FinTech firms will travel the world and describe what they are up to using brand-new terms that are different or exciting. People might draw comparisons in response — wait a second, isn’t this kind of like? — and use some more familiar terms that have been in the marketplace for a long time. FinTechs have created some repeated descriptions that might be useful to a broader audience.
Payment gateways, for instance, have generally been a service that people access outside their organizations. “Sometimes they’re directly associated with a processor, sometimes not,” Modo CEO Bruce Parker told PYMNTS in an interview. It’s likely most analogous to the software-as-a-service (SaaS) concept, but it predates that. The whole point, Parker said, was to connect to a gateway, and one that will connect to everything else. Beyond connections, gateways typically helped people get their “arms wrapped around” settlements with a single report.
They didn’t, however, consolidate from a connections perspective. If a company was talking to one payment service or another one, they had different calls that were different elements within an application programming interface (API). It’s still generally the case today where a developer or implementer talking to one payment service has to figure out what it wants. All of the differences end up driving complexity, or what is thought of as friction. He notes that a single point of aggregation is very valuable.
A hub was about the problem of having wallets different from cards (that are different from bank accounts and other forms of payment). They tended to be on-premise software and still tend to remain that way for companies that are trying to figure out interoperability. The key problem that hubs have solved is having different types of payment with different connections. They were focused on helping people get their arms wrapped around that so one settlement or reconciliation team could face off against wallet, card and direct-to-pay traffic.
Switches, too, have been around for a long time, and they tend to be specific to a payment method such as cards or bank transactions. The point of a switch is as it sounds, which Parker said is to “route or choose between different payment service providers.” A company could have a switch between two different card processors. The challenge is switches are not consolidating connections or settlement processes, and they are also not dealing with different payment methods. Switches do allow a company to make choices and say they want a given card transaction to go to provider A versus provider B.
Companies, however, want to figure out how to get the efficiencies of a switch, the interoperability of a hub and connections as well as the single overall operational processes of a gateway. FinTechs such as Modo enter the picture by providing the software — it doesn’t hold, touch or move money — but it does offer a software stack. Parker says the company “rearchitected from the ground up” the concepts of a hub, switch and gateway. It took a clean sheet of paper to the software design and has one single piece of software as it aims to combine the benefits of a gateway, hub and switch.