Some people know Glenbrook for our Payments Boot Camp™ workshops, some know us for our book – Payments Systems in the US – while others know us for this podcast. Interestingly, while we do all of those things, we are, in fact, a consulting firm. A consulting firm that believes educating industry professionals is a great way to make the industry stronger.

Our consulting practice gives us a front-row seat to stakeholders across the value chain. Whether they are in start-ups or central banks, we hear what’s on their minds every day and have the opportunity to help them tackle challenges, identify growth opportunities, and instigate change.

In this episode, Yvette Bohanan sits down with Bryan Derman, Chris Uriarte, and Drew Edmond to take stock of payment industry trends as we reach the halfway point of 2023, to hear their perspectives on what’s hot, what’s not, and what are they watching as we venture into the second half of the year.

Yvette Bohanan:

Welcome to Payments On Fire, a podcast from Glenbrook Partners about the payments industry, how it works, and trends in its evolution. Hello, I’m Yvette Bohanan, a partner at Glenbrook and your host for Payments On Fire.

Let’s think back to about a year ago in June of 2022 when there was quite a bit of discussion around the new normal ranging from the prospect of sustained remote work policies to persistent supply chain issues. While those topics continue to evolve and reshape our lives, we’ve had some unexpected curve balls that have been thrown our way since then, and that’s true of the payments industry as well.

The implosion of FTX, the collapse of Silicon Valley Bank, both having raised new questions around regulation, reserves and risk. Then we have rising inflation and interest rate countermeasures, creating an environment of economic hesitation. New natural language processing like ChatGPT is spurring a rethink of automation along with some existential thoughts about the future of work and life in general. So we decided to sit down with some of our partners who lead our commercial practice area, and we’ve had so much to talk about that we don’t have one episode here.

We have two. So this is part one. Our commercial practice area covers topics related to merchant acceptance, payment facilitation, payments risk management, product strategy and investment strategy. And I thought it would be interesting to check out what they are seeing in the current macroeconomic climate and the tech landscape and what’s influencing the work that they do for our clients and their points of view on where the payments industry is headed. So welcome to Payments On Fire, Bryan Derman, Chris Uriarte, and Drew Edmond. Thanks for taking time to share your observations and insights as we cross the halfway point of 2023.

Bryan Derman:

Hi, Yvette. Always fun to be on the radio with you.

Chris Uriarte:

Great to be here.

Drew Edmond:

Great to be back.

Yvette Bohanan:

All right, I am looking forward to hearing what you all are thinking about on these hot topics these days and the implications for the payments industry and what your eyes are focused on as we enter the second half of the year. So are we ready?

Drew Edmond:

Ready.

Yvette Bohanan:

All right. Let’s start with the big picture. When we were exiting 2022, if you can remember that far back, we had a few items that we were watching very closely, open banking, buy now, pay later, fast payment systems and digital currency systems. In your vantage points, are these topics still trending or are they being displaced?

Bryan Derman:

Yeah, and that’s quite a list Yvette, no wonder we love the payments business. No shortage of things to talk about, but they do move around over time. Six months does bring some change. Let me cheat and start with the easy one. In terms of digital currencies, I think it’s fair to say we have hit the pause button on that one to a large degree.

The FTX situation certainly created a chill, and now just in the last two weeks, we have the SEC bringing suits against two of the biggest exchanges, Binance and Coinbase, accusing them essentially of running unlicensed securities markets, securities exchanges. So the crypto winter is extending into the North American summer, I would say.

That’s definitely put a little hold on things, but I think it is a pause rather than an end to things. We will see central banks continue to study their central bank digital currencies, CBDCs and I certainly don’t think anybody in the Chinese government is particularly worried about what the US SEC has to say about this. They will continue to do their work, and this is inherently a global phenomenon.

So many of the interesting use cases involve cross boarder payments. It would be wrong to think of this as a US thing, so I think we can put it to the side for the moment, but nobody should sleep on digital currencies. And you even see the indications of that in the relatively robust valuations that Bitcoin is holding onto. Even as exchanges have collapsed, the currency has not. I think of the other topics you’ve listed, the hot button issue of the moment is probably fast payments, instant payments driven by the introduction, we think next month of Fed Now in the first Fed Now transactions coming to market, what almost six years after RTP debuted in late 2017.

A lot of discussion about that. A lot of people trying to figure out what their place in that is. I have a slight sense that we’re entering the hype cycle there, and we’ve got to be a little cautious about what kind of adoption curve we expect for that. It’s a big change for certain … New payment rails don’t come along very often, so it’s a generational upgrade. But those things can take a generation to take hold or at least a few years, particularly in the US when so many financial institutions need to become enabled before you have a ubiquitous payment system the way we think about ACH or checks or cards to a great degree.

