The McKinsey 2022 Global Payments Report presents a detailed analysis of the 2021 results and the insights they reveal, including regional and country-level nuances. It offers perspectives on areas where payments leaders’ actions will help determine market share shifts and the role of payments in the broader financial ecosystem.
First of all, the report provides an analysis of the 2021 results and the insights they reveal. It also analyses the current drivers of change and their impact on the industry.
Based on our analysis, the payments industry revenues rebounded strongly in 2021, growing at an 11% rate and reaching a new high of USD 2.1 trillion globally. Growth was strong across all regions, reshaping the payments landscape.
Europe and Asia saw a swifter rebound than the Americans mostly due to where revenues come from – Europe and Asia are more dependent on deposit balances, whereas in the Americas credit cards are the largest source of the region’s payments revenue.
Something that has been increasingly visible over the last half a decade is China’s growing importance in the global economy and global payment revenues. The biggest driver of growth renewal in the payments space has been China. The robust performance of Asia–Pacific, the largest regional revenue pool, accounted for 57% of global revenue growth, and China accounted for 88% of Asia–Pacific’s growth, largely centred on account-to-account (A2A) activity.
As they often do, the drivers of growth are shifting: the first one is the interest rate and inflation context. Inflation and interest rates are both reaching levels not seen for decades in many countries, altering payments dynamics.
Obviously, for the payment space, on the revenue side, this is a positive. Higher rates typically correlate with larger net interest margins on transaction account balances. Inflation creates an organic uplift for the transactional components of payments revenue priced as a percentage of the value, such as credit card interchange.
We expect the initial stage to be positive for banks. Factors like higher inflation and interest rates will protect margins from higher operating costs while creating the right balance in revenue sources.
However, these effects tend to materialize gradually, partly because of the rolling averages and maturity matching applied to calculate revenues.
Additionally, the decrease in many payments companies’ valuations could provide a catalyst for consolidation by incumbent payments companies and tech company entrants, given the lower multiples and reduced feasibility of IPOs as an exit strategy for private firms. Attackers might, in turn, shift their focus from pure growth to a profitability model. These companies will likely revisit monetisation opportunities and form partnerships with incumbent payments companies and companies in other sectors.
Another key theme is related to payments increasingly serving an integrated, value-added commerce role rather than merely executing a financial or money movement transaction. The most common current embodiment of this trend is commerce facilitation, extending beyond checkout and payment to enhance the commerce journey. The most promising for the future is embedded finance and embedded payments products into non-finance ecosystems.
Geopolitical events have also had an impact on trade and treasury international payments, strengthening regional bonds and creating shifts in segments and geo-corridors. Based on our findings, the trend toward reshoring and nearshoring that emerged in 2020 continues to develop. The best approaches are often those which see relocation and reshoring as part of a project to transform and modernize the company, update processes, technology, people, and culture for the next phase of the digital age and stay in lockstep with ever-evolving demands, investors, regulators, and customers.
We also see that, after a long period of mostly incremental upgrades to networks, and to bank and business payment systems, companies are now making more structural as well as infrastructure improvements. For instance, banks are actively modernising their core systems to real-time, third-generation cores and updating their payments infrastructures, largely in response to the continued rise of instant payments, Open Banking requirements, and cloud technology.
Lastly, the overall momentum for social responsibility in business – environmental, social, and governance (ESG) - is also changing the context for payments. We believe that over the next five years, ESG concerns will be at the core of strategies for payments providers, banks, and other firms in financial services and that these companies need to be clear about their efforts to meet consumer and business expectations.
On governance, payments companies play a key role, given their obligation to contribute to the stability, security, compliance, and resilience of economic systems.
The increase in the interest rate impacts nearly every part of the economy, including credit cards. Credit card debt itself can become more expensive due to inflation.
Inflation indirectly affects the interest charged on credit cards and loans. Policymakers generally respond to high inflation by raising interest rates. Now, with the raising interest rates to contain inflation, consumers and businesses are feeling the pinch of higher borrowing costs. It's more expensive than ever now to carry debt on a new credit card.
Just as the primary drivers of payments revenue differ across the four major geographic regions, the impact of inflation and interest rates on revenue will vary geographically as well. In most regions, interest rate increases are expected, which will benefit markets more dependent on deposit balances, such as Europe and Asia. However, based on our observations, China is reducing its interest rates as we speak.
On the payments front, the picture is unexpectedly positive, despite challenges.
Yes, the global economy is experiencing a sharp downturn and there will be new challenges ahead, particularly on the cost side.
But overall, this is a positive story; we forecast a growth which is higher than it was in the past and the payments industry is still a very dynamic space with more competition than ever before. Particularly, we see an element where competition, which had shifted away from the incumbents, is balancing back again (mostly due to banks getting some of the benefits of the tailwinds that we have today).
We're already starting to see positive change in the payments ecosystem. The industry is catching up with the advances we've already seen, identifying and addressing new opportunity areas being created by the changing landscape, and supporting sustainable innovation in the years to come.
Olivier Denecker is a Partner with McKinsey & Company and is the director of knowledge for payments, advising global clients on complex issues across the payments value chain, from transaction banks and central banks to digital attackers, payments processors, and merchants. Olivier is deeply involved in McKinsey’s payment and transaction-banking knowledge development, leading efforts on the profitability of markets, digital solutions, and regulatory trends. He also serves on the editorial board of the firm’s McKinsey on Payments publication, to which he is a frequent contributor.
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