Mediaboss Marketing

Digital payments innovation happens in 10-year cycles, and the next big wave is already here.

It all started in the late 1990s when PayPal brought online payments to the masses. A decade later, in the late 2000s, Square and Stripe transformed the landscape by building professional payments tools for merchants. Now, with 2020 on the horizon, it's clear that we are in the early stages of the next cycle of payments innovation. Venture capital (VC) investment in financial technology is at an all-time high. Unexpected players are entering the market, and perhaps most telling, merchants now have access to a growing number of new tools for delivering better customer experiences faster and cheaper.

So what does the next decade of payments innovation have in store? To prepare for what's coming, it helps to understand how we got here in the first place:

The Rise Of Online Payments: 1999-2009

Think back to 1998. No one thought of going online to order something except, of course, for savvy shoppers searching eBay, which launched three years prior. Nevertheless, asking consumers to enter a credit card into an online form was like pulling teeth. Rumors of fraud and identity theft were everywhere, and consumer trust in the internet was virtually nonexistent.

For merchants, things were even worse. First, you had to find a bank that would accept online payments, which was no small feat. If successful, you would then have to connect your merchant account with a payment gateway and processor, develop a user interface for customers to enter their credit card information, implement security measures and then monitor for fraud and abuse.

Then PayPal launched in December 1998, and everything changed. Suddenly, the world of online shopping became more accessible to merchants and consumers alike. For merchants, all you had to do was sign up, connect a bank account and add a few lines of code onto your website. For consumers, the company focused on making the online payment experience more secure and trustworthy with a herculean effort by early PayPal engineers to try to prevent fraud and manage risk.

In the years that followed, the market expanded dramatically. By lowering the barriers to online payments for merchants, PayPal kicked off a virtuous cycle. With more merchants coming onto the internet, consumers had more reasons to try out online shopping and a growing number did. This, in turn, attracted more merchants, which then attracted more shoppers, further accelerating the trend.

Digital Payments Go Pro: 2009-2019

Fast forward 10 years to 2010, and the world of online shopping now called e-commerce is booming. In fact, the first wave of online payments was so successful that PayPal couldn't keep up with all of the new possibilities it created while also serving its original purpose. This opened the door for Square and Stripe to bring about a second wave of payments innovation: professional payments tools for merchants.

Square's big innovation was bringing the connected online payment experience into the real world with an entirely new point-of-sale system. Like PayPal, it invested heavily in making the merchant onboarding experience headache-free. It also offered merchants something new: a simple, seamless back-end system for managing key aspects of their business, from accepting payments and closing the books to email marketing, customer loyalty programs and even payroll.

Stripe, meanwhile, focused on building a payments platform to support the growing ranks of internet-native companies and the new business models powering them. At the time, the rise of cloud computing, mobile devices and software delivered "as a service" was transforming the business landscape, with companies such as Airbnb, Instacart, Lyft, Uber and others taking the world by storm. Stripe helped make it all possible with payments services including recurring subscriptions and instant merchant underwriting.

Every Company Becomes A Payments Company: 2019-2029

Fast forward yet another decade, and here we are today. 2020 is on the horizon, and another wave of payments innovation is right on schedule: verticalization. In other words, companies are bringing payments in-house to become their own "vertical" Square or Stripe.

For companies of every shape and size across every industry, the next decade of payments innovation presents a major opportunity to own a piece of the growing payments industry by bringing payments in-house and becoming a payment facilitator. This not only translates to savings in terms of fees no longer paid to third-party service providers, but it can open up new opportunities for business and customer experience innovation.

How can you tell whether this model makes sense for your business? Here are two key considerations:

Processing volume: Once transaction volumes exceed $50 million annually, it may be cheaper to handle payments in-house. Lightspeed POS, for example, estimates it is able to take an additional 55bps per transaction via its own payments product rather than relying on its legacy merchant referral model.

Payments complexity: If you're just accepting card transactions from customers, it may make sense to outsource your payments. But if you're taking payments on behalf of others and making payouts to those submerchants as a platform, marketplace or aggregator, you might want to bring payments in-house so you can own your merchant portfolio, streamline disbursements to recipients and tune merchant underwriting rules to fit your specific use case.

As history shows, companies that keep up with payments innovation cycles and deliver the right customer experience are the ones that ultimately win. In the late 1990s and early 2000s, PayPal's innovative payments experience powered a new generation of e-commerce companies. During the next decade, it was companies like Airbnb, Instacart, Lyft, Uber and others leveraging Stripe and Square that won big.

Looking to the decade ahead, it's all about verticalization. What can you do to prepare your business for the shift to verticalization? In an upcoming article, I will outline a few key strategies to set you up for success.

Excerpt from:
Preparing For The Next Wave Of Payments Innovation - Forbes