Does regulatory coverage play the key role in the success of next-generation card processors?

Over the past few years, card processing has experienced a notable shift. The growing number of financial services offered has pressured established players to aim for acquisitions and consolidation to leverage economies of scale, while challengers entering the market with a fresh approach and technological platforms have proven to be a disruptive factor. Within a short period, the challengers managed to secure a large client base and high transaction volumes.  

The evidence from the market leads to fundamental questions: What drivers are hidden behind the success of these so-called next-generation card processors, who position themselves as having an easy-to-integrate system that simplifies compliance? Is wider regulatory coverage playing the main role in their success? 

Challenging the Hypothesis  

The initial hypothesis suggests that access to banking and payment licensing enables card processors to broaden their reach and capture new market segments. To test this hypothesis, BPC and Arkwright engaged in analysis, with full results being shown in the 'Next Generation Processing' guide. 

An extensive analysis of 46 payment processors was conducted to assess whether they hold relevant licenses such as Electronic Money Institution (EMI) licenses, Payment Institution (PI) licenses, or full banking licenses. The objective was to determine if licensing enables processors to expand their market effectively.  

The research revealed that both established players and challenger players leverage similar licensing models, obtained either by themselves or through partnerships, indicating that licensing alone may not provide a competitive edge. 

While regulatory coverage alone proved to be a non-critical factor for next-generation processors to thrive, it is still essential to offer these services (either directly or through partners) to support card program owners in the context of embedded finance or white-label issuing. Two types of licenses can be considered:  

• Regulatory Licensing: Grants legal authorization to issue payment cards within a specific jurisdiction. Depending on the partnership structure and product type, key compliance areas may include credit scoring, regulatory reporting, GDPR (data protection), AML (anti-money laundering), KYC (know your customer), and equity requirements.
  
  
• Scheme Licensing: Permits the issuance of payment cards and the processing of transactions within the framework, network, and brand of a payment scheme (e.g., Visa, Mastercard). 

Challenges have been growing faster than the overall market in recent years. However, the success cannot be attributed solely to one of the previously described factors such as open APIs (which we covered in a previous blog) or comprehensive regulatory support. As derived from the report, it comes from how all these elements work together and how well the challenger can combine those to focus on specific customer needs or different parts of the card issuing process.  

Discover other critical factors and the most relevant features, which were evaluated to serve as competitive advantages and may influence the challengers’ success. 

If you would like to know more about next-gen card processing, download the full whitepaper.