What is Payment Orchestration?

September 27, 2023 | Expertise
Adam Vissing

IXOPAY is a payment orchestration platform (POP). But what exactly is payment orchestration, and how does it differ from a payment service provider (PSP), especially given that many PSPs now claim to offer “payment orchestration” as a feature in their sales pitches?

The Origins of Payment Orchestration

The origins of payment orchestration as a concept, if not a term, go back to the 1990s. The internet was slowly becoming mainstream, and the first online businesses were founded. Many higher risk industries, such as adult entertainment, gambling, digital goods and file sharing services became staples of the early internet. Merchants operating in these industries all faced similar challenges when it came to handling payments, as banks were very wary of working with them. 

These companies faced the very real threat of having contracts terminated at short notice, in part due to the reputational issues associated with the industries these merchants operated in, and in part due to the higher rates of fraud and chargebacks in these industries. These merchants needed to safeguard their ability to process payments. To mitigate their risks, they integrated multiple payment processors, giving them fallback options should one payment processor no longer be available. Integrating multiple providers also allowed payments to be cascaded; a transaction declined by one provider could be retried with a different provider, increasing the overall chance of a successful transaction.

eCommerce and the Proliferation of New Payment Methods

As the payments landscape became more diverse with alternative payment methods like PayPal, these capabilities became more important to mainstream vendors. When we started developing and maintaining eCommerce platforms for international clients in 2001, many were looking for functionality similar to that used by earlier high risk vendors: back-up providers and the ability to cascade transactions. But these international companies also wanted to diversify their payment providers for other reasons - to increase authorization rates using local acquirers, and to offer consumers additional payment options besides credit cards.

With each payment provider using its own API (application programming interface) and data formats, it soon became clear that a common technical layer was needed to abstract the process of submitting and routing transactions. This would simplify the integration of new payment options via a single unified API, allowing all transactions to be handled the same way for any integrated PSP. The technical layer would handle transaction routing to PSPs and translate transaction requests into the format required by the target PSP. This was the birth of the IXOPAY payment orchestration platform.

A Term is Born

However, the term “payment orchestration” itself only crystallized much later, around 2018. Several vendors, including IXOPAY, were looking for a term to differentiate ourselves from other “payment gateways”. We wanted to create a distinction between those vendors providing a purely technical solution - a framework for integrating multiple payment providers, routing transactions as needed, and handling responses from the PSPs - from those involved in the actual transfer of funds. This handling of funds was the responsibility of the integrated PSPs and acquirers, not the technical layer. “Payment orchestration” was the term settled on to describe the technical stack for processing payments at scale, detached from the actual process of moving funds.

In a nutshell, payment orchestration simplifies the process of handling payments across multiple PSPs via a single technical integration. This extends beyond just routing transactions between multiple providers, as the transaction lifecycle does not end once a transaction is submitted for processing. There is also the need to handle reconciliation and settlement, for example. Once again, each PSP has a slightly different transaction life cycle and supplies settlement and reconciliation data in their own format. Consolidating this data allows transaction data to be collated and analyzed across all providers, helps automate the settlement and reconciliation processes, and vastly simplifies transferring transaction data to external systems (e.g. ERP and CRM solutions). 

The difference between a PSP and POP

But why does the process of moving funds fall outside the scope of payment orchestration? This boils down to the difference between a PSP and a POP - both of which are types of “payment gateways” - and the value proposition of each. Payment orchestrators typically charge a flat fee per transaction, irrespective of the PSP, removing any incentive to prioritize one PSP over another. This allows the merchant themselves to decide where to route transactions and which providers to work with, and this agnostic approach is a core tenet of payment orchestration.

In contrast, the profit margins that PSPs derive from taking a percentage share of transactions are much higher than these flat rates. While some PSPs claim to offer orchestration functionality, there is an inherent conflict of interest at play here. A PSP is incentivized to route transactions through its own infrastructure. This is fundamentally at odds with the primary goal of payment orchestration, which is to simplify the processing of payments across multiple payment providers. This conflict of interest also shapes strategic decision-making and determines what features are implemented - with orchestration features likely to be given a lower priority to those that add value to the PSP’s core business.

This is not to downplay the importance of PSPs to payment orchestration. PSPs play a crucial role in the payments ecosystem. After all, they are responsible for processing transactions and moving funds, thus making sure that merchants actually get paid. But by virtue of how they operate and generate income, they are not well-suited to providing agnostic payment orchestration.

At its heart, payment orchestration is about giving the merchant the power to process large transaction volumes according to the merchant’s needs. It is a technical solution that simplifies transaction management across multiple payment providers and all stages of the transaction lifecycle, consolidating multiple disparate providers into one, easily manageable, whole.

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IXOPAY is a best-of-breed payment orchestration platform offering flexible and independent global payment processing options. Fully PCI-DSS Level 1 certified and highly scalable, IXOPAY caters to the needs of enterprise merchants and white label clients, including payment service providers (PSPs), acquirers and independent sales organizations (ISOs). Built upon modern, easily extendable architecture, IXOPAY provides smart transaction routing with cascading, state-of-the-art risk and fraud management, fully automated reconciliation and settlements processing, comprehensive reporting and access to hundreds of acquirers, payment service providers and alternative payment methods.

IXOPAY is trusted by national and international enterprises and has offices in Austria and the USA. The owner-led and financed company has grown from 2 to nearly 100 employees by delivering innovative eCommerce solutions.

For more information, visit: https://www.ixopay.com

About the Author

Adam Vissing

VP Sales & Business Development

Adam has worked in the enterprise software and high-tech industry for several decades and a has degree in Computer Science & Management. His role at IXOPAY involves helping our clients streamline and scale their global payment processes.