Maturing PSP landscape: Reaching the state of equilibrium

Written by Shikko Nijland

For over a decade payment service providers (PSPs) played an important role in the online payments landscape. In our definition PSPs are companies that connect merchants via a single interface with multiple (acquirers of) payment methods. This is the first of a series of blog articles by Innopay’s online payment experts. In this first blog, we will explain the drivers of maturity in the PSP market and the rising need for PSPs to reconsider their strategy.

In the beginning of this millennium e-commerce 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 e-commerce, 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 the related risk issues. The growth era of the PSP had begun.

Ten years later, e-commerce is still growing strongly and online payment revenues are too. The apparent attractiveness of the PSP sector has not been unnoticed and has resulted in a landscape of over 300 PSPs in Europe ofwhich the top 20 probably accounts for 80% of the volumes. In this period PSPs evolved from 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 e-commerce outlook we also observe that the European market for PSP services is showing some first signs of maturity. This could be an indication of what we might expect in terms of future growth figures. We have identified four main drivers for this maturing market.

  1. First, 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 these 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 might 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 (e.g. PayVision) and PSPs with a broad, integrated service offering (e.g. Moduslink).
  2. Secondly, we see consolidation in the industry, due to increased M&A activity between strategic buyers and financial sponsors e.g. Ogone and Global Collect. This has resulted in the emergence of large integrated PSPs. Even Visa and Mastercard has entered this space by buying respectively Cybersource and DataCash.
  3. Thirdly, 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 (e.g. 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.
  4. Lastly, 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 is pivotal for PSPs to choose how they will differentiate. With the growth rates in e-commerce still soaring, there is 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.The next blog of this series will further elaborate on the developments in the payment value chain and the importance for PSPs to reconsider their strategy to stay relevant in a still growing, but swiftly maturing market.

About the author

Shikko Nijland

Shikko is Partner at Innopay. Innopay is an independent consultancy firm specialized in payments, e-identification and e-invoicing. Prior to Innopay Shikko was Partner at Accenture and was leading the corporate strategy practice. He has more than 15 years of experience in strategy & management Consultancy.

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