In addition to new challenges that payment processors face – such as supporting new payment technologies like mobile wallets – there is the never-ending mandate to acquire new merchants and retain existing ones. This “always-there” pressure results in three unwanted headaches:
- Increased pricing pressure. With new entrants coming into the payment space daily, someone always seems to be offering lower rates and reduced fees in an effort to buy their way into the market. For established payment processors, price cutting in response to this competition means lower margins. For the new entrants, the increasing costs of onboarding plus lower margins equals a longer payback window that threatens long-term viability. Even though all the participants understand that nobody wins this race to the bottom, no one can seem to resist joining in.
- Higher interchange costs. Payment processors may accept more underwriting risk and enroll a higher number of “borderline” merchants in an effort to continue growing their portfolio, leading to higher costs from issuers and downward pressure on margins.
- Greater regulatory compliance requirements. As authorities demand to know more and more about where merchant funds are coming from and where they’re going, the operational costs of complying with mandates can further erode profits.