Uncovering the paradox of inefficient payments

“Growth creates complexity, which requires simplicity.” It was said by an American pastor and, truth be told, it wasn’t said about payments.

But as we think of payments and what they mean to high-growth businesses, it’s a statement that seems to resonate with increasing urgency.

Our new research report, Black Boxes and Paradoxes: The Cost of Disconnected Payments, asks: how can we meaningfully quantify ‘optimization’? And how can we gain a better understanding of the untapped value tied up in payments with a view to finally unleashing that value to the good of all merchants?

We worked, with renowned economists and econometricians at Oxford Economics, to crunch the numbers and stretch-test the hypotheses against the data. We surveyed more than 5,000 consumers and 1,500 merchants from the US, UK, France and Germany. And we also dug-deep, interviewing visionary payments leaders from the likes of Uber, Deliveroo, Microsoft, and Airbnb.

We set out to understand where significant payments value may be trapped, hidden or under-optimized. And perhaps one of the most interesting findings can be neatly encapsulated by, what we have begun to call, the Payments Inefficiency Paradox.

What is the Payments Inefficiency Paradox?

What does the paradox have to do with the complexity that creeps in as your business scales? Well, everything.

As merchants grow, it’s not surprising that complexity becomes a hurdle to be overcome at every step of the way, in every function of the business -- from logistics, to procurement, and, yes, to payments.

But more often than not, in this hunt for growth, leaders can be put at ease with the expectation that at some point economies of scale will kick-in, balancing out the initial costs of complexity. That’s the efficiency part.

But here’s the rub: payments do not actually get more efficient as you scale. Instead, growth, which hinges on payments, begets complexity that directly impacts...payments. The unvirtuous cycle is set in motion. The old pastor was right.

As Logan Vander Linden, Head of Payments Partnerships and Operations at Scribd (and formerly of Airbnb), says, “Payments don’t scale the same way other parts of business scale and there’s a reason why even payments providers oftentimes pick geographies or pick a specific functionality that they’re the specialist in. To do it all is just too complex.”

That’s all very well, but merchants deserve to do it all if they want to. And they deserve to be enabled in such a way which does not over-lay further third party complexity and rigidity  -- hamstringing  vision and ambition.

The research shows how payments inefficiency is hampering the total value that merchants are deriving from their transactions. These are the hard cost and the opportunity costs to your business currently locked-up in inefficient payments.

This loss of value which comes from growth can stem from a variety of challenges -- more varied customer expectations and demands, more wide-ranging customer (and so diverse risk) profiles, increased compliance and regulatory demands.

As merchants seek to localize in new geographies, the challenge of accepting money from local markets keeps on coming. And while fraud algorithms remain crude and clumsy, it doesn't matter how much more money you’re pouring in, too much of it is still being lost to false declines. And the list goes on and on.

This all puts a squeeze on your company's growth, just as you are in flight. We’re talking customer frustration, blockers to new markets, and brand damage. They all spiral from this struggle in payments to scale in a streamlined and optimized way.

Collectively, these challenges can mean that even as merchants scale and accept more payments, they increasingly get less value from each transaction. It is this concept that we have aptly begun to refer to as the Payments Inefficiency Paradox (PIP).

Payments Inefficiency Paradox (PIP) = The principle that payments efficiency reduces as payments volume increases due to growing complexity.

We are going to explain why this happens and look at how we can manage the PIP. But, first, let’s look at this in the simplest of examples.

Take the small or mid-sized business who is doing a few hundred transactions a month. They’re selling in one country, with customers who all look pretty similar. They’re accepting and settling in the same currency. So far, so efficient.

Meaning: for every possible transaction, they are likely to be getting the full value out of that transaction. They have limited challenges with acceptance rates, low risk of fraud, one set of customer demands, a more narrow range of payment methods that they are required to accept, and only one set of regulations with which they must comply. Nice!

But now that business thrives and scales. Instead of doing a few hundred transactions a month, they are doing hundreds of thousands of transactions a month. They are serving 15 markets and they have extended their product line to include a subscription service. All of a sudden, the level of complexity skyrockets and, as a result, so does their payments inefficiency. Approval rates can dip; cart abandonment can soar; false declines can result, reputation is hit, revenues lost; the cost of each transaction grows.

Of course, they’re still growing and making more revenue, so in sum, things may still look positive. The challenge is that you’re not getting as much value as is possible. Because of this, it’s actually even more difficult to recognize that the Payments Inefficiency Paradox as in play at all.  

Why it can be difficult to identify the Payments Inefficiency Paradox

Let’s look quickly at just some of the reasons that this can happen.

Lost local payment methods: More markets mean that customers have more local payment demands. Our research found that 56% of consumers say they would take their money elsewhere if the merchant did not offer their preferred payment option. Yet only 37%  of the merchant’s surveyed currently offer a full range of alternative payment methods, from local methods like Giropay in Germany, Oxxo Pay in Mexico or Boleta in Brazil.

