Disclaimer: This interview is for informational purposes only and should not be relied upon as a basis for investment decisions. In Practise is an independent publisher and all opinions expressed by guests are solely their own opinions and do not reflect the opinion of In Practise.

{audio:0:00:32} Could we start with a quick introduction? You've worked with some really high-profile companies; how did you get involved in this field? 

{audio:0:01:25} I've been in payments my entire career. I studied computer science and my first job as an intern was with a payments company, First Data. Since then, I just never left the payments field. I feel lucky because the range of different types of companies I have worked at, have allowed me to see the full cycle of payments. At First Data, I got to see the back end of how banks work from the issuing and acquiring side. Then working at banks, you get to experience working at PSPs. Now working at merchants and with marketplaces, you really get to see the full cycle of where money can go. I started out as an engineer, which is a different way to get into the payments industry but I really understand the back-end systems. I have worked with Adyen for many years as well as other PSPs. I have a very good relationship with them and have used them in different capacities for different companies.

{audio:0:04:09} When you first used Adyen, what was the reason you chose them and what were they offering you that others didn't?

{audio:0:04:21} I was working for a small startup that connected to Ingenico and I had just worked with them. I knew that I wanted to look at other PSPs, especially Adyen. Adyen had one office in Amsterdam and I was living in Amsterdam at the time. This is when I became acquainted with them. I started understanding all the solutions and comparing them with others. It was the first time I started using RFP processes. They had all the normal functionality that everybody had at the time. There were a few things that stood out, but this was my first interaction with them. Our startup didn’t use them in the end; we knew our company would be sold and possibly changed, so we decided not to pursue. 

{audio:0:05:35} Later on, I started working for HelloFresh where the payment capability was turned on without optimization. There were no payment people, I was the first. This was when I started to understand Adyen’s areas of optimization, their new products and solutions. We met weekly and I saw them grow. At this stage they were an industry leader, they were the first to build anything new in the market. We wanted to be the first ones to use it and we were happy to be data merchants for Adyen. Their positioning is different now to when I first met them. They are leaders in everything including coverage. I have kept track of all the RFPs and PSPs as they grow and Adyen does things quite differently. There’s some kind of magic sauce that sets them apart. 

{audio:0:07:04} What makes them stand out compared to the others?

{audio:0:07:10} When something is new in the industry, they want to be one of the first PSPs to offer it to their merchants. The last example was when Visa and MasterCard were doing their real time account updater, other companies said they had it on their road map but Adyen wanted to be first. They invited their strategic merchants to be betas, so they could roll it out and show how successful it can be. When Adyen does something new, they do it right. I have never experimented with anything at Adyen that was a failure. They focus on the things they know will provide value. They might be doing a lot of research, but I like their focus on value.

{audio:0:08:17} They don't come up with a half-baked solution so you know it will work?

{audio:0:08:22} Adyen always try to do things themselves, as opposed to a PSP who simply patches things together and create problems. You are simply connecting to middle men, and I know Adyen's philosophy is not to do that. You can see the results there, even if it takes time.

{audio:0:08:57} You mentioned that in several places you came in and it wasn't optimized, what does that mean?

{audio:0:09:11} When I come into companies who are immature in the payment space, they simply make the connections and have a checkout page, and nobody looks at any metrics. They don't know about off rates or if they go into a different country, they turn on whatever is there without any decisions. Adyen does many things in the background to optimize for you. They need to stop looking at payments as simply a checkout page and think of it as customer enablement. There are other revenue opportunities that young companies don't know about.

{audio:0:10:20} To what extent can it be a revenue opportunity?

{audio:0:10:22} Buy now pay later is a good example. Merchants advertise for and bring on finance businesses such as Affirm and Zip, who will obviously offer you some rebates on that. Real time premium payouts is another good example. I can do a bank transfer to somebody for free but it will take one to two days, or I can pay 50 Euro cents and it can be real time. If it has value for the customer, they are willing to pay which could be a new revenue stream. Many PSPs have these solutions but if you didn't know they exist, you would never build them.

{audio:0:11:50} Adyen makes a big thing about having local acquiring and the difference it makes to processing transactions; is it rare to have that and which competitors don't?

{audio:0:12:18} I am in favor of local acquiring because I've experimented with Adyen and other PSPs with non-local and local. The results are black and white; local has higher authorization rates. A good example is Moneris in Canada, who had a monopoly in local acquiring. All PSPs were going through Moneris, including Adyen, but Moneris had very old systems and there were many problems. You could send something to Moneris but they would not send a response that the payment went through. It was strange but they had no competition. 

