Even just thirty years ago, most financial services offerings were dominated by a select group of traditional banks. While change has not been an easy or a smooth process, today the financial landscape looks completely different. In particular, the payments industry has undergone some drastic transformations even in the last ten years.
Payment Service Providers (PSPs) have emerged as one of the main challengers to the traditional banking monopoly. Thanks to recent regulatory shifts, a variety of different types of PSPs have materialized in response to market pressures.
In this article, we will explore some of the different types of PSPs in Europe and what their presence means for the future of finance.
An Introduction: What is a Payment Service Provider?
So, what exactly is a Payment Service Provider? Basically, it is a third party that helps merchants accept payments. Whether they be credit cards, debit deposits, real-time bank transfers, or other types of payments, PSPs make the experience of a money transfer straightforward for the customer and stress-free for the merchant.
All of the relationships to the various payment schemes (be it credit cards, debit cards, mobile apps, Apple or Google Pay, or even AliPay) are managed by the PSP, opening up the hands of the merchant to focus his or her energy on the relationship with the customer. Part of the services that a PSP can provide include payment terminal and Point of Sale (POS) technologies. Lastly, the PSP is responsible for the security of the payment transaction.
The different types of Payment Service Providers
Let’s talk a little bit more about the different types of PSPs that are out there.
Large financial institutions
On the one hand, you have large financial institutions that offer a wide variety of PSP related products and services, like Nets Group from Denmark (founded in 2003). Nets Group has a massive network of relationships that it has created over the past 15 years or so, with all kinds of different actors. It is able to then harness the various relationships to create a payment service infrastructure that reaches across 20 different countries in Europe.
From providing merchants with in-store, online, and mobile payment acceptance solutions, to operating domestic debit card schemes, “Nets operates across the entire payment value chain from payment capture and authorization through to processing, clearing and settlement.”
On the other hand, you have a variety of smaller startups that offer specialized products and services within the PSP sphere of influence.
Examples of this include: Mollie (a technology-based payments processing platform from Amsterdam), Lemon Way (a centralized payment management system dedicated to e-commerce websites, crowdfunding platforms and marketplaces), HiPay (which provides data analytics, omnichannel support, fraud protection and automated financial reconciliation for payments), and Rapyd (a mobile-first cardless financial network).
The possibilities are endless, and the startups that do exist are constantly finding new gaps in the market where they can offer innovative solutions to existing problems. Although they operate on a smaller scale than an organization like Nets, they have been able to significantly increase competition in the payments industry, exerting more pressure on incumbent institutions to innovate.
Startups are constantly finding new gaps in the market where they can offer innovative solutions to existing problems
How Corporations and Startups Are Sharing the PSP Market
Traditional banking institutions have definitely begun to feel the pinch due to increased competition in the payments industry. As they struggle to update their existing legacy systems and properly respond to changing regulations, large parts of their revenue streams are being sapped away by Fintechs and other competitors.
However, “compared to traditional payments providers, startups and other third-party providers have not yet gained significant business volumes.” As such, banks still hold the upper hand in the market due to their incumbent status. “Banks can prosper if they join forces to create an industry-wide platform that is highly functional and consumer-friendly. But if banks don’t figure out how to appeal to mobile-first customers, competitors will.”
Looking at the future of payments
The future of payments is bound to be interesting. According to McKinsey & Company, “in 2016, the global payments industry accounted for 34 percent of overall banking revenues—up from 27 percent just five years earlier. For the next five years, annual growth will average 7 percent, making payments a $2-trillion-dollar-industry by 2020.”
The Asia-Pacific region accounts for more than half of the global payments revenue, at around $900 billion. Alternative payment solutions are growing greatly in popularity. In certain “European countries, such as Sweden and Norway, [they] are executing no more than 20 percent of their transactions in cash, while generating 520 noncash transactions per capita per year.” Payment service providers are likely to play an even more important role in the ecosystem as it continues to expand globally.
Payment service providers are likely to play an even more important role in the ecosystem as it continues to expand globally.
Payment Services Providers: Concluding
In conclusion, Payment Services Providers are increasingly important players in the global payments ecosystem.
From large financial institutions that have created massive international networks to smaller startups that address specific pain points within the market, big changes are happening.
The development of real-time payments has also created a seismic paradigm shift in how the international payments industry functions. What will be interesting to observe in the future is how the rest of the world is able to compete with the current industry front-runner: Asia.
Although we never know exactly what is to come, what is clear is that the future of payments and PSPs is bound to be interesting!
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