Welcome the Integrated Payment Gateway
End-to-end payment platforms create opportunities for ISOS and agents
As the payments industry evolves, so do payment gateways. At its most basic, a payment gateway is the technology bridge that connects merchants and payment networks in an online or mobile platform. After capturing the transaction request, the gateway encrypts the payment data and sends it to the acquiring bank. Once the acquiring bank authorizes the transaction, the payment gateway informs the purchaser that the transaction was approved.
But that straight-forward passing of payment information has given way to more sophisticated payment gateways. The new payment gateway is an integrated platform with add-ons such as shopping carts, intelligent routing, and point-of-sale and billing solutions. For instance, an integrated payment gateway can send notifications to the merchant’s order management system. Says Jared Drieling, Business Intelligence Manager for The Strawhecker Group, “Payment gateways are evolving into being able to integrate with the payment throughout the lifecycle of the purchases,” Drieling says, adding, “payment gateways offer a layer of technology that can really empower merchants.”
And this integration with other business management software turns a payment gateway into a sticky product, notes Drieling. “An integrated payment gateway makes it very difficult for a merchant to jump ship to another payment provider,” he explains.
According to Aite Group, there is about $5 trillion in retail turnover in the U.S., meaning that there’s a lot of money to be made helping merchants process transactions. And the payment gateway industry is evolving as a result. Technavio predicts that the global payment gateways market will grow at a CAGR of close to 17% from 2017 to 2021.1
BI Intelligence expects the U.S. online processing market—payment gateways’ bread and butter—will grow to $17.5 billion in 2020, mostly due to online shopping.2
And Javelin Strategy predicts that while 8% of purchases were made online in 2016, that percentage will rise to 12% by 2020, largely due to consumers ordering online and picking up goods in-store.
To compete and to take a share of the growing payments market, long-time players in the payments space are reevaluating their business models. Acquirers and processors have incorporated payment gateways to accommodate merchant needs for online payments into their offerings. POS terminal providers such as Verifone are moving “up the stack” to offer a full suite of payment services from the terminal to the actual processing function. Integrated systems providers like Revel Systems are offering enterpriselevel software platforms for global retail organizations, says Thad Peterson, Senior Analyst, Aite Group.
And ISOS are increasing the breadth of their product offerings, notes Peterson. For example, Cayan has moved from a traditional ISO role to a full-service, integrated payments processor.
A more competitive market is also forcing providers to push the bar on integration and other capabilities. Leading vendors, including Amazon Payments, Ccbill, Paypal, and Stripe continue to invest in innovative technology.
Large acquirers and processors including First Data, Global Payments, and Vantiv are all developing, or have developed gateways, or have acquired payment gateway providers. Drieling highlights the Vantiv acquisition of Litle & Co and First Data acquiring Cardconnect as examples.
Although there are still a mix of standalone gateways and integrated platforms, the trend is toward integration, agrees Michael Grillo, Director, Marketing Line Leader for ACI Worldwide. But this trend is putting pressure on ISOS and agents. “ISOS and agents are feeling the squeeze as acquirers, logistics companies, card schemes, banks, POS manufacturers, and others have adapted their offerings with the goal of providing end-to-end payment applications.”
Industry Trends Drive Gateway Changes
The innovation in payment gateways is fueled by several industry trends, including global payments, the need for more effective fraud management, and omnichannel commerce.
“Enabling international payments processing and effective fraud management continue to dominate the conversations we have with our partners and prospects,” says Grillo. “Merchant demands around payment methods, reporting options, and fraud prevention tools are increasing as providers look to move quickly and take advantage of global ecommerce growth.”
Peterson also notes that cross-border commerce can be a challenge for merchants. “Merchants can be constrained by the types of payments they can offer and their ability to effectively process pay-
“Payment gateways are evolving into being able to integrate with the payment throughout the lifecycle of the purchases.”
“An integrated payment gateway makes it very difficult for a merchant to jump ship to another payment provider.”
ments around the world,” he says “Omnichannel is very important in the new payments ecosystem,” continues Grillo. “More and more brick-and-mortar stores offer both in-store and online sales, as well as buy the option to online and pick up in-store.”
The challenge with omnichannel for merchants, says Peterson, is that the merchant has little control over the customer experience. However, an integrated payment gateway can give merchants a holistic picture of customer behavior regardless of the channel the customer chooses.
The merchant challenges can be even more acute for mid-size or small merchants. Although larger merchants may have dedicated technical staff to manage payments, smaller merchants do not have the resources to dedicate to payment processing. They often struggle to stay current with the rapid changes in the industry, says Peterson.
Opportunities for ISOS & Agents
The complexity of the payments ecosystem is challenging for ISOS and agents trying to keep up with the technology. “ISOS must keep pace with evolving merchant needs to integrate mobile POS, mcommerce, ecommerce, and in-store POS transactions,” says Grillo.
But that complexity also provides opportunity. “ISOS and agents that can deliver a full solution to merchants—from consolidated reporting to API integration—and the ability to monitor all channels, will empower its merchants to remain agile and profitable in such a competitive landscape,” he says.
Drieling is seeing more ISOS and agents offering payment gateways, essentially, he says, becoming more of an ISV or a technology partner. “Connecting the payment gateway to other assets is an opportunity for ISOS and agents,” says Drieling.
“At the end of the day, ISOS, ISVS, and merchant service providers (MSPS) are looking for optimal solutions that give them both choice and a competitive edge,” says Grillo. “Connecting to an existing modular payment gateway such as a gateway that can “switch on” alternative payment methods as and when needed can help facilitate rapid global expansion when the merchant is ready to pursue a cross-border strategy.”
But perhaps the biggest opportunity for ISOS and agents is in the relationship they have with their merchant customers. “The ISO and agent are closer to the merchant than anyone else in the payments ecosystem and should be in a position to provide the online and in-store solutions that merchants want in a way that reduces friction and makes it easier for customers to buy,” says Peterson. “For ISOS and agents, the technology is pretty generic so perhaps the only differentiator is the understanding of the merchant’s business and the relationship you develop with them.”
ISOS and agents also need to think long and hard about whether what they offer to merchants really meets their needs, contends Peterson. “This requires a lot of strategic intelligence,” he notes. “I challenge the idea that an ISO or agent can walk into a small retailer, sell them a POS terminal, and walk away. That’s just not an effective business model any longer.”
Agility is critical, says Grillo. “Within this dynamic environment, ISOS and agents must be flexible and able to adapt quickly,” he says. “ISOS and agents should work with their technology partners and industry associations to keep on top of current and emerging merchant trends and stay in tune with the needs of their merchant customer base.”