Cost returns because structure has not changed.
Financial institutions operate payment landscapes that have evolved over time across multiple platforms, networks, and service providers.
This article focuses on:
This article examines how financial institutions can simplify payment economics by addressing structural cost drivers rather than isolated inefficiencies.
- Why financial institutions overspend on card-linked rewards that no longer drive loyalty.
- How simplifying payment cost structures creates space for better customer experiences.
- How procurement’s cross-layer visibility supports better allocation decisions & GenAI scalability.
- What practical steps leaders can take to improve cost-to-serve and free capital for reinvestment.
The scale of the cost base
Payment services represent a double-digit share of operating expenses and a material share of fee income. Their scale justifies structural scrutiny.
10–15%
Share of total operating expenses linked to payment operations in retail banks
Up to 40%
Share of fee income generated by payments in card-intensive markets
20–50%
Portion of card gross revenue absorbed by rewards and loyalty programs
Are Payment Operations Still Paying Off?
Banks face simultaneous pressure on the payment proposition. Fintech entrants compress customer expectations into simple experiences. Regulatory standards increase reporting density and technical requirements. Investment shifts toward system layering and compliance routines, limiting customer-visible reliability gains.
Over time, payment operations develop reinforcing cost dynamics:
- Additional standards and products increase fixed operating costs
- Higher fixed costs encourage broader product coverage and transaction volumes
- Expanded transaction paths increase reconciliation, reporting, and control effort
- Additional controls further increase system complexity
Optimization initiatives generate savings that are gradually reabsorbed because the underlying architecture remains intact.
How Legacy Architectures Shape The Cost Of Compliance
Each new payment standard, such as PSD3 or instant payments, introduces additional technical and operational requirements. Instead of replacing legacy components, many modernization efforts layer new systems on top of existing ones. Costs become fragmented across platforms and functions, while legacy infrastructure increases manual effort and limits transparency.
As a result, regulatory spend is often driven by system structure rather than actual risk:
- Controls concentrate where systems are most complex, not where exposure is highest
- Spending can exceed risk in some areas while underfunding customer-facing reliability
Mapping cost categories to regulatory objectives helps rebalance control budgets and align spend with real exposure.
Given the double-digit share of operating cost embedded in payments, even marginal structural inefficiencies compound quickly. A five percent improvement in payment cost base moves the cost-income ratio more than comparable reductions in peripheral overhead. Payments therefore influence structural profitability, not operational housekeeping.
Recurring Sources Of Payment Spend Concentration
An Inverto analysis shows that payment spend typically falls into four categories where inefficiencies are common:
- Rewards and benefits (10–30%) – Low redemption rates and limited tracking of actual retention impact.
- IT systems and services (30–50%) – Overlapping processors, duplicated fraud modules, and multiple vendor service levels.
- Network and scheme fees (10–30%) – Rebate opportunities not fully captured; funds often left unclaimed.
- Operations (5–15%) – High manual effort in onboarding, chargebacks, and data reconciliation.
A review of European retail bank’s card-linked loyalty programs revealed that ~30% of the benefits were rarely used, and that ~50% of cardholders had benefits linked to their cards that they were not even aware of. Simplifying those programs, consolidating IT contracts, and updating network agreements allowed the institution to redirect 40% of spending into automation and service upgrades.
Procurement’s view across suppliers enables this reallocation. It quantifies impact by category and tracks improvements through unit economics such as cost per approved transaction or redemption volumes.
Procurement’s Contribution To Cost Transparency And Capital Flexibility
Payment modernization delivers results when cost structures are transparent and commercial incentives reinforce business objectives. Procurement contributes by coordinating decisions across suppliers, systems, and cost categories:
- Review contracts for rewards providers, loyalty engines, and catalogue providers
- Benchmark redemption rates, costs and perceived value assumptions
- Support renegotiation of co-brand and affinity partner economics
- Apply strategic sourcing to reduce unit costs for merchandise and travel benefits e.g. through merchant-funded benefits
- Run sourcing initiatives for processors, APIs, cloud services, and digital banking platforms
- Assess build-versus-buy decisions for platform development needs
- Negotiate enterprise pricing and service levels for uptime, latency, and integration
- Mitigate vendor lock-in risks
- Build vendor performance dashboards covering cost, service, and customer metrics
- Identify contract leakage and out-of-scope fees with processors and card schemes
- Enforce volume discounts and service credits
This coordination role links modernization to measurable improvements in both cost and experience, rather than technology adoption alone.
GenAI in Payments: A Procurement and Contract Architecture Question
Near-Term Areas for Economic Review
Preparing For Future Standards
Real-time settlement mandates, open data frameworks, and enhanced AML controls will continue to reshape payment cost structures. Institutions with simplified architectures absorb regulatory change without reactive budget expansion.
Institutions with layered systems fund each new requirement with incremental complexity. Structural simplification compounds over time. Layered complexity compounds in cost and control burden.
In Summary: Smarter Economics Make Better Experiences Possible
Simplifying payment economics is not only about savings. Reducing overlap and contractual rigidity increases the share of budget that can be redeployed deliberately.
This discretionary capital allows institutions to:
- Absorb new standards without reactive investment
- Improve customer experience without increasing compliance exposure
- Avoid repeated defensive IT spend cycles
With clear visibility and contract discipline, procurement helps link payment costs to business outcomes and supports the shift from maintaining complexity to funding reliable, customer-relevant payment services.
Get in Touch
Harry Brunow
Harry Brunow
Principal
José Carande Morgado
José Carande Morgado
Managing Director
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