So it’s exciting, but be ready for a multi-year rollout of enablement of banks and then use cases beginning to come online. And ultimately, somebody’s got to explain all of this to end users and-

Yvette Bohanan:

It’s exactly what’s going on here.

Bryan Derman:

Whether it’s my aunt trying to send somebody a gift or a corporate treasurer finding a better way to do payroll, it’s going to have to get explained. That takes some time. I do think use cases are the important consideration in terms of what the uptake will be because every new payment system has to answer the question, what can this thing do that the old system couldn’t do or couldn’t do very well to where this one does it much better?

And there are cases you can begin to point to for that in instant payments, but it still has a sound of being a little bit nichey. The overwhelming one is the one we’ve already seen in the person to person space. Zelle came on the scenes and sort of went vertical in terms of its growth rate. It was filling a need that was not very well filled, certainly in the banking space. It was not easy to make for one individual to make transfers electronically to another individual, nevermind in real time.

And so kind of no surprise that Zelle did that. But as we start to look at the other domains of payment that we think about, the other ways this might be used, people are starting to talk about useful cases in bill payment, in payrolls, in different kinds of enterprises, routing money to consumers, and then probably on a much longer term in the B2B space. But as I said, a little bit nichey in that same regard. I’ve become a big fan personally of what we sometimes call me to me transfers, moving money between my own accounts. So whether that could be-

Yvette Bohanan:

Which can still be very, very difficult these days, surprisingly.

Bryan Derman:

Surprisingly so, or some are saying, wait three days for this ACH to be really good. So think of a new account opening or moving money from an existing account to a newly opened one, funding a wallet of some kind, crypto or otherwise. In the corporate space, I sometimes call these us to us payments for corporation, but concentration accounts or moving money between use cases, [inaudible 00:08:29]-

Yvette Bohanan:

Treasury management.

Bryan Derman:

But those seem to have some real upside from an instant payment.

Yvette Bohanan:

Well, they’re faster rails. It’ll be interesting to see how companies come in and can innovate on top of this rail, this and what it means to have the Fed jumping in. I think one of the more interesting aspects of one of the more fairly recent announcements they made, I think when they announced the July launch was that the treasury, the United States Treasury was going to be supporting Fed Now. And I think that’s a good bellwether indicator of what they’re trying to do here and where they’re trying to really start to get a foundation in place.

Bryan Derman:

And there’s certainly a nice history of government being sort of the catalytic user of new payment systems going all the way back to direct deposited payroll, to a certain degree, purchasing cards got a big boost from the GSA embracing them, prepaid cards with social security,

Yvette Bohanan:

ACH. Yeah, all of it.

Bryan Derman:

The government is probably the biggest user so they can shape behavior.

Yvette Bohanan:

So that’s digital currencies, best payment systems. What about open banking?

Drew Edmond:

Yeah, I can jump in on the open banking topic. An extension of open banking is the ability to pay using your bank. It’s a method of payment that has really lagged behind in adoption in the US compared to other countries around the world. You recently had Eric Shoykhet, the CEO of Link Financial Technologies talking about this topic on the podcast.

Yvette Bohanan:

Yes .

Drew Edmond:

And the key value propositions there are really allowing consumers to pay by bank, and that provides merchants lower costs, higher success rates, particularly for transactions that have a recurring component to them, even if they’re not necessarily monthly recurring payments like we’re used to. And I think that just with the macroeconomic environment that we’re in today can shift merchant psychology a little bit to think about reducing costs, maximizing customer retention, trying to do more with less in their own business.

So it might help to shift a little bit. It might be the time that pay by bank starts to look a little bit more attractive to merchants that are typically a little bit reticent to make major changes to their checkout flow without knowing what the ultimate outcome might be of that change.

Yvette Bohanan:

Yeah, I think we’re starting to hear people asking about it, which is the first step, how can I use this? What would the implication be to the customer journey if I did this, and all this stuff that merchants should care about? Conversion, simplicity, frictionless, fraud, all that good stuff. So yeah, I would agree. I would agree.

Bryan Derman:

Can I jump in quickly, Yvette, as the guy who was around when debit cards first became a thing in the US, the watch-out to sound here is somebody’s going to have to explain this to the consumer. If you remember the early days of debit, the card networks hired everyone from Bob Dole to Daffy Duck to explain to consumers what a check card was, I think they called it then.

Yvette Bohanan:

I think Daffy was actually more effective, but that’s my personal take on it.

