The annual Money 20/20 conference held last week in Las Vegas brought together thousands of people from across the payment processing and financial services industry to get a handle on where technology is headed. While a trend toward next-gen payment services isn’t brand new, BMO Capital Markets analyst Paul Condra argues that the momentum behind it has picked up significantly over the last year.

“The most powerful trend driving industry transformation is the gradual shift away from business models built around providing utility-like services at scale (i.e., basic processing), and toward business models that leverage mobile and SaaS technology to provide more sophisticated, customer-specific solutions,” writes Condra in a November 7 report. “Investors should consider this paradigm shift when evaluating the acquisitions and investment strategies of existing providers.”

Condra says that most major players are on board with this changing landscape, but his top pick is Vantiv Inc (NYSE:VNTV) because of its lower valuation.

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Payment Services - The Future Of Fintech: No More Dumb Pipes

Payment services: Transaction costs becoming commoditized

At some point this change was bound to happen. Transaction costs have fallen in recent years while interchange fees have actually gone up, a situation that’s hard to justify and is subject to more and more regulatory scrutiny and merchant pushback. In the long run, the legacy business model of simply processing a payment with no value added – what Condra calls dumb pipes – won’t be enough to sustain a growing business as fees become commoditized.

The good news for the industry is that customers expect to shift their payment patterns away from traditional form factors (cash, cards) toward PayPal, digital currencies, and other newer options. If the fintech industry is successful, it could speed up the change even more.

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The potential of real-time, non-retail payment processing

One interesting possibility that you don’t hear much about is the potential for practically creating a new market with real-time, non-retail payment processing. Condra says that there are billions of payments that could be better served because they are either fragmented and informal (splitting rent between flatmates) or because their best options are much slower (businesses making small payments by check). Since major companies like Visa Inc (NYSE:V) are focused on becoming a platform for payment services, meeting the needs of individuals and small, non-retail businesses could be an important source of future growth for the industry.