Rojin Nair, Advisor
June 1st, 2021
At Incyub8 Inc, Rojin is focusing on nurturing and guiding various national and international start-[...]
Global payments: Expansive growth, targeted opportunities
McKinsey&Company | Oct 2018
Robust growth makes payments a dynamic sector for incumbents—and a draw for new competitors.
Global payments revenues swelled to $1.9 trillion in 2017, the best single year of growth in the last five years (Exhibit 1). In last year’s report, we forecast that payments would become a $2 trillion business by 2020. Indeed, 2017’s market performance was so robust—its 11 percent growth rate fueled by continuing strength in the Asia–Pacific corridor—that global revenues are poised to surpass that $2 trillion threshold in 2018, and to approach $3 trillion within five years.
This rapid growth makes payments an expanding and increasingly important component of the broader banking industry. After an extended period in which payments generated roughly 30 percent of overall banking revenues, this metric has turned sharply upward. The continued prominence of payments in banking revenues might come as a surprise, given the continued pressure on payments fees—increasing competition and regulatory pressure—and ongoing low-interest-rate environments in many developed economies. In contrast, the trend makes sense, given healthy underlying fundamentals, including electronic-transaction and digital-commerce growth, and increasing cross-border activity. The growth of the payments component also points to the imperative for financial institutions to develop and continually refresh sound payments strategies to remain competitive in a market being reshaped by technology, new competition, and customer demands.
Not surprisingly, global payments revenue growth is dominated by the Asia–Pacific region, as has been the case for several years. At more than $900 billion, the region now accounts for nearly half of global payments revenue—compared with less than a quarter just six years earlier—as well as four-fifths of recent growth (Exhibit 2).
Remarkably, double-digit growth has continued even as the base of business has grown. The 20 percent growth rate for 2017, driven largely by liquidity factors, was Asia–Pacific’s strongest ever. Although our forecast calls for inevitable moderation, revenues in the region should continue to grow at low double-digit rates over the next five years, still considerably faster than any other region.
See: Large Global Payments Processor Unveils Airdropping Campaign Among Users
Latin America’s payments sector has been the fastest-growing among the major regions in the recent past (albeit off the smallest revenue pool); but growth rates flatlined abruptly in 2017. We expect the region to return to average annual growth of 8 percent over the next five years, second only to Asia–Pacific. While several Latin American countries continued to deliver double-digit growth in 2017, Brazil’s payments sector—the region’s dominant revenue engine—was hampered by regulatory action targeting credit-card rates (Latin America is reliant on interest for two-thirds of its card revenues). Credit-card annual percentage rates (APRs) in Brazil fell by more than 60 percentage points as a result of actions restricting the duration of high-cost revolving credit lines. The plan is expected to reduce delinquency rates but will also reduce average APRs, which remain among the world’s highest. Latin America’s underlying fundamentals remain solid, particularly for domestic payments.
Revenues in Europe, the Middle East, and Africa (EMEA) were similarly near flat, continuing a trend that has persisted for the past decade. The developing nations of Africa and Eastern Europe have generated high single-digit growth, offsetting nominal declines in Western Europe. Fee revenues have been the primary factor in the growth that has occurred, while a persistent environment of low interest rates—reaching negative levels in some cases—acts as a drag on growth. A return to a stable rate environment combined with continued transaction growth will result in revenue growth in the middle single digits for Western Europe until 2022, while Africa and Eastern Europe are likely to continue at their present pace. At the same time, individual companies in the European payments arena, such as Adyen and Wirecard, are finding growth areas that lead to substantial valuations.
On the surface, cross-border payments might appear to comprise a low single-digit share of global payments revenues. However, once liquidity factors such as net interest margins are excluded—as many institutions do in analyzing their own payments P&Ls—this growing category of transactions account for a larger share (roughly one-quarter) despite increasing competition from new entrants and solutions. Cross-border transactions also continue to generate unusually high margins for payments products and serve as a foundation for a broader array of client services.
After a period of tepid results, following the financial crisis, North America’s overall payments revenue growth returned to a healthy 7 percent in 2017, and is poised to continue at a similar pace over a five-year horizon. Credit cards comprise more than half of North American payments revenues, far more than any other geography, and will continue to grow faster than other products. More surprising is that the drag on North American revenue growth, from the temporary slowdown in credit-card usage following the financial crisis, has only recently lifted.