But you’re right, you’re right, the naming and branding of this is really important. The fact that they called a debit card, a check card to make that association in people’s heads like, I can use this where I use the check, right?

Chris Uriarte:

Yeah.

Yvette Bohanan:

A lot of effort went into that and I think they took a few runs at it before people actually understood and the use case. There was a little social, I don’t know, embarrassment maybe with consumers, if you weren’t using your debit card at point of sale and you were the person writing the checkout or fiddling around in your wallet or your purse for cash and change or whatever, suddenly it became a thing that you didn’t want to be that person.

We saw that at Covid too with digital payments. People who were really, really reluctant to try to use their phone to tap and pay or just tap with a card, suddenly had to, and they were afraid and a little embarrassed to try to do something else or reluctant. Consumer adoption, it’s what motivates people to change behavior is just that’s a whole podcast or two in and of itself, right?

Chris Uriarte:

That’s a whole podcast. That’s a whole thing. Yeah, for sure.

Bryan Derman:

Go big or go home is the summary though.

Yvette Bohanan:

Yes, exactly. Exactly. That’s true. Chris, what’s on your mind?

Chris Uriarte:

So we’ve got a very hot topic this summer. Sometimes we like to say we have the song of the summer every year. This is sort of the payments topic of the summer, I think here in 2023. And it all really revolves around the regulatory landscape in the US related to debit card routing, as well as some new potential regulations on the credit card side as well.

So let me talk a little bit about debit. So I think most of us, or many of the listeners on the podcast here are very familiar with the Durbin regulations. And just when we thought that there was nothing else to talk about for Durbin, and that Durbin was fully baked and was sort of written law and there wasn’t going to see much change or changes in behavior by different participants in the payments ecosystem, the Federal Reserve stepped in last year sometime around October, and they clarified their position on what’s referred to as the regulation II part of the amendment, to say that debit card issuers are required to have connectivity to unaffiliated networks for all types of transactions.

And that’s really where the clarification came in October, stressing that it had to be all types of transactions, including online transactions. And that this connectivity to multiple networks needs to be put in place and needs to be supported by July 1st of this year. So everybody’s scrambling to meet this deadline, wants to make sure that they’re in compliance with it.

And we’ve spoken with lots of retailers, we’ve spoken with the various networks and people say they’re going to be ready. So this means that we’re going to see the regional debit networks in the US really try to step up and make a real push to take market share from Visa MasterCard’s dual message networks when it comes to online debit processing. So that’s something we’re watching very closely for sure.

Now, somewhat related to that, when we shift our focus over to the folks on Capitol Hill, we see Senator Durbin taking a second swing now at introducing his Credit Card Competition Act. And this is very similar. There’s some similar themes of course related to the original Durbin amendment focused on debit, but this one of course focused very much on credit card. So the push here is also going to be to force credit card issuers to connect to multiple unaffiliated networks with the hope of increasing competition, ultimately lowering merchant processing fees. And we hope that it’s ultimately going to benefit consumers as well.

Yvette Bohanan:

All right. So the song of the summer in payments, it feels like a lamenting rock ballad from the seventies here, right? It’s like a throwback, and so Durbin won, we’ll call it the first one, it was like, yeah, 14, 15 years ago that all of this stuff …

Bryan Derman:

Implemented in late 2011.

Yvette Bohanan:

’11. So ’12. And here we are refreshing. And then we’re, he’s taken the choice piece out of the debit side and implementing it over in credit. Do you think this is going to work? Are merchants actually going to drop everything they’re doing right now and sort of block to either one of these to sort of adopt this? You’re talking about the providers being ready, but is there a demand over here with the merchants, our classic chicken and egg question?

Chris Uriarte:

Well, of course it’s not that straightforward. There’s a lot of factors here, and if I look at the debit front, there’s still a lot of confusion amongst merchants as to what’s required to process on these alternative networks. These networks, they operate differently from Visa MasterCard. Most of these networks are single message networks, for example. They have different rules, their regs and their operational processes with things like disputes and chargebacks are very different.

So there’s a lot of merchants that are really patiently waiting in the wings to see what’s happening here. And when we now shift back over to the credit card side to the CCCA as they’re calling it’s still pretty early. They took a first swing at bringing this to the table several months ago. Last year they weren’t successful at sneaking it in. They’ve revived it. There’s a lot of news media coverage around it.

It’s sort of a hot topic over the course of the last several weeks, but it’s still early. And we’re not even sure what will be contained in the final bill, but there is a lot of confusion about this, and there’s a lot of major objections from key stakeholders in the industry. And when you look at who these different regulations are supposed to benefit, of course the merchant is going to get benefit hopefully in these cases.

