Industry Outlook
Technology First
The payments industry has long been focused on point of sale solutions--that was until the internet and ecommerce started taking the world by storm. Coming out of the pandemic, the payments industry now more than ever, is a technology first industry.
That is where I think companies like Stripe and Square have really left a permanent impression on the market. Those companies showed that a technology first approach focusing on innovative solutions that optimize the customer experience can result in disruptive growth when compared to the legacy systems and processes that are often disjointed, difficult to navigate, and often don't have a concept of a customer experience. I think the late 2010's started to show the efficacy of this technology first approach and led to a recognition on behalf of the large legacy payments companies that they need to invest in technology to stay relevant.
That started a technology revolution in payments which has gone through several phases.
Ecommerce: This phase focused on capitalizing on the "emerging markets" created by the advent of online only businesses. This tracked with the larger macro trend where the bar for entry for new businesses kept getting lower which has increased the potential addressable market of merchants.
Onmichannel solutions: Then the industry focused on taking those ecommerce platforms they had developed and integrating them with legacy point of sale solutions for the merchants who want to have a single experience that integrates their in person and online sales. This omnichannel solution package helped the larger processors combat the high growth of the startup disruptors by delivering a solution that could be expanded upon what their current merchant base already had--and therefore avoid attrition to the "new kids on the block".
Value Added Services: The omnichannel response by the legacy processors was met with a pivot most recently to driving revenue with an integrations and value added services strategy as a way of increasing the stickiness of the customer - processor relationship. This has done a few things including increasing the revenue per account and opportunities for upselling. But it has also allowed technology first payments companies to show their tech prowess by extending their product into all sorts of different product lines that are beneficial to merchants but have little or nothing to do with payments.
But with technologies like ChatGPT and other AI based technologies hitting mainstream tech only companies, I believe we are on the cusp of a new phase in this evolution. I believe AI and machine learning models will be the next battleground upon which payments companies compete. This transition will show who is truly a technology first company and who isn't.
What I mean by that is in how the technology itself is being built. A lot of legacy processors were able to stay relevant by acquiring smaller companies (and their technologies) and adding it to their tech stacks. This was a common practice during the omnichannel phase of the tech race. Their growth was inorganic and from a product perspective that presents a challenge. How do you modernize your legacy systems while also integrating your new tech stacks into a single unified architecture that is capable of building a machine learning or AI infrastructure on top of? The answer is that you can't. At the very least, you can't until you get all of your disparate systems into a common framework which can then be enhanced and modified. This leads to large projects with long lead times with every acquisition and further delays the realization of a unified architecture that is able to deploy these new technologies at scale.
Contrast that with the true technology companies who have built their solution from the ground up in a way that allows for deploying these types of new technologies because they aren't encumbered by integration projects. I believe this positions tech companies at a strategic advantage to experience another phase of double digit growth as compared with the larger legacy providers.