The interview explored the “Europe of payments,” the potential for banks to participate, and Gilles’ perspective on change in the payments landscape at large. An edited transcript of the conversation follows.
McKinsey on Payments: How do you see the short-term impact of the COVID-19 crisis on payments?
Gilles Grapinet: As far as payments are concerned, 2020 got off to a flying start; it was looking set to be a record year when the crisis hit. As long as the COVID-19 outbreak was limited to China, its effect on our business remained minimal, despite seeing a 65 percent fall in Chinese travelers in our markets in February. By contrast, the closure of non-essential retail in most European countries resulted in a 30 percent drop in transaction volumes, despite a very significant increase in activity in the grocery retail sector and a rise in online purchases. The rise in online, however, was not as high as it could have been, as takeoff was initially hampered by logistical constraints and the very sharp decrease of airline, hospitality, events, and transportation businesses, which are usually a strong component of online-payment transaction volumes.
All in all, even though up to 80 percent of stores were closed, the payments industry has displayed undeniable solidity, particularly for the more diversified players like us, with powerful cushioning mechanisms that have shored up its revenues. This, I think, is an asset that investors have begun to rediscover.
Being an acquirer as well as a processor, Worldline covers the entire value chain. Across all our businesses, the payment industry has shown remarkable resilience, and activity remained strong for most of our teams.
In addition to this solidity, it is clear that we are active in a truly digital real-time industry. We observe and can quantify changes in consumption as they happen. The processing of card-authorization requests, for example, tells us that online platforms have registered a 30 percent increase and enables us, also, to measure new habits like the rise in click and collect.
And as soon as an economic zone reopens, we see the impact on our business immediately, since we have no supply chain and no physical distribution bottlenecks. In Austria, for example, on the day the lockdown measures were eased, we recorded instantaneously a 50 percent increase in volumes on our platforms. Therefore, we are not planning any major structural measures in response to the crisis; we focus our short-term efforts on demanding but temporary cost-adaptation measures, as we expect business to resume progressively its fundamental growth trajectory after the next quarters.
McKinsey on Payments: Are you already starting to see medium- and long-term trends for the sector?
Gilles Grapinet: As soon as the crisis broke out, we naturally took all the necessary steps to manage the immediate impacts around three key priorities: employees’ health protection, business continuity, cost reductions.
But we also lost no time in setting up a team to prepare for the next “new” normal. There, we expect to see some major changes, in response to which we are already starting to adapt our sales strategies, our product ranges, and the capabilities of our teams.
The first change is an acceleration of the cash-to-plastic migration—the switch to cashless transactions. Despite cashless payments already growing four to five times faster than GDP in Europe before the crisis, 75 to 80 percent of purchases were still not digital, and there were huge pools of cash usage remaining in Europe, with cash being the default means of payment in several countries, such as Germany, Austria, Italy and Switzerland amongst others. We know that changing payment habits has historically been a very slow and complex process. In this regard, the crisis has been a phenomenal accelerator. The idea has suddenly taken root among consumers and retailers that handling cash could be a factor of risk, so much so that some outlets have sometimes banned cash outright. Cash withdrawals at ATMs have collapsed, while the massive raise of the ceiling for contactless payment up to €50 in 17 countries enables it to cover 85 percent of everyday consumer purchases. The level suddenly reached in cashless usages is, of course, poised to decrease somewhat post lockdown, but the current situation will mark a turning point and bring about a new normal in payments.
The second notable phenomenon is the accelerated digitization of commerce and the future growth in the merchant payments market that it entails. One of the lessons of the crisis is that this is certainly the real birth date of the internet mass-market consumer. But circa 80 percent of small European businesses in retail did not have any online-shopping capabilities; some did not even have a basic informative website. Many were just out of business during the lock-downs. They now need to catch up in terms of technology, prepare for a possible resurgence of the virus, and gear up to process orders end to end, using at least a “buy online, pick up in store” model. Our priority will therefore be to help them equip themselves accordingly and help close the digital divide between large companies and SMEs, especially as the investments required are modest. In order to meet this demand, we have created an ultrasimple offer: a structured digital solution for click, pay, and collect, which can be set up by the merchants literally in less than one business day.
