Payments Processors Turn to Analytics and Embedded Finance to Combat Margin Pressure

Value-added services, once the free sprinkles card networks tossed on top of plain vanilla processing contracts, have become core product offerings in an industry racing to stand out and shore up margins.

Competitive pressure, shrinking interchange spreads and merchants’ rising bargaining power are pushing processors “to expand into value-added services like analytics, rewards and lending, where the margins could be two to three times that of core processing,” said Vik Raman, vice president of product, enterprise at Trustly Inc., an open banking firm best known for its pay-by-bank rails.

Core processing economics are being squeezed “by increased competition, regulatory intervention and merchant negotiation leverage from marketplaces and massive retailers,” Raman told PYMNTS as part of the “What’s Next in Payments” series. Capturing a bigger slice of global digital payments revenue now requires processors to layer on higher-value services that merchants cannot easily get elsewhere.

Trustly regards this new paradigm as validation of its thesis that controlling the moment of payment unlocks an opportunity to deliver more sophisticated tools.

“Processors are increasingly collaborating or competing with FinTechs but are now positioning themselves as one-stop shops to maintain control of those merchant relationships,” Raman said.

Trustly’s own expansion plan hinges on open banking. By moving money straight from bank accounts without a card network in the middle, the company can bolt on services ranging from real-time account verification to data-driven loyalty while cutting acceptance costs, he said.

Embedded finance sits at the center of that land grab.

The idea is simple: Embed payments and adjacent financial functions inside the software consumers already use so the money movement all but disappears.

Raman said he sees the model spreading quickly from ride-hailing and coffee apps into scores of business-to-consumer and business-to-business workflows.

“When payments are integrated directly into consumer activities, it creates a very frictionless, intuitive experience,” he said, pointing to Starbucks’ order-and-pay app and Instagram’s one-tap checkout as early templates that marry loyalty, ordering and settlement in a single gesture.

The Partnership Equation

Getting there demands a new species of partnership. Raman predicted “greater integrations and greater interoperability” as open banking APIs tie together more than 8,000 U.S. and Canadian banks.

Those pipes let companies such as Trustly authenticate accounts in real time, but they also force incumbent processors to decide whether to build rival tech or cooperate with aggregators that already have the connections. Either way, the line between friend and foe will blur.

“Those relationships are rarely linear,” he said, forecasting a landscape in which processors, banks and FinTechs trade roles as collaborators in one market segment and competitors in the next. Specialization will be rewarded. Data-centric firms that master analytics or fraud prevention will bolt into broader payment stacks, while aggregators stitch everything together for merchants.

For merchants and their customers, the most visible dividend is hyper-personalization. By letting consumers opt in to share banking data, a wireless carrier can propose a billing date that lines up with a customer’s cash flow cycle, or an online gaming platform can offer “immediate VIP treatment upon account funding,” Raman said.

Trustly is preparing to launch a one-time credential that links a verified bank account to any merchant in its network, turning future purchases into true one-click events.

The same data that greases checkout also fortifies security.

“We can supplement basic know your customer checks with additional bank data to verify ownership and user attributes,” Raman said, raising approval rates without asking shoppers to re-enter credentials.

The Global View

None of those bells and whistles matter if a payment fails when a shopper in Berlin tries to pay in euros or a Los Angeles retailer cannot accept pounds from a British tourist.

Raman called multicurrency processing “absolutely critical,” warning that providers unable to navigate local regulations risk “being boxed into a niche or regional role.”

High-velocity verticals such as travel and online gaming depend on presenting prices in a shopper’s home currency and settling funds across borders without surprise fees, Raman said. That, in turn, requires fluency in regulatory alphabets ranging from Europe’s PSD2 and GDPR to North America’s PCI guidelines, plus local anti-money laundering regimes.

The confluence of personalization, embedded finance and global reach explains why perks that were once treated as nice-to-have now command board-room attention.

Networks are responding with installment payment products and forays into open banking — such as Mastercard Installments and Visa’s acquisition of Tink — but the gravitational pull appears to favor tech providers that can assemble modular capabilities into a coherent platform.

“Build-buy-partner exercises will become even more critical,” Raman said, and those that strike the balance stand to collect the outsized margins that value-added services promise.

Whether those margins ultimately accrue to card brands, large processors or alternative payment providers such as Trustly will depend less on slogans than on flawless execution. But the direction is unmistakable: In payments, “value-added” is no longer an add-on — it is the product.