How payment providers can expand solutions to grow profits

For traditional payment service providers, including merchant acquirers and card issuers, strengthening core products was once the surest route to increased profits. But now, increased commoditization of payments, as well as a growing pool of competitors, have both cut margins and sometimes distracted players from focusing on meeting customer needs. Those companies that take a different approach – putting the customer at the center and maximizing technological innovation – can find growth opportunities in solutions that offer more than just payments.

• Changing customer needs: Consumers increasingly demand a fully consistent payment experience across all channels and products – a vision of “unified commerce” which requires enhanced interoperability and information flow between channels and services. This means more complexity for payment providers, but can also translate into more revenue, with customers prepared to pay higher fees.
  
  At the same time, merchants expect holistic consultation and a one-stop seamless payment solution that bundles adjacent services, such as fraud management and treasury. For providers, the pay-off for investment in such solutions may not only be higher margins but the ability to bind merchants into a growing ecosystem of services.
  
  
• Increasing regulatory pressure: Changing regulatory requirements, particularly Europe’s Interchange Fee Regulation (IFR), are also a driving force in encouraging providers to expand solutions beyond payments.
  
  An EY-Copenhagen Economics study commissioned by the European Commission examined the impact of the IFR, finding that it has reduced interchange fees for card-based payments and decreased the cost of accepting card payments for merchants – at the expense of the issuers.
  
  As the Commission continues to monitor the effects of the IFR, it has indicated its willingness to adapt the regulation. A potential IFR 2 may strengthen the provision for transparent price information for merchants or include a maximum absolute interchange fee amount, both of which would result in even lower interchange fees for larger transaction values. Payment providers that develop different solutions, free of the reach of European Commission regulations, can get ahead of tougher rules while growing margins and increasing flexibility in pricing.
  
  
• Accelerating digital investment: “Beyond payments” solutions present a technology challenge to many providers, with most of these solutions demanding a much deeper IT knowledge and broader technological capability than traditional payment offerings. To seriously compete in this space, providers will have to invest in the right technology, particularly software solutions, and increase their use of application programming interfaces (APIs) to ensure the interconnectivity and interoperability inherent in these new services. For example, offering cross-border payment services requires the development of digital wallets, or e-wallets, to enable interoperability between different countries’ payment methods.
  
  Without a deep understanding of the digital tools that underpin “beyond payments” solutions, incumbent providers can quickly fall behind more savvy competitors or new entrants. Those that invest in accelerating their digital transformation can win a major competitive advantage.
  
  
• Market dynamics: Intensifying competition and the need to grow investment has driven a trend toward consolidation within the payment acceptance segment. For those remaining merchant acquirers, offering “beyond payments” solutions to existing customers could be a way to increase revenue per customer, with small-to-medium-sized enterprises (SMEs) especially willing to accept higher margins in return for more services.
  
  Market shifts among issuers, including the arrival of several challengers, such as neobanks, have increased pressure on incumbent players to enhance their product offerings. These challengers are surpassing traditional competitors by providing customers with simple, intuitive products that maximize technological expertise and software capabilities. Competing will require incumbents to move fast to invest in enabling technologies before challengers gain further momentum.