Last year marked the beginning of a revolutionary phase in the non-card payments infrastructure across Europe. Growth is accelerating across all markets in instant payment solutions focused on interoperability.
Five trends are shaping the payments landscape in Europe today: regional blocs, evolving finance solutions, the increasing role of artificial intelligence (AI), regulatory changes, and evolving customer preferences. Together, they illuminate the strategic considerations for stakeholders in the payments value chain to better position themselves in 2024.
The emergence of regional blocs in the European payments landscape
A new era of European payments is dawning, with cash usage continuing to decline, the European Commission mandating instant payments, and an increased desire for convergence to create a European payments champion.
At the same time, we see various regional blocs emerging in commercial instant payments:
Northern bloc — a Nordic, inclusive mobile wallet
MobilePay (founded in Denmark) and Vipps (founded in Norway) officially merged at the end of 2023 with a mission to create a prominent Nordic mobile wallet, providing inclusive and cross-border solutions within e-commerce and mobile payments at a much larger scale.
Eastern bloc — Polish Blik expanding in the region
Blik is expanding beyond Poland into Romania and Slovakia to drive further integration and advancement across Polish and European banking.
Western bloc — e-commerce payments with Wero
The European Payments Initiative (EPI) has managed to unite French, German, Dutch, and Belgian banks and third-party payment service providers (TPPs). They aim to launch a new digital payment solution called Wero in mid-2024. Wero will initially offer peer-to-peer (P2P) and e-commerce payments before expanding to point-of-sale (POS) transactions and other functionalities.
Southern bloc — P2P instant payments
Three leading mobile payment companies, Bizum (Spain), Bancomat (Italy), and SIBS (Portugal), have announced a plan for P2P interoperability, allowing fast, convenient, and secure instant payments in all three countries, marking a step toward a broader agenda.
European Central Bank’s digital euro project
We also see a public player entering this space: the European Central Bank (ECB), which is currently preparing for the digital euro project. The digital euro will combine P2P, e-commerce, POS, and government payments into a single payment offering. PayPal, a prominent player in instant transfers, also continues to have a significant impact in the P2P space globally. Will there be enough room for all these solutions to succeed, or will there be further integration in the European payments landscape?
Finance for POS, SME lending, and embedded solutions
Banking is moving closer to customers' point of need and is increasingly being delivered by a broader range of providers in digital ecosystems.
While POS financing for consumers — and particularly buy now, pay later (BNPL) — continues to grab the headlines, the real action lies in SME lending. Merchant cash advance (MCA) solutions have experienced a remarkable 50% surge, underscoring the growing reliance on alternative financing methods.
Successful specialist acquirers address merchants' needs more holistically, managing their cash flows end-to-end and building broader banking offers. Combined offers are particularly compelling for smaller merchants, who usually have less access to issuing and lending products.
Platforms and marketplaces are also stepping into the arena with the launch of seller financing.
Banks have traditionally struggled to do embedded finance well because it requires a different set of capabilities from traditional banking, with a stronger focus on tech enablement, customer servicing, and risk management in third-party ecosystems and distribution capabilities. Fintech companies have dominated the partnerships that have fueled the rise of embedded finance globally in recent years by creating innovative products that define new markets such as buy now, pay later (BNPL), forming large landmark partnerships with merchants, platforms, and marketplaces, and evolving their funding models to both increase lending capacity and reduce cost of capital. Recent European examples include the £4 billion private securitization deal between YouLend and JP Morgan and the Mangopay partnership with Mondu.
Banks must build capabilities to stay competitive
Failure to respond will harm business models in the medium term, hitting market share, profitability, and customer stickiness. Banks should decide how they wish to compete, either partnering with fintechs or acquirers and playing in the parts of the value chain where they are strong in. They should also build out product and distribution capabilities, organically or inorganically.
Key partnerships accelerate growth for payment service providers
There is scope to accelerate growth and diversify into other embedded finance revenue lines. Partnerships with third-party financial institutions or alternative investment firms are an option to secure financing lines. Leading payment service providers (PSPs) in this space are now driving 40% of their revenue from non-acquiring revenue lines.
Critical due diligence for corporate development investors
It is a good time to explore selective financing and investment opportunities with PSPs and fintechs. Selecting the right target, with distinctive payments and embedded finance value proposition, will be decisive in a "few take most scenario." Conducting thorough and ad-hoc due diligence is critical.
Embracing AI in payments
The integration of AI in payments, embodied by fintech giants like Stripe, is transforming fraud detection and transaction analysis.
In contrast to traditional methods, AI operates on a grand scale, scrutinizing vast amounts of transaction data to thwart false declines, thereby bolstering conversion rates. This shift underscores a strategic response to the mounting challenges in fraud prevention, affirming the industry's dedication to leveraging state-of-the-art technologies for heightened security and user experience.
Separately, issuing banks can leverage AI-powered analytics on spending behavior, budget management, and preferences to enable a personalized customer experience. This will ultimately boost merchants' loyalty and sales. Businesses can further use real-time analytics and insights to forecast and manage cash flows and make informed decisions.
Keeping up with AI solutions in banking
A pivotal moment looms. Either they will become early adopters by integrating AI into developing frameworks such as open banking, potentially encountering initial challenges, or risk lagging behind competitors that have already embraced AI in payment operations, for instance, by enabling seamless user journeys across channels.
Investing in AI streamlined analytics for payment service providers
Specific use cases need to be identified, such as ensuring compliance, improving risk management, and enhancing reporting, to leverage AI's true potential. Given the technology's novelty and unpredictability, PSPs may opt to collaborate with specialized firms or invest in internal capabilities to harness AI for streamlined analytics.
