A wide range of factors are reshaping payments sector dynamics. Geopolitical disruptions, capital market resets, commerce expectations, technology advancements, and societal responsibilities are all accelerating change.
These trends leave you with more ways to accept payment than ever before. But with that comes new issues you might not be prepared for.
1. High Costs
The payment processing landscape is complicated and often expensive, primarily due to the myriad of fees involved. These include card-not-present (CNP) and online transaction fees, which can vary by credit card type. Additionally, chargebacks (when a customer disputes a purchase) can lead to higher processing fees.
In addition, a host of factors could reshape payments sector dynamics, including a return to normal interest rates and inflation, capital market resets, commerce expectations, and heightened attention to societal responsibilities. As a result, adept payments companies with balanced operating models and strong market positions could emerge as industry leaders.
In contrast, neobanks that can’t effectively expand their offerings to create customer ecosystems may find themselves pushed toward traditional financial institutions if they don’t address the challenge of scale and a willingness to embrace more conservative growth strategies. The decrease in many payments company valuations could also facilitate consolidation by incumbent players and a reduction in the feasibility of IPOs for new entrants.
2. Lack of Innovation
The industry must remain on the cutting edge to meet customers’ rapidly evolving needs, including a push for instant money movement that makes business and consumer payments more convenient. This trend is driving current digital trends that will continue to shape the industry in 2022 and beyond, such as implementing open and integrated payment solutions for a seamless commerce experience and integrating third-party payment technology into traditional clearing rails.
But there’s a downside to this pace of innovation. With revenue growth expected to slow, payments companies could face lower multiples, making it more difficult for them to raise capital and grow.
This could prompt some consolidation of existing payment processing companies, while also reducing the feasibility of IPOs for many payment technology firms. The key to mitigating this threat is to establish a clear legal status and regulatory system for third-party payments, giving them confidence to innovate and contribute to economic development in more ways.
3. Poor Customer Service
In the payment industry, poor customer service is a major problem. Customers remember and communicate bad experiences far more than they do good ones. It’s estimated that the cost of poor customer service is $75 billion per year and growing rapidly.
One big problem is that a variety of fees and pricing models make it difficult for business owners to understand what they’re paying for. For example, some processors use tier-based pricing systems in which similar transactions are lumped together and charged a higher rate. Many also charge hidden fees and line items that increase as your business grows.
Other problems in the payment industry include fly-by-night direct providers that try to grow quickly by masking their true nature and transaction types, then disappear when the banks or networks catch them. These are some of the most complained-about companies on CPO. And the legacy payment-acceptance incumbents are struggling to meet user demands for peer-to-peer payments, mobile wallets, and cashless transactions.
4. Limited Options
Historically, high-risk merchants faced limited options for payment services. They could work with direct providers that specialized in their industry (i.e., gambling, mobile game developers) or with more horizontal industry gateways that were open to high-risk, but didn’t provide specific value-added functions, and required clunky technology and data integrations that resulted in payments declines, unexplained charges, multiple credential re-entries by consumers, and high take rates. Or, they could rely on indirect providers like publishers or marketplaces (i.e., Apple App Store for mobile games) to expand their digital footprint and satisfy logistical compliance requirements with regulators. However, these solutions are often expensive and time-consuming to implement.