{audio:0:13:30} One year, Adyen decided it was enough, and started doing their own local acquiring in Canada. All the big merchants at the time fully supported this, and we were lucky to do AB testing when they first rolled this out, and it was such a stark difference. Not only do they have higher acceptance rates but there were no longer payment errors where things get lost using a middle man. We also did AB testing when they had local acquiring in Australia. We actually did ABC testing because we were also locally connected to NAB Bank, but Adyen were the best. Many people think that if they do local acquiring directly through a bank, it would be better, but banks are local and might not work well with other banks. Adyen optimizes such that all banks in that country can have higher acceptance. They understand this because they have done it so many times. They have become the experts in local acquiring.

{audio:0:15:00} What are other competitors doing as far as the middle man?

{audio:0:15:09} It's costly and takes a long time, and younger PSPs don't have the right expertise.

{audio:0:15:18} What about the big established companies?

{audio:0:15:23} They make local connections but do not offer local acquiring. They are not doing it locally in APAC and LATAM because those are difficult regions to be in.

{audio:0:15:54} Was it not such a big focus for them because they thought it was good enough to have an intermediary, whereas Adyen built up their local acquiring network?

{audio:0:16:15} Every year they open one or two, like last year in Japan, for example?

{audio:0:16:20} You cannot have local coverage everywhere so you have to prioritize where the biggest bang for your buck is. Japan is an interesting example of doing local acquiring and I applaud them because it is such a difficult country to get into, and many other PSPs failed.

{audio:0:16:50} Why is Japan so difficult?

{audio:0:16:53} I was living and working in Japan when Adyen asked me to be country manager. I no longer wanted to live there but it would have been interesting. Japan has very old systems and remain stuck in the 80s and 90s when they had their boom. They are a cash society and their banking technology is really old. For example, charge backs are still done by faxes.

{audio:0:17:30} You also have to have Japanese staff or else nobody will do business with you.

{audio:0:17:41} Adyen managed to set up there, now it's about how successful they will be.

{audio:0:17:54} Canada and Australia had large merchants doing international ecommerce who put a lot of pressure on Adyen to have a local solution. They promised 100% of their Japanese volumes which is quite the incentive, so I know they had to prioritize. Now they are in Japan, who is next on the list?

{audio:0:18:27} They announced a deal with Amazon in April which I found really interesting because Amazon is considered best in class. The fact they go through Adyen in Japan, highlights how tough market the market is. Why did Amazon do a deal with Adyen?

{audio:0:18:54} I was at Amazon for a short time but we spoke with many local Japanese payment companies. Amazon is an international company and don't do things in the old traditional fashion most Japanese companies do, so it made sense to work with an international company who somehow cracked the Japanese market. I think it's a good partnership.

{audio:0:19:24} Can that be extended to other markets if Amazon were impressed by Adyen's capabilities in Japan? How do they do their payments in other countries?

{audio:0:19:45} It's super localized because they have offices everywhere. Each office has a region which acts as a separate unit, and that unit wherever it is, will choose the best solution. There are overall corporate partnerships but, in the end, these localized places deal with that.

{audio:0:20:12} Could Amazon be working with Adyen in other markets?

{audio:0:20:19} You have given me a picture of an innovative company who is taking market share from traditional banks and the incumbent players such as WorldPay and others, who were of an older set up and not moving as fast as Adyen and newer companies, is that correct?

{audio:0:20:52} When the established ones see they're losing market share, they go into other areas. Stripe, for example, offer a suite of solutions and have branched out into financial services and heavily market their payout solutions. That is one thing that can combat this, but Adyen are doing the same thing. When it comes to the smaller, new PSPs that are popping up everywhere, I don't know why they start new payment companies. I try to meet them to see how the market is and often ask what makes them different? None of them differentiate to what already exists. I hope the over saturation in the PSP market calms down.

{audio:0:22:10} It's easy to get excited and think you have a differentiated solution but then discover that Adyen have already done it. On the competition, Checkout came from nowhere to become a relatively established player, and have accounts like Nespresso and Deliveroo who are relatively big names. I understand Adyen cannot have 100% market share, but how do you explain the fact that Deliveroo is not an Adyen client?

{audio:0:23:03} Checkout is really interesting. I was at a London conference several years ago, and saw this little booth with Checkout.com. They had a different logo at the time and I had never heard of them, but they were the only booth offering warm cookies and champagne. I spoke to them and asked why Checkout.com because it was a stupid name and sounded like Shopify. Because they also had a London office, we became friends and spoke about how they could get market share. I did an RFP with them which basically was a no, because they didn't have several items, which they saw as a learning opportunity, so to see them this big is great. 