Finally, the changes will also deeply affect the way companies operate. We will certainly have numerous companies starting to rethink their current model, which is based by default on everyone being present in the office and characterized by a unity of time and place. At the same time, we all know that a company cannot only be a virtual, remotely working organization. As a human organization, we need also to nurture a company culture, a team spirit, our own DNA somehow which results from our formal and informal interactions and ways of working. A new balance can and will certainly be found between remote and office working, and we have already initiated a very serious analysis on this topic, taking into consideration the need to maintain our productivity ratios.
McKinsey on Payments: What prospects do you see for the payments industry in Europe?
Gilles Grapinet: I am convinced that our payment industry is on the right track and has a bright future. Our fundamental mission is to support the long-term transition initiated decades ago towards economies with much less cash-based payments and much more electronic payments.
We may not have the driving force of Silicon Valley or the volumes of China, but we can rely in Europe on one of the world’s most innovative regulatory systems and a very competitive market, which helped us cross many thresholds. Through the creation of the euro, our single currency, as a founding act, then the SEPA [Single Euro Payments Area] directive, followed by the Payment Services Directives 1 and 2, national payment platforms were gradually encouraged to provide the necessary support for a more efficient and frictionless circulation of the currency. We have emerged from all these adaptation efforts with a highly competitive regulatory environment, which has driven the payment product to a very low point in terms of price—the interchange rate, for example, has been cut to 0.2 to 0.3 percent—in comparison to the other monetary regions, which helps further market adoption and, at the same time, implies that the providers must be extremely efficient.
The “Europe of payments” is still under construction; the full impact of the transposition into national laws of the Open Banking and PSD2 directives still lies in front of us. But I would say that our industry players are fit for growth, though they need to scale up further in order to draw down the full value of these regulations. All taken into consideration, it explains why the European processors and acquirers must be particularly efficient to meet these demanding market conditions. It also explains why there has been such a huge industrial consolidation taking place in Europe over the last ten years or so, and it obviously must go on.
As a matter of fact, despite this first wave of consolidation, my personal view is that the European payment industry is still too fragmented: the top three players account for less than 50 percent of processing in their own zone, compared with 80 percent for the top three US players. Our industry must develop the capacity to play in the global league, and I hope that the growing awareness of Europe’s level of fragmentation and dependency will act as a spur and will foster the needed consolidation of processing and acquiring platforms.
McKinsey on Payments: It is striking to observe that the major retail payment brands launched in the relatively recent past—for example, PayPal, Alipay, Google Pay, Apple Pay—are all non-European. What do you think about this situation?
Gilles Grapinet: It is somehow a paradox, because as previously mentioned, Europe has been very, very innovative from a regulatory standpoint. And many mobile-payment brands have also been launched locally by the banking communities—Paylib in France, Paydirekt in Germany, TWINT in Switzerland, Payconiq in Benelux, MobilePay in Denmark, and Vipps in Norway, just to name a few. But for payment brands, the game is no longer only local. And unfortunately, Europe hasn’t played its own scale at the payment brand level.
I observe, by the way, that the debate on sovereignty and dependency is now also touching on this topic. The European Central Bank is very vocal about this situation, and more and more market participants are challenging the fact that, for example, Europe is the only superpower using third parties’ brands for its own cross-border domestic retail payments within the SEPA countries.
The New initiative EPI, which has been launched in Europe by 16 banks with the support of the European Central Bank to explore the potential creation of a new pan-European retail payment brand is interesting and deserves a lot of attention. As long as it would be well designed from a business-model standpoint, allowing a win-win for all market participants and relying on open and inclusive governance, we would be ready to support any quality initiative that would bring the industrialization potential and the scalability of the European platforms to the next level. If it no longer had to juggle with more than 20 local payment schemes operated on too many subscale platforms, Europe would gain greatly in competitiveness for all market participants and, as I understand it, it would certainly meet the objective of the public stakeholders around stronger sovereignty as a political organization.
McKinsey on Payments: How do you see the role of banks in this moving landscape?
Gilles Grapinet: For banks, payment products are valuable assets, since they remain a privileged entry point to create a relationship with the retail world. So I cannot imagine a world in which retail or corporate banks would not distribute payment products and services. But though I believe it is crucial for them to keep complete control on the distribution side, where their brand and capabilities are decisive, I also think they should consider outsourcing much more of the technical production and the back-office tasks of these payment services, at least the ones that are plain vanilla and which are not bringing them distinctiveness—and which carry significant costs, both in capex and opex, which they can’t mutualize as we do. Within the past two years, we have settled some major outsourcing partnerships of that kind with players such as Commerzbank and Unicredit in Germany and Austria, as part of the major strategic transformation and improvement programs implemented by these large institutions. Beyond immediate cost optimizations, these outsourcing partnerships allow leading banks to reallocate resources and investments today mobilized in operational payment IT platforms on other strategic domains.
