Payment Service Providers (PSPs) are facing
significant challenges in their relationships with traditional banks. A recent
report by fintech firm Neo highlighted that 95% of PSPs have had their banking
accounts closed or restricted, often with little to no explanation.

As these providers grapple with limited banking
options, many are turning their attention to fintech solutions, signaling a
potential transformation in the industry.

Banking for PSPs

The report presented the findings of a survey
involving 100 C-suite executives at European PSPs. A concerning 71% of these
professionals noted that their accounts were closed without transparency from
their banking partners. This lack of clarity adds a layer of complexity to an
already precarious situation.

Relying on a small number of banking partners is a
risky strategy for many PSPs. Approximately 69% of respondents indicated they
depend on three or fewer banks, which heightens their vulnerability. If a safeguarding bank fails, as seen during the 2023
banking crisis, the repercussions could be severe for those with limited
banking options.

Compounding these issues, only 2% of PSPs reported
successfully opening a traditional bank account in less than six months. The
average wait time extends to nearly a year, leaving many PSPs frustrated and
seeking alternative solutions.

As a result, over one-third (39%) of PSPs have formed
partnerships with one to three Electronic Money Institutions (EMIs) or other
PSPs. Nearly half (48%) maintain relationships with four to five EMIs,
emphasizing a growing trend toward diversifying banking partnerships.

The report identifies several pain points PSPs
encounter when dealing with traditional banks. 44% of respondents are plagued by lengthy onboarding processes, while 29% cited incompatibility with crypto
exchanges. Additionally, 25% reported the risk of account closures as a
significant concern, alongside challenges stemming from outdated banking
technologies.

Challenges in Traditional Banking

The difficulties extend to cross-border payments,
where 31% of PSPs highlighted limited banking platform capabilities,
particularly in real-time processing and multi-currency handling. The discrepancies between regional issues are notable;
for example, reconciliation of flows emerged as a top concern in the UK, while
limitations in banking platforms troubled many in Italy and France.

In light of these challenges, PSPs are increasingly
integrating EMI and PSP solutions into their operations. On average, firms have
three EMI/PSPs within their banking ecosystem.

A significant 75% of PSPs are actively exploring
fintech solutions as potential replacements for traditional banks. This trend
is particularly pronounced in regions like the UK, where 86% of PSPs are
looking to fintech partners for improved service delivery.

When selecting a fintech partner, PSPs prioritize
several key factors. The security of funds tops the list at 31%. Speedy
onboarding (26%) and low, transparent fees (26%) also play crucial roles in
decision-making.

This article was written by Jared Kirui at www.financemagnates.com.

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