A method of manufacture of an integrated circuit packaging system includes: providing a first substrate; mounting a component over the first substrate; mounting a stack substrate over the component, the stack substrate having an inner pad and an outer pad connected to the first substrate; mounting a first exposed interconnect on the outer pad; forming a first encapsulation over the stack substrate, the first exposed interconnect partially exposed and the inner pad partially exposed in a recess of the first encapsulation; and mounting a second exposed interconnect on the inner pad.