For many years, PSPs have had relatively easy pickings, charging significant markups to online merchants for handling their payment traffic. However, despite the growing volumes of online transactions, retail prices for online transactions are dropping. Simultaneously, merchants expect ever-increasing service levels as they go through their digital transformation. As a result, players aim to gain scale through strategic acquisitions and therefore the industry is consolidating.
Strategic options for PSPs
These developments challenge PSPs to define a clear view on how to remain relevant to their customers. The options differ significantly between large, global players, and smaller, local players. The former primarily serves large, international customers and deals with multi-currency payment settlement, currency risks, and cross-border data protection regulation. The latter largely acts as payment facilitator for merchants in local markets, catering to a long tail of merchants with easy integration options.
Pursue cost-leadership through scale, flexibility, and backward integration
In a mature market with increasing price pressure, cost-leadership is a key driver of competitive advantage. A first step to create cost-leadership is by pursuing scale.
Examples of recent scale-driven acquisitions in Europe are Worldline’s acquisition of Digital River World Payments and Ingenico’s acquisition of Bambora. We currently see various financial sponsors entering the market, acting to enforce the consolidation process.
A second path to cost-leadership is to build a flexible platform with low-cost, automated onboarding processes through APIs. Though relevant for both global and local players, fast and easy integration is becoming an especially relevant USP (Unique Selling Proposition) in local markets.
A final cost-saving measure can be to integrate acquiring activities into the payment method offering, capturing value both from integrating and facilitating the payment for the merchant, as well as acquiring the transaction.
Explore options before, during, and after payments to provide merchant full-service offerings
To counter dropping transaction fees, and to remain relevant in an ever more complex digital world, PSPs can do much to unburden the merchant. We see several options for PSPs to offer additional services on top of payments processing and integration. These services can take place throughout the customer journey, either before, after or during the payment.
During pre-payment, the PSP can offer tools to help the merchant drive personalised interaction by checking in the customer early on in the process. Targeted interactions can help improve conversion. During payment, better identification of the customer allows for personalised interaction and the improvement of risk and fraud management. During post-payment, additional services for PSPs can be found in financial support (such as credit management and pay-out), reporting, and integration with the ERP and other services.
Provide merchant an omnichannel offering
Another way for PSPs to unburden merchants is to become a one-stop shop for omnichannel retailers. Global PSPs and offline payment players are acting on this trend by building a full omnichannel offering, mostly through acquisitions. Integrated omnichannel offerings help these players drive cross-sell across their customers’ business segments and provide integrated service offerings for their customers on the path towards a seamless customer experience.
Strategic opportunities for PSPs
The current market environment is a challenging one for PSPs. Many players will likely not be able to survive and will be acquired or stop business. For those players that are able to invest smartly, however, significant opportunities exist to remain relevant, either by pursuing cost-leadership tactics, or by diversifying the service offering and unburdening the merchant. Exciting times are ahead for those who weather the storm.
About Walter Lutz
Walter focuses on strategic challenges that players in transaction markets face when introducing new products or entering new markets. He has worked on M&A engagements, among others in the PSP segment, and helps clients understand customer demand and solve regulatory issues when driving product and market expansion.
About David Mintjes
David is Business Analyst at Innopay. He has a professional background in financial economics and strategic management. Previously, he worked for the Dutch Authority of Financial Market, where he was responsible for analysing potential investor risks in the Dutch Crowdfunding industry. He is interested in disruptive innovations, specifically in the fintech industry.
About Mounaim Cortet
Mounaim Cortet focuses on strategic and innovation challenges in payments and digital identity. His main interest lies in PSD2 and Open API banking and related opportunities for market actors. He supports business executives to develop strategic insights that enable them to (re-)define their business (model) and operational strategy to compete in the digital era.
About Innopay
Innopay is an independent consulting company, specialised in online payments, digital identity and e-business. We help our clients, including financial institutions, governments and corporates, to develop the compelling strategies and digital services for consumers and companies that are key for successful competition in a rapidly digitising world.
To read the entire story from Innopay regarding the present PSP landscape, please download the Online Payments and Ecommerce Market Guide 2017 from our Reports section.
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