Banks face fallout as 40% of small and mid-sized merchant businesses eye shift to PayTechs: Capgemini report

Banks face a tough challenge, with satisfaction levels particularly low among small (15%) and mid-sized merchants (22%). Despite this, 66% of merchants still prefer traditional providers for their financial service needs, highlighting a significant opportunity ahead, according to the Capgemini Research Institute’s World Payments Report 2026, published today.

The report highlights the increasing pressure on banks to update their merchant services amid competition from more agile PayTechs—companies specifically created to provide payment technology solutions.

The report reveals that, according to the new report, banks have deprioritised the merchant services business, citing margin compression, increasingly complex infrastructure, and hefty operational costs, so PayTechs have stepped in to fill the gap.

While 70% of merchants prioritise high payment success rates and reliable infrastructure in a digital-first environment, only 19% of banks are confident in their ability to provide these services. Similarly, 69% of merchants demand fast and seamless onboarding, yet just 13% of banking executives believe their institutions can fully deliver this service.

The report emphasises significant challenges in bank onboarding for merchants, which can take up to seven days and cost as much as $496 on average. In contrast, PayTechs allow merchants to go live in less than an hour for as low as $214. This slow, cumbersome process drains merchants' revenue and patience, increasing the risk of them leaving.

“As many banks focus on the card issuing business over merchant acquisition, gaps have emerged in servicing merchants, enabling agile, digital-first competitors to win market share,” said Jeroen Hölscher, Global Head of Payment Services at Capgemini. “With 40% of merchants on the move, the message is clear: banks risk falling out of the merchant ecosystem entirely. To recover, they need to eliminate the friction that costs merchants time and money, and embrace the possibilities offered by Generative AI. Those who act swiftly and put merchants at the center of their strategy will be best placed to compete with PayTechs in a new era of commerce.”

When it comes to the pace of innovation, PayTechs are outpacing banks, creating a significant disparity. For instance, 70% of PayTechs have deployed payment orchestration – a critical enabler for the intelligent routing of transactions – compared to just 47% of banks. A further 41% of banks report adopting GenAI across their operations, compared with 60% of newer entrants. Similarly, PayTechs are shaping market expectations in line with regulatory shifts, with nearly half prioritising Central Bank Digital Currencies and stablecoins, and 59% exploring digital identity frameworks, versus only 23% and 38% respectively of banks.

Gaps in fraud prevention and payment processing offer another area for improvement. Only 26% of bank executives feel confident in providing advanced fraud prevention and data security. Merchants experience this strain directly, reporting losses of about 2% of total revenue to payment fraud and up to 9 hours of downtime annually due to unreliable systems.

The rise in transaction volumes in e-commerce, combined with the stickiness of the payments business, positions merchant servicing as a prime opportunity for banks to deepen relationships beyond processing. Banks can leverage their unique strengths, including deep trust and the power of working capital, built over generations to regain business.

Specifically, merchants cite banks’ strong brand reputation (78%), perceived stability and long-term market presence (49%), and broader suite of financial products (46%) compared to PayTechs.

Merchants appear willing to switch back to traditional providers if banks and payment providers can offer embedded, industry-specific value-added services such as smooth integration with food delivery platforms for restaurants or seamless loyalty programs for retailers. Eight in ten merchants also say they would consider switching to a bank if it could offer all the services of a PayTech at the same cost, according to the report.