Hi, I'm Martijn, a technology enthusiast with a background in VC / growth equity investing at Fortino Capital, HPE Growth and Allianz X as well as operational experience at N26, Adyen, and Mondu. My articles explore emerging fintech trends in the European tech ecosystem. Today, I am sharing a piece on the payment orchestration platforms in Europe🇪🇺
The backend operations of payments often appear as a black box to outsiders. As a consumer, when you purchase an item in a store, you simply tap your preferred payment method, such as a credit or debit card from Visa, on the point of sale (PoS) device. Alternatively, when shopping online, you enter your card details at the (hosted) payment checkout page. If the payment is successful, you receive the goods. But what actually happens? How does the merchant know that you have sufficient funds?
To fully understand payment orchestration platforms, it's essential to explore what happens behind the scenes during a successful payment transaction.
In the payment transaction loop, there are typically four key entities involved namely, the payment gateway (e.g., PayPal, Adyen), the acquiring bank (e.g., Adyen, Stripe, Mollie), the card scheme (e.g., Visa, Mastercard), and the issuing bank (e.g., ABN AMRO, ING). Occasionally, only three entities are involved, which occurs when the card scheme and issuing bank are the same, as is the case with American Express and Discover.
The payment transaction journey begins when the buyer initiates the payment by either tapping their payment instrument on the PoS device in a physical store or entering their payment details online at checkout. The first entity involved is the payment gateway, which securely processes the transaction and routes it to the acquiring bank, the second entity. The acquirer processes the credit or debit card payment on behalf of the merchant. Acquirers are responsible for holding licenses with different card schemes and payment methods (e.g., open banking payments, buy now pay later) as well as managing the money flow to merchants. Next, the third entity, card schemes, such as Visa or Mastercard, communicate with the issuing bank of the shopper. The issuing bank checks whether the payment instrument (i.e., credit or debit card) is valid and if the buyer has sufficient funds. Once approved, the communication flows back through each entity to inform the merchant whether the buyer has enough funds.
Figure 1, Payments transaction loop
Before delving further into payments orchestration, we will first define the concept of orchestration. Orchestration is the process of organizing, planning, and coordinating various elements within a system to achieve a desired effect efficiently. Each element in the system is assigned a specific task. In the world of music, orchestration refers to the art of arranging a composition for an orchestra, where different musical instruments (i.e., the elements) are assigned to specific parts or tasks within the composition.
In the realm of software, it involves multiple computer systems, software applications, or services working together to streamline and execute workflows. Orchestration software solutions are widely used in various domains, including risk management to combat financial crime and fraud. Another significant application, which we will explore in detail, is in the merchant payments acceptance realm. Here, providers like Payrails assist merchants and financial institutions (FIs) in optimizing the payment process through smart payments routing and acting as a single point of integration to other software applications, among other elements. As a result, the end objective is to deliver a superior outcome being a simplified payment process for the merchant as well as a seamless payment experience for the buyer.
Where do payment orchestration platforms fit into the payment transaction loop (figure 1)? They are an integrated layer within the payment gateway. Traditional payment gateways offer an overview of available payment methods for all consumers at checkout, irrespective of market or geography. Additionally, all payments are directed to the same fixed acquirer. Should an alternative route be necessary, such as during a technical failure with the primary acquirer or PSP, merchants must manually reconfigure settings (e.g., Merchant ID, PSP details). As a result, they are very static. Payment orchestration platforms represent the layer that provides enhanced flexibility, cost efficiency, performance, and more through the core elements of the platform, which we will discuss below.
In this section, we will discuss the core elements that the top payment gateways as well as PSPs on the market can offer and that third-party (i.e., independent) payment orchestration platforms build.
Connecting to multiple processors or acquirers in a specific market is crucial in today's e-commerce market. If the primary or standard payment processor or acquirer experiences downtime, this core element allows the merchant to switch to an alternative processor or acquirer. This capability ensures greater operational resiliency.
Payment orchestration platforms simplify the integration process for merchants by providing a single unified point of integration with various service providers, such as acquirers, PSPs, data vaults, fraud and risk management software solutions. This reduces the integration effort and complexity for merchants. Historically, merchants had to integrate with each service provider separately, which was impractical for SMEs due to limited technical and financial resources. Enterprises, on the other hand, have the resources but require significant technical payments expertise to develop these solutions, leading to the dilemma of whether to build the platform in-house or buy it from a third party.
Figure 2, Payment orchestration platform API connection (CellPoint Digital)