Orchestration is about aligning business requests with software applications and coordinating activities, workflows, services, and data. In last month’s newsletter, we alluded to an association between the pandemic, the growth of e-commerce, and the use of marketing vocabulary by some payment providers, such as “dynamic routing” or “smart transaction routing”, which has evolved into a new paradigm that the payments industry is calling “Payments Orchestration”.

Some of the questions that many of our clients are asking include:

• What is Payments Orchestration?
• What can a Payments Orchestration solution offer a merchant?
• Why should merchants consider Payments Orchestration?
• Is there a particular type of merchant where a Payment Orchestration solution works best and where it does not?
• What is the best approach to implement a Payment Orchestration solution?
• What are the benefits in comparison to a traditional PSP model?

This article aims to provide answers to all of these important questions. Firstly, let’s not forget the consumer. Consumers have simple demands when it comes to the checkout process, regardless of whether in-store or on their smartphone. Consumers want:

• To be able to use their preferred payment method in a currency they recognise
• Their payment method authorised successfully on the first attempt
• A checkout process that is as quick and frictionless as possible
• A simple method of getting their money back if the merchant fails to deliver
• Their payment to be protected at all times

Merchants want to fulfil these customer needs but are facing a complex payments ecosystem

‍Merchants have found that there is a growing number of different payment methods, primarily when they aim to attract consumers from outside their home market. Merchants are not replacing older payment methods but adding to the payment mix. Meanwhile, the number of alternative payment methods (APMs) that consumers can use to make a payment continues to grow. Plastic payment cards never fully replaced cash. Digital wallets have not completely replaced cards and are unlikely to do so in the foreseeable future. Real-time payments are not expected to replace the card networks. We have some considerable time before cryptocurrencies become a commonly accepted form of payment (if ever). However, virtual credit cards, payment apps, and e-wallets are making it easier for consumers to transact in a more instantaneous and streamlined manner.

There are more ways to pay today than ever before, some payment methods have survived, and some have not. The graphic below illustrates how digital payments have evolved, fuelled by a payments industry that has become increasingly fragmented.

There is a growing number of payment methods that consumers can choose from, including domestic payment schemes, and a wider range of sales channels that merchants can use to sell their products. As an independent advisor, we would not promote one payment method over another but look at the merchant’s requirements, geographic relevance, and customers’ needs.

As merchants start operating at scale, finding new consumers in new markets across multiple channels can prove to be insufficient. A single payment service provider or gateway to manage payments can limit growth.

‍An in-house approach to Payments Orchestration

‍Integrating with multiple PSPs, multiple payment gateways, and multiple acquirers can help merchants avoid dealing with system outages and downtimes, adding robustness to the merchant’s payment system to better fit the merchant’s customers’ payment preferences. However, suppose a merchant wants to achieve a so-called in-house Payment Orchestration. This requires multiple integrations, which can quickly become challenging as digital innovation and payments continue to evolve. New payment methods and value-added services, such as Buy Now Pay Later (BNPL) solutions and payment models such as subscription payments, require a perpetual investment in the development roadmap. For many merchants, this is not sustainable.

An In-house Payment Orchestration Solution

A merchant approach to in-house Payment Orchestration comes with many challenges:

• Requires extra time for development teams to create and manage different payment integrations;
• Prohibits the merchant from capturing valuable insights from the entire payment operation because each payment provider has different analytics tools and incompatible data definitions;
• Diverse data formats will result in unnecessary overhead to create a unified back-office reconciliation across the different payment methods and payment providers;
• Excessive work to create a system of business rules to direct transactions to the most appropriate payment provider;
• Inability to deliver new services at a reasonable pace to support new customer journeys and offer new payment methods.

What can a Payment Orchestration solution offer a merchant?

‍For many merchants, the topic of ‘payments’ can be tricky or challenging because it does not fit easily into a merchant’s organisational structure. Often, it is one of those subjects that rarely gets enough attention. Is the operation of payments part of the finance team under the CFO? Should payments be with the technology team? Should payments be close to the customer services function because the customer experience is understandably linked to payment? Where is the relationship with the payment services providers managed? What is the strategy for payments? How does this strategy relate to the business strategy, and what if the merchant issues payments such as a gift card or a co-branded consumer credit card? Should payments be a revenue opportunity or only a cost?

