Accelerating winds of change in global payments

McKinsey & Company | By Philip Bruno, Olivier Denecker, and Marc Niederkorn | Oct 1, 2020

changing the world - Accelerating winds of change in global paymentsThe COVID-19 crisis is having a significant and widespread effect on global payments across sectors. The most striking and potentially lasting impact is an accelerating pace of change in the industry.

For the global payments sector, the events of 2020 have reset expectations and significantly accelerated several existing trends. The COVID-19 public- health crisis and its many repercussions—among them, government measures to protect citizens and rapid changes in consumer behavior—changed the operating environment for businesses, large and small, around the world. For the payments sector, global revenues declined by an estimated 22 percent in the first six months of the year compared with the same period in 2019. We expect revenues to recover (only to a degree) in the second half of 2020, ending 7 percent lower than full-year 2019. Over the past several years, payments revenues had grown by roughly 7 percent annually, which means this crisis leaves revenues 11 to 13 percent below our prepandemic revenue projection for 2020.

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A half decade of change in a few months

Cross-border payments flows also have been severely affected by the pandemic, as well as by geopolitical dynamics. In 2019, cross-border payments totaled $130 trillion, generating payments revenues of $224 billion (up 4 percent from the previous year). In the first half of 2020, many cross-border fundamentals radically changed:

  • International travel all but ground to a halt, with more than 90 percent of countries imposing restrictions. Transaction-fee margins on remaining volume also declined, because of waivers offered to stimulate demand to offset the impact of a reduction in leisure and business travel flows, which fell by more than 70 percent.
  • During the pandemic, interregional trade saw greater impact than intraregional. Drops in interregional flows for Asia (−13 percent), Europe (−20 percent), and the United States (−23 percent) directly cut into cross-border payments volumes, while the prices of oil and other commodities fell sharply.
  • Business-to-consumer payouts (often salary disbursements) and remittance payments slowed, because of restrictions on the movement of cross-country workers and growing unemployment.
  • Cross-border e-commerce volumes provided a notable exception to the gloomy news: the second quarter of 2020 brought double-digit growth as initial logistic challenges were resolved. UPS and PayPal, for example, reported double-digit growth on cross-border shipment volumes and the value of merchandise sold.
  • Increased volatility and uncertainty have enabled growth in foreign-exchange-related revenues and pushed up treasury-related transactions as companies scramble to mobilize surplus cash.

McKinsey 2020 global payments report - Accelerating winds of change in global payments

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As we indicated, not all players, countries, and products will arrive at the same end state (see sidebar “A regional overview of the year in payments”). At a regional level, the following differences are notable:

  • Asia–Pacific (excluding China) could suffer larger declines, as its revenue model is more affected by NIM contraction, faces increasing government pressures on mass-market transaction fees, and has greater exposure to long-term affected industries, such as travel, tourism, and international remittance payments.
  • Europe may be poised for a swifter rebound, for two reasons. First, NIMs were already so compressed before the COVID-19 crisis that there was little room for further squeezing. Second, volume growth is being fueled by the acceleration of digital migration in Southern and Eastern Europe, and by government stimulus measures.
  • In North America, the revenue benefit from an accelerated shift to digital channels has been more than offset by credit-card economics—outstanding balances are down roughly 29 percent from 2019 levels, and increased delinquencies are a possibility. Considering credit cards are the largest source of the region’s payments revenue, at roughly 44 percent, the decline in outstanding balances alone will outweigh the benefits of increased use of digital channels.
  • In Latin America, which is characterized by a significant unbanked population, cash usage will likely remain resilient. Among the banked, Visa-supported mobile wallets such as PLIN and Yape have gained more than a million users since December 2019, with the pandemic accelerating this trend.
  • Overall, the greatest recovery opportunities reside in countries with low electronic penetration (such as Brazil, India, Indonesia, and Thailand), as the next normal provides impetus for electronification. However, countries starting from a high level of digitization (such as France, Germany, and the United Kingdom) are also seeing pandemic-induced behavior push cash usage to the minimum—fueling payments-revenue growth.

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