On the cusp of the next payments era: Future opportunities for banks

| Report

The payments industry’s 2022 performance shows ongoing change with opportunities for growth and margin improvement across geographies and products. A close look at revenues uncovers structural changes, including new developments in instant payments and digital wallets.

This 2023 edition of McKinsey’s Global Payments Report shares key findings from our proprietary market intelligence recorded in the Global Payments Map, which spans more than 25 payments products in 47 countries that together account for 90 percent of global GDP. Among this year’s findings are the following:

  • Global payments revenue grew by double digits for the second year in a row.
  • Sustained growth in India, fueled by cash displacement, moved it into the top five countries for payments revenues.
  • For the first time in several years, interest-based revenue contributed nearly half of revenue growth.
  • Cash usage declined by nearly four percentage points globally in 2022. Over the past five years, the growth rate for electronic transactions has been nearly triple the overall growth in payments revenue.

Besides noting the industry’s performance in 2022, we take a longer view and see the progress the industry has made since businesses first began creating systems to process their payments. From its early days to the present, the payments sector has already been through three distinct eras. Evidence suggests the industry may be on the verge of a fourth era, which we interpret as an era of “decoupling.” This new era presents concrete opportunities for banks and other payments players.

Revenue results highlight resilience and future direction

Globally, payments revenues proved remarkably resilient, overcoming a variety of regional headwinds to grow at rates well above the established long-term trend. Payments revenues grew at 11 percent in 2022—a double-digit rate for the second consecutive year—reaching more than $2.2 trillion, an all-time high (Exhibit 1).

Global payments revenues grew by 11 percent in 2022.

Revenues by geography: Broad-based gains

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.

The exception to this trend is Asia–Pacific. In recent years, this region, which accounts for 47 percent of global payments revenues, has served as the primary growth vector. But in 2022, regional revenues rose just 4 percent, as a result of a 3 percent decline in payment revenues in China. Excluding China, however, the Asia–Pacific region grew at 25 percent—faster than in 2022.

The economies with the largest payments revenue pools delivered growth at or above the mean, contributing to 2022’s strong result. This list, which includes Brazil, India, Japan, and the United States, posted solid results in both interest and fee-driven revenues.

A key insight into China’s results is a 5 percent decline in transactional fee revenue. It fell to $255 billion as a result of smaller ticket sizes on card transactions and fee concessions implemented by payments providers to spur small and medium-size enterprise (SME) activity and counteract the COVID-19 macroeconomic shock.

By category, interest outpaced fees, and commercial maintained a lead over retail

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. 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. EMEA’s transaction-based revenue continued to grow at a steady pace (5 percent in 2022), while net interest income’s (NII) share of total revenues rose from 33 percent to 45 percent in a single year, bringing it closer in line with other regions.

Another way to understand payments revenues is by customer segment (commercial and consumers) and the products that the industry delivers to each (Exhibit 2). The mix has been subtly but persistently tilting toward commercial across all regions for some time. Overall, commercial now accounts for 53 percent of revenues, and consumer 47 percent. This proportion varies from region to region. Commercial revenues have long predominated in Asia–Pacific and EMEA. Consumers still generate the majority in North America (63 percent) and Latin America (54 percent), where markets remain mostly card driven.

Liquidity revenues in 2022 accounted for $750 billion globally, largely driven by Asia-Pacific.

Cross-border payment dynamics were particularly robust. Flows reached about $150 trillion in 2022, a 13 percent increase in a single year. This money movement generated an even greater increase in cross-border revenues, which rose 17 percent to $240 billion. Revenues from cross-border consumer payments—both C2B and C2C—increased at double-digit rates, accelerating from high single digits in 2021. Conversely, both forms of commercial payments (B2B and B2C) grew by 10 percent, somewhat slower than 2021’s postpandemic surge.

The US–Latin America corridor remains the largest for C2C remittances, representing 11 percent of the total value of such flows. Central America has been an increasingly relevant destination for remittances and humanitarian aid from the United States.

While B2B remains the primary driver of cross-border revenue (69 percent of the total), the consumer categories carry higher margins and are projected to grow more rapidly over the next five years. Much of the growth is expected to be in C2B, related to increased travel and e-commerce spending.

Future revenue growth: Instant payments and digital wallets on the rise

Our analysis suggests that future revenue growth 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 percent versus 6 percent) 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.

These dynamics are also evident in cash displacement. Cash usage declined by nearly four percentage points globally in 2022. Worldwide, the decline in cash usage during the pandemic shows no evidence of being reversed, led downward by the cash-reliant economies of India and Brazil, where the share of cash transactions fell by seven to ten percentage points. Brazil’s cash declines are concurrent with the rapid uptake of the country’s PIX instant-payments network.

A similar transformation is taking place on a smaller scale in Nigeria, where instant-payments capabilities are being built into point-of-sale devices to facilitate merchant enablement. Nigeria’s share of cash transactions fell from 95 percent in 2019 to 80 percent in 2022. Over the same period, instant payments’ share quadrupled to 8 percent.

Instant payments are playing a key role in this transition out of cash. In Brazil, almost half of the transactional revenue growth through 2027 is expected to come from instant payments. Yet in other places, revenue growth from instant payments could be meager. Instant payments in India are expected to contribute less than 10 percent of future revenue growth because no fees are currently charged for the Unified Payments Interface (UPI). Conversely, in several European countries such as Germany, instant payments are perceived as a premium option, resulting in relatively strong potential for revenue growth.

