For more than a decade, payment service providers (PSPs) played an important role in the online payments landscape. In my definition, PSPs are companies that connect merchants via a single interface with multiple (acquirers of) payment methods. In this blog post, I will explain the drivers of maturity in the PSP market and the increasing need for PSPs to reconsider their strategy.
At the beginning of this millennium, ecommerce really started to take off and changed the dynamics of transactions. Agreement, payment and delivery were no longer bound to one sequence, place or time, resulting in unbalanced risks for the buyers and sellers involved. This resulted in a fast-growing number of (local) payment and delivery methods. Suddenly, the web merchant had to deal with various payment methods, local payment preferences, handling of multiple currencies, cross-channel ecommerce, geographical expansion of operations and rapidly changing industry requirements. Smart entrepreneurs recognized the opportunity and started developing platforms and services to support merchants handling online payments and related risk issues. The growth era of the PSP had begun.
10 years later, ecommerce is still growing strongly and online payment revenues are too. The apparent attractiveness of the PSP sector hasn’t gone unnoticed, and has resulted in a landscape of over 300 PSPs in Europe, of which the top 20 probably accounts for 80% of the volumes. In this period, PSPs evolved from being merely technology providers into full end-to-end service companies offering collection, settlement, chargeback handling, FX conversion and financial reporting. However, next to this impressive transformation and the sunny ecommerce outlook, the European market for PSP services is showing some first signs of maturity. This could be an indication of what we can expect in terms of future growth figures. I have identified four main drivers for this maturing market:
- We see increasing competition among PSPs due to the commoditization of pure payment services, such as processing and offering of payment methods. Due to the scalability of this type of services, we expect that this will result in overcapacity, which in turn will further drive price transparency and price warfare. This in turn will erode profit margins and may choke off funding for innovation. Parallel to this development, PSPs are increasingly facing competition from new entrants, such as the powerful PayPal and Google platforms, acquirers with PSP subsidiaries, specialised PSPs (eg PayVision) and PSPs with a broad, integrated service offering (eg Moduslink).
- We see consolidation in the industry due to increased M&A activity between strategic buyers and financial sponsors (eg Ogone and Global Collect). This has resulted in the emergence of large, integrated PSPs. Even Visa and Mastercard have entered this space by buying, respectively, Cybersource and DataCash.
- PSPs face changing merchant demand. Merchants used to focus on business growth in one geographical region. Nowadays, they ask for value added, innovative services, a variety of payment methods and new channels (eg mobile) in order to serve a global market. Merchants are scrutinising the capabilities of their current PSP and are open to switch PSP if their requirements are not satisfied.
- We see that European regulation is of growing importance for the payment industry, as regulators are pushing for innovation, more competition and stronger consumer protection. This may impose new regulatory reforms on the payments industry, such as the Payment Services Directive (PSD), which forced PSPs to apply for a license or change business model. As a consequence, it has become less attractive to exit the payments market, while having invested in the trajectory to obtain a Payment Institution license. At the same time, this will increase competition since barriers to entry will become lower.
Although there are a vast number of options that can be used by any firm to be successful in a maturing industry, there are a few strategic imperatives that PSPs should bear in mind in order to deal with this new reality. It’s pivotal for PSPs to choose how they will differentiate. With the growth rates in ecommerce still soaring, there’s reason to be optimistic, but second-best will no longer suffice in any scenario. The PSP business is too competitive, and the nature of merchants is too demanding to allow this.