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The future of European payments: Strategic choices for banks

McKinsey & Company and Euro Banking Association | Nov 24, 2020

European payments - The future of European payments: Strategic choices for banksPayments and accounts services are at the core of banks’ offering to customers. They contributed about a third of European banks’ total revenues in 2019 (Exhibit 1), and represent banks’ leading source of customer interactions.

Banks’ payments revenues have grown steadily at about 3 percent per year over the past six years. However, some specialist payments providers—processors, acquirers, schemes, and others—have achieved double-digit growth rates over the same period (Exhibit 2). This suggests that banks’ traditional role at the centre of the payments ecosystem may be coming under challenge.

High ambitions, significant challenges

Almost two-thirds of the executives and experts who were surveyed as part of a joint effort undertaken by McKinsey & Company and the Euro Banking Association between November 2019 and November 2020, believe that banks will continue to be the leading players in European payments over the next five years.

european banking and account services - The future of European payments: Strategic choices for banks

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However, survey respondents and interviewees identified a number of challenges faced by banks. These included increasing competition (especially from tech companies and fintechs), the rise of technologies that could allow other payments providers to come between banks and their customer relationships, the lack of flexibility in banks’ operating models, the constrained revenue environment, rising customer expectations, and the complex regulatory outlook. Executives also identified gaps in the capabilities and practices needed to grow their payments business, especially in technology, organisational agility, and monetisation models.

The outlook for the European payments sector

On the stock markets, payments specialists outperformed the overall European banking sector between January and November 2020, with a shallower decline and a bigger rebound. Interviewees noted that banks continue to be affected by mounting credit losses and low interest rates; payments specialists stand to gain from the shift to digital commerce and electronic payments; fintechs have opportunities to target a broader pool of customers and capitalise on their cost advantages, but are more exposed to structural factors because of the narrower focus of their customer relationships; and big tech companies have ample resources to invest but may come under increased scrutiny from governments and regulators.

Despite the uncertainties, the interviewees saw the outlook for payments as broadly positive. Most felt the crisis of 2020 would not damage their strategic position, and could even improve it.

The strategic choices facing banks

In defining their strategy for each customer segment and step in the payments value chain, banks can choose to lead, accelerate, follow, or reduce their payments footprint, depending on their wider aspirations and starting point.

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As technological advances, evolving customer behaviour, new market dynamics, and changing regulatory agendas converge with the after effects of the pandemic, the early 2020s may become an inflection point for payments. Despite the uncertainties of the current environment, this could be the moment for banks to secure the growth of value in their payments business over the next cycle—and to come together with other stakeholders to solve sector-wide challenges and capture opportunities.

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