Payment acceptance for a merchant that operates physical stores will add to the complexity of payments and its relationship and reconciliation with sales via the e-commerce site and mobile app channel. Omnichannel payments should enhance the customer experience and offer many different customer journeys from registration with the merchant to the payment checkout. Inevitably, achieving an omnichannel customer experience adds further complexity to the acceptance, processing, and reconciliation of payments.

‍An outsourced approach to Payments Orchestration

‍Payments Orchestration is a hot topic in digital payment acceptance and payment processing. However, only in the last 12 months, merchants have started to realise that it could be something that will give them simplicity when it comes to their payment strategy.

Payments Orchestration is a concept that can influence how a merchant accepts payments through to where they are settled and specifically how payments are processed.Payment Orchestration is performed by a new breed of middleware FinTech companies who connect to multiple Payment Service Providers (PSPs), payment gateways, fraud prevention technologies, e-commerce platforms, and acquirers. Payments Orchestration can be equally performed by merchants with an in-house approach or by an off-the-shelf solution or performed by a merchant’s own payment services provider or payment gateway.

A Payment Orchestration Solution

A Payment Orchestration solution should enable merchants to take control of payment acceptance, from checkout through to the settlement of funds into the merchant's bank account. Merchants could stay competitive and agile in the constantly evolving payments landscape by using a single API to connect the merchant with multiple service providers such as payment service providers (PSP), acquirers, processors, enterprise resource systems (ERP), or business intelligence, analytics reporting, and reconciliation services. Even chargeback management, fulfilment and delivery companies, and other third-party services can seamlessly be integrated into the merchant business via a Payment Orchestration solution.

Payments Orchestration places the merchant at centre stage to all the third-party service providers that relate directly or indirectly to payments. Payments Orchestration is about determining how best to route a payment transaction from the merchant’s checkout to bank settlement, increasing the conversion and maximising sales

What are the next steps for a merchant when considering Payments Orchestration?‍

Payments Orchestration is not suitable for all types of merchants. As we have seen, there are many questions that merchants have to deal with when it comes to payment acceptance. In some cases, issuing a payment instrument such as a gift card or a co-brand consumer credit card will be yet another complexity to include in the payment mix. The ultimate question is, “What is the strategy for payments?”.

Merchants need to create a vision for payments and how it relates to the customer’s journey from their initial registration to the purchase, checkout, and product delivery or in-store collection. Even after-sales support must be part of the vision for payments because there may be exceptions where a refund or credits must be offered to consumers.  The payments vision must take into account every element where a customer payment touches the organisation.  Furthermore, all this must be compliant with payment scheme rules and regulations.

Payment acceptance and processing are a commodity, but what it means for the customer experience must be a high-value differentiator for the merchant.  How payments are accepted, processed, reconciled, reported, and analysed will drive business growth and create customer value. The payment process must be smooth and easy, especially at the end of the purchase. It is essential not only to optimise existing products but also to optimise the payment mix.

Edgar, Dunn & Company (EDC) helps merchants to define their payments strategy or vision through a series of collaborative workshops. There are particular types of merchants where a Payment Orchestration solution can provide value; however, there is no one solution that fits all types of merchants. EDC can determine a payments strategy by analysing whether a merchant has optimised its payment acceptance and processing arrangements using the proven proprietary 360 degreesPayments Diagnostic methodology. This will address the need to change or enhance its third-party service providers to support their business goals and determine whether Payment Orchestration is suitable and provide them with a robust, future proof solution to their payment needs.

When a Payment Orchestration solution is required, a provider needs to be selected, and the solution needs to be implemented. The transition and migration from the current state to the future state can be technically challenging and potentially disruptive for the merchant that cannot afford any downtime.  Edgar, Dunn & Company has a collaboration with an implementation company called aye4fin, headquartered in Cologne, Germany.  aye4fin consists of a team of experts who, based on many years of experience, have focused on Payment Orchestration and transaction-based business models. Having access to technology experts is an important initiative for Edgar, Dunn & Company and essential for merchants who do not have any experience in implementing a Payment Orchestration solution.

The content of this article does not reflect the official opinion of Edgar, Dunn & Company. The information and views expressed in this publication belong solely to the author(s).