Orchestrating connected commerce – What’s next?

How will the commerce ecosystem shape out and who will win?

This question is like asking what’s the best instrument in a well-coordinated orchestra. Orchestration is the art and science of arranging a musical composition for performance by an orchestra or another ensemble. A good show, on the other hand, is orchestrating - keeping the audience in mind. Successful commerce orchestration is not being a sole winner. It’s about creating a good show and that almost always never happens alone.

I received interesting feedback to my earlier post “Connected Commerce – The case for value multipliers and platform driven partnerships”

One common thread which emerged is that there has been an information overload in the larger payments space. Notable activity, with players large and small, making interesting moves to drive change and innovation from their vantage point coupled with large scale M&A and investments that has led to a significant overlap between traditionally classified verticals like banking, financial services, payment processing, retail and e-commerce.

I was speaking to a research consultant from a large research firm and they were finding it uniquely challenging to track all of this under traditional industry heads.

My views have primarily been associated with the acquiring business and everything that influences that – merchants, consumers and vendors which touch financial services, payments and commerce. Pretty wide but an interesting evolution - so let me try and present the larger trends on how I see this evolving. It’s a macro attempt on forward looking trajectories so bear with me.

Let’s start peeling this onion.

Some key observations which I think lay the foundation for further discussion:

1.    Huge disintermediation potential in merchant services – look at the commoditization of payment processing. Selling merchant services solely on payment processing is fast disappearing

2.    Unbundling of traditional banking – merchants and consumers alike have shown an increasing appetite to look beyond just the trust equation to other players if the service is seamless and reliable

3.    Re-bundling of POS – I use this term to signify not the unbundling of the architecture of POS but rather the movement on building an eco-system of merchant services beyond traditional POS

4.    Increasing realization that digital wallets are a repository of aspirations and not just cards

5.    The one who owns experience will drive the conversation

6.    And hence, platform plays are creating eco-systems which are changing monetization, onboarding and partnership models

The interplay of merchant services, consumer-oriented services, payments processing and fintech is leading to changes in the way the larger industry is evolving.

A simplistic view of the retail-payments core could be represented as below:

The retail – payments model has been traditionally portrayed by the 4 party model of merchants, acquirers, networks and issuers. I find the above visually more convincing. Now you could ask, where would the networks fit into this as they are significant players, but I still do feel the DNA of innovation which pushes experiences from the merchant and consumer perspective sit beyond traditional networks but we will get to it in a moment. Also, the larger $2T payments revenue ecosystem sits in the (fairly limited value add) payments bucket.

Over the last 10 years the single biggest factor that has forced a change in the above model has been consumer aspiration through the introduction of the smartphone. For the first time, consumer tech was leading merchant tech. This in my opinion was the single biggest factor as to why I am writing this article. This single device forced change all-around – talk of empowering the consumer!

POS devices and merchants were forced to adopt creating materially connected experiences, payments for the first time showed glimpses of becoming exciting and banking in the traditional sense was faced with the stark reality of seeing the decoupling of trust from the experience value chain. What I mean by this is that the traditional custodians of trust which were banks were now seeing experience-driven value adds forcing a new consumer to emerge. One who was more willing to try new products from providers who were tech-driven and providing financial microservices. The emergence of fintech began distinctly as custodians of experience and aspirations working directly with banks and in many cases competing with them.

A picture is worth 1000 words, but sometimes 1000 words are not enough. The model above makes it seem as if there were distinct components being run independently. In reality, as we all know there was a significant overlap of services and products cutting across these segments. I would like to refer a brilliant screenshot of how core banking functionality was unbundled by fintech to create better-targeted experiences – can be seen here.

Payments by themselves were not enough to sustain revenue models and hence, payments providers moved into services coupled for merchants and consumers. POS vendors looking for integrated offerings started tightly integrating payments into their service offerings. Also, the move to omnichannel and globalization led to payment platforms like Adyen, Stripe and Rapyd to emerge. These platforms provided core payments + value-added services for the digital and (also) physical environments coupled with a single token use case. On the consumer side, platforms like Facebook had started migrating to a broader suite of services cutting across commerce and payments and on the POS and commerce platform side we had the proliferation of cloud and mobile. Leading to smarter POS doing more than just core POS or ecomm shopping cart functionality. A case in point on the dynamics of what a POS provider could do and increase ARPU can be seen here.

Square as an example, started building significant ecosystems through platform capabilities merging merchant and consumer offerings.

Core platform players like Google, Facebook, Apple, Amazon, Uber, Shopify, Airbnb etc. were all approaching commerce and building offerings for merchants as well as consumers which cut across core payments, commerce as well as banking in many cases.

Essentially, this was possible with easier developer access to banking platform and POS environments, which was a prerequisite to decouple large integration times from core POS and banks to take “experience” driven services to consumers and merchants. The progression of API specific players emerged to enable this growth. Plaid is a classic example for the last mile into banks for DDA account access. Marqeta and Stripe have issuing APIs, Roostify for lending, Dwolla for ACH payments as an example. On the POS side, Square actually exposed its APIs for developers to build a customized POS experience for their merchants, moving towards a platform ecosystem. Poynt, a startup in the connected commerce platform space, which has a smart payment device as an endpoint, has a rich set of APIs for creating a true digital platform – where consumption of commerce services (POYNT owned as well as 3rd party) can happen in real-time.

It’s far from all over for the banks. I think the large banks are in a position to, if they want, manage the development of experience-driven capabilities themselves. They certainly have the ability and the resources to do it – appetite could vary and that will determine who runs the risk of getting disintermediated. The smaller banks and traditional FIs will partner and build holistic business models to take better services to merchants and consumers alike.

On the POS side, it’s a slightly different story. Smart POS is changing checkouts and is best positioned to keep pace with consumer experiences. Enterprise POS is still slow and finds it prohibitive to change as driven by the vendors. For the Tier 1 retailers, the biggest change is going to come from the retailers themselves. There is still a significant amount of legacy inertia in place for vendors to drive this.

The platforms, on the other hand, are leveraging their large merchant and consumer eco-system to drive payments, commerce and banking. Amazon’s “Just Walk Out” is really a platform as a service for retailers and there is a significant implication of this move downstream beyond the Amazon Go stores.

The networks find themselves building and buying core capabilities to play in the new commerce ecosystem being built, they will, like large banks, be able to meander and monetize their asset base if the appetite exists.

Wallets are one of the most interesting plays in my opinion. Their historical adoption should not be an indicator of future growth. The ones who recognize and learn from the success of Starbucks will realize that you could be in a narrow vertical of retail but what matters is how you link acceptance with consumer lifestyle and related choices. That will be the mantra of success for the wallet players.

One thing is clear, Payments are surely a commodity and are as essential as wheels to a car. Necessary but not what you talk about while selling the car. Even global payments platforms like Stripe and Adyen have built multi-dimensional, cross-vertical capabilities around core payment processing and depending on how they go to market can easily cut across Fintech and banking.

Needless to say, the conversation on this subject is just getting started and will look very different 12 months out. Lots of disintermediation, mergers, acquisitions, pivots and new starts. But the winner is going to take consumer experience, link it to aspirations and deliver it with seamless technology.

To summarize with Richard Bach’s famous quotes:

“The mark of your ignorance is the depth of your belief in injustice and tragedy. What the caterpillar calls the end of the world, the master calls a butterfly.”

Given the current times – stay safe folks!