The Payment Service Provider (PSP) market has evolved significantly over the past two decades, driven by technological advancements, regulatory changes and shifting consumer preferences.
The market took shape in the late 1990s with the advent of electronic payment systems, such as PayPal. Initially, these systems were limited to traditional credit and debit card processing, but technological advancements spurred innovation in payment solutions.
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In the next two decades, the rise of the internet and mobile technology fuelled the growth of digital wallets, mobile payments and contactless payments making PSPs essential players in the ecosystem. The market size in the UK alone was £11.4 billion in 2023, with around 20,000 employees and almost 2000 companies.
To operate effectively, PSPs rely on banking partners, which form a vital backbone for delivering their core services. These partnerships extend beyond auxiliary support to enable fundamental offerings like transaction processing, technology infrastructure, liquidity management, and balance investment.
However, PSPs have faced significant challenges with traditional banks, forcing many to move towards alternative solutions.
Fragile relationships
PSPs relying on a small banking pool are in a vulnerable position. Research reveals that 14% of PSPs depend on just one bank, while 55% work with only two or three. This is worrying as typically safeguarding banks don’t make up the majority of this number.
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By GlobalDataA startling 95% of PSPs report sudden account closures or restrictions by banks, often without clear communication. For 71% of these, the closures occurred with little or no transparency, disrupting daily operations and jeopardising compliance.
Without stable banking relationships, PSPs risk breaching regulatory obligations to protect client funds, making business continuity an increasing challenge.
The 2023 collapse of Silicon Valley Bank exposed the dangers of concentrated banking reliance. No institution is fail-proof and for PSPs, a narrow banking network magnifies the risk of sudden disruption.
Are banks a barrier to growth?
Despite the rapid advancement of digital payment technologies, PSPs continue to face barriers that hinder their operational efficiency, generate regulatory risks and affect their ability to meet market demands.
Research has revealed that the most pressing pain points PSPs face when working with traditional banks include:
Lengthy onboarding processes
44% of PSPs cite lengthy onboarding as a major issue. The extensive know your customer (KYC) procedures and other compliance checks delay the time to-market for new services, impacting revenue and competitive positioning.
Incompatibility with crypto exchanges
29% of PSPs find it challenging to work with crypto exchanges due to their banking partners’ restrictions.
Banks’ hesitance to engage with the cryptocurrency market due to regulatory uncertainties limits PSPs’ opportunities to participate in this growing sector, potentially affecting their capacity to innovate.
Given the rapidly increasing usage of stablecoins as a means to circulate money fast, this is a concern.
Risk of account closure
25% of PSPs are concerned about the risk of account closure, which can disrupt operations, freeze assets and damage client relationships.
Sudden account closures force PSPs into crisis management and leave them scrambling to find alternative providers and it can take months to be onboarded.
Other headaches which PSPs cited when working with traditional banks also include the use of legacy technology (23%), poor customer support when payments are blocked (19%), unclear risk appetite and AML processes (19%), and restricted access to USD clearing (18%).
Cross-border payments issues
PSPs also rely heavily on banks for cross-border payments, utilising the established infrastructure and international network access to process transactions across diverse currencies and regions.
However, this dependency presents significant challenges. According to research, 31% of PSPs report that banking platforms lack advanced features like real-time processing and multi-currency capabilities, essential for efficient cross-border operations.
Additionally, 26% of PSPs struggle with reconciling payment flows due to the complexity of multiple intermediaries, currencies, and fees, leading to discrepancies and delays. Moreover, 24% face integration issues with enterprise resource planning (ERP) or treasury management systems (TMS), which results in inconsistent data and increased reporting efforts.
Other issues cited included limited payment tracking capabilities, a lack of support from cross-border payment experts, issues with unfair pricing and slow execution speeds.
As digital payments accelerate, PSPs can no longer afford outdated, slow banking solutions. Emerging alternatives are now essential, offering a path toward resilient, diversified partnerships that can support both growth and regulatory demands.
Fintech alternatives are gaining momentum
With a rising demand for agile, secure, and technology-driven solutions, many PSPs are increasingly turning to fintech partners who offer faster onboarding, transparent fees, and enhanced fund security.
In fact,75% of PSPs are actively exploring fintech solutions as potential replacements for traditional banks, while 39% of PSPs have one to three EMI/PSPs and, 48% maintain relationships with four to five EMI/PSPs, demonstrating a strong preference for diversified fintech partnerships.
The adoption of fintech alternatives represents a seismic shift in the financial services landscape, and when it comes to selecting a fintech partner, research reveals the factors that are most important to PSPs are security of funds (31%), speeding onboarding (26%) and low transparent fees (26%).
As fintech alternatives increasingly fill the gaps of traditional banks, the market is evolving and setting new standards for efficiency and customer service.
Laurent Descout is co-founder and CEO of Neo.