The jump in global revenues in 2017 is a direct reflection of an improved global economic scenario, reinforcing the close link between growth in GDP and payments revenue. According to World Bank data, in 2017, global nominal GDP grew at 6.0 percent year over year, compared with 1.5 percent in 2016. During the same periods, payments revenue increased in similar proportions, from 7 percent in 2016 to 11 percent in 2017.
See: Meet the fintech entrepreneur who thinks payments are boring
Comparing payments revenues across regions, we observe that payments revenue per unit of GDP (a measure of the cost of payments for consumers and businesses) in Asia–Pacific and Latin America is 50 to 60 percent higher than for Europe and North America. In addition, the share of electronic payments transactions in Asia–Pacific and Latin America is 60 to 65 percent lower than in Europe and North America. In other words, payments are significantly costlier for the economy in Asia–Pacific and Latin America, because the cost of processing cash and check payments is higher, as are the fees paid by consumers and businesses.
Transaction dynamics remain strong
Although the strong recent growth in global payments revenue has been broad-based and diverse, an increasing share is related to transactions. This is a positive development for banks and payments providers, as transaction revenues are more predictable and sustainable, and more readily controlled by financial-services firms. Transaction-based revenue now accounts for 40 percent of global payments revenue, up from 37 percent in 2012. We expect this share to grow to 46 percent by 2022, even in an improving rate scenario.
More specifically, while the overall number of transactions continues to increase, the true revenue driver is the electronification of transactions—namely, away from cash—which more than offsets the downward pressure on fees (Exhibit 3). Over the past five years, the share of the world’s transactions carried out in cash has fallen from 89 to 77 percent. At the same time, the share of combined debit- and credit-card use has nearly doubled, from 5 to 9 percent. The decline of cash usage globally is expected to be even more pronounced over the next five years, due to an increasing range of payments options, the push toward real-time payments, the growth of digital commerce, and continued regulatory focus on payments electronification.
Given that the Asia–Pacific region accounts for more than 60 percent of the world’s population, it is not surprising that it is responsible for two-thirds of global transactions. The fact that Asia–Pacific still lags behind other regions in overall electronification at only 21 percent (despite more than doubling since 2012) illustrates the region’s ongoing growth potential. The move away from cash, as witnessed in markets such as China, will serve as the single-largest cause of global electronification. The share of electronification in China has increased more than tenfold over the last five years, from 4 percent in 2012 to 34 percent in 2017.
See: Singapore consortium claims breakthrough in DLT payments project
Meanwhile, North America has become the first region to execute more than half of its transactions electronically. At 450 electronic transactions annually per capita, it far and away leads other regions on this dimension. Meanwhile, individual European countries, such as Sweden and Norway, are executing no more than 20 percent of their transactions in cash, while generating 520 noncash transactions per capita per year.
The shifting digital landscape
The growing popularity of alternative payments solutions, and digital commerce in general, further contributes to the electronification trend. Global digital commerce volume exceeded $3 trillion in 2017 and will more than double by 2022. Asia–Pacific already comprises more than half of this $3 trillion and, due to the fast-growing Chinese market, will increase its share to nearly 70 percent by 2022. Mobile commerce, including in-app payments and mobile browser payments, is the dominant factor driving strong digital commerce growth, due to rising smartphone adoption, an increasing shift toward online shopping, and improvements in network bandwidth. Mobile commerce accounts for 48 percent of digital-commerce sales globally as of 2017, and is forecasted to reach 70 percent by 2022 (tripling to $4.6 trillion).
Consumers and merchants alike are increasingly embracing app-based commerce and in-app payments, with retailers ramping up investments in mobile apps with innovative use cases to provide omnichannel shopping experiences for customers. Globally, mobile apps accounted for more than 30 percent of total digital-commerce volume in 2017, and they are expected to continue strong growth across all regions (Exhibit 4). Digital wallets are estimated to have added approximately 40 billion to global payments revenues in 2017.
The outlook for in-store commerce varies significantly by country and region: in countries with near-field-communication infrastructure, tap-and-pay will drive growth; in the United States, in-store app use will grow as consumer use of order-ahead increases; and in emerging markets, the introduction of new payments solutions will influence how people pay. In the United States, in-person use of digital wallets will increase at a 45 percent compound annual growth rate to reach nearly $400 billion in annual flows by 2022. Although most of this growth is expected to be on “pass through” wallets like Apple Pay, private-label wallets such as Starbucks and Walmart Pay—both of which have enjoyed impressive early adoption—will also continue to increase in popularity. Even with these gains, however, digital wallets will comprise less than 10 percent of US consumer in-person point-of-sale payments in 2022. Lack of ubiquitous merchant acceptance will remain a barrier, along with the continued percentage of consumers who do not know how to use their mobile phone to pay at the point of sale.
