'Payments Orchestration is about buying in to the philosophy that there is no magic 8-ball' – Interview with Spreedly

Monday 12 July 2021 09:05 CET | Editor: Andra Constantinovici | Interview

Douglas Fry, Account Manager at Spreedly, answers the hard questions regarding Payments Orchestration and what it can offer subscription businesses.

Traditional subscriptions have undergone a major overhaul in recent years. Can you speak a bit about what specific opportunities Payments Orchestration offers to organisations in the subscription space?

I believe there are several ways to view the opportunities for businesses to grow and actually survive. Logistically, expanding into a new market can be hard, regardless of whether the business is in the subscription payments scene. As with any growth, an organisation’s payments strategy needs to change over time. Typically, the time it takes to bolt on new pieces to the payments infrastructure will be much shorter than building from the ground up. Companies have the opportunity today to be in front of the potential subscriber from any given market at any time, whether or not they are present in said market. This is exciting, for sure, but if your payments systems are not flexible, this opportunity can be lost.

I’ll share a personal story. I recently moved to the UK from the US. To help with that move, I thought it was an excellent idea to subscribe to a meal box service, just to get over the hump and have some meals coming to my door as I got the lay of the land. When I went to subscribe with my US credit card even though I was in the UK, the system would not take my card. When I went to my second option, they were able to process my transaction even without a UK credit card. The first service obviously didn’t think about this possibility, but it does have an impact if you’re not able to take payments from anybody even if you are serving a specific target location.

And it is not just about growing subscription businesses. Flexibility comes as an opportunity to survive, as the subscription market becomes increasingly competitive. We can look at streaming as an example. New services enter this market daily. I’ve never come across numbers that reported fewer than two services per household. This means that services need to fight harder to acquire new customers. Companies can either raise their prices – probably not an easy decision – or they can preserve the profitability from a single subscriber. For as long as the customers log in and don’t hit unsubscribe, it is critical that the payments process runs successfully, month in and month out. On top of that, they need to keep costs down. For a subscription model, this means costs associated with storing payments credentials, compliantly and securely, while managing this payments process for a longer period.

How are subscriptions companies using a multi-processor strategy to improve their payments?

When it comes to payments, you don’t have to try to boil the ocean. From what I’ve noticed, it typically follows a spectrum that subscription companies progress through. Tie it back to some of the opportunities above, starting with expanding to new markets, and it can become obvious that not every processor is the best choice for a given market. Your primary payments processor may not be able to serve that new market, let alone be the best choice for the endeavour. Because of that, a multi-processor strategy becomes pivotal. 

For subscription businesses, the cards that they have vaulted are probably their most precious asset from a payments perspective. Taking advantage of a fully portable vault and not having to move, copy, or split their vault to support their new processor, is a big win for them. 

When thinking about not missing an opportunity for growth, for the new signup flows, organisations often look to have a backup processor. They use one processor as a primary, but if for some reason the primary goes down, they immediately switch to the second. This isn’t unique to subscriptions, as it works the same for a singletransaction. However, for subscription businesses, losing that first transaction, similar to my story, could also mean losing all the subsequent revenue. Missing that first one can multiply in losing the lifetime value of a customer. 

Moving along the spectrum, we also see businesses move to a cascading approach. When starting from the primary, we cascade down to multiple processors on any failure. Sometimes, three, four processors are used in hopes that they can ensure the success of the transaction. One key difference is that subscription businesses have time on their side. If a transaction fails, they can retry to process that transaction for hours, days, or even weeks at a time. The cascading approach allows for the opportunity to always bring the customer back. 

Of course, even the cascading approach can be costly. In the interest of keeping costs down, customers and subscription businesses can progress to a payments strategy that includes smart routing smarter, progress-based routing. Data tells the customer that transaction 1 has a higher probability of success on a processor A, so they start there. Whereas transaction 2 would have a higher probability of success on a different processor, so they go there. While for one-time transaction businesses, the costs of cascading are minimal, for subscription businesses, cost will multiply, and that’s why smart routing makes more sense in the desire to achieve the highest success rates possible.

Tell us a bit more about how Payments Orchestration serves the needs of this space and what value it brings to those organisations using it? 

