Technology is helping to blur some lines in payments, where the big become bigger by buying what they need, or partnering – or both.
In the eternal “build or buy” debate, large players in the payments sphere are snapping up technology firms to boost capabilities and turbo-charge efforts to scale.
In the most recent example, just this past week, Paysafe said it struck a deal to acquire iPayment Holdings to enhance its U.S. presence.
But build vs. buy is no easy question to answer. And when it comes to bringing payments into their environment, software providers must mull a few things – including the concept of integrated payments.
Call it what you will, as Paya President Greg Cohen told PYMNTS’ Karen Webster in a recent interview: “If you’re a software guy, you call it ‘X’ and if you are a payments guy, you call it ‘Y.’ But what I think you’ve got is two industries – payments and software – that are having a natural convergence. The questions being asked are different depending on what side of the ecosystem you sit on.”
One thing is clear, as he said: Businesses are buying solutions now. In an age of cloud computing, and as computing power comes ever cheaper, “payments become a toll road” and “a value-added feature inside of some greater solution.”
A few strategies play out, and some players are adopting multiple strategies concurrently, said Cohen – boiling down to either offering integrated software solutions or powering the software providers themselves.
Against that backdrop, then, a software provider delivers a full set of software solutions, with payments embedded. Or, from the payments side, some firms can opt to distribute software, like Clover, or Square … or power software providers, which is what Cohen likened to what Stripe, Mercury and Cayan do – and what Paya does across different verticals, given their specific needs.
The two roads – from the payments perspective, powering software providers, and from the software side, building and shipping full-suite solutions – follow different paths, surmised Cohen.
Software providers eyeing payments typically look at that function as providing incremental revenue, said Cohen, to close the loop on transacting inside their own environments as an essential value-add.
On the payments side, Cohen said that many payments players are at a decision crossroads: asking themselves whether they should use payments to enable software players, or become a software player by either buying or building a software platform that can be distributed in a given vertical where payments is a value-add inside of a given solution, the same way payroll and time and attendance are.
However it shakes out between the two camps, Cohen said it’s not about which model wins out over the other, but “where the greater piece of the economic pie winds up.”
Distribution, he said, has always carried the greatest piece of the economic pie, even back to the days of the ISO, where the processor was responsible for 10 to 20 percent of the economics, while the ISO itself represented 80 to 90 percent.
Distribution as payments companies scale means “there is an arms race, as companies get the tools necessary to complete in a software world.” As Cohen noted, this is amply illustrated by the Chase/WePay deal or Global Payments’ purchase of ACTIVE Network, and First Data with Clover.
“Technology has much more to do with distribution than it ever did,” said Cohen.
But even as scale matters, and the world is increasingly cross-border, the question becomes whether payments players can make money just on payments.
If payments can be likened to a toll road, as mentioned above, the question becomes whether companies need ancillary offerings to fill the coffers – and the answer is yes, Cohen said. He cites Worldpay, where almost all of the revenue stems from payments as a result of the many things wrapped around the payment that drive greater revenues overall.
On a large scale, he said, “it’s value-added wrappers around payments that enable payments to be a revenue driver.”
Looking ahead, Cohen cautions “a day of reckoning” for some software providers, who have branched into touching money and managing risk without being fully prepared for the responsibilities of managing risk and enabling settlement.
“I think there’s a lot more education [needed] for PayFacs who are not adept at settlement and managing risk – because those are the two scary areas around the payments transactions that even bigger players have shied away from,” Cohen explained. Some large eCommerce firms and marketplaces have opted to have payments powered by other companies.
That day of reckoning may be hastened in a post-Facebook, pre-GDPR world, he said, where questions about data security abound from current and would-be customers.
Of concerns that arise, Cohen said they include “everything from security of information to how you handle tokenized data in your own vault, to who you share that data with … it’s more of a conversation around processors and their vendors … I expect to see more on that, and I expect to see more from a regulatory standpoint about how we handle [data and security].”