Traditional payment service providers face an increasing commoditization of payments, a fiercely competitive marketplace, and significantly lower margins. Add to that the fact that customer needs have become increasingly complex and it becomes apparent that these organizations must take a new, customer-centric approach to find new growth opportunities.

Building a profitable payments strategy in 2021 requires companies to take advantage of technological innovation and use it to create value-added services on existing customer interfaces. These services may even extend beyond payments alone and into payment-adjacent arenas that are in need of tailored services that meet specific demands. In order to do this successfully, payments organizations will need to be aware of several considerations.

Mounting Regulatory Pressure

Not only are regulatory requirements becoming more stringent, but they’re also driving service providers to look beyond payments. One regulation — Europe’s Interchange Fee Regulation (IFR) — is becoming expensive for issuers, even as it lowers the cost of payment card acceptance for merchants and reduces interchange fees for card payments. While the goal of this regulation was to pass down the reduction of input costs to consumers via reducing prices, it remains to be seen whether or not these effects will come to bear.

Beyond the regulations themselves, payments organizations must also bear the cost of compliance. This includes resources exhausted on items like reporting, compliance-specific tasks, new systems, and necessary updates to existing systems. Some large institutions spend upwards of $200 million each year on compliance measures.

Accelerating Digital Transformation

Incumbents face increasing threats from savvy new entrants and competitors who are better technologically situated to innovate and compete. As payments organizations look for strategic paths beyond payments, they face steep technology challenges that require a more robust IT knowledge and talent base to overcome. This means that success depends on an organization’s ability to invest in cloud technology to support the increased use of application programming interfaces (APIs).

APIs will be critical in quickly developing new services, which will depend on interoperability and interconnectivity. The technology behind digital wallets, for example, relies on interoperability to enable payment methods of different countries. Continued innovation leans on these features, especially as global payments continue to expand.

Cloud technology will continue to be table stakes for payments organizations who want to remain agile enough to survive a heavily disrupted marketplace where

Shifting Markets

Payments consolidation is also accelerating, propelled by intensifying competition and the emergence of various FinTechs and challengers. Payments organizations have an opportunity to develop value-added services, especially to the small-to-medium-sized enterprises (SMEs) segment.

This increased pressure puts the onus on existing payments players to enhance product offerings and ensure that services are customer-centric, simple, convenient, and fast. Reacting to the market shifts will require significant investments in technology to maintain pace with competitors, new entrants, and challengers.

Customers Demand Seamless Payments

Consistency is what customers expect, especially as payments expand across channels, products, and services. Extreme interoperability and compatibility that allow for the smooth flow of data to enhance payment channels and services are critical. While this may add to the complexity for payments organizations, it can also spur more revenue as customers are willing to pay extra for additional functionality and convenience.

Those that serve merchants will find that the expectation is around holistic, consolidated payments options that include everything from payments to fraud management and treasury services. This can translate into better margins, but also give providers the opportunity to entice merchants into a bundle of services that continues to expand.

Finding the best path to new revenue requires payment providers to take a hard look at key segments and to identify which services and products can add the most value for their most valued customer segments. This information can inform a strategic roadmap aimed at new revenue growth. Alignment with customer needs will help insulate payment providers against declining revenues and find new ways to become profitable in 2021.