The payments revolution: Strategic imperatives for payment service providers
Payment service providers need to rethink their business model and take advantage of their customer relationships to offer more diversified services that meet the changing needs of consumers and businesses
20 January, 2025
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For years, payment service providers (PSPs), the companies that facilitate electronic payments, derived substantial and reliable revenue from processing payments. However, these companies, which include banks, non-bank acquirers, and some financial technology (fintech) providers, now confront narrower margins as payment processing and money movement become cheaper.
To preserve their revenue and market share, PSPs need to rethink their business model and take advantage of their customer relationships to offer more diversified services that meet the changing needs of consumers and businesses.
To appreciate the magnitude of the threat PSPs face and their urgency to adapt, it is critical to understand the sea change in the payments space in a relatively short period.
Global payment networks like Visa, Mastercard, and SWIFT, once the backbone of the money movement, are facing increasing competition from local and regional players.
Domestic infrastructures — such as instant payment systems like Sarie in Saudi Arabia and Aani in the UAE, domestic card schemes such as Mada and Jaywan, and local digital wallets like stc pay (now bank), Barq, and Hala in Saudi Arabia, or e& money and du Pay in the UAE — provide faster payments tailored to local needs with strong regulatory support. These payment mechanisms meet consumer demand more effectively at a lower cost than traditional networks.
Growth in real-time payment transactions
Real-time payment grew 42 per cent year-over-year in 2023, reaching 266 billion transactions, with projections to reach 575 billion transactions by 2028. On the other hand, domestic digital wallets have built strong customer bases. For example, we calculate that digital wallets in Saudi Arabia, a cheap domestic payment method, have attracted over 15 million users by 2024.
Moreover, these low-cost payment providers are no longer confined within national borders — further squeezing the margins in cross-border payments. For example, UAE merchants can accept payment solutions such as WeChat and Alipay from China. Increasingly, they are interlinked and so provide the convenient “glocal” (global and local) solutions that customers favour.
The BIS Innovation Hub’s Project Nexus also supports the interoperability of domestic instant payment systems, driving cost efficiencies in cross-border payments. Standards like ISO 20022, expected to cover 80 per cent of global high-value payments by 2025, are part of this change.
Distributed Ledger Technology (DLT), an emerging technology, could facilitate a further shift. Regulatory initiatives like open banking, and cooperation frameworks such as the G20’s Roadmap for Enhancing Cross-border Payments, are pushing for lower costs and greater accessibility, further encouraging the use of alternative payment rails.
Strategies for payment solution providers
In response, PSPs take advantage of their customer relationships, their knowledge of their customers, and their strong regulatory compliance, to seek new avenues for growth in three ways.
First, PSPs can position themselves as one-stop shops for all specialised payment services, including alternative payment methods (APMs), payment orchestration, and anti-fraud solutions.
By integrating APMs, PSPs can cater to customers’ diverse payment preferences, and cover emerging technologies such as central bank digital currencies, which some 94 per cent of central banks were involved with at the end of 2003.
Meanwhile, payment orchestration ensures efficient routing of transactions, reducing costs and enhancing speed, and anti-fraud solutions bolster transaction security, build trust, and protect customer assets.
Second, PSPs should offer a broader range of services beyond payments. By analysing data and insights from payment interactions, PSPs can underwrite loans for thin-file customers, broadening financial inclusion and opening new avenues for lending.
Additionally, PSPs can offer business and personal financial management tools that enhance efficiency through forecasting, budgeting, and personalised financial recommendations.
Third, PSPs should offer a wide range of services in areas closely related to payments given the central position they play in the operations of their customers.
By establishing strategic partnerships, PSPs could become curators of a vast ecosystem of solutions that small- and medium-sized enterprises (SMEs) could use to digitally transform their businesses, enabling them to manage finances, inventory, and sales from a single platform.
PSPs could also appeal to larger enterprises by facilitating treasury and cash management in enterprise resource planning (ERP) integrations which connect core business processes like finance, inventory, and sales into a single platform, thereby streamlining operations.
Accounting is an example of this new suite of offerings generation. A PSP could partner with an accounting solution provider to integrate accounting with payments to create a solution with significant efficiencies. Or the PSP could develop industry-specific solutions, such as order management systems for restaurants or retail.
Further, PSPs could use open banking and application programming interfaces (APIs) to integrate third-party fintech solutions to offer a comprehensive suite of tools.
PSPs have an opportunity to seize the initiative, expand the services they offer and diversify their revenue streams. They have customer relationships, a knowledge of customer needs, and strong regulatory practices. Now is the time to seize the opportunity.
Dr Antoine Khadige is a partner, and Basar Okay is a principal at Strategy& Middle East part of the PwC network.