Payments Orchestration is about buying into the philosophy that there is no Magic 8-Ball. It’s about incrementally improving your payments infrastructure. To use a metaphor, I like to think about it like trying to lead a healthier lifestyle. I might start jogging every morning, and I do that until it’s ingrained. Then I want to eat better, so I make my lunch every day. Then I need to start getting more sleep. At that point I might need to start sacrificing a bit from the old habits to bring in a new one.

Payments Orchestration not only makes it easier to add in these new tactics, by bolting them into your infrastructure, but it allows you to take these actions without having to make difficult sacrifices. Where a one-time payments company has to fit in every little optimisation approach, sometimes in a 500 millisecond window, the subscription business doesn’t have to worry about that on this recurring transaction. They can keep looking for newer and newer ways to optimise their process.

Can you give us a real-world example?

We have a customer that we’ve seen go through a progression such as the one we outlined – incrementally adding new steps to their payments stack as they tackle more challenges. They do both one-time and subscription payments. Their biggest problem was low success rates and high involuntary churn, and they wanted to tackle that. 

The first piece that they added in was to develop a multi-processor strategy and they implemented simple cascading. The results of that are impressive. In a given day it might save them around 120 transactions, but on an annual rate, it’s about $2.8 million in revenue that they get back through cascading – not adding to this the lifetime value that they could have lost. This is just assuming the first transaction.

As a next step, they added an account updater. It is a service that has been out there for a long time, but, using a Payments Orchestration layer allows them to utilise account updater in their centralised vault, which complements their multi-processor strategy. This continues to improve success rates and to reduce involuntary churn.

We are now in the process of launching network tokenization. This concept works complementary to account updater. Not every processor out there supports network tokenization, but some do. In this particular case, none of the four processors they used previously supported it, so they brought in a new processor in a matter of days, in order to use network tokenization in conjunction with account updater and cascading. 

Very recently, we talked about 3DS-2. Even though this is a US-based merchant, they were concerned about PSD2, and whether or not they were going to be in the scope for that. We looked at the data and, in the end, it proved that it wasn’t necessary for them to implement it. However, had they needed to do it, the cascading would no longer have been possible without a Payments Orchestration layer in between. There are a lot of businesses that are in scope for PSD2 and might have to sacrifice some of these strategies that they have built up over time just to support the PSD2 mandates.

The moral really isn’t what they did or did not do, it’s about the shift in this cost / benefit equation – and how to lower the threshold for adding strategies. That’s what Payments Orchestration offers these companies.

How does using Payments Orchestration in a payments strategy differ from traditional subscription management services?

In many ways they aren’t different. Moreover, traditional subscription management services are actually beginning to allow the employment of all these strategies, such as multi-processor, network tokenization, account updater, and so on. And this is not only to keep their customers longer, but also to monetise these tactics. This also ties up to a growth opportunity that I left out, which is product expansion.

Not everything is suited for subscription. I get surprised at what’s turning into a subscription service, such as cars, for instance. That being said, there will always be products for one-time buyers. In order to support multiple models, the whole process gradually becomes very challenging without Payments Orchestration. Nobody likes friction, so if you want to allow a customer to add a one-time product to their cart, while at the same time add a subscription product to that same cart, you will have to decide how to get that payment instrument over to multiple entities in order to handle their respective flows. These types of merchants introduce a Payments Orchestration service in the beginning of the flow so that the subscription service becomes more of an extension of the payments process itself.

For subscription services, in many cases, Payments Orchestration is the underlying infrastructure that they have built on top of so they can expand the products and services they need to and fit with the needs of their business. 

About Douglas Fry

Doug Fry is an Enterprise Customer Success Manager at Spreedly.  He consults with Spreedly's largest customers across the globe to help them solve their payments challenges.  After graduating with a Degree in Accounting from the University of Vermont, he began his career in Finance.  He lives and works in London, UK.

About Spreedly

We orchestrate payments for the world’s most innovative businesses. Global enterprises and hyper-growth companies grow their digital business faster by relying on our payments platform. Hundreds of customers worldwide secure card data in our PCI-compliant vault and use tokenized card data to enable and optimize nearly USD 20 billion of annual transaction volumes with any payment service.

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Keywords: payments orchestration, payments infrastructure, subscription payments, subscription economy, subscription commerce
Categories: Payments & Commerce
Countries: World
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Payments & Commerce

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