We are becoming an increasingly cashless world – and we are being charged for the convenience. Even in our home country, Sweden, for example, few people still pay in cash, but more are dissatisfied with the decline in cash use – from 36 percent in 2022 to 44 percent in 2023. We believe cashless payments can and should do better. Imagine a world where payments are cost and worry-free. That is the future we want to back.

The hidden cost of cashless payments

Access to goods and services is as easy as ever, thanks to the internet, global distribution, and cashless payments. However, the simplicity of cashless payments comes with added costs. Goods and services are priced differently from when cash was dominant. Every transaction carries a fee, typically passed on to consumers.

It was not always so. Historically, cash payments did not have a direct cost; the expense associated with processing cash was considered an operational cost for businesses. But today, the fees charged by payment service providers (PSPs) and card networks are factored into the cost of goods sold, effectively shifting the burden from merchants to consumers. This has led to higher prices as merchants adjust their pricing structures to cover these lower margins.

This puts consumers in a difficult position. The money in their bank accounts is only worth something if they can exchange it for goods and services, but they are forced to pay for the privilege of spending it. This has been the case for a long time – payment companies have always taken a cut of check, card, and online transactions – but it is a more serious problem now that the option to pay with cash is disappearing.

For something as fundamental as payment, we need a better, fairer way of doing it.

The commoditization of payments

Payments are a necessity for participating in society. Transacting, trading, and participating in the market are intrinsic to the human experience. Money does not just talk; it is a universal, fundamental form of human interaction.

Payments might not be an actual human right, but we should aspire to treat them as such.

So how do we use technology to broaden access to payments and reduce transaction costs? This is not just about making payments cheaper; it is about enabling as many people to participate in the market as possible in as easy a way as possible.

We envision a return to a time when payments incurred no fees. Like cash before them, cashless payments should be truly free. To make this a reality, intermediaries like PSPs will need to waive processing fees for consumer transactions. This might sound fantastic, but market forces may soon compel them.

Fifteen years ago, accepting payments was complex. Enterprises had to build their own software to connect to a payment processor or use one of the early PSPs,which were clunky and complex to work with.

As e-commerce grew, PSPs offered more services along the value chain. Companies like Stripe and Adyen would handle issues like risk and fraud, and they allowed merchants to accept a variety of payment methods, like American Express, ACH transfers in the US, and UPI payments in India.

The increasing number of PSPs made it much easier for merchants to accept payments. A decade ago, it would have taken days. Today, you can do it in under half an hour. The quality of integration and documentation has also improved to the point where there is now a commonly accepted base standard for what the service looks like. Quality and reliability are a given, to a large extent.

This commoditization has forced payment companies to compete on cost, pushing down prices. Adyen’s share of income that came from processing fees slid from 9.2 percent five years ago to just 4.3 percent in 2022. Stripe processed $1tn in payments last year but has reportedly forecast just $100m in EBITDA.

The universal declaration of payments

We believe that there are power laws at play forcing the industry into a new paradigm. To understand how payments will evolve, one has to suspend disbelief.

Picture this: a world where the tables have turned in the payments ecosystem. Instead of merchants paying fees to accept payments, they make additional money by accepting payments. Payment processors bid against each other for the privilege of processing transactions. It is a radical shift that could transform the entire landscape of commerce.

In this reimagined scenario, every transaction becomes a privilege for PSPs to bid on. When a customer is ready to pay, payment processors enter a bid, each offering a price for the right to process that payment. The merchant does not just passively accept the payment – they actively get the lowest cost processor at a transaction level, and perhaps even make money on the transaction. The lower the price, the less the merchant pays, optimizing the cost of each transaction.

We adamantly believe in this future of payments, because we have seen it play out in other commoditized industries, like digital advertising. The mechanics work exactly the same. Ad placements are based on real-time auctions. When a user is about to see an ad in their social media feed, advertisers bid for the opportunity to display their ads, with the highest bidder winning the placement. The decision is not simply about the highest bid, though – it also factors in the relevance and quality of the ad, ensuring the best possible experience for the user. Similarly, in the payment processing auction model, processors would need to offer more than just money – they would need to provide a base level of auth rates and reliability to win the merchant’s favor.

This model could revolutionize how merchants view payment processing. No longer just a necessary cost of doing business, payments would become a strategic asset. Merchants would be incentivized to add more processors. Real-time bidding can be a far more open and fair process, compared to the conventional average pricing percentages. Payment processors, on the other hand, would need to innovate and differentiate themselves to win bids – offering lower fees, faster processing times, or enhanced security features.

As auctions did for the ad market, this model could help dismantle the oligopoly of established payment networks and processors, fostering a more open and dynamic market. Smaller and newer PSPs would have a fair chance to compete, leading to greater diversity and resilience in the ecosystem. Ultimately, it would reduce transaction costs, benefiting both merchants and consumers by lowering the fees embedded in the price of goods and services – and thus increase accessibility to cashless payments.

So as payments become increasingly commoditized and the cost of processing falls to zero, how will processors make money?

In the SMB market, relying on a single processor often makes sense and will likely remain the norm. However, in multiprocessor environments, PSPs risk becoming commoditized, capturing volume at the top end while earning margins in the SMB space – a dynamic already evident today.

One potential future is a freemium model in a single processor scenario: PSPs charge for additional services, not the transaction itself. This would be driven by enterprises with complex needs, requiring features like wallet payments, split payments, chargeback protection, and token vaults as their payment architecture matures. Even though merchants are earning from the auction process, they might still pay for advanced features that improve their business operations.

For example, imagine a U.S. ride-hailing company with a UK subsidiary. When a rider pays for their journey, split payments can share the amount between the driver, the platform, and the payment processor in real time. If the rider is French and pays with a card issued in France, there is a new problem. The payment provider needs to route the payment via the best processor for a euro-denominated card, make a charge in sterling on the card, pay out to the platform in sterling, then eventually move the money back to its U.S. parent company.

In this future scenario, payments become software and will be above the processor, similar to an ad server, acting as a single interface where enterprises can manage these complex payment flows quickly and flexibly. This could be Payrails, for example, an EQT Ventures portfolio company. By uniting all payment operations in one system, technology will help reduce costs and increase revenues for merchants by streamlining payment processes.

Facilitating the transfer of goods and services is the lifeblood of society. If payments are truly free, society becomes more equal and prosperous. There is a lot of opportunity to innovate towards this goal, and the successful companies will create a lot of value – for themselves, merchants, and consumers.

We are actively investing in the next generation of payments. If you see the world differently and are driven by innovation in fintech, please reach out to [email protected].