In their make-or-buy trade-off, there are also now numerous examples in the past years where large banks or banking communities have considered their payment factory as a non-core, shareable asset, which can be contributed into a larger specialized company like ours for cash or shares. By doing so, based on well-known high-value creative precedents, these banks have at the same time revealed significant capital gains, reinforced their balance sheet and CET1 ratios and, from an operational and business standpoint, fully benefited from our increased scale and reach, and from our technology and skill sets. As SEPA and the euro create a level playing field in more than 20 countries, this reflection is being conducted by more and more players. And this type of shared operations is easier in payments than in other sectors, given payment production systems have tended to standardize massively in order to secure international interoperability at scale.
By so doing, banks would emulate open-architecture models, and can reallocate capital and resources to reinforce their real sources of distinctiveness—customer interface, customer acquisition and knowledge, banking expertise and distribution—and pool remaining non-differentiating activities with specialized third parties. The consolidation which is happening in the securities services industry or in Assets Management is a very strong and relevant example of such strategies in other financial services domain.
The transformation of the merchant acquiring market is a great example of the previous observations. Today, for example, tier-one international retailers increasingly globalize their sourcing of payment services, both in-store and on the internet, and therefore launch international tenders for payment at the continental level rather than per country. Only a few European banks can provide an answer to such complex tenders, which embed omni-commerce solutions, digital expertise, and cross-country multilingual operations. As a matter of fact, most European retail banks have an exclusive domestic focus and can’t even answer such requests. This is where partnership between banks and acquiring specialists can increase their capability to serve their local clients across geographies beyond their home market. Through commercial acquiring alliances or JVs, banks can move away from the complexity of production and rely on a partner to help them keep their existing domestic relationships, bring their customers a wider reach, better services and technologies, and complement their own go-to-market.
The current crisis can only accelerate such a trend and remove remaining barriers. Outsourcing could be crafted as an M&A operation, designed to create value and free up capex while reaching more comprehensive and higher-quality services. Against this evolving backdrop, I believe that European anchoring is an asset and will remain so. Banks on our continent will be in search of a multinational partner—but one that ensures them also decision-makers proximity and offers guarantees in terms of security and a respect of European data-protection laws.
McKinsey on Payments: What gives you the greatest pride as CEO?
Gilles Grapinet: It is not the time for being proud, as it is still only the start of our young history, as a listed company since 2014. In addition, our recently announced merger with Ingenico, which is planned to close in Q3 this year, is a new major milestone still to be delivered in the years to come. This said, I believe we can recognize that Worldline has developed over years a very strong, open, and inclusive company culture of permanent transformation, which is a very powerful asset for the successful execution of our well-known, long-term consolidation strategy.
Each time we do a large acquisition, we always pursue three parallel objectives of equal importance: cost synergies, organic-growth acceleration, and last but certainly not least: business transformation. Being bigger or leaner is never enough for us. We want each merger to be an opportunity to become genuinely better.
It means that our integration process is as much about technically integrating the target as about challenging our current ways of doing things. Each time, we re-challenge ourselves: How can we redesign a new target operating model where we take the best from both organizations? Are their go-to-market or sales methodologies more efficient than ours ? Is their product management better than ours, et cetera.
And beyond organization, tools, and processes, it is the same open and inclusive approach for the staffing of managerial positions. Every manager, whether she or he comes from Worldline or from the acquired company, has an equal opportunity to be a candidate for the newly defined roles in the combined entity through a fair and competitive “best fit for the job” process. Each time, we want to somehow reinvent ourselves and become better.
I believe this is also illustrative of the broader company culture, where our employees truly feel like—and even designate themselves as—“Worldliners,” united around a motivational and integrative project—a project to create a new global leader that speaks to everyone and encourages them to invent a common future.
Having a strong, unifying, and powerful sense of purpose is a real strength for our organization!
Gilles Grapinet is Chairman and CEO of Worldline.