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“This is the 4th in a series of 5 on “The History of Payments”. If you have just landed here, checkout the past blogs on the past part one, part two, and the present.”  Martin Herlinghaus

To ensure they meet the payments needs of today’s merchants and consumers, payment acquirers must always plan for tomorrow. That is never easy, and particularly not when consumer trends are moving faster than most merchants are able or willing to go.

Going into 2020, traditional financial institutions were struggling to adopt the open, innovative and value-oriented mindset of the digital generations.

diagram history of payment

Social Economy & Convenience

The so-called millennials (Generation Y) and the succeeding Generation Z are practically unattachable from their smartphones. It is often said they would rather leave their home without their wallets than their mobile devices. Many would just as soon shop online than wait in line in a traditional store, and with the growth in one-day delivery services that is a threat that traditional merchants cannot ignore. 

These digital-native consumers are accustomed to an easy, virtual wallet checkout process that is seamless and sometimes even invisible (Uber, Amazon Go). Small to medium-sized businesses (SMBs) are increasingly opting for payment solutions that accommodate these preferences, particularly when they can also utilize them in helping to manage their businesses end-to-end. 

Independent software vendors (ISVs) were early to spot the opportunities in these trends and created networks of connected services that they market as merchant ecosystems. Their solutions pre-bundle main modules into one offering, often including payment processing and sometimes spanning both physical point of sale (POS) and online commerce (eCommerce). 

POS and eCommerce systems represent the heart of most merchant ecosystems, and are naturally positioned to function as the main integration hub into associated services such as loyalty, inventory management and staff management, giving the solution provider access to a vast pool of payment and non-payment data.

 

Tough Competition  

Merchant payment systems are the key to unlocking and monetizing the data generated by payment transactions. That is why competition is fierce, and from many directions, in the battle to dominate merchant payments. 

While ISVs have gained much attention in their efforts to consolidate payments for SMB merchants, their combined volume is dwarfed by the efforts of large technology firms, so called “BigTechs”, such as Apple, Amazon, Alibaba, even Facebook, that are leveraging dominant platforms to expand into financial services. BigTech firms benefit from having large existing customer bases and from collecting and analyzing their customers’ data, according to a report by the Financial Services Board

“They can use this to achieve scale rapidly across different business lines, including in financial services.” 

Many BigTech companies have created a stored value or loyalty currency as a way to extend their influence on a customer’s outside spend. They partner with traditional banks that can handle regulated aspects such as card issuing and account opening in a win-win arrangement: Extending the usability of their own products and tapping into new revenue streams, while the banking partner gets a digital make-over and access to a new distribution network. 

Smaller, emerging technology companies are focusing intently on financial services, earning the label of “FinTech’s.” They aim to disrupt what they perceive as outmoded aspectof traditional banking payments processes. Venture capitalists have poured more than an estimated $29 billion in investments into such payment’s ventures over the last 9 years. 

The FinTech explosion has produced a proliferation of products that are designed to be customerfriendly, but which leave merchants trying to reconcile separate, singlepurposed solutionsOften they partner with similarly minded “challenger banks” that are emerging to take on traditional retail bank services in a highly digital, data-driven manner.   

That leaves many traditional payment processors and acquirers struggling to adapt legacy infrastructure, built on massive monolithic systems that were focused on achieving the highest processing efficiencies, but lacking the agility and flexibility to edge out the new technology-driven competitors. Newer, innovative processors, with a digital and front-end focused mindset, are using digital know-how to build and consolidate multiple steps from the processing value chain to create a highly flexible integration layer. 

Collectively, these competing forces are dramatically accelerating innovation in payments, which we will cover in our next blog. Stay tuned and watch this space or follow us on LinkedIn / Twitter to get the latest updates.

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