dr. Stephen Whitehouse
dr. Stephen Whitehouse
Oliver Wyman

2024: The dawn of a new era in European payments

the dawn of a new era

Last year marked the beginning of a revolutionary phase in the wake of transformative changes in the non-card payments infrastructure across Europe. We are seeing growth in instant payment solutions focused on interoperability across all markets. Demand for new solutions and analytics to reach more customers and changes in the regulatory landscape are shaping the future of payments.

I want to reflect upon the key trends shaping the payments landscape in Europe and illuminate strategic considerations for stakeholders in the payments value chain to better position themselves in 2024.

1. Instant payments in Europe: regional blocks

We are entering a new era of European payments, 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 "blocks" emerging in commercial instant payments:

- Northern block: 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 block: Blik is expanding beyond Poland into Romania and Slovakia to drive further integration and advancement across Polish and European banking.

- Western block: 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 P2P and E-commerce payments before expanding to POS transactions and other functionalities.

- Southern block: 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 towards a broader agenda.

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. Will there be enough space for all these solutions to succeed, or will we see further integration in the European Payments landscape?

2. 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 has seen modest growth, 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/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. FinTechs have dominated the partnerships that have fuelled the rise of embedded finance globally in recent years by creating innovative products that define new markets (e.g. BNPL) and forming large landmark partnerships with merchants, platforms, and marketplaces. Recent European examples include the £4bn private securitisation deal between YouLend and JP Morgan and the Mangopay partnership with Mondu.

For banks: 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 that they're strong in. They should also build out product and distribution capabilities, organically or inorganically.

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 PSPs in this space are now driving 40% of their revenue from non-acquiring revenue lines.

For corporate development investors: 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.

3. Embracing AI in payments

The integration of artificial intelligence (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, scrutinising vast 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 behaviour, budget management, and preferences to enable a personalised 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.

For banks: a pivotal moment looms. Either become early adopters by integrating AI into developing frameworks such as open banking, potentially encountering initial challenges, or risk lagging behind competitors who have already embraced AI in payment operations, for instance, by enabling seamless user journeys across channels.

For Payment service providers (PSPs): 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 specialised firms or invest in internal capabilities to harness AI for streamlined analytics.

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 multi-currency exchanges and Business-to-Business BNPL transactions?

4. Payments: how regulators are shaping the future

One area of focus is the scrutiny of schemes and interchange fees, particularly in markets like the UK. This pressure forces payment networks to reassess their pricing structures. Additionally, regulators are emphasising 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 defences.

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 NFC access on iPhones.

Furthermore, a highly significant regulatory initiative on the horizon is the digital euro. As it evolves, the digital euro could have a profound and 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 capitalise on opportunities it could present.

For Banks: card issuance economics need re-evaluation in light of these new regulations and consider lowering 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.

For Payment service providers (PSPs): infrastructure and risk frameworks will need to be updated to ensure full compliance. PSPs will need to maximise exemptions granted under PSD3 while mitigating the potential adverse impact of the shift in liability for fraud losses if SCA is not applied.

For corporate development investments: attractive valuations of certain FinTechs may prompt strategic investments in niche spaces. Merchant acquirers and open banking infrastructure providers in the UK and European markets are particularly attractive targets for consolidation in the payments industry.

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.

5. Payment acceptance is evolving quickly

Payments 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.

We are seeing increased vertical integration between Independent Software Vendors (ISVs) and payment providers. Bundled offerings have become commonplace in the U.S. and are now increasing in the UK and, to a lesser extent, in continental Europe. PSPs have adopted different strategies to address this trend, with some servicing this need with products optimised for ISV distribution (e.g., Adyen, Rapyd), while others have acquired software solutions to support their go-to-market strategy in specific verticals (SumUp, Planet). Previously, online-focused PSPs (e.g. Stripe, Viva Wallet, Mollie) have also shifted to "omni-channel" strategies with the launch of their own POS solutions.

SoftPOS infrastructure is gaining traction with the launch of MPoC standards in 2022. More and more PSPs are deploying Smart POS terminals with added functionality. This has the potential to expand the digital payments opportunity, particularly for Micro SMEs and countries with low card infrastructure. In the online space, payment orchestration platforms are becoming more accessible and relevant not just for enterprise clients but also for mid and large corporate segments.

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.

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.

For investors: Deal flow has been slower in 2022 and 2023, and valuations are down from previous heights. More opportunities are expected to come for carve-outs, but equally for consolidation both horizontally and vertically. Key to success in M&A will be driving synergies in platforms through consolidation and migration of customers and delivering on product cross-sell.


dr. Stephen Whitehouse is the head of Oliver Wyman’s payments platform in Europe

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