Merchants’ preference for utilising multiple payment service providers is increasing. This is in part fueled by payment challenges encountered during the pandemic, such as processor and gateway outages, but more broadly driven by a growing appetite to optimise payment processes.
While many payment service providers tout the advantages of using a single, unified processing platform, the reality is that most merchants (60%) prefer a multi-provider approach to payment processing. This is increasingly the case, with the percentage of merchants preferring to work with multiple payment providers growing by 11 percentage points between 451 Research’s 2020 and 2021 Voice of the Enterprise: Customer Experience & Commerce, Merchant Studies.
Figure 1: The rise of the multi-provider approach to payments
Source: 451 Research, part of S&P Global Market Intelligence, 2021
Base: n=252 merchants
The drivers fueling a multi-provider payments strategy are many and vary depending on the business needs and size of the merchant. Common rationale includes:
Flexibility. Many merchants want to avoid the consequences of vendor lock-in. Having the ability to route transaction volume across multiple partners ensures that merchants don't become overly reliant on one processor, especially in the event of a development that may be seen as unfavourable (e.g., outage, acquisition, platform migration).
Cost optimisation. Connecting to multiple payment processors enables merchants to pursue a least-cost routing strategy. This involves directing transaction volume to specific processors based on various criteria (e.g., card brand, card type, card issuer) to receive the most favourable processing rates. It is also typical for large merchants to hold back a percentage of their volume from their primary payment processor to use it as bargaining power during pricing negotiations.
Accessing multiple best-of-breed capabilities. Not all payment processors offer the same level of functionality and variety as value-added services. Some merchants may elect to route a percentage of their transaction volume to one processor to make use of a specific capability they offer (e.g., a PIN debit routing engine, a gateway).
Authorisation rate optimisation. The authorisation rate of each individual payment method varies from processor to processor. This is due to a variety of factors, and can include local acquiring connections, direct payment method integrations, and geographic location. Routing transactions to the payment processor proven to have the highest authorisation rate based on a specific set of transaction criteria is a sound strategy for increasing topline revenue.
Accessing multiple geographic markets. Payment processor expertise, capabilities and presence varies across geographies. As merchants expand into new markets, some choose to integrate into a new payment processor with proven experience in a given geography, to optimise their strategy for the local market.
Champion/challenger testing. It's common for larger and more experienced merchants to continuously put payment processors head-to-head to optimise their acceptance strategies. This involves the merchant holding back a subset of its volume from the champion (the incumbent processor) and routing it to the challenger (the new processor) to see who produces the most favourable authorisation rates.
Redundancy. Processor outages have become a common issue, especially among several of the legacy processors. Consider that 'improved payment processor scalability and resiliency' is the top payments need that merchants say COVID-19 has sparked. Connecting to multiple processors ensures that merchants have failover support in the event of an outage, allowing for business continuity.
The tradeoff for utilising a multi-provider payment-processing approach is that it creates added operational complexity. Simply put, more partners translates into more integrations to maintain, and ultimately, more fragmentation in merchants' payment environments. It's no surprise that the top reasons cited by merchants that prefer to work with a single payments provider include simplified integration, increased operational efficiencies, simplified vendor management, and unified reporting.
To realise value from a multi-provider payment-processing strategy, some level of payment orchestration is required. Payment orchestration involves a series of strategies, techniques and tools designed to optimise and streamline payments across multiple partners. It often includes elements such as payments data tokenization and vaulting, transaction routing logic, transaction retry logic, and unified reporting/ KPI tracking.
Enterprise-scale merchants often have large payment teams that handle many elements of payment orchestration in-house. Many large multinationals have built their own sophisticated payment routing and rules engines, token vaults, and even internal payment gateways to simplify processor integrations. While impressive, this necessitates a large resource investment, and often requires the ongoing involvement of in-demand skill sets such as data scientists and engineers.
For merchants unable or unwilling to build payment orchestration capabilities in-house, an alternative exists. There are various platforms now available in the marketplace that enable the outsourcing of several elements of the payment orchestration.
Regardless of the preference for an in-house or third-party approach, our 2021 Voice of the Enterprise: Customer Experience & Commerce, Merchant Study made clear that payment orchestration is becoming a growing business priority. More than one-quarter (28%) of the commerce and payments technology decision-makers that responded to the survey said enhancing payment orchestration capabilities is a top payments initiative at their organisation this year. Similarly, 29% reported that COVID-19 has increased their need for payment orchestration, rising to 44% of those we classify as digitally-driven (executing on a digital transformation strategy and early adopters of new technology).
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This article was first published in Payment Methods Report 2022, the most updated overview of trends and developments in the payment methods space and the innovative technologies that these methods work upon, emerging consumers habits, and strategies on how to win at conversion and retention.
Jordan McKee is a Principal Analyst at 451 Research, the technology research arm of S&P Global Market Intelligence. Jordan leads the firm’s coverage of digital payments, overseeing all qualitative research, market forecasts, customer surveys and strategic consulting and go-to-market engagements.
At S&P Global Market Intelligence, we understand the importance of accurate, deep, and insightful information. We integrate financial and industry data, research and news into tools that help track performance, generate alpha, identify investment ideas, perform valuations, and assess credit risk. Investment professionals, government agencies, corporations and universities around the world use this essential intelligence to make business and financial decisions with conviction. S&P Global Market Intelligence is a division of S&P Global (NYSE: SPGI).
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