By 2027, cash-heavy developing economies are likely to make further significant shifts toward instant payments, bringing these transactions’ share to roughly half of overall payment transactions—nearly two-and-a-half to three times greater than in 2022. By contrast, our analysis indicates that near-term impact in mature markets such as the US and UK will be nominal. Instant payments remain in a nascent stage in the US, where 2022’s cash decline was more muted following 2021’s reduction associated with pandemic restrictions. July 2023’s launch of the Federal Reserve’s FedNow real-time payment rails may prove to be an inflection point, but the effect will be gradual.

The story varies from country to country, but the developments in Europe are worth a second glance. Today, instant payments constitute 12 percent of the credit transfer volume in the Single Euro Payments Area (SEPA) (Exhibit 3). Absent regulatory intervention, this share could double by 2027, and if regulators proceed with anticipated actions to encourage adoption, this share could rise to 45 percent of SEPA’s 23 billion annual transactions and a far higher share of account-to-account (A2A) payments, including transfers done through Automated Clearing House (ACH), real-time gross settlement (RTGS), and instant payments.

If new favourable regulations are issued, as anticipated, instant payments volumes could double the current forecast for 2027.

Digital wallets, the source and destination of much of the flow in instant payments, are similarly booming. Several business models are taking shape in different parts of the world. In several African countries (Kenya, Ghana, and Tanzania, for instance), mobile-wallet infrastructure is ubiquitous and interoperable. Nigeria’s Central Bank spurred uptake by pushing a “cashless economy” during a note-change process in early 2023. Demand for digital payment solutions has spiked among Nigerian merchants of all sizes. One acquirer reports that 70 percent of the new merchant customers haven’t previously accepted digital payments—a clear indicator of expanding network effects.

Positioned for growth

Overall, the payments industry’s 2022 revenue and valuation growth are consistent with optimism about the future. Our analysis indicates that the five-year outlook is strong, with likely revenue growth of 6 to 8 percent. The opportunities will likely be widespread: all four regions are projected to expand at an annual average of 6 percent or higher. Fee-based revenue growth is forecast to return to slightly exceed interest-based contributions, and global electronic transaction volumes should continue to grow (15 percent in this case) at rates exceeding revenue. Although these interest rate effects may moderate in the coming years, the market remains on pace to exceed $3 trillion in payments revenue by 2027.

Entering a new payments era

During the last few decades, as the payments industry has grown, it has rapidly embraced new technologies, in the process opening new avenues to serve customers. Along with these changes, the composition of revenue sources has been evolving. Cash usage is declining rapidly, having lost 20 percentage points in the share of global payments over the past five years. Net interest margin is driving a greater share of growth, and players are moving into less penetrated areas of the payments value chain. Together, these changes suggest that the industry is poised to be defined by a new business model.

How we got here

The industry has been through three distinct eras, dominated, in turn, by paper, plastic, and account-based transactions (Exhibit 4). Since the 1990s, payments has operated in the Account Era, with plastic no longer required to access funds. The emergence of online capabilities at the end of the last century fueled the start of this era, as internet and mobile technologies empowered users to direct funds from their accounts, leveraging existing infrastructure. But in the present decade, we see signs of a fourth era starting; we call it the Decoupled Era.

Changes in the payments ecosystem have ushered in four eras of payments business models.

To anticipate what this means for banks and other payments providers, it is possible to consider the dynamics of the past progression from paper to plastic to accounts. First, older payment mechanisms don’t disappear but rather decline in usage. Each successive era has also leaned harder into technology, fostering disruption and requiring established institutions to undertake extensive retooling. Payments have become more embedded into shopping journeys, making them increasingly important to users in pursuit of convenience. Finally, each era has seen more competitors enter the market, driving transaction volumes and lower costs in both consumer and commercial segments.

The Decoupled Era

The Decoupled Era will likely be characterized by payments becoming increasingly disconnected from accounts and other fixed repositories of value. Users will have an even greater voice as they seek convenience, affordability, and security. The Decoupled Era is shaping up to be further reliant on technology—with the winning technologies yet to be determined. Contenders include platform as a service (PaaS) models, enabling niche providers and promising seamless customer transitions across products and services, and generative AI, which will further personalize customer experiences, streamline payments processes, and protect against fraud.

While the expectation is for the emergence of some new players in the Decoupled Era, archetypes of existing players could morph as well. Fintechs, having pivoted their business models toward sustainability, will likely either move further into traditional financial services or aggressively pursue partnerships to fulfill customer needs. Banks in turn will likely seek more independence and control across the value chain, which may take the form of partnerships or M&A.

Competition for customer deposits and balances will likely intensify in the Decoupled Era in tandem with heightened pursuit of customer relationships. We believe returns will accrue to players that can seamlessly embed payments into customer lifestyles and behaviors.

The business models, solutions, and firms of the Account Era remain relevant, but the Decoupled Era generates new opportunities for actors willing to explore fresh growth vectors. Banks will no longer be able to rely solely on the account ownership paradigm. They will need to build new businesses to differentiate and keep customers within their service ecosystem