Over the past 5-10 years, the retail payments ecosystem has become increasingly complex. New channels and payment tenders have continued to expand promising consumer usage growth and loyalty. Issuing banks have begun offering incentive programs for merchants to prioritize routing and avoid interchange fees. All the while, regulations tighten to ensure compliance and protect consumer payment data. The natural response from many merchant organizations has been to push the management of their payments environment outward to the service provider landscape. Payment switches, gateways and acquirers grew their suite of services to meet the demand from merchants to transfer both operations and risk out of their four walls.
However, a select number of innovative merchants are beginning to look at payments as an opportunity to maximize influence over their environment instead of as a commodity to be maintained. With this control, merchants are seeking to decrease their processing and operational costs, improve speed to market of new programs and increase flexibility in their processing relationships. To achieve that level of control, these merchants are looking to bring the technology and integrations inside their four walls. Accomplishing this goal proves to be more complex as it requires significant investment into and maintenance of an expanded internal payment architecture. This article will highlight some of the significant decisions needed for bringing payments in-house.
From a technology perspective, we must first define what it means to bring payments in-house. The short answer is that the requisite processor integrations and routing logic are performed by an internalized system instead of the processor or cloud-based payments gateway. The internalized system is the responsibility of the merchant to operate and maintain. To accomplish an internalized system, the merchant organization will need to ensure hosting capabilities are established and secured to securely support payment data traffic. If the merchant does not have data center space then a data center will need to be built out or procured to support an in-house solution. Adding data center capability is an important decision due to the maintenance cost of the data center space as well as the incremental security requirements that must be met for payment data.
An internal payments system does not, however, need to be fully developed in-house to obtain the benefits. Payment switch or gateway instances can be purchase/licensed and hosted within the merchant data center which creates a decision for the merchant organization to buy or build. Making a decision around buy or build is largely tied to two main factors that must be balanced: innovation and maintenance. The primary benefit to building the solution is that the merchant retains full control over solution innovation as well as the implementation cycle. This control, however, also carries the cost to retain a capable development staff as well as change management resources to ensure smooth implementations. Licensed or procured solutions provide many of the same operational benefits without the same level of internal maintenance. The trade-off is that the merchant does not have the same level of control over innovation and enhancement timing. The merchant must decide where the trade-off between control and maintenance that best fits with the organization’s structure and path forward.
Operationally, bringing the payments environment in-house provides tremendous opportunity to optimize processes to the merchant’s specific needs. For example, a merchant can establish multiple relationships for processing that can drive down costs through competition. However, this also creates a lot of complexity in the merchant’s operations team. Gateway and processor solutions have years of incremental advancement in understanding how transactions should be handled to achieve the highest successful return. Replicating this knowledge internally and translating it to the necessary processes for payment transactions is a significant challenge. Additionally, the more of the payments environment that is brought in-house increases the level of responsibility for risk aversion and compliance management. This responsibility creates transference of risks that have both security and legal implications to ensure that customer data is protected.
The complexity is addressed by putting resources, both automated and human, in position to regularly monitor the processes and provide them with the data to address problems and make adjustments to optimize the environment. The investment in operations becomes as important as the investment in technology because a decrease in processing optimization can cost the merchant a lot of money.
So how does the decision get made? First and foremost, a merchant organization must understand whether a transition to in-house payments is realistic based on internal capabilities. If there would be a significant ramp up required in technology, personnel or both then it may not be the right time to take the leap. An important evaluation tool is to break down the expected one-time and ongoing costs to enhance the internal environment into a per transaction basis. This process allows the merchant to view a quantifiable between an in-house payments environment to the more common outsourced approach. If the nature of the merchant organization reveals a positive outcome to in-house payments, then a qualitative assessment of the increased control versus the risk that is transferred internally should be required.
If the end result of all this examination is a real opportunity to take control of the payments environment, it might be time to join that group of innovative merchants and bring payments in-house.
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