Payments innovation has morphed from being a lucrative prospect for early adopters to an essential component for companies at large, offering a fascinating case study of the constant battle between value creation and market saturation. With the progression from mobile wallets to embedded payments, the space has evolved significantly. Early opportunities gave way to heightened competition, leading to diminishing advantages and thinner margins. As the industry matures, the challenge lies in extracting value in a saturated market.
When embedded payments initially emerged, vertical SaaS platforms transformed workflows by integrating payment functions. For instance, applications let gym members or tenants transact seamlessly without leaving their respective apps. This feature turned into a vital revenue model that significantly bolstered their per-customer financials. Now, however, fierce competition has escalated the necessity for robust compliance, risk management, and customer service, raising the operational hurdles. Amid these changing dynamics, Aiwyn and Fiserv recently made acquisitions aimed at leveraging new payment strategies. Aiwyn acquired QuickFee’s U.S. payments business to enhance its platform, whereas Fiserv integrated CardFree’s solutions to drive enterprise-level offerings.
How Is the Industry Adapting to Shrinking Margins?
The industry is exploring new avenues beyond traditional payments to capture enduring margins. Companies are now realizing that each transaction generates valuable byproducts — data, trust, and liquidity — posing opportunities for higher-margin offerings like credit underwriting and sophisticated fraud protection, capitalizing on real-time transaction data to mitigate risks. Liquidity management also presents potential, as platforms can optimize fund flows through features like instant payouts or yield-bearing accounts. Furthermore, data analytics to forecast market trends and customer behaviors adds another layer of potential revenue streams.
Why Are Adjacencies Becoming Key Focus Areas?
Adjacencies offer promising pathways to capture additional value beyond core payment services. Beyond transactional efficiencies, platforms are exploring comprehensive financial services portfolios, ranging from lending to insurance, custom-tailored to industry-specific needs. While these adjacency strategies promise new growth opportunities, they come with risks. Diversification efforts like financial supermarkets and vertical specialization demand significant maintenance and investment. Infrastructure ownership represents another path, albeit a capital-intensive one, aiming to reduce dependencies on third-party services.
The sector is witnessing significant momentum toward digital payment solutions. A PYMNTS Intelligence report highlighted the growing adoption of virtual and mobile payment options by businesses. By 2025, 82% of merchants are independently expected to broaden their use of digital wallets, primarily focusing on controlling cash flow and mitigating late payments.
Sustaining strong economics in the future may require companies to integrate higher-margin financial services beyond basic payments. The market focus has gradually shifted from sheer excitement over the payment volumes processed to scrutinizing net revenue retention generated through these new services. Discussions are increasingly centered on “average revenue per user” (ARPU) necessary for a thriving financial services ecosystem, emphasizing services like credit offerings and compliance tools over traditional payment models.
“The challenge isn’t whether to embed payments anymore, but rather how to extract durable margin from it.”
As platforms race to redefine their roles and reposition their strategies for higher margins, the business horizons in payment processing are being redrawn. The strategic imperative now lies in augmenting core services with data-driven insights and added functionalities.
“Early adopters built formidable businesses on integrated payments, yet today’s margins require more.”
With an evolving competitive landscape, the insights gathered from transaction data, along with the arsenal of bolt-on services, could dictate new economic outcomes, emphasizing the continuous evolution within the industry.
