The future of Payment Service Providers

Traditionally a payment service provider (PSP) has a straightforward value proposition: helps merchants to collect payments from their consumers, worldwide. Or as one of my ex-colleagues said: “they aim to be part of every possible transaction”. They offer one technical integration, one contract, one money flow and consumer support, in a so-called “full-service” model.

The whole payments ecosystem is being commoditized. The competition pushes for a price race between the biggest payment service providers. This is still a longer than expected process because the contracts with the biggest e-commerce merchants are not often renewed (many dating from more than 10 years ago). Besides price, the technical integration is becoming a decision factor. The development and product teams are part of the decision making process, therefore the success of Stripe or iZettle.

As a strategic theme or customer value proposition, the big PSPs aim for operational excellence. They focus mostly to minimize transactions costs and automate their back-office, so they can leverage economies of scale. Most of the PSPs are seeing mergers and acquisitions as part of their strategy in order to reach this goal. Meanwhile, they need to aim to create a more sustainable business model, by including value added services at the top of the value chain. “Boutique” PSPs compete on a different theme — usually customer intimacy, by offering tailored solutions and payments consultancy.

Going more practical, what kind of services can they offer and monetize in the near future? By looking at the Fintech opportunities, they need to consider several criteria like market attractiveness, added value potential and risks. The suggestions below are from the B2B/payment transactions area, not covering lending, wealth investment and the overall consumer segment.

1. Real and frictionless omnichannel — enterprise and SMB merchants are looking for a common platform that enables the same user experience for desktop, mobile and offline purchases. One of the popular use cases here is to start the purchase online and finish it offline. PSPs need a way to enable merchants to collect any amount from consumers, so they can monetize new use cases as pay per interaction.

2. Payments analytics and optimization tools — WorldPay’s Paizen, Ingenico’s Elevate or Adyen’s RevenueAccelerate are few examples of tools that started to learn and adapt transactions optimization in real time. These are becoming more and more popular even for enterprise merchants because it allows them to benchmark their key metrics performance with industry standards.

3. Machine learning fraud detection — today, most of the tools in use by merchants are rule-based tools. They are just fine for dealing with some recurring and known patterns, but they are not effective for new fraud schemes or handling new fraudsters techniques. Machine learning fraud detection takes advantage of an ensemble of neural networks and huge data sets, and it can return a score indicating if a particular transaction is fraud. Once it is proven that this technique identifies more real frauds than today’s systems, there will be no merchant hesitating to reduce their losses. Moreover, this can be done at the user account level and not only per individual transaction.

4. Zero fraud “insurance” — Merchants would externalize chargebacks and risk management and would pay for a fraud free product. Of course, if it makes sense from an economic perspective and this is where PSPs can leverage the power of their economies of scale. There are already startups offering this service, such as Fraugster.

5. Marketplaces and crowdfunding solutions — the raise of the platform businesses is higher than ever. PSPs can white-label escrow and splitting funds for sharing economy use cases like classifieds, taxi rides, e-commerce marketplaces, freelancing and so on. Usually their payment-related needs are to externalize KYC (Know Your Customer), handling multiple currencies and local payment methods, deferred and one click payments — value propositions that are well known by PSPs. The main thing missing today is the possibility to create a user account, a kind of white-label wallet account for each consumer.

6. Tokenization as a service — one-click payments from Amazon rocks. But most of the merchants struggle to implement a similar consumer experience. If they use a particular PSP to store their CC or tokens from alternative payment methods, they need to stick “forever” with that PSP because they will own the tokens. If the PSPs will provide this as a service, platform agnostic, more merchants will start using these solutions instead of building it in-house.

7. Worldwide centralization of alternative payments — this is still an ongoing problem. In the future, the consolidation of payments industry will help fixing it, but currently a merchant needs to integrate several PSPs in order to cover their consumers’ preferred payment method. There are lots of startups trying to build one technical integration API, but they struggle with the lack of experience with money flows. If a PSP will manage to find a solution and offer it in full service, that could be key in their future revenues, since they can charge premium for it.

PSPs can sell all the above value added services as Maximization/Optimization as a Service. Internally, they will strive to be more agile, to ramp-up teams that are empowered, to experiment and to deliver end-to-end customer value quickly. The challenge is to find a way to combine innovation and maintaining the current revenues source through their legacy platforms.

Large e-commerce players like Amazon, Zalando, Uber started to build in-house solutions and they even own or are in process of getting a banking license. They’ve seen the strategic value of transactions and they want to deal directly with network processors and issuers. For these companies, PSPs will be valuable by providing the above listed services and having them integrated as part of their consumer proposition.

Furthermore, traditional PSPs started to look into the consumer space, or so called B2B2C. Thus, they should aim to build a consumer business in addition to their current PSP operations. For this, they should find and partner with a potential “fly wheel”, a topic that I will address in a further article. The biggest opportunities for PSPs are still ahead of us.

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