Why better technology doesn’t always improve margins
Payment providers keep investing in capabilities that improve merchant performance. According to Abhimanyu Julaniya, partner at Simon-Kucher, too often, their commercial models fail to convert that differentiation into higher revenue or margin.
Payment propositions are becoming more sophisticated. Advanced fraud management, optimised routing, adaptive checkouts, broader local payment method coverage, integrated software, and other value-added services can improve conversion, reduce risk, and make payment operations more efficient.
Yet commercial conversations still frequently narrow to one number: the transaction price. When that happens, meaningful differences between providers become harder for merchants to assess and harder for providers to monetise.
In our article on the new competitive advantage in payments, we looked at five commercial capabilities that determine whether differentiated technology translates into stronger financial performance. One of the most important is the ability to monetise the value created.
We frequently see valuable capabilities bundled into standard offers without a clear monetisation rationale or discounted before merchants fully understand their impact. The provider creates more value but captures little of the upside.
The margin challenge is therefore not simply about defending price in a negotiation. It starts earlier, with how the proposition is segmented, packaged, and priced.
Margin leakage starts before negotiations begin
Commercial teams often associate margin leakage with discounting. But by the time a salesperson is negotiating a deal, much of the value may already have been given away through the design of the offer.
Two extremes are common. At one end is the all-inclusive proposition. Providers keep adding capabilities to the standard offer in the hope that the combined package will differentiate them. Merchants receive more value, but it becomes unclear which capabilities are genuinely premium or why they should justify a higher price. At the other end is the catalogue of modules and add-ons. Almost everything can be monetised separately, but merchants face a long menu of decisions and sales teams have to explain an increasingly complex proposition.
The answer is not simply more or fewer packages. It is to understand where customer needs and willingness to pay genuinely differ, then design the commercial model around those differences.
Merchant segmentation in payments is often dominated by vertical, size, or processing volume. These dimensions matter, but they do not necessarily explain what a merchant values. Two businesses of similar size in the same industry can have very different priorities. One may place a premium on maximising conversion and payment performance. Another may want reliable processing at a competitive cost.
Geography, channel, workflow, service model, and the number of providers they want to manage add further variation. Those differences affect willingness to pay.
Providers therefore need to identify merchant archetypes based on needs and buying behaviour, not only observable characteristics. The objective is not to create dozens of micro-segments. It is to identify the relatively small number of patterns that materially change which outcomes matter and what customers are prepared to pay for them. That creates the foundation for both packaging and pricing.
Package value for merchants to see and buy
Packaging determines whether differentiation is commercially visible. A good offer architecture requires three deliberate choices.
First, providers need to determine what belongs in the core proposition. Essential capabilities and functionality customers regard as table stakes should normally sit here. Trying to monetise every feature separately creates friction without necessarily creating value.
Second, they need to identify which capabilities support a meaningfully differentiated proposition. A premium offer should not simply contain “more features”. It should deliver a clearer or higher level of outcome for a merchant that values it. That might mean better payment performance, more sophisticated fraud capabilities, greater operational integration, or a higher-touch service model.
Third, specialist capabilities can remain optional add-ons where customer need is narrower or less predictable.
The important design trade-off is between simplicity and value capture. Too few distinctions make premium value invisible. Too many make the proposition difficult to understand, sell, and buy.
The strongest structures organise capabilities around merchant problems and outcomes rather than the provider’s internal product catalogue. They also give sales teams controlled flexibility to adapt the proposition without rebuilding it for every customer.
Packaging should make the reason for paying more obvious before the price conversation begins.
Pricing needs to capture how the value scales
Once the packaging architecture is clear, pricing has to reinforce it.
This involves more than choosing a higher price for the premium package. Providers need to make deliberate choices across price metrics, fee structures, price levels, and discounting.
The price metric determines what the provider gets paid for. Transaction value or transaction count may work well where customer value broadly scales with payment activity. But not every differentiated capability follows the same logic.
Software, reporting, reconciliation, support, or workflow capabilities may generate substantial value without increasing proportionately with transaction volume.
In those cases, relying exclusively on transaction-based pricing can leave value unmonetised. Subscription fees, usage-based charges, or hybrid models may create a stronger link between the commercial model and the value delivered.
The fee structure determines how revenue develops as the relationship grows. Volume tiers, minimum commitments, subscriptions, premium service charges, and bundled structures create different incentives for customers and different economics for providers. The right design should reward deeper adoption where appropriate without automatically giving away the incremental value created at scale.
Price levels should reflect willingness to pay as well as economics. Cost provides an important floor, but it does not determine what a capability is worth to the customer. Providers need to understand how much additional value different merchant archetypes attach to a premium outcome and translate that into differentiated price points while considering the competitive reality.
Finally, discounting needs commercial guardrails. A discount should ideally buy something in return, such as greater volume, higher share of wallet, a longer commitment, adoption of additional products, or lower cost-to-serve. Otherwise, providers risk negotiating away the differentiation their packaging was designed to make visible.
This is where pricing becomes a strategic monetisation tool rather than simply a rate card.
Treat monetisation as a system, not a one-off exercise
Packaging and pricing need to evolve over time - providers need to monitor which propositions customers choose, which capabilities drive conversion and retention, how much discounting occurs, and whether premium offers generate the expected economics.
That evidence should feed back into the proposition. A capability that once differentiated the provider may eventually become expected as standard. Another may prove more valuable to a particular merchant group than initially thought. Usage patterns can reveal where pricing metrics no longer reflect how customers receive value.
The question for management is not simply: Are our prices high enough? The more useful test is to check against five questions:
1. Do we know which outcomes different merchants will pay more for?
2. Does our packaging make those differences clear and easy to buy?
3. Do our pricing metrics and fee structures capture value as it grows?
4. Do the price levels reflect the value vs. those of competitors?
5. Are discounts and concessions linked to something economically valuable in return?
Payment technology will continue to advance. That alone will not protect margins. The providers that turn innovation into commercial advantage will be those that make differentiated value visible through their offer architecture, attach the right economics to it through pricing, and continually adjust both as customer needs and competitive expectations evolve.
Creating more value matters. Designing the commercial model to capture it is what makes that value show up in the P&L.
If your payments business is delivering better outcomes for merchants but not seeing the same benefit in commercial performance, it may be worth examining how those capabilities are being packaged and priced.