And we saw on Durbin one, of course, there was direct benefit through regulated interchange associated with those cards that were issued by the regulated institutions, the larger institutions. But you can’t forget the consumer in this. And if you go back to the original Durbin amendment, the consumer was supposed to be one of the ultimate beneficiaries here that cost savings to merchants was supposed to trickle down to the consumer.

And there’s a lot of well-documented data backed stories from very respectable institutions like the University of Chicago, Department of Economics and the University of Pennsylvania that tell a story about how the original Durbin framework didn’t really benefit consumers at all. In fact, in a lot of cases, it costs consumers a lot of money. So we’re going to have to wait and see on this one for sure.

Bryan Derman:

I’m not sure that lack of consumer benefit is really slowing down anybody in Washington. The song of the summer, to me seems like a distinctly American tune in the sense that rather than jump in like so many countries have, and try to set interchange and frankly, that that’s what Durbin one did, they’re seizing on this other sort of network choice aspect of it and pushing that further into reg II and saying, it’s not easy to do in payments, but let’s make this market as competitive as we can and kind of let the chips fall where they may.

That tends to be more the US perspective, rather than directly regulate, let’s be pro-competitive and see what the market forces do to you. The Credit Card Act, the CCCA really fascinating in a couple of other ways. I’m paying attention to it. As Chris said, it’s far from a done deal, but the bipartisan quality of it, this started as something called Durbin Marshall, a very liberal Democrat, a pretty conservative Republican, finding common ground on anything is nice to see.

But this bill in particular, I think gives it a fighting chance at passage. And the other interesting wrinkle they’ve put into that version of it compared to debit, is that they’re saying they want to have two unaffiliated networks on each card. And it can’t just be MasterCard and Visa. It has to be some third or fourth network, whether that’s a regional debit network making its way into credit, Amex, Discover, I think it opens up some very interesting possibilities if it goes through for that third, fourth, fifth network out there. So you end up with quite a chess board and there’s going to be the regulation, and then there are going to be responses and counter responses from all these players jockeying for position in the new rule set.

Yvette Bohanan:

That’s true.

Bryan Derman:

I’m going to try to predict today where that’ll come out, but I think people will be busy with it.

Yvette Bohanan:

There’s going to be some big winners out of it if it goes through the … PSPs that can respond and help make things simple for all the participants, networks, like you’re saying, there’s certain networks that are going to come out, big winners here, but who knows.

Interesting, interesting times. All right. So the curve ball in all of this, I think one of the curve balls has been around a topic we kind of obsess with at Glenbrook sometimes, interoperability. And it was a little bit of a, whoa, didn’t see that one coming moment when we read a couple headlines. One we sort of did see coming and one that’s a little intriguing. So we have Visa Plus that was announced a little while ago, and the ideal EPI announcement. So two big announcements on interoperability. What do we think some of the implications are around these announcements?

Drew Edmond:

Yeah, I’ll talk about Visa Plus. We’ve got Visa with their network of network strategy. We’ve got Visa Plus, which is in and of itself is kind of a network of networks. And so it’s really networks all the way down at this point. It’s a platform that’s going to allow users of digital wallets and closed loop systems like PayPal, Venmo, Western Union, TabaPay, et cetera, to send money from their account on whatever closed loop system they’re using to someone on a different system completely.

So if I have a PayPal account and I want to pay somebody that has a TabaPay account, Visa kind of sits in the middle here and allows that to happen. And so it’s really acting as an interoperability layer between the growing number of account to account networks that are used for P2P payments. So while interoperability can certainly be a positive, I think the closed loop systems themselves may have a little bit of skepticism about connecting to this platform potentially.

If I can send money and receive money to and from anyone, do I really have a reason to sign up for another wallet account? So this could potentially limit user growth on these individual systems themselves. I think it’ll make it so that these providers have to work hard to demonstrate how they are better than other options in the market. But that being said, this isn’t necessarily a brand new concept. Western Union already pays out to other digital wallets around the globe as a way to get funds in the hands of their recipients. So they probably just see this as kind of an extension of that concept. And in fact, just improving their own capabilities and reach geographic reach of being able to send funds around the world.

Yvette Bohanan:

I don’t think it’s super novel maybe, because you look at, they sort of took a little bit of chapter and verse out of UPI’s philosophy, a little bit out of things like Western Union that are already there. Discover Network has had reciprocity agreements with card networks all over the world. So there’s a lot of forms of interoperability.

