Global payments – where are we heading? Exclusive interview with McKinsey

Thursday 25 October 2018 08:02 CET | Interview

The Paypers sat down with Philip Bruno, Partner at McKinsey & Company and co-head of their Global Payments Practice, to discuss the current state of the payments market and what the future of payments looks like

How do you see the current state of the payments market? What is the scale of the global payments market in terms of size and what has been the current growth rate?

The prominence of payments in the global financial services system has undeniably risen over the 12 years that McKinsey has formally tracked the sector’s dynamics. However, 2017’s results are striking. Global payments revenues swelled to USD 1.9 trillion in 2017, delivering the greatest single year of growth since McKinsey has formally measured the market. The 11% growth generated by payments is the largest annual increase we have measured in the past five years.

Not surprisingly, global payments revenue growth is dominated by the Asia-Pacific region, as has been the case for several years. At more than USD 900 billion, the region now accounts for nearly half of global payments revenue—compared to less than a quarter just six years earlier—as well as four-fifths of recent growth

What are the challenges the global payments industry faces today?

The biggest challenges are related to competition – such as we find in the digital commerce environment. From the very inception of Internet 1.0 – in 1994 all the way up until eBay bought PayPal, in 2002 – we have seen a huge uptake in the use of traditional electronic payment devices, such as credit and debit cards. This shift from physical payments to electronic instruments created an opportunity and a winning environment for the traditional banks and the payment networks and processors.

However, while the online card experience has improved, alternative payments methods (APMs) have gained far greater traction by tackling a variety of pain points. The primary impetus for most APMs is to deliver an improved shopping or checkout experience with payments as a component, rather than approaching payments as a business.

In digital commerce, a substantial portion of payments is going to alternative payment methods, so although overall payments are growing, this is impacting credit, debit and traditional payment instruments. In addition, if we include new payment instruments and private label instruments much of the value goes to the digital commerce ecosystem or directly to the merchant. In the US we have already seen 25% of the value of transactions going to alternative payment instruments; with 40% in Europe, 75% in China and 60% in India.

For instance, some companies see owning the checkout experience as their top motivation (Amazon, Flipkart, Mercado Libre), while others (Walmart, Starbucks) are focused on lowering acceptance cost. Other companies (Adyen, Klarna, Shopify, and Stripe) approach payments as a platform business and aim to supplement it with value-added services.

The result is that significant portions of the digital commerce segment are opting for solutions that operate outside the traditional card system to fulfil their payments and adjacent needs.

How are non-banks working towards stepping up the pace of innovation in payments?

Non-banks are focused on improving customer experience and offering value to the end-customer. These players often talk about whats the incremental benefit to the consumers and how to make their experience more seamless with commerce focused on a broader value chain.

The first area where theyre changing payments is in the checkout experience. Many non-banks are making the checkout experience more seamless and, in many cases, the payment factor blends into the background. For instance, we dont pay for taxis the same way we used to, we use a service such as Uber where the payment happens automatically, without us having to think about it. Another example is one-click checkout services for coffee or pizza. The experience revolves around the act of ordering, its not about the act of paying.

The use of alternative payment mechanisms in digital commerce is also experiencing growth. In several countries, real-time payments systems are fueling commerce, with many banks now being in a position to offer new applications and services both for consumer and commercial payments. In Denmark, Mobile Pay (of Danske Bank), originally launched as a peer-to-peer system, this is now employed at the point-of-sale and has developed a digital commerce solution. 80% of Danish adults are now using this app for both person-to-person payments as well as digital commerce.

Cross-border payments are also becoming more of a hot topic. We are seeing an explosion of cross-border transactions, both in consumer commerce and commercial transactions. Whilst there are heightened tensions around the world and despite lagging behind domestic payments in terms of transparency and innovation, trade and cross-border payments have begun to show progress. Introduced by SWIFT in 2017, global payments innovation (GPI) revamps cross-border payments by increasing the speed, transparency, and end-to-end tracking of payments, allowing for improved fee clarity compared to traditional correspondent payments. A late 2018 release will add features such as the ability to stop payment at any point in the payments chain (in case of fraud or error) as well as live transaction tracking.

Based on the findings of this year’s Global Payments report from McKinsey, what does the future of payments look like?

We expect to see much more compression of the revenues in cross-border payments. Transactions are going to grow quite fast, but the revenue associated with that is going to develop at a much slower pace – as we get more competition and thinner margins on a transaction basis.

That said, the end profit margins of the players are actually going to stay quite healthy as these are businesses that have fixed cost of over 50%, with high transaction growth. Therefore, they can absorb a substantial amount of price compression without impacting the profit margins of the providers.

We’ll continue to see changes in competition at all levels, particularly for cross-border commercial transactions and cash management, with all the companies that are coming up with new solutions aimed at making cross-border transfers more effective and helping reduce the cost. What is more, the combination of the cross-border remittance market size, globalization, and advancements in technology has drawn (and will continue drawing) new players into the global cross-border remittance area; players whose business models and uses of technology are digitizing for the consumers, upending the industry to deliver funds to recipients faster and cheaper.

On the commerce side, were seeing a localization of digital commerce, which is an essential part of creating a great global ecommerce customer experience. Sellers looking to drive growth by targeting shoppers overseas often face a major barrier in the delivery of localized customer experiences for international shoppers, resulting in low conversion rates and lost revenues. Features such as cost-effective shipping, a guaranteed final cost, displaying prices and processing the transaction in the buyers’ local currency, and using local authorization and payments systems are not just nice-to-haves – they are increasing approval rates. Therefore, sellers must select suitable platforms and collaborate with players who are able to provide services that are compatible with the habits of consumers in their local environment.

Which payment innovations and trends appear to offer the greatest potential? Any thoughts on what the defining stories of the next 5 years in payments will be?

We expect to see new players entering the digital ecosystem, who are focused on increasing payments revenue and customer engagement. In the past, the key players and innovators were built up with venture capital money by small technology startups. We are seeing a shift in this trend, towards some of the most highly valued companies in the world entering the digital ecosystem.

Moreover, we are witnessing a transformation in credit. The use of credit is shifting towards digitization, as a result, we’ll see more point-of-sale financing and purchasing in consumer spending habits.

The regulatory landscape is also ever-changing. Open Banking is going to reshape payments by giving third parties access to initiating transactions in the payment system, this move will fundamentally change the competitive payments landscape. From a regulatory perspective, this is a mildly overlooked phenomenon. There are at least nine countries in Latin America that have mandated electronic invoicing through either the central bank or through a legislative process, allowing electronic invoicing for commercial transactions. As a result, the entire commercial purchase-to-pay value chain will become electronic.

About Philip Bruno

Philip co-leads McKinseys Global Payments Practice. He works extensively with financial services, nonfinancial, and technology firms on strategy and operations issues with a focus on payments, such as enterprise payments strategy, credit cards, emerging payments technology, payments infrastructure, and policy.

 About McKinsey & Company

McKinsey & Company is a global management consulting firm with over 100 locations across more than 75 countries. With more than 20 different industry practices and eight major functional practices, McKinsey is a trusted advisor to the leaders of many of the worlds most successful businesses and institutions.

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Keywords: Philip Bruno, McKinsey & Company, interview, digital commerce, payments , Global Payments, commerce, innovation, digital, banks, non-banks, transactions , cross-border payments, transfers, remittances, Open Banking, electronic invoicing, cards, APMs
Countries: World