2023 will be an interesting year for payment orchestration (focusing here specifically on merchant orchestration). At present, payment orchestration sits at a point of inflection. On the one hand, there is strong demand from merchants for orchestration services. On the other hand, payment orchestrators are challenged by long lead-times for revenue development in the enterprise segment. We firmly believe that a wave of revenue generation is on the horizon, but getting to this horizon will require adequate capital reserves. And many early-stage orchestrators are challenged on this basis.
Figure 9 lists many of the payment orchestration specialists that we observe globally. Most of these orchestration specialists started in the last decade, or even the last five years. Most are also still striving for revenue scale, for example, surpassing USD 10 million of annual recurring revenue. We believe that many of these earlier stages and/or specialised payment orchestrators will be acquired in the coming one to two years given the challenges of raising capital to get to cashflow positive.
Figure 9: Map of payment orchestration startups/earlier stage/specialists
Sources: Flagship Advisory Partners market observations and research
As with embedded finance, there are different answers to the question: ‘what is payment orchestration.’ At its core, payment orchestration helps merchants to ease the complexity of working with many PSPs and other service providers by delivering a technical hub (single API) for accessing many services end-points, and to manage the data from all of these services. Merchants attracted to orchestration are generally working across many geos, using many service providers, which results in technical integration complexity, imperfect UX, and messy data.
Most orchestrators focus on payment transaction management (i.e., routing and connections), expanding from there to also provide independent payment credential vaults and tokenization as well as data aggregation and reconciliation services. POS enablement is an underserved area of orchestration; most orchestrators focus on digital commerce use cases. Orchestration of identity, fraud management, and chargeback servicing is considered a strategic area of expansion for orchestrators, but few are well-developed in this domain. Lastly, most orchestrators are pure technical service providers, but we also see good potential for expansion into money services, such as APM collecting, or multi-currency services. We illustrate these various service domains in Figure 10.
Figure 10: What is payment orchestration?
Sources: Flagship Advisory Partners
Not all orchestrators are specialists or emerging startups. As Figure 11 illustrates, many traditional PSPs have adapted to support payment orchestration (i.e., offering flexibility to connect or collect via their API and payment gateway). More traditional solution providers such as NMI, ACI, Worldline, and Ingenico all now support payment orchestration.
Figure 11 also includes a number of business models that not everyone would consider payment orchestration per se, but that we see as closely adjacent. Token and data vault specialists are one such close adjacency, noting that a number of these token specialists also migrated into payment orchestration. Another related business model is payfac enablement, fintechs that specialise in enabling software or other non-payment companies to become payment facilitators. These payfac enablers generally do not focus on end-user merchants, but rather on orchestrating the needs of payfacs such as onboarding and settlement.
Figure 11: Orchestration fintechs categorised by business model
Account-to-account (A2A) payments are a preeminent and accelerating form of fintech innovation and disruption in Europe as well as many other countries and regions globally (e.g., India, Brazil, etc.). Following a decade of regulatory opening and infrastructure build-out, A2A payments, supported by real-time bank payment rails and now open bank APIs, are thriving as preferred means of P2P and C2B ecommerce payments. A2A payments exist in different forms, as shown in Figure 12. Most A2A payments in Europe run through branded payment schemes that are owned by bank coalitions (i.e., iDEAL, Blik, Swish, etc.). There are also a number of branded A2A schemes that are privately owned, including Trustly and Klarna/Sofort. None of these branded schemes was built on an Open Banking foundation, though some such as Trustly are migrating into these new rails. There is also a class of fintechs that have emerged to specifically enable Open Banking payment initiation (aka PISPs). Using these PISPs services, merchants or PSPs can enable direct A2A payments under an unbranded experience.
Figure 12: Forms of A2A payments in Europe
Source: Flagship Advisory Partners research and market analysis
Figures 13a and 13b illustrate the penetration and growth curves of select leading A2A payment schemes in Europe. All of these A2A schemes are highly successful and deeply penetrated as preferred means of payment for consumer ecommerce. While many of these schemes are at, or approaching saturation in C2B ecommerce payments, we believe that there is still good ongoing growth potential for expansion into B2B payments, alternative use cases such as bill pay/Request-to-Pay, and even into POS. We estimate, for example, that c. 20% of iDEAL’s volume in the Netherlands is B2B, and that 20% of Blik’s volumes in Poland are POS transactions.
Figure 13a: Penetration of select European A2A payment schemes
Source: Flagship Advisory Partners research, company website
Figure 13b: Transaction growth (# billions) for select European A2A payment schemes
Source: scheme websites, local payments associations, Flagship analysis and estimates
Setting aside the privately-owned A2A schemes such as Trustly, the bank coalition schemes are effectively domestic (except in the Nordics, where the domestic schemes merged). In the coming years, we expect more consolidation of these schemes, potentially even spurred by the unwinding of certain of the bank ownerships.