I think the eyebrow raise on this one came when it was Visa. I think people weren’t expecting this from Visa necessarily, and it has a lot of implications to it. I mean, they’re global to begin with in the sense that, you could pick up your Visa card and do whatever you want cross border. So this is them enabling something kind of unique. And notably after there’ve been a lot of attempts at Visa having their own wallet, Visa inter-operating with other network wallets, and now they’re sort of, it’s an interesting position to step into for them.

Chris Uriarte:

So Drew, you’re saying we’ve reached the point where Visa is really a network of networks of networks right now.

Bryan Derman:

That’s right.

Yvette Bohanan:

A network of a network of a network.

Drew Edmond:

It’s a seven layer cake.

Chris Uriarte:

That’s where we’re headed, for sure.

Yvette Bohanan:

Oh, shoot. What about EPI? EPI comes in and they acquire Ideal. And for those that are really focused on the US here, Ideal is the payment method for online commerce in the Netherlands. If you’re not in Ideal in supporting it in the Netherlands, you’re leaving a lot of money on the table.

Chris Uriarte:

Yeah. It’s a non option if you’re a financial institution in the Netherlands, for sure.

Yvette Bohanan:

And they’ve been around forever, right? Since the beginning of the internet. So what do you think of this?

Chris Uriarte:

So this is really an interesting one. So when it comes to EPI, an EPI is a European Payment Initiative, which is a European Central Bank backed organization. They came in just about two months ago and they announced that they were acquiring Ideal. And we like to think of Ideal as really being sort of this long-standing workhorse of the Dutch online payments world, that it’s 70% plus of transactions that are completed online in Netherlands are done through Ideal.

So Ideal, if you’re not familiar with that, it’s an account to account realtime payment system, and it works very, very well. And it’s beloved, I would say by individuals in the Netherlands for sure. But I do have to say that a lot of the industry was really blindsided by this. I mean, I think this is a very interesting acquisition. I think it’s an acquisition that makes a lot of sense, but boy, it was quite a surprise, to say the least.

And what was interesting for me personally is I happen to be sitting in Amsterdam at our Merchant Payment Roundtable European Forum on the morning that this announcement came out. So it was certainly a topic of discussion that morning for the next few days amongst all the payments geeks in Europe and in particular, all the folks that I was spending time with that were Dutch citizens, of course.

So very, very hot topic, and we got a little bit of a flavor here. Look, I mean, we really don’t know what the full strategy is here, but I don’t think you need a crystal ball to see really where this is headed. As I said, EPI’s a European Central Bank backed Payments Integration Initiative. So they’re focused on looking around Europe and figuring out how do we make all these different systems work a lot better.

And Ideal, as we talked about, is a non card account to account is the payment systems, it’s really been, as we’ve said, that de facto way to pay online in the Netherlands for decades. So this most certainly is going to be a serious push to create an account to account Pan-European online payment system that competes directly with the big card brands. So it would be very interesting to see. I know that we’re planning on covering this on podcast in the future. We’ve got some things in the work that works here. We know that this is going to be really important to the European market, so we’re keeping a close eye in it for sure.

Yvette Bohanan:

We’ll have to unpack what is Ideal, how does it work, what’s its structure? What does this mean? So yes, we’ll be doing that in a future podcast, but I think it is a notable development for a lot of reasons. And we’ll see what happens. A lot of times we say you can be next door to each other in terms of a country and still have very different ways you like to pay or prefer to pay. So it’s a little bit of a gamble, but an interesting one, let’s see what happens.

Chris Uriarte:

Yeah, for sure.

Yvette Bohanan:

Let’s see what happens. We talked to all the stakeholders across this space, and particularly in this practice, in the commercial practice. Let’s start with our clients and just sort of walk through some of the stakeholder perspectives and what they’re focusing on right now, starting with business merchants. What are merchants, what’s top of mind right now given all of this backdrop that we’ve just been talking about?

Drew Edmond:

Yeah, I’ll take a slightly adjacent angle to it. I think we talk a lot about merchants sometimes, but I think an increasingly large group of companies in the value chain that we should talk about are platforms that are enabling payments for their customers that are accepting payments. This could be business management software companies, marketplaces, and the like. And the last several years have really seen an explosion in these companies embedding payments and other financial services into their platforms.

And because those several years have now passed, we see the maturity level of these platforms and their understanding of payments has started to increase pretty significantly in some cases. So what started as I want to embed payments and make some additional revenue is shifting in some examples and moving towards, well, I understand my business and my customers better than my payment provider, so I want to take on more ownership of the risk.

