Innovation and regulatory changes increasing payment provider costs

The payment industry is undergoing a surge in global regulations, initiatives, and innovations, resulting in new payment instruments and use cases.

However, managing the volume, velocity, and variety of these simultaneous changes comes at a cost for banks and payments firms – and it is significant – says the World Payment Report 2023.

The payments executives surveyed in this years report said managing risk, regulatory compliance, and scheme compliance (such as SWIFT ISO20022 migration) comprises 36% of total payment business costs.

Maintaining and modernising legacy systems followed at nearly 27%.

Payment processing incurred another 17% of expenditures, and 9% went into talent-related expenses. Payment firms are left with barely 11% to invest in innovation (see below).

At the same time, revenues are under stress. Survey participants said traditional revenue sources for a payment business include 37% fund revenues, 13% float income, and 29% fee income, but these metrics are changing:

• Instant payments are reducing float-income and this trend will likely continue
• Fee income that includes interchange fees is under pressure, too: regulators in the United States, the UK, and Europe aim to cap interchange fees to reduce payment costs for consumers and merchants
• Fund income primarily comprises interest income from credit cards and more recently BNPL products. Rising consumer debt and lack of regulatory clarity around BNPL can dent fund income growth.

Consumer credit card debt is increasing due to high inflation and its impact on the cost of living. In the United States, consumers’ total credit card balance was $986 billion in Q1 2023, according to June 2023 consumer debt data from the Federal Reserve Bank of New York.

Q2 2023 was the first time credit card debt surpassed the $1 trillion threshold in nominal terms since the New York Fed began tracking the data in 2003, leaving the balance the highest it has ever been since the New York Fed began tracking in 1999.

Debt balances of this magnitude trigger fear of payment delinquencies, which may also impact payment rms’ fund income.

For instance, in 2022, American Express and Discover reported year-over- year profit declines of 13% and 21%, respectively, as charge-offs and delinquencies increased. 

Card operators may also likely earmark funds for potential 2023 loan losses.

In contrast, income from value-added services contributes 21% of total income, which cannot off set fee and fund revenue losses.