payment orchestration model is only economical for midsize and large enterprises (i.e., annual revenue over US$50 million). Partnerships with PSPs or acquirers typically serve the small and midsize market.

Orchestrators let merchants easily connect with a wide variety of payment acquirer/processors supporting global payment types. They also offer merchants connections to local acquirer/processors and additional service providers that can augment processing with support for fraud mitigation, analytics, and loyalty programs, among other services. Payment orchestrators are transaction-management enablers, not acquirer/processors.

Besides connecting to a merchant’s acquirer/processors and other ancillary services, payment orchestrators provide core services that help merchants strategically manage their payment operations. Orchestrators offer their clients smart payment routing that can direct a transaction to an acquirer/processor most likely to accept the payment.

Smart routing services include smart payment routing to optimize payment acceptance rates by directing a transaction to the most appropriate acquirer/processor. With that capability, orchestrators provide their merchants with several tools to improve their payment-acceptance capabilities (See table, page 17).

A key benefit of the payment-orchestration model is its ability to support merchant efforts to optimize the value of their payment capability. Beyond smart payment routing, orchestrators also assist merchants with vault storage for tokenized cards, reconciliation and reporting, fee management, management information, risk management, and security/compliance capabilities.

Who Can Benefit?

Payment orchestration makes sense for midsize to large merchants that wish to be acquirer/processor-agnostic, optimize authorization rates, manage payment expenses, and outsource complexity. For smaller merchants with equally complex payment challenges, several PSPs offer a payment-orchestration capability through a white-label version provided by some orchestrators.

Payment orchestration isn’t a good fit for every merchant. Some merchants want to work with a single acquirer/processor to simplify program management, and some organizations prefer to keep payment management in-house, in which case the orchestrator model may not be the optimal solution.

How Is the Space Evolving?

Payment orchestration is still a nascent industry, but there’s clearly value to many merchants to offload the overhead burden of payment management while at the same time increasing their ability to effectively manage payments for the benefit of the enterprise.

Traditional acquirer/processors remain the most efficient vehicle for moving a transaction from the moment of purchase to the provider of that payment service and back again. But providing merchants with a choice of acquirer/processors based on the situation is a strategic option worth exploring by any merchant with a complex payment situation.

The orchestration model applies intelligence to payment processing and lets a merchant optimize payments by tender type, market, transaction cost and strategic priority. For merchants with complex or cross-border operations, payment orchestration is an effective tool to efficiently manage the payment process with minimal overhead. It’s clearly worthwhile to explore the value of payment orchestration for the enterprise.

As the payment-orchestration space expands, traditional acquirers, processors, and PSPs will be challenged to offer a competitive solution. At the same time, it will be increasingly difficult for payment orchestrators to differentiate their offerings from competitors. The result of these two factors is that payment acceptance will continue to be a highly dynamic, rapidly changing ecosystem for the foreseeable future.