Two industry reports about the payments industry came out last week, taking stock of the state of play of the industry and also looking at the opportunities in the space for banks. Both take a deep dive into the changing cross-border payments space.
First up is the 2023 McKinsey Global Payments Report. According to McKinsey research, payments revenues grew at 11% in 2022 — a double-digit rate for the second consecutive year. Revenues are estimated at more than $2.2tn, which is an all-time high.
Revenue growth was broadly distributed geographically, with three of the four regions posting their strongest increases in a decade. North America, Latin America, and Europe, the Middle East and Africa (EMEA) all grew at double-digit rates.
However, the exception to this trend is Asia-Pacific. Despite being the primary growth engine in recent years, regional payment revenues grew by just 4% in 2022 as a result of a 3% drop in revenues in China. If China is excluded from the analysis, the Asia-Pacific region grew at 25%, which is faster than in 2022.
Where the revenue is coming from has changed. For the first time in several years, interest-based revenue contributed nearly half of revenue growth. “In many markets, about half of 2022’s revenue growth came from rising interest rates, interrupting a long-standing trend in which fees were the main source of growth,” according to the report. “The shifting interest rate environment had the greatest impact on the EMEA region, where net interest margins jumped markedly, reversing a trend of the last decade.”
The report highlights the decline in cash, citing that cash usage dropped by nearly four percentage points globally in 2022. Interestingly, over the past five years, the growth rate for electronic transactions has been nearly triple the overall growth in payments revenues.
Cross-border payment dynamics were particularly robust, according to McKinsey. Flows reached about $150tn in 2022, a 13% increase in a single year. This money movement generated an even greater increase in cross-border revenues, which rose 17% to an estimated $240bn.
While business-to-business payments remain the primary driver of cross-border revenue (69% of the total), the consumer categories carry higher margins and are projected to grow more rapidly over the next five years, according to the report.
The report concludes that the payments industry’s growth [is] consistent with optimism about the future.
In terms of future revenue growth, McKinsey’s analysis suggests that it will likely be stimulated by instant payments innovations and the rise in digital wallets in certain geographies. “The increase in electronic payments transaction volumes has consistently outpaced payments revenue growth (17% versus 6%) over the past five years. This is indicative of the continuing evolution in payments preferences, a general migration toward lower-fee instruments and the gradually declining margins that accompany scale,” says the report.
Overall, the report concludes that the payments industry’s 2022 revenue and valuation growth are consistent with optimism about the future, with likely revenue growth of 6% to 8% over the next five years.
In addition to the McKinsey report, Citi released its latest Future of Cross-border Payments report, which asks the provocative question: who will be moving $250tn in the next five years? The report highlights the changing competitive landscape in the space.
According to the report, “Cross-border payments is a large and growing business with expected 2022–27 growth rates in the high single digits for innovative players who invest in this business.”
However, it notes that market share shifts will hurt some incumbents. According to a proprietary survey conducted by Citi among more than 100 financial institutions, almost 90% of financial institution clients believe at least 5% of market share will be lost, predominantly to fintechs, over the next five to 10 years, with 40% noting that at least 5% share of wallet has already been lost.
Despite significant challenges, such as legacy technology and a tough regulatory environment, Citi’s research revealed that financial institutions are focused on innovation and exploring this across traditional fiat currency and digital asset spaces.
According to the report, the changing cross-border payments space will favour those elevating and concentrating on the client experience. While over 50% of banks see the need to revamp their front ends to improve client experience, over 60% of respondents point to the need to upgrade their core infrastructure.
Interestingly, 83% of bank respondents recognise application programming interfaces (APIs) as the key technology to improve client experience. Many incumbents, however, have to upgrade their legacy systems in order to take full advantage of APIs.
Joy Macknight is editor of The Banker. Follow her on X (formerly known as Twitter) @joymacknight
Register to receive the Editor’s blog and in-depth coverage from the banking industry through the weekly e-newsletter.