Layered providers and suppressed reliability: As Vander Linden noted, often payment providers do not have a truly global footprint or what we call “feature parity” within each of those markets. If a scaling business is partnering with a payment provider who is not able to offer global coverage, they must integrate with multiple providers -- layering them on top of one another. This not only creates a reliability risk, but also creates back-end operational costs and obfuscates valuable transaction data too.

As Vander Linden notes, “Nobody ever thinks about the fact that once you add 12 payments partners into your stack, you’ve got 12 different external portals with 12 different user credentials and maybe they don’t look at what money movement means, and then that’s tax reporting that you have to do for 12 individuals now in 12 different portals. The internal costs are significant but rarely considered.”

The research from 1,500 merchants shows that even where economies of scale could exist in staffing many merchants are suffering sup-optimal productivity levels as a consequence of the back-end labor hours spent fixing payments problems. These range from chargebacks and fraud to downtime and outages. That’s brain power spent neither on optimization nor innovation.  

Here, we see not only lost revenue, but another type of cost associated with the Payments Inefficiency Paradox: an operational toll to the business.

Compounded compliance demand: With every market comes new compliance and regulatory requirements. The Revised Payment Services Directive and subsequent 3DS and 3DS 2.0 has been a top discussion, as has Strong Customer Authentication. Not only is regulatory compliance often operationally costly, but failure to effectively implement authentication protocols can lead to false declines (we’ll get to that in a minute) or customer abandonment. So consider then, that 72% of the 1,500 merchants surveyed are not currently receiving timely regulatory support from their payments providers.

Increasingly complex risk: The greater the risk, the greater the potential reward, right? But in payments, increasing the scale of your transactions also means that the risk profile of your customers holistically becomes more complicated. This complexity in turn can result in some significant losses for your business and more often than not you are not in a position of control. In our most recent research, we found that in 2019, the overall loss at the UK, US, French and German digital checkout as a result of false declines was $20.3 billion. That is a lot of money left on the table.

Settlement and FX: In our example above, a small or medium sized business may not have the same level of challenges with settlement or FX as a multi-national digital leader. But for those big enterprise businesses, settlement and currency exchange can end up being a costly complexity. In fact, only 28% receive their preferred settlement currency and only 29% receive their preferred settlement frequency. That’s a pretty significant blow to treasury and liquidity management especially in these straitened times.

And these are just a few examples which we uncovered. Payments inefficiency is a bundled package of stifled value and leaky buckets.

But if payments inefficiency is a known challenge, and if those critical pain points are identifiable, what can merchants do to fight against it?

The solution to payments inefficiency

The solution relies on three primary categories.

Unified payments platform: You can use digital payment orchestration to make the best use of efficient payment routing technology. You should choose a platform provider with true global footprints and “feature parity” in all markets means that merchants can serve customers around the world without needing to layer in more operational complexity into their business. Data cuts from the merchant survey reveal that businesses who only use unified payments platforms are deriving numerous significant benefits ranging from the quality of data they receive and settlement currency and frequency satisfaction, to a far greater sense that growth in payments can derive efficiencies and benefits across the whole business.

Future-proofed compliance: With the right payment provider, compliance with global regulatory requirements should be simple. Merchants must look for a provider that proactively offers solutions for these changes as they emerge. Merchants working only with unified payments platforms are also more likely to feel supported on critical regulatory changes than their peers who are saddled with a more complex and legacy-laden provider roster.

Data transparency: Perhaps more important than all is the need for more granular data. In fact, 41% merchants surveyed do not receive any actionable analytics with their payments data. And 67% of merchants surveyed do not receive detailed fraud and chargeback data. Without complete data transparency. It is impossible for merchants to be able to understand what is happening within their payments -- why they aren’t getting the most value out of every transaction -- and effectively solve it.

If you lack data granularity, you are lacking the crucial information needed to make impactful change. To iterate, test, optimize and control.  

Our new report Black Boxes and Paradoxes: The Costs of Disconnected Payments highlights a sobering statistic. The majority (c.60%) of merchants surveyed do not feel that their payments data are informing their business strategy nor their innovation. Sobering, but not at all surprising now that we know just how few merchants are actually receiving the necessary data.

And herein lies the very good news. There is still so much scope for improvement. So imagine what the future holds in store for merchants. Because while paradoxes may abound along the way, at the heart of the matter there is no gordian knot.

There are solutions to be had and a clarity about what is required. The change is afoot already and we expect the pace to pick up in the next 18 months. The research highlights just how open banking and a paradigm shift in the banking and payments landscape is already paving the way for agile fintechs who really get payments and who flex to their merchants as never before. As Gaurav Yadav, Lead Product Manager at Deliveroo succinctly put it: “We’re not stuck anymore.” Change is apace.

Explore the findings in our new report Black Boxes and Paradoxes: The Costs of Disconnected Payments