{audio:0:24:00} I sometimes speak with the COO so I am happy to see this. I recently spoke with them to find out their new functionalities and solutions, because I was curious to see why they had more market share. I didn't see much of a difference but they do have a very charismatic sales team who can convince people through better pricing. I have no first-hand experience because I never tested them, but they do say there are certain areas in the US, where at the BIN level, they are able to get higher acceptance rates. They have proved this against Adyen with merchants who have done AB testing, but it is only with specific US banks where they have optimized how payment information is sent. We have an orchestrator so we can easily AB test that, but that's what they say their biggest differentiator is.

{audio:0:25:56} Adyen makes a point that they offer one solution to all their clients; is that a good strategy or could that all-or-nothing approach alienate some of their clients?

{audio:0:26:31} It depends on the size of company but most bigger companies use their own customized version and simply use Adyen as a gateway. Smaller companies probably use their hosted checkout page which doesn't necessarily lack customization, but smaller companies might not have built a brand yet. Once they get bigger, they will become more customized and only use the Adyen fields instead of their whole page. It shouldn't scare big merchants away.

{audio:0:27:19} That validates Adyen's approach to target the enterprise segment, but when it comes to SMEs, they go via platforms which avoids the customization trap.

{audio:0:27:41} They also talk about being at the premium end of pricing.

{audio:0:27:51} Premium means you're willing to pay more because others don't offer it, which is exactly how I would describe Adyen. When something fails via one route, Adyen will automatically send it to the next one in order to gain authorization there. They also include their fraud solution in their pricing. Because most of what they do happens behind the scenes, they have nice graphs which show you that out of the 5% that declined, we recovered 0.23% which equates to this much money. When I've moved some volume away from Adyen in the past, I have felt it. Pricing can always be justified with higher authorization rates.

{audio:0:29:29} That's what they say your return on investment is tangible.

{audio:0:29:39} Exactly; that's why they're so good at showing you that.

{audio:0:29:43} Continuing on the subject of service levels and their offering, they make a big point of talking constantly to their clients to understand their future needs and to develop new solutions. I don't know if you attended their investor day a few months ago where they presented new products, but as you mentioned, they go into pay outs, financial services, compliance and fraud. One can see they're preparing themselves for five years ahead and that it will be a slow burn. Is it because people like you want those products or will they upsell them to you?

{audio:0:30:53} It is definitely coming from merchants. When I was working at HelloFresh, I made a request for something they didn't offer, and said we were not the only ones who needed it. It was something random like Belgian banking tax payments, if they made them subscription, recurring was not possible. They built it and told me all the merchants who had turned it on, so they definitely listen. Companies who have payment people have realized there are other revenue streams where they can be very creative with payments and add premium services that their customers are willing to pay for, and because of that, Adyen has responded. 

{audio:0:31:59} With financial services, I have been speaking with their team before they made the announcement, and even though it's still being built, they let us know what the solutions will be, and we will be one of their first merchants to start using it because we're also very interested in it. They are heading in the right direction but we are not the pioneers in the industry. They have many merchants who are willing to be the first test pilots. If you want to have a relationship with Adyen, they're very happy about that, so it's not only them creating things and trying to sell them; they are building with the merchants who they partner with, to help grow together.

{audio:0:34:44} When it comes to fraud and identity theft, before Adyen presented their offering, what kind of systems were you using?

{audio:0:35:09} Most merchants use third party fraud, in conjunction with Adyen. That has changed since Adyen has a machine learning product which is working quite well, but with their old scoring-based fraud rules, it worked to a degree. With all rule-based fraud, you are able to stop obvious fraud, but friendly fraud is a slightly gray area. Companies like Sift and Riskify specialize in that. I would be surprised if somebody was only using the Adyen fraud solution, as most people use both. They want a quick check, then check the transaction. Some people also do post, so if Adyen said it was declined, they would do some other kind of check, then put it through Adyen again without the fraud rules. It is slightly creative but some people are doing that, and we also wanted to move to that.

{audio:0:36:31} The two systems co-exist; you might still be using Adyen's anti-fraud capability but you also use another one because you don't want to lose transactions?

{audio:0:36:51} Is that a natural market to address because their existing clients all need it?

