Accepting credit card payments at a food truck, building a website for an online store, or figuring out how to make legacy payment processors work with a new type of commerce were difficult problems to solve before Stripe, Block (formerly known as Square), PayPal, and Adyen came along.
As a merchant, you’d have to work with a legacy processor or a middleman broker who could provide you access to a processor. Then you’d deal with the banks, the credit card networks directly, and probably a jumble of other services that were often poorly explained, packaged, and sold by various third parties. The slew of regulations, hundreds of interchange rates dependent on a variety of factors including card type, merchant type, charge amount, and so forth, as well as huge antifraud measures making regulations more than triple what they once were made accepting credit cards an incredibly complicated and poorly explained process.
For an ecommerce business, merchant acquirers were difficult to work with. Most were still doing mainly physical retail and didn’t possess the technology or knowledge to take on a new type of commerce. Signing up to a merchant account was cumbersome and opaque and some required minimum monthly revenue and a long application process. It was hard to know what your rates would be, how much the technology would cost, what service could be expected, and whether the processor technology would integrate well with your backend. Payfacs eased the burden but required significant time and financial investment. If a merchant wanted to expand to new markets or integrate another payment method, it would require another inconvenient process.
Things have evolved fast in the past 10 years. When Stripe Payments came along as a modern PayFac focusing on digital card payments, it moved the game from opaque to transparent by focusing on the merchant and developer first. Stripe made signing up as a merchant simpler, faster, and more transparent, and life easier for the developer for API integration. Regardless of technical ability, Stripe presented a framework on few lines of code that allowed merchants to get running quickly.
But while it seems like Stripe streamlined the payment ecosystem from the perspective of the merchants and their customers, it wasn’t doing the heavy lifting of processing the transactions other than collecting and forwarding them upstream to those (i.e. Chase Paymentech) that would clear the funds. If you imagine the payment stack with the issuing banks on top and the merchants and shoppers at the bottom, Stripe swooped in the middle and made life easier downstream. As merchants signed up with Stripe, they became sub-merchants underneath Stripe’s main merchant account so they could bypass the headaches associated with AML and KYC regulations, application processing, and underwriting.
On the other side of commerce, the physical side, Block also came along as a PayFac with its famous mobile payment processor for small businesses that operated on the go, such as food trucks, plumbers, and so forth. With a small and convenient adapter that the merchant could plug in a phone’s headphone jack, which Block gave the merchant at a loss, the company could scale across mobile and brick-and-mortar businesses alike who otherwise wouldn’t go through the hassle of setting up a payment system the traditional way. Before Block, small merchants would have been approached by a commissioned salesperson working for an ISO who’d try to sell the merchant a heavy POS install for thousands in setup fees, needing to be regularly maintained by the ISO itself.
Scale on the brick-on-mortar front turned into high gear once Block launched Square Stand, a physical stand that transformed iPads into cash registers on which the company could slap on inventory management, analytics, online ordering, gift cards, capital management tools, and so forth. Square Cash, later renamed Cash App, then launched as a P2P platform, Square Pa yearoll allowed SMEs to easily manage pa yearolls, and the open platform API allowed for customization at the merchant level, evolving Block into a full suite of financial business software to the physical SME market.
As Stripe and Square invented a new layer of the payment stack, what went on upstream got more hidden from many smaller merchants. As payment setups turned convenient, merchants were more than willing to let each FayFac skim a few points off the top per transaction rather than going through the hassle of making all the connections to the card networks themselves — but larger enterprises would continue to do so since a few bps could equal millions in incremental sales.
Given the many layers, players, applications, and dynamics that involve everything payment, it’s no wonder that the payment ecosystem is difficult to understand. You can view payment flow from two perspectives: the demand side and the supply side.