I want to take on more ownership of the customer experience, the onboarding process, and as a result, move to improve my unit economics and extract more revenue from the service that I’m providing. So I think we’ll start to see more platforms start to think and act like large merchants have done for a long time, and look to find ways to add redundancy and negotiating leverage by finding ways to use multiple providers to enable their payment business rather than necessarily sticking with a single provider.

And maybe have more of a focus on identifying point solutions that they bring in to their payments environment, whether that’s tokenization or risk or that KYC process that I brought up. So we could see some more kind of optionality and flexibility in these payments environments and platforms. This of course, comes with more challenges, but as their experience continues to develop on how to optimize and precisely customize the payments environment that makes the most sense for their business, over time, the benefits are likely to outweigh that initial investment.

Yvette Bohanan:

It’s ironic. I think this is really ironic because 15 years ago, 10 years ago even, you would talk with merchants and they would say, I just want to make payments disappear. I don’t want anyone thinking about or deciding anything at the moment they’re about to pay me. Just pay me, make it so simple, make it disappear. And in order to do that, now what they’re doing is, payments on their agenda internally is becoming front and center. So in order to really achieve embedded commerce, they really have to understand this industry a lot more and what’s going on so that they can make the payment disappear effectively.

Drew Edmond:

That’s right.

Bryan Derman:

Even as they monetize the heck out of it.

Yvette Bohanan:

That’s right. Exactly. Make it disappear. But if it helps, it’s a creative to my P and L, that’s always a good thing, right? Fascinating. There’s so many wrinkles to this industry. That’s what keeps it interesting. What else are we seeing?

Bryan Derman:

Sure. Well, speaking of your P and L, if we turn to our more traditional merchant clientele, we sense a change in attitude there. I think Mark Zuckerberg gets credit for christening 2023 as the year of efficiency, but that vibe is present at more than just Meta. We’re feeling it from a lot of the merchants we work with who maybe over recent years have been biased toward, how do I just keep up with the growth, particularly in the E-commerce space, and through the pandemic.

They’re sort of holding on for dear life, making sure their payment systems and operations could keep up with the growth. And now you get the sense of everybody sort of exhaling, ingesting kind of a new environment, being prepared for slower growth and saying, okay, the time has come to clean things up a little bit. In our consulting practice that gets expressed as a real increase in merchants coming to us for RFP type work.

Let’s have a look at our various payment services providers and everything from making sure our contracts reflect the latest pricing, because pricing in that market tends to decline over time, companies coming to us saying, effectively saying, could you run a little audit on our bills from our processor, from our networks, and make sure we are paying what our contract says we’re supposed to be paying?

Again, folks who are once all about the growth are now saying, let’s tighten these contracts, let’s look at our own operations and figure out whether the procedures we’re using internally are as efficient as they could be. Let’s think about whether it’s time to introduce a multiprocessor configuration to get a little competition going within our account and give us a little bit of redundancy because we’ve hit such a scale that we can afford to divvy up the volume a little bit and still get really good pricing and have a couple of different competitors pushing each other. So it’s a notable change from what we would’ve been talking about just a few years ago. Everybody’s trying to get more out of what they have as opposed to just trying to get more.

Chris Uriarte:

I think, Brian, one thing that I’ll add to that, and Yvette, you’ve been exposed to this as well, is we’re also getting merchants that are just coming to us and maybe not asking to do a four RFP for a new provider, but they’ve realized that these contracts that they enter in with acquirers and PSPs, they’re long contracts. They’re three, four year contracts. Their business has changed over the last two, three, four years. They’ve grown. And they say, I think I’m paying a lot more than I should be paying. Or am I paying what others in this market are paying, similar businesses to us? So merchants are really along that theme of optimization. They’re really starting to look at costs to see where they could trim, where they could optimize some of the relationships, et cetera.

Yvette Bohanan:

Yeah, absolutely. And it’s interesting because when you’re in the go-go days of just keeping up, white knuckling through growth and scale and everything else, you have a lot of people just sort of signing contracts, right? They just, let’s get going with this. And providers, to some degree, to their credit, have made it a lot easier for people to sign up and get going, and start taking payments and start making money.

And those are all good things. But when you hit a macro and economic period like we’re in, which a lot of people in this industry and a lot of working professionals outside of this industry have never hit before in their lives, really. It’s new. And now the tide’s turn, things are different, the lens that we’re looking through is different. And people just want to know, what should I do? Is there there, is really the question? Whatever it is. Is there something here I should be paying attention to? And oftentimes there is just because of the switch in the environment, now we have time to take a pause, as Brian was saying, and look at things a little differently through a new set of eyes.

