A diverse market of payment providers is healthy competition but it comes at a cost

Today, companies whose raison d’etre is far from fintech find themselves needing to process payments transactions in very large quantities. Yet the historical payments infrastructure, which only supported financial institutions with payments, is increasingly unfit for purpose.

What’s happening is that consumer businesses are being forced to become fintechs. This evolution is causing the entire payments system to be re-engineered, as well as pushing the momentum of open banking.

As open banking evolves, there will be growth in adoption. In July, the UK will introduce variable recurring payments, which enable customers to connect authorised payment providers to their bank accounts – effectively allowing these providers to make payments on their behalf.

They are designed to make life easier for customers and businesses.

But currently the changes taking place are particularly apparent from the consumer side. Merchants with businesses unrelated to financial services are being asked to act like fintechs. Startups are having to build teams of 10 people or more, just to manage all the different payment methods for relatively small businesses. Larger merchants have teams of hundreds managing  reconciliation, payment flows, and fallbacks. Online merchants often find that the underlying business they are running is functionally a fintech.

There is, therefore, a need for creative solutions to reduce complexity.  Platforms such as Primer enable merchants to build and control their entire payments workflow and quickly connect to Stripe, Klarna and their ilk. This allows companies to focus on core business, without requiring a large team of payment specialists.

Startups that allow modern payments infrastructure to be built on top of legacy systems will flourish in the coming years. Another platform, Numeral, automates payments across banks with an application programming interface. It works with legacy banking standards for payments. It is answering the key question of how to make decades-old payment methods feel like API-driven interfaces for modern businesses.

As the payment sector evolves, one school of thought is that the variable cost of payments will trend downwards and eventually become free. This has  been an aspiration for more than 30 years; in reality, it is still nowhere near true.

High-cost payments from providers like Klarna or Bolt in the US are growing quickly because they offer the convenience consumers value. Convenience leads to client conversions – so merchants like Klarna-style payments too. They need customers to find easy ways to pay and maximise conversion: if that costs them 2 per cent, they will happily pay that.

Businesses also need a robust architecture that can deal with payments and chargebacks, credit risk on some payment methods and other edge cases, and there is a cost for this. Even if the movement of the payment was free, there is work needed before and after the actual transfer. Take the example of fraud: there is a need to provide checks which often use data from a third-party source. This has a cost.

Providers will always have to charge a meaningful amount for payments. Most likely, they will become cheaper over time, but they will never get to zero. As cutting-edge innovation makes its way to the front of the payment sector, there will still be a price to be paid for.