In-house production and development (make) versus outsourcing (buy): this is a decision that companies have faced and continue to face at regular intervals. This strategic question dates back to, among others, Nobel Prize winner Ronald Coase and his 1937 publication The Nature of the Firm. Hence, academia and companies have been grappling with this question for 85 years. Has it lost any relevance? On the contrary.
Product and service development and respective research and development are time-consuming and cost-intensive; market success is often uncertain. In addition, product life cycles are becoming shorter, and customer preferences are changing faster. The latter have also become the focus of corporate strategy and marketing. That is, the needs of customers are now in the foreground, anticipated in the best case, and decisive for product and service development (customer orientation). Adapting to rapidly changing customer needs in turn requires disproportionately more effort in product and service development.
And what does all this have to do with payment services?
The tense economic and market situation caused by war, inflation, and rising interest rates has caused – if not forced – many payment service providers and other fintech companies to massively cut costs and reduce jobs. IPOs have been postponed. Company valuations were revised downward. Where investors used to line up, the focus today is on efficiency, cost reduction, and profitability. This brings us back to the classic make-or-buy decision. In light of cost and profitability pressures, fluctuations in demand, and changes in preferences, the question arises which strategy is more effective: developing payment and financial solutions in-house or relying on solutions from partners.
In any case, the entrepreneurial risk and investment volume is higher for in-house development (asset-heavy model) compared to outsourcing (asset-light model). Therefore, particularly in the current situation, it seems more promising to (also) resort to solutions from others (e.g., white-label solutions). In this way, companies reduce costs and risk, can adapt quickly to market conditions and customer needs, and scale their business quickly. Saved costs can in turn be used for customer acquisition and retention and other strategic measures. The market is expected to further consolidate and companies pursuing an asset-light model will have good opportunities to strengthen their competitive position and expand market share.