Assessing AI solutions that bring value to consumers for corporate development investors
The critical task is selecting viable opportunities amid a landscape saturated with startups touting AI expertise. Key considerations include assessing how AI delivers tangible value to stakeholders, particularly merchants and consumers. Can AI effectively address their pain points in complex transactions, such as multicurrency exchanges and business-to-business BNPL transactions?
How regulators are shaping the future of instant payments
One area of focus is the scrutiny of schemes and interchange fees, particularly in markets like the United Kingdom. This pressure forces payment networks to reassess their pricing structures. In addition, regulators are emphasizing the importance of granting third-party access to proprietary wallets, such as Apple Pay, which highlights a critical aspect of regulatory development.
Regulators have also intensified their efforts to combat anti-financial crime (AFC), anti-money laundering (AML), and counter-terrorist financing (CTF) risks. Several businesses, including Modulr, Railsbank, Prepaid Financial Services, and CFS Zipp, have faced fines and remediation programs. These programs demand significant management attention and underscore the need for proactive measures to strengthen financial crime defenses.
Looking ahead, the introduction of PSD3 in Europe will have a profound impact on payment regulation. It aims to address fraud, payment authentication, and the evolving competitive landscape between banks and fintechs. Banks will need to re-evaluate their card issuance economics and consider cost reductions in payment operations, including branch and ATM networks, to remain competitive against app-only challenger banks. Compliance with PSD3 will require issuing banks to balance risks and support strong customer authentication (SCA) exemptions to enhance the cardholder payment experience. Depending on the outcome of the consultation process following Apple's commitment to the European Commission, banks may also explore investments in proprietary wallets. They may also leverage near field communication (NFC) access on iPhones.
Furthermore, the digital euro is a highly significant regulatory initiative looming on the horizon. As it evolves, the digital euro could have a transformative impact on the payments landscape. Industry participants will need to adapt their strategies, infrastructure, and services to accommodate this new form of digital currency. The digital euro represents a pivotal development that will shape the future of payments. It will necessitate proactive measures to mitigate risks and capitalize on opportunities it could present.
Reevaluating payment operations cost for banks
Card issuance economics need re-evaluation in light of these new regulations. Banks should lower the costs of their payment operations, including their branch and ATM networks, to remain competitive against the app-only challenger bank model. As part of their compliance with PSD3, issuing banks must balance risks and support strong customer authentication (SCA) exemptions to improve the cardholder payment experience. Subject to the conclusion of the consultation process following Apple's commitment to the EC, banks may consider investing in proprietary wallets and leveraging access to NFC on iPhones.
Full compliance with regulations is essential for payment service providers
Infrastructure and risk frameworks will need to be updated to ensure full compliance. PSPs will need to maximize exemptions granted under PSD3 while mitigating the potential adverse impact of the shift in liability for fraud losses if SCA is not applied.
Investing in niche targets for corporate development investors
Attractive valuations of certain fintechs could prompt strategic investments in niche spaces. Merchant acquirers and open banking infrastructure providers in the United Kingdom and European markets are particularly attractive targets for consolidation.
Proactive response to regulatory changes drives payments development
Overall, regulators are actively shaping the future of payments. Industry stakeholders must proactively respond to regulatory changes while seeking strategic advantages in this evolving landscape. The digital euro, in particular, represents a monumental development that demands attention and careful consideration as it reshapes the payments ecosystem.
Payment acceptance is evolving quickly
The payment acceptance infrastructure is changing with the integration of payments with software platforms, the convergence of offline-online offerings, and the acceleration of new POS and orchestration solutions.
Vertical integration is increasing between independent software vendors (ISVs) and payment providers. Bundled offerings have become commonplace in the United States and are now increasing in the United Kingdom and, to a lesser extent, in continental Europe. PSPs have adopted different strategies to address this trend, with some servicing this need with products optimized for ISV distribution (such as Adyen, Rapyd), while others have acquired software solutions to support their go-to-market strategy in specific verticals (SumUp, Planet). Previously, online-focused PSPs (Stripe, Viva Wallet, Mollie) have also shifted to "omni-channel" strategies with the launch of their own POS solutions.
Software point-of-sale (SoftPOS) infrastructure is gaining traction with the launch of mobile payments on commercial off-the-shelf (MPoC) security standards in 2022. More PSPs are deploying smart POS terminals with added functionality. This has the potential to expand the digital payments opportunity, particularly for the smallest companies and countries with little card infrastructure. In the online space, payment orchestration platforms are becoming more accessible and relevant not just for enterprise clients but also for midsized and large corporate segments.
Strong technology is a must for banks
There is more pressure than ever to have strong technology to service payment needs. Operating models will continue to evolve as banks seek to address proposition gaps and efficiently deliver improved payment services to their customers. More banks will "carve out" or enter into strategic partnerships with leading payment technology providers or risk being disintermediated by PSPs as they extend their reach and product offerings in the market.
Targeted strategies will pay off for payment service providers
Culturally, PSPs are increasingly looking like fast-moving technology or software companies. Clarity on strategy is critical here, as is a strong understanding of what segments of the market a PSP is targeting and how it differentiates itself. There are potential opportunities for further consolidation, either on existing portfolios or integrating vertically.
Growth through cross-selling and consolidation for corporate development investors
Deal flow has been slower since the beginning of 2022, and valuations are down from previous heights. More opportunities are expected to come for carveouts, but equally for consolidation both horizontally and vertically. Key to success in mergers and acquisitions (M&A) will be driving synergies in platforms through consolidation and migration of customers and delivering on product cross-selling opportunities.