While branded A2A payment schemes that existed before Open Banking are thriving, the results for payment initiation services via Open Banking are less exciting. In theory, A2A payments are now fully enabled via Open Banking APIs: banks are required to provide API access, and many PISPs are not licensed to provide the service. The volume of payments, however, remains stubbornly low. In Figure 14, we estimate that only 2% (or less) of European C2B ecommerce payments are via unbranded, Open Banking payments. Achieving readiness for B2B transacting is a critical step for Open Banking payments to achieve their potential.
Source: Flagship Advisory Partners estimates, OBIE
Over the last decade in the US, the evolution of B2B payments fintech created USD 75 billion of shareholder value. We believe a similar wave of value creation is now coming to European B2B fintech. We already see this in cross-border payments where companies such as CurrencyCloud (now part of Visa) are part of a European contingent of fintechs revolutionising global cross-border payments with more elegant, efficient, and faster payment services.
Figure 15: Scale of global payments (B2B vs. C2B), share of flows owned by fintech
Source: Flagship Advisory Partners estimates
As shown in Figure 15, the scale of B2B flows is 2.5X that of consumer-to-business. Cross-border flows have proven to be a lucrative segment for fintechs who are rapidly winning market share from banks. Domestic B2B flows, however, are not yet disrupted by fintechs. Banks provide businesses with low-cost domestic A2A payment services, but typical transaction banking services lack rich value-adds. For example, B2B payments in Europe are often disconnected from invoicing and payables software, requiring manual workflows and resulting in slower cash flows. There is also little integration of easy-to-use trade finance within European B2B transaction flows. We believe that fintechs will solve these problems.
Before breaking out, European B2B fintechs must first solve the riddle that is monetisation of European B2B A2A payments. Europe has ubiquitous, low-cost bank payment rails. Fintechs must find a way to charge real money for payments that are today often processed for free by banks. The US provided more ample opportunity given the prevalence of cheques and paper workflows, the creakiness of the ACH rails, and the prevalence of commercial cards providing rich economics. Figure 16 provides a breakdown of US and European B2B flows by payment method.
Figure 16: Contrasting the mix of B2B payment methods in the US and Europe
Source: Flagship estimates, Global Data, Mercator Advisory, 2021 Business Payments Insight Report, FT Partners, Windward Strategy
B2B fintechs span a range of product and business models. In Figure 17, we define these various categories and include examples of fintechs headquartered in the US and UK/EU. We also highlight the relative maturity of each domain. For example, the domains of A/R and A/P automation combined with embedded payments and financing are comparatively mature (still high growth) in the US versus Europe. We believe that these A/R and A/P domains, along with integrated lending and expense management, are set for major breakouts in Europe.
Source: Flagship Advisory Partners market research
With access to capital now rationalised, if not constrained, fintechs must evolve – some for survival, and some to achieve their next gear of growth. 2023 into 2024 will be a period of survival for smaller, earlier-stage, less-well-capitalised fintechs; we expect many to be acquired or fail. On the flipside, it is a great time for larger, well-capitalised fintechs to be M&A hunting. Embedded finance in particular, in its various forms, is in the midst of a Darwinian shakeout. Less established fintechs and business models must quickly find a path to scale and profit. Payment orchestrators are also looking for a path to revenue scale, and we believe that some will find this revenue given the strong demand for orchestration services.
Embedded payments, particularly related to software-integrated payments, have no such challenge. This domain remains both lucrative and high-growth. If anything, we expect an acceleration of embedded payments in Europe, where many verticals remain under-penetrated. Similarly, A2A payments will continue to achieve rapid growth in Europe, while still looking for the right combination of accelerants in the US. However, fintech business models founded on A2A payments are still evolving. We believe that European B2B fintechs, fuelled by both integrated payments and embedded lending, will establish new value propositions that drive a wave of value creation.
This analysis is the second part of a two-part series. To read the first part, please visit our Voice of the Industry section or click directly on THIS link.
This article was first published in ‘The Global Overview of Payments Providers 2023’, the most recent market overview and analysis of key payment providers in the B2B and B2C commerce payment ecosystem.
Joel is a trusted global advisor to the payments and fintech industry with 24 years of experience around the world. He is a recognised thought leader on strategy and value creation in payments, digital commerce, and embedded finance. Joel is also a trusted M&A advisor, having advised clients on hundreds of fintech M&A transactions globally.
Flagship Advisory Partners is a boutique consultancy focused exclusively on payments and fintech. We provide strategy and M&A advisory support to financial institutions, PSPs, fintechs, technology providers, brands, and investors. We serve clients globally from offices in Europe and the US.
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