The first full stack payments platform…
…was not a tech company.
I’ve been pondering a discussion from a few years ago, where a former colleague and I were discussing the “omni-channel” pitch. Her sharp insight was that the first omni channel payments platform was a bank. Because banks offered a full stack of payment solutions to their business customers like:
- Acquiring (online AND offline) eg providing the hardware terminals
- Treasury/liquidity management/FX
- Issued cards
- Lending
- Payouts
amongst many other services. However at some point, business line/services were split up, and “full stack” and “omni channel” payments became a “new” (but actually old) sales narrative, along side the rise of third party payment service providers. What happened? My hypothesis is two main reasons:
1/ Business decisions: Banks chose to focus less on acquiring.
2/ Tech developments outside of Banks.
First, quick definitions.
- Issuing refers to the process of creating and distributing debit, credit, prepaid cards to consumers. Banks earn revenue from interchange, interest fees, and some annual/transaction fees. This is balanced by potential losses (eg if cardholders aren’t able to pay bills), cost of consumer rewards, and the scheme fees they pay to the card networks.
- Acquiring refers to the process of accepting and processing payments made with credit and debit cards. Banks earn revenue from acquiring by charging a % of the transaction amount as a processing fee. There’s also a credit risk element — acquirers underwrite merchants, as the acquirer bear the losses if a merchant goes under (eg normally the merchant refunds the cardholder, but if a merchant goes out of business the acquirer is on the hook for the losses instead).
1/ Business Decisions: Banks chose to focus less on acquiring
Why did banks move away from acquiring to focus on other lines of business? I’ve been looking for an explanation, that came via Electronic Value Exchange (David L. Sterns) in tracing the technological changes in the 1970s-1890s that contributed to the dynamics in the merchant services industry. Professor Sterns explains in the book how technological changes in data capture and processing changed the business model to be completely that of scale. To quote an excerpt:
To survive, a merchant processor needed to acquire as many transactions as possible, and by the mid to late 1980s, banks found themselves either incapable or uninterested in providing the necessary computing infrastructure…Throughout the 1970s and early 1980s, nearly every bank was both an issuer and an acquirer, but by the late 1980s, members tended to specialize in one function or another. (Sterns, pg154)
and later on he mentions how most banks outsourced this to First Data, the behemoth we know today for online and offline payments. To double click on two words —
- Incapable: In the book, incapable refers the lack of tech capability to process more and more transactions as scale (it does require robust tech investments).
- Uninterested: perhaps acquiring did not feel that profitable given the risks —making basis points per transaction with the scary potential of large losses. This is vs the more attractive and lucrative business of issuing (earning that $$$ interchange).
In the 2000s we see some international sells offs from banks to third parties.
- HSBC selling Global Payments in 2009 (source)
- Standard Chartered selling its JV to First Data in 2013 (source)
- Citibank selling Wirecard in 2017 (source)
To be clear, the banks above do have acquiring businesses in some shape and form in specific markets, or they’re the underlying bank behind PSPs and sell to merchants. Banks leaving some parts of the space has given room for the rise of the likes of the “non bank” payment providers — First Data, Worldpay, Adyen, Stripe, Paypal etc.
2/ Tech developments outside of banks
Third party providers leapt ahead in payments acquiring technology. Why? It could be due to:
- Focused resourcing: Acquiring is one of many business lines for a bank. Being one of many even more profitable businesses usually means a struggle for attention and resources, as per any business line in a large company. Some business lines get the resources, and some (like acquiring) do not. In fact, having one narrowly focused acquiring business line can go all in to focus on developing the best platform possible.
- Starting small and afresh: Decomposing that into smaller units can mean that a smaller company can do things in a faster, more nimble fashion [1]. Large companies carry a more complex tech stack, years of tech acquisitions that might not have been fully integrated, legacy systems, and most of all known practices and ways of doing things (APIs being behind a portal vs publicly accessible, less of a focus on documentation or the lack of sandboxes 😅). New companies bring a new reset to the way things are done.
All this to say — banks are not generally known for their APIs (core strengths lie elsewhere), and so technology providers grew to provide merchants with the new, full stack, omni channel experiences built on better APIs.
Banks were the first full stack platform
Things come together and then come apart. Business lines are spun out, and then sometimes come back (thinking aloud here about the numerous mergers and acquisitions in payments). But, this goes beyond payments — for example a business can use Microsoft — an Azure, Github, to MS Ofice suite, including Teams. Great services come from the outside too, eg Zoom or Slack, and lift the growth and improvements across the industry (would Teams have gotten great without Zoom as a competitor?).
Looking ahead, I believe bank APIs will get better — or at least good/decent enough to justify not working with third party PSPs. Will be curious to see how things evolve, especially in a poorer financing environment for new upstarts breaking into payments.
[1] A topic of another post, but the value of a rewrite is expounded in “Mythical Man Month”