{audio:0:37:01} Yes, but now that Adyen has machine learning fraud, this changes things. If you have machine learning fraud turned on, which we are currently AB testing, you don't use the Adyen fraud rules. This is exactly what Sift does, so it will be interesting to see the comparison. You have to wait three months to see the impact but this is a new model for Adyen, and if it works out, it could replace Sift. Adyen are trying to bring everybody into their family.

{audio:0:37:49} That's the power of what they suggested in March, that they can make themselves more than just a payments company, which is what they're aiming for.

{audio:0:38:03} Are there metrics to determine if one system is superior to another?

{audio:0:38:13} When it comes to the machine learning fraud and doing the AB testing there, we look at conversion rates and if we are letting more people in. We don't think of fraud prevention as stopping all the bad guys, even though that's what you are doing. We think of it more as letting all the good people in, so we can give them more customer enablement, so that's the metric we look at. Three months down the line, we will look at the number of charge backs to see if we are getting too many as a result of machine learning. We look at acceptance rates and final conversion rates, which to us is GMV. If there was no machine learning, this person would not have been able to transact and we would not have got this money.

{audio:0:39:10} Do you look at that in terms of incremental GMV?

{audio:0:39:13} Yes, and it's quite impactful too; 1% is such a huge number.

{audio:0:39:24} I did not realize they were hitting the ground running on those products.

{audio:0:39:33} We were a bit too guinea pig on this as the main version is coming out in the summer, so we've been using a primitive version of it, with good results. I can't imagine what the live version will be like.

{audio:0:39:50} You don't use their omni-channel approach because you are 100% online?

{audio:0:40:07} Exactly, but in the past, I've tried to, especially when I was at HelloFresh, where they had stalls selling products and customers who bought them with POS devices. At the time, their solution was too expensive compared to others who specialize in POS devices. You don't see many Adyen terminals in stores; you see more Ingenico and other companies who are POS based. Adyen realized there's omni-channel and have tried to get mass POS devices in stores that are both online and bricks and mortar. They have started lowering those costs but are still mostly for enterprise. For a small store with 10 POS devices, it would still cost too much.

{audio:0:41:08} To what extent is orchestration necessary to Adyen's model?

{audio:0:41:29} I am in favor of orchestrators. Many companies try to make their own routing engine and simply connect to different PSPs, but you need two years to get that started and another six months to get PSP number three. It is egotistical that people think they can build these kind of things. When I added orchestrators to companies, I have taken away volume from Adyen in order to test things. Adyen will see a lower volume and react by saying, let’s test it together. If we have a lower performing BIN for example, we let them know and they will try to fix it. 

{audio:0:42:39} They want to work on being the best one, and orchestrators allow you to test other PSPs. Adyen realize that not everybody uses them. If somebody uses MANGOPAY or Checkout.com 100% but then add an orchestration layer, that company might hear that Adyen was good in Canada, so they can simply use us an orchestrator to turn the switch on. They can easily get business from people who didn't want to spend the time integrating with them. With an orchestrator, you can simply flip the switch after signing the agreements, which can also bring them incremental business.

{audio:0:43:47} Does a payment orchestrator decide which PSP to use for each transaction?

{audio:0:43:57} No, they have the connections but the merchant does the routing.

{audio:0:44:07} There are many different ways but one good application is waterfalling, which is what I was talking about with the fraud thing. If you do one transaction and it's declined, you use a third-party fraud to decide this one is not bad, then send it to another PSP who might have fraud rules turned off. The merchant makes the rules there.

{audio:0:44:41} You are presumably automating all of this?

{audio:0:44:45} It's automated but the rules definitely need to be there. I have recently spoken with 15 orchestrators who all do routing differently. I am surprised how different routing is, and it makes a huge difference.

{audio:0:45:16} Do you choose an orchestrator for every region?

{audio:0:45:27} I know of merchants who use orchestrators for a set part of the business, but I believe that if you're going to use an orchestrator, it should be for everything, because the point of an orchestrator is that everything can be routed through them. I don't worry about transaction costs because they don't charge that much per transaction. One caveat is that you should have a backup because having only one can be detrimental where there is down time. That may only happen once every year or two, but when that happens it's really bad for you. Most companies should have an existing PSP before they went to an orchestrator, so I believe the best set up is to keep that connection and if the orchestrator for whatever reason is down, you auto backup to the PSP you originally built. That is the best redundancy payment model.

{audio:0:46:42} When did you start using your orchestrator?