Drew Edmond:

And I think one of those levers, if we look a little bit more narrowly at still a large group of merchants, but a narrower band of merchants that have subscription based products or recurring payments as part of their business model, the concept of involuntary churn comes up very regularly these days, and people are really trying to optimize their payments business to help to address metrics associated with involuntary churn.

And just to explain what that is a little bit, it’s truly a payments issue if you’re losing folks due to the failure of the payment itself. There’s other types of churn, of course, there’s voluntary churn where people choose not to use the product anymore and they stop using it. That can be addressed in other ways that are very much more product focused. But involuntary churn applies specifically to the payments failure itself. And so there’s a lot of work that merchants can do, that billers can do themselves and in concert with their payment providers to help address the loss of a customer that happens when a payment is not successful.

The cost of these payment failures is extraordinarily high. You’re not just losing a transaction. If you’re another merchant that just is selling goods and services one off and you lose a transaction, okay, that’s a single transaction. But if you’re a recurring merchant or a merchant with recurring subscribers, you’re losing that customer potentially for life. The lifetime value of that customer is just shot at this point.

So it’s a very important metric for these merchants to focus on and do what they can to both optimize for the initial success rate of the transaction when it’s actually happening, but after it fails, there’s still an opportunity to ultimately recapture that payment. You may try for the rest of the month trying to get the money associated with it, because if you’re a Netflix or a newspaper or a digital goods and services provider, you don’t necessarily have to turn off their access to your product right when that payment fails.

You can say, well, we assume they want to continue using this. We’re going to continue to attempt to try to capture that payment over time and allow them to maintain access to our services. Until then, it doesn’t really cost us anything at the end of the day, but it’s still important to ultimately be able to actually recapture that payment if that’s going to be the case. So there are some different tactics that merchants can use, and again, you see more sophisticated merchants doing some of this themselves. You might take advantage of the tools and services that your payment service provider offers to you, and you may even go out to the market. There are payments companies out there that focus specifically on recapturing payments and helping merchants with this. Not to mention some of the kind of billing engine and subscription based companies that are out there.

So we’ve got, in terms of the tactics that can be used, there’s business logic that we refer to as retry logic, and this kind of attempts to capture the transaction after it has failed within the bounds of the card network rules, hopefully. You can also use card updater products that allow you as a merchant to maintain an up-to-date list of card credential information to make sure that you’re actually authorizing the correct card for each customer.

We’ve got expiration dates, cards, they get lost and replaced. We want to make sure that we’re actually charging the card that the customer is now using going forward. There are network tokens, which are tokens that are generated by the network or the issuing bank that guarantees the card is up-to-date without having to use that card updater product, and is even more secure than the token that a merchant might receive from a token provider, a gateway, or a PSP.

And the value proposition on using these tokens is that additional layer of security and the additional layer of security should lead to higher authorization rates. So merchants, PSPs, subscription providers, they’re also using machine learning to maximize conversion and enhance a merchants retry logic by determining when to retry, when and how to use the card updater products, and when and how to use network tokens versus actual card numbers.

Yvette Bohanan:

Oh, Drew.

Drew Edmond:

There’s a lot to talk about on this topic.

Yvette Bohanan:

You have opened a can of worms here. All right.

Drew Edmond:

I can talk all day about it.

Bryan Derman:

The context here though, I think is important, and I don’t know if we have the data, but I think we all just sense that this subscription or installment model has just exploded underneath us in the digitization. I feel like everything on my card statement now is a recurring transaction, right? I used to buy a newspaper, now I have a monthly subscription. I’ve got a bunch of CDs in the basement that I don’t play anymore because I subscribe to a music service.

I used to buy a CD-ROM and install software on my computer. Now I’ve got a monthly subscription for Office and Adobe and G-Suite or all the tools you use there. I’ve come to the conclusion that iPhone is going to be a subscription that runs on my card for the rest of my life. I’m renting that phone on a monthly basis at this point, not even buying hardware anymore. So I think this model’s blown up underneath us, and the kind of stuff Drew’s talking about with churn is going to be crucial. So many sellers in this environment.

Yvette Bohanan:

Well, it’s so overlooked. So coming out of incrementality scale revenue at any cost, everyone was just implementing new forms of payment. Let’s just implement new forms of payment. We’re going to a new country, a new region, we want to increase sales. We think adding forms of payment is a way to do that. This part was being completely overlooked. It was all about growth. If you came close to this, people would start to look at incrementality and say, did somebody shift from one form of a payment to another? Or was it incrementality? But this notion of churn was often sort of third, fourth priority, and people didn’t get to it because they were so focused on growth. And now here we are.

