The Hidden Costs of Payment Service Provider (PSP) Lock-in

September 22, 2022
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Budgets are hard to balance. That fact remains true even when financial numbers can seem clear and reliable. In the real world though, decision makers are often forced to work with vendors – and sign contracts – that contain hidden costs. Over time, these unforeseen expenses can wreak havoc on your budget.

In this blog, we’ll examine a particularly vexing budget challenge that every enterprise faces: vendor lock-in, specifically in terms of payment service providers. This unfortunate dynamic occurs when:

  • Your business is too dependent on a particular payment service provider; and/or
  • Your business cannot switch payment service providers even when it is desirable.

Examples of vendor lock-in

History is littered with examples of vendor lock-in. In fact, there have been global monopolies in tea, diamonds, and the railroads. Even in your home, it is easy to think of examples like coffee capsules, ink cartridges, camera lenses, laptop cords, and batteries. Governments also fall victim to vendor lock-in; even as scientists seek to promote renewable energy, many voters and politicians are often more inclined to stick with the familiar energy paradigm of their grandparents: oil and gas.

Information technology is no different. There are many different types of vendor lock-in within the IT space. Here are just a few examples:

Technical
  • Digital services and specific hardware devices are often linked together via proprietary code and protocols that are designed to limit or even prevent customer choice. Remember when digital music was almost synonymous with the iPod? In 2014, Apple won a $1 billion lawsuit by arguing that iPod music limitations were legitimate product enhancements – and not a ploy to limit competition.
Contractual
  • In the current migration to cloud computing, contractual lock-ins are a real danger. The cloud is immense and diverse, but it is also expertise and resource-intensive. For small companies, it is easy to get locked into a specific provider or contract, in part because it can be hard to move an entire business operation to a new cloud environment. In August 2022, Amazon argued that Microsoft was implementing “unfair” restrictions to competition; Google added that Microsoft’s cloud strategy was based on “contractual lock-ins.”
Familiarity
  • The investment of time and money required to learn anything new is often an obstacle to progress. For years, despite the fact that its users were desperate for an alternative, enterprises were slow to quit Microsoft Windows. Today, kids are too cool for Facebook, but because the service now has almost three billion active monthly users, the transition to other platforms may take a generation. And given how many times we have used its search engine, there is little that Google does not know about us – but still we use it everyday.

What’s the problem?

The dynamics of vendor lock-in beget winners and losers. For the companies in control of the market, their near-term bottom line should be safe, because their customers may have nowhere else to go for certain products and services. However, such companies may suffer in the long-run, because there is less need for them to innovate, which in turn may lead to stagnation. For the companies held hostage to a particular vendor, contract, or business practice, decision-making can be tough, or even impossible. Sometimes, this friction leads to a court case, as happened with the Pentagon’s cloud-computing strategy.

In extreme cases, vendor lock-in simply makes it too expensive to quit an existing relationship – despite every incentive to do so. This is currently the case with Russian energy supplies. Following Moscow’s disastrous invasion of Ukraine, the European Union (EU) imposed a broad set of political and economic sanctions on the Kremlin, as it tries to end EU dependence on Russian oil and gas. In response, Vladimir Putin has intermittently halted energy supplies to Europe. However, the dynamic of vendor lock-in has led to a stalemate in which both sides have suffered serious economic consequences, including dramatically higher energy prices as winter approaches.

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Strategic Planning

Therefore, as you plan your corporate strategy, your enterprise should seek to avoid vendor lock-in.

The reasons why are numerous, and can also be hard to predict. They include:

  • Another vendor develops a better product
  • Another vendor sells the same product at a lower price
  • Your vendor increases the price
  • Your vendor’s work becomes unsatisfactory
  • Your business needs simply change.

Strategic planning requires that you choose your business partners wisely. Ideally, you want to collaborate with partners who support your business, without becoming too dependent on any particular vendor, or locking yourself into a dead-end relationship.

A Better Way

At Very Good Security (VGS), vendor lock-in is not our philosophy. We give our clients control of their payment flows. When you store your sensitive data in the VGS Vault, you retain 100% ownership of it, and your business is not locked into one payment service provider.

Here are some of the benefits of the VGS Vault:
  • Choose between many cost-effective and reliable payment service providers, including payment processors and payment gateways
  • Route online transactions to the ideal payment gateways for your business
  • Minimize transaction costs to maximize ROI
  • Optimize payments based on payment system availability and market reach
  • Streamline your customer checkout experience
  • Reduce card payment failure rates with Card Account Lifecycle Management (CALM)
  • The VGS Vault helps you achieve PCI Compliance.

The VGS payment platform is designed to save you money. Your business can experiment with unique payment service provider configurations in order to discover and design your ideal architecture. With VGS, you can increase payment acceptance – while reducing the risk of fraud. Furthermore, VGS provides access to comprehensive transaction reports, which you can use for advanced business analytics.

Take Control of Your Payments

Take control of your payment flows across multiple cost-effective, reliable PSPs and avoid payment service provider lock-in, streamline the checkout experience for your customers and increase your top line by lowering payment transaction failure rates with automated card lifecycle management. Connect with a VGS Payments Expert

Ken Geers Kenneth Geers, PhD

Information Security Analyst at VGS

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