The Next Evolution in Payments: Diagonal Thinking

For years, payments have largely fallen into two camps: horizontal platforms built to serve a broad range of businesses, and vertical solutions designed around the specific needs of a particular industry.

But businesses increasingly need both. They want the flexibility and scale of a horizontal platform without giving up the specialized capabilities that come with a vertical solution.

That’s where diagonal thinking comes in. Rather than choosing between scale and specialization, diagonal thinking brings the two together. With a diagonal perspective, payments infrastructure can serve multiple use cases without sacrificing the depth required for each application.

Take healthcare, for example. A healthcare provider may need to manage patient payments, insurance transactions, payroll, benefits and other financial workflows, each with its own requirements. Historically, that could mean stitching together multiple solutions. A more diagonal approach can bring these capabilities together through a single platform while still accounting for the nuances of the healthcare industries.

In a recent PaymentsJournal podcast, Stephen Faust, CEO of Dash Solutions, and Jordan Hirschfield, Director of Prepaid at Javelin Strategy & Research, detailed the diagonal approach to payments and the use cases where it can make an impact.

While this perspective aims to bring the best of both vertical and horizontal worlds to organizations, the ultimate objective is to make transactions so unobtrusive and embedded that end users can focus on their business, not payments.

The Enablers for Change

One of the main drivers of more diagonal solutions has been the substantial rise of vertical software providers. According to McKinsey, vertical-specific software now accounts for more than half of payments-adjacent small- to medium-sized enterprise spend. 

“One of the big things that was an accelerator for this was COVID,” Faust said. “I heard at a conference someone say, ‘There’s been more changes in payments in the last five years than in the 50 years before that,’ and it’s true. Things are rapidly changing.”

Three key factors are driving this shift. First, modern APIs allow organizations to overhaul their payments operations without rebuilding their core infrastructure. This flexibility, combined with today’s digital environment, means more companies are equipped to integrate APIs and work directly with payments providers. 

The infrastructure supporting embedded finance is also rapidly maturing. McKinsey research forecasts that embedded payments will grow by more than 30% annually through 2034.

Artificial intelligence is another important factor. AI can now handle operational complexity that previously required custom builds or additional staff, making it increasingly feasible to tailor payments capabilities to specific organizational needs.

“AI is not only allowing payments companies to move faster and configure solutions more uniquely, but it’s also letting the payers eliminate manual processes on their end,” Faust said. “That’s providing more opportunity for them to look at modernization to drive efficiencies and cost savings, and in a greater user experience. The growth could be more than 30%, the payments industry is expected to continue to boom for many years, and it’s an exciting place to be.”

The Legacy Pain Points

Along with these technology-driven shifts, organizations are feeling the pain points associated with legacy payment methods.

“Where there are greenfield opportunities and where the APIs come in are in some of these spaces that have been difficult to conquer—the disbursements, the reimbursements, and the refunds,” Hirschfield said. “Now, when you add these APIs and new efficiency layers into it, it’s much easier versus going the old school way, like writing a check that no one really wants to do.”

“Having these opportunities to engage in technology makes all the smaller markets ready to grow and grow fast,” he said.

Beyond the inefficiencies that can weigh down business processes, legacy payment methods can have an impact on the customer experience. Fueled by the digital and mobile ecosystem, customers now expect speed, choice, security, and flexibility—and businesses are increasingly aware of these expectations.

Together, these factors are driving an imminent transition in which trillions of dollars in payments will shift from legacy formats to modern protocols. 

“When the payer looks on their side and they’re saying, ‘I have all these check processes that potentially are manual,’” Faust said. “’I’ve got reconciliation processes, I’ve got abandoned property escheatment processes, I’ve got check fraud processes, and I’m not delighting my customer, I’m creating a burden for them.”

“They want to change,” he said. “Now, AI can eliminate barriers on their side and get them to the point that says, ‘OK, I’m ready to turn this on, and I’m ready to drive that efficiency and that modern experience for my customers, which is opening up these opportunities.’”

Diagonal Thinking in Action

One of the most compelling examples of diagonal thinking in payments can be found in the large public research university use case. Institutions of higher learning manage massive ecosystems spanning multiple operations, many of which require payment capabilities.

However, the needs of each department can be dramatically different. Payments may be issued for employee payroll, student refunds, research participant payments, student-athlete per diems, and employee rewards.

What’s more, each payment type can come with its own compliance and reporting requirements. This makes an event like sending a college football team to an end-of-year bowl game a herculean effort for universities, involving the coordination of travel and accommodations for student-athletes, coaches, managers, security staff, band members, and others. 

These trips involve an array of payments that may be executed and reported properly, something most universities weren’t built to manage. In this application, a diagonal solution provides a single interface that addresses all the institution’s needs.

“Universities are fascinating because they’re incredibly sophisticated organizations in everything they do except business, like getting people paid for all these different things,” Hirschfield said. “They’re so disparate, where you talk about a clinical trial that might be paid out of one thing with one process, paying the athletes and their per-diems out of another payroll, and especially short-term payroll employee and student payments in another.”

While this is a challenging process, it is also an area where end users expect payment speed, accuracy, and choice.

That has not always been the case at colleges and universities. Traditionally, for example, a student refund might have required the student to visit the bursar’s office, pick up a paper check, and then cash or deposit it.

With a diagonal approach, the refund can instead be delivered digitally via email or text message in near real time. The student can click a link and access multiple ways to receive the funds. Depending on the available options, they may be able to receive the refund on a digital prepaid card, via an ACH transfer to their bank account, or even have it sent to their Venmo or PayPal account.

“The university is a cool example because we can go in as a single provider and support all those various solutions from one interface,” Faust said. “Now, they don’t have to have a new contract and vendor partner for each of the payments. One can do all of them and they have a single repository platform where they can see all these payments, get reporting, and digitize them and modernize them in an efficient way.”

“They’ve got tremendous scale, and they can drop all their scale onto the horizontal platform but have a specific vertical experience for each of these payments, be them restricted, reloadable, consumer funds, corporate funds, or whatever it may be,” he said.

The Days of Off-the-Shelf Are Gone

While the university environment is ripe for a diagonal approach to payments, organizations across industries can benefit from customizable payments solutions that adapt to their specific use cases. Advances in technology, especially AI, are making this increasingly possible and giving organizations a powerful tool to meet the evolving needs of their customers.

However, diagonal thinking is less about customization for customization’s sake and more about combining the scale of a broader platform with the specialization that varying use cases demand.

“The days where we build off-the-shelf products that are one-size-fits-all for businesses are over,” Faust said. 

Adopting this diagonal approach has become imperative in the current business environment. Moving forward, payments processors won’t be differentiated by the platform offering the greatest scale or the lowest fees. They will be distinguished by their ability to embed payments so deeply and seamlessly into workflows that users can take their presence for granted.

“It starts with listening to the industries, understanding what their needs are, and focusing on the features in the technology that matters—versus building a lot of fluff that looks cool but that no one uses,” Faust said.

“The people receiving payments expect these things now, and the user experience has to be great,” he said. “It needs to be simple; It needs to be clear. They need to understand why they’re getting paid, and they love the ability to have access to it quickly and with choice on how they want to use it. Those are the things I’d be focusing on if I was going after this market.”