See: The lending revolution: How digital credit is changing banks from the inside
In the United Kingdom, a total of 38 million contactless transactions were conducted using a mobile device in 2016 (representing roughly $358 million in spending). While this is significant in absolute value, it accounts for only 1.2 percent of in-store payments, indicating a huge opportunity for growth. China leads on this front with 40 percent of in-person spending already on mobile digital wallets. However, unlike the United States, almost all of this is on closed-loop systems like Alipay and WeChat Pay. China’s ratio is projected to continue to increase to nearly 60 percent by 2022. Within the same region, Japan remains a largely untapped market. Research has found that close to 70 percent of Japanese consumers across all age groups still prefer to use cash when making in-store purchases, mainly due to security concerns with mobile payments. It is interesting to note, however, that despite the preference for cash, prepaid-card solutions like Suica have found high adoption in Japan. In the third section of this report, we look in more depth at the digital landscape.
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Read More
Read More
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Read More
Read More
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Read More
Read More
Guest Post | Jul 28, 2021 Image: Pixabay When buying a home, there are plenty of important factors a lender will consider when deciding whether or not to give you a mortgage. They will think about your income, your down payment, your other debts, and of course, your credit score. Your credit score is essentially a snapshot of your history as a borrower. The higher the score, the less risky you are to lend money to, in most cases. While most with an average credit score or above average will be fine, those who are below might experience a bit more trouble. But thankfully, you aren’t doomed to have a bad credit score forever. Read on as we go over some of the best ways to quickly raise your score to buy a home. Remove Negative Items on Your Credit Report Perhaps the fastest and most affordable way to raise your credit score is to remove negative items from your credit report. These generally include collections and inquiries. While each one might only hurt your credit a bit, if they pile up, it can have a major impact. Be sure to go through your report and ensure you do all ...
Read More
Read More
Guest Post | Jul 28, 2021 Over 80% of enterprises fail due to cash flow problems. The figure is a dead giveaway of why you need to minimize your expenses. After all, reducing your business costs has a direct impact on your cash flow. Not only does it help you pocket more money, but it also bolsters your business financially. If you’re looking for tried and tested tips to reduce your business costs, consider following the tips below. 1. Invest in preventive measures Risks are inevitable for businesses, and when they happen, they often eat up a considerable chunk of your profits. To avoid experiencing the financial nightmare that comes from unforeseen threats, you must set preventive and protective measures to mitigate risks. For instance, if you invested in creating an app for your business, you need to ensure your critical business codes are protected against system failure or cybercriminals. An effective way of doing this is to back up your codes regularly. To avoid spending countless hours running your backups, which increases your business cost, run automatic DevOps backups. That way, your backups are done with very little to no workforce hours needed, and you know your code is ...
Read More
Read More
Bitcoin.com | Sergio Goschenko | Jul 27, 2021 Goldman Sachs, one of the biggest banking institutions in the world, has filed an application to offer an Exchange Traded Fund (ETF) linked to the performance of decentralized finance (defi) companies. The instrument, if approved, would help institutions and retail investors gain exposure to defi assets with the help of a regulated bank like Goldman Sachs. Goldman Sachs Proposes Defi ETF Goldman Sachs, one of leading commercial banks in the world, has introduced an application to the SEC to offer a defi-linked ETF. The defined ETF is called “Goldman Sachs Innovate Defi and Blockchain Equity ETF,” and it would seek to provide exposure to these technologies for regulated institutions. The performance of the fund would be linked to the Solactive Blockchain Technology Performance-Index. See: 10 Highlights From Goldman Sachs’ June 2021 Digital Asset Thought Piece This index follows a portfolio of tech industries that are invested in blockchain technologies. The index includes companies like Nokia, Alphabet, IBM, Microsoft, and Overstock. This would be the first ETF that aims to capitalize on the popularity that the defi sector has experienced this year. As Bitcoin.com News reported in June, Goldman Sachs has been courting ...
Read More
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DeFi Market Cap Reaches $45 Billion as Token Prices Shoot Up
Accelerating winds of change in global payments
Kickstarter dumps Amazon Payments in favor of Stripe
McKinsey’s Global Banking Annual Review 2020: A test of resilience