{audio:0:46:46} With the first company, we integrated five years ago, at a time orchestrators were in their early stages. You didn't hear the term often and few companies existed. They were also trying to build their own solutions but today it is very different. Orchestrators remind me of PSPs in that there are too many and they cannot differentiate from each other. Payment orchestrators used to only offer payments by simply connecting to the major PSPs, but now they offer a US tax calculation service and other third-party risk solutions. After that you can also connect to a payout provider, so they are connecting to whatever makes sense. They are also automatically connecting to your SAP or ERP system. They send Slack alerts and automatically open Jira tickets based on the rules you have.

{audio:0:48:10} In your current role, when you switched to an orchestrator, did you notice the volume going via your main PSPs materially change or not that much?

{audio:0:48:29} You need a very clear plan on how you want to use an orchestrator, as it's only as strong as the people using it. We would do AB testing on our hypotheses. If we had a connection to Adyen and Checkout.com, but Checkout.com were saying they have higher performance on certain BINs, we would test it and make special rules to see the results. If it is, we would switch 100% of the volume, but you have to continually look at these things. Strong orchestrators give you many insights. They could say they noticed you were sending 80% of your volume to a certain PSP, but 20% is higher, so you should think about changing that.

{audio:0:49:34} Have you noticed a change in volume routed to Adyen over the past year?

{audio:0:49:43} Yes. If you start with 100% Adyen, you will notice some BINs are outperforming. I had an orchestration with another company but we decided to send a lot of Braintree volume to the US to get better PayPal rates, which made sense financially. Braintree can't tell you what they're good at, but over time we noticed there were certain BINs they were good at. At first, 100% was with Adyen, then 98%, 96% and we brought it down to 90%, we brought over what made sense. If Adyen was under performing and we told them, they would change something and then we would move it back, so it goes back and forth. Over time the goes down, but overall, they did have good performance.

{audio:0:51:00} There could be a material change in the volumes processed via Adyen, and it seems that initially you would find inefficiencies in their set up that would make you go to another provider, but if they fixed them, part of the volume comes back to them, so the net is not a huge erosion in volumes?

{audio:0:51:32} Exactly, and we do other optimizations, over time, making marginal changes. Adyen is connected to buy now pay later companies such as Klarna, but the fees are high and they offer no rebates. Adyen do that for you because if you can't integrate with them directly, Adyen is your gateway, but that is no longer necessary with an orchestrator. For APMs and buy now pay later solutions, I would no longer send any to Adyen, as it no longer makes sense. Once you have a direct connection, you would stop going through Adyen and paying high fees. In these cases, we would take 100% of the volume away from Adyen.

{audio:0:52:39} Because their fees are very high, it makes more sense to go via an orchestrator, but the orchestrator still routes those volumes via another PSP which might also charge also higher rates?

{audio:0:52:55} I would never use an orchestrator unless they were directly connected to them.

{audio:0:53:04} Are you saying instead of using Adyen, you would use Klarna directly?

{audio:0:53:07} Exactly, and if the orchestrator is not directly connected to Klarna, I would connect to them. If they were using Klarna through Checkout.com, that defeats the purpose. Another example is countries like Brazil, where Adyen has local processing but you need your own Brazilian bank account, which is difficult and not every company wants to do that. You can still process in Brazil but the acceptance rate is dire at 30%. There are Brazilian and Latin American PSPs that, because of the relationships they have with the banks, they are able to do the processing for you, so you don't have to have an entity because they are your entity. You can have normal acceptance rates of 90% that you see in other countries. For these specific examples, I would also use the orchestrators to connect with specialty local PSPs.

{audio:0:54:30} Brazil is a key focus for Adyen, so are they doomed to fail not being local?

{audio:0:54:40} No, but if your company doesn't have an entity there, it will not work. That is not Adyen's fault; Brazil is simply a weird country when it comes to banking and processing. One day, Adyen might make themselves like these local companies, but currently they are able to do local processing in the local currency, without acting as an entity for you.

{audio:0:55:10} That's presumably something they're working on or is it too difficult?

{audio:0:55:20} We have an entity in Brazil but we're closing it down and Adyen said I shouldn't because they can't do anything, meaning we will have bad acceptance rates. They didn't say we should wait slightly longer and that we would be able to do it through them.

{audio:0:55:40} What is the point of having local acquiring in Brazil if it's so difficult?

{audio:0:55:50} I'm sure they work with big merchants who must have entities in Brazil.

{audio:0:56:01} The established players who can afford to have an entity and pay for it, choose Adyen because they go with them anyway in other parts of the world?

{audio:0:56:10} If you have a local entity, bank account and currency, Adyen is great.

Adyen: A Merchant's Perspective

Former Global Head of Payments at Hello Fresh

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