Drew Edmond:

For sure, for sure.

Chris Uriarte:

I’ll throw in sort of a hot off the presses little thought nugget on this one here. And actually it’s really interesting and it relates to a panel that I was moderating yesterday afternoon at this Ascend Conference in Nashville. Churn actually came up as a topic. And Kevin, who leads up payments for chewy.com, which is a great online site for all your pet goods. It’s a really and excellent-

Yvette Bohanan:

I love Chewy.

Chris Uriarte:

… excellent site. Everybody loves that site that you-

Drew Edmond:

They’re not a sponsor, but we’ll allow it.

Chris Uriarte:

They’re not sponsors, disclaimer, not a sponsor, but we all endorse Chewy. It’s a great service. But that aside, we were talking about churn, and Kevin brought up a great point about how orchestration, which has been a very big buzzword the last several years, becomes more and more important when you really start to look at how to solve this churn issue here.

Because you start looking at things like Drew has said, it’s tokenization, it’s retries on authorization. It’s maybe retrying from one acquirer to another acquirer. It’s the timing of those retries and everything there. So he talked about in the context of how maybe it is now, maybe orchestration is finally coming to fruition and it’s going to be more than a buzzword, and you really should be thinking about what your orchestration capabilities and what that layer looks like when you’re looking at this very complex churn problem.

Yvette Bohanan:

Well, this is not what I thought you were going to say, Chris. I thought you were going to say there’s a calculus to all of this that is getting increasingly complicated. We went from single integrals to triple integrals when it comes to, Drew’s bringing up tokenized, account updater, all of that, everything has a behavioral incentive fee now from the networks. And I thought that’s what you were going to talk about.

Chris Uriarte:

And I think that’s what Kevin’s saying here. I think Kevin is saying that this used, in fact, he did actually say on the panel, he said it used to be like, retry to a different process or retry on a different day. He said, “I could easily write code for that. That’s not a big deal. But now this has become so complex and there’s so many factors that you need to start thinking about, really your logic capabilities here, your routing capabilities. It needs to be a lot more advanced than just saying, I’m going to retry now on Friday afternoon if this payment failed.”

Yvette Bohanan:

But it’s losing the sale or not, losing the customer or not, putting the customer in what you were referring to, Drew, grace. Like, you didn’t pay me, but I’ll let you keep going here because I can with certain products and I want to because I keep you. But at the same time, there’s some real cost factors here that are increasing. We’re talking about interchange on one hand, getting potentially increasingly more regulated and lowering the cost of interchange and some of the fees.

On the other side, we have an increasing number of fees where it doesn’t matter if you’re doing A or B, tokenizing or using, there’s a fee for both, which do you use and how do you get help figuring all that out. And then in comes orchestration, in comes all of these tools. But I think orchestration’s a great thing in a lot of cases and very helpful. But even that has to be tuned, even that has to be monitored, even that you have to understand what it’s doing for you or not.

Drew Edmond:

And that may get even more complicated. We were just talking about these regulations and all these different routing paths that a single card can have. So now you have, the card itself has routing options. You have your own processor routing options. Is it processor A, network B, processor B, network A? It just gets harder and harder.

Chris Uriarte:

But Drew, I have this solution for that. We talked about this briefly yesterday. AI is going to solve all these problems.

Drew Edmond:

That’s right.

Chris Uriarte:

But that’s a whole other podcast. And we’ll leave that right there. We’ll leave that right there.

Bryan Derman:

This is all just next gen operate optimization, which we’ve been talking about for five plus years now, right? It’s a great avenue for machine learning, AI, et cetera.

Yvette Bohanan:

Right. But to Chris’s point, if you wrote the logic 10 years ago and you haven’t refreshed it and you haven’t been paying attention to, it’s become less efficient for you, not more efficient. And I think that’s what’s interesting about the current situation, to keep that efficiency in check or in line with what you really should have. This is not a one and done kind of thing. Even with orchestration, even with all these other things, it’s not a one and done.

Maybe with AI, someday maybe, maybe. We’ll see. Hopefully someone’s working on this. So let’s just pause there. We’ve covered a lot of ground. We’ve talked about the big picture, the macroeconomic environment, and some of the trends that we were anticipating coming into the year, as well as some of the perspectives of key stakeholders, businesses, regulators, and how they’re viewing this world and what’s going on with them. I think we’re going to hit the pause button and ask our listeners to rejoin us for part two of this very interesting conversation where we’re going to delve into some other areas of the industry and what’s going on. So until next time, thank you for listening and continue to do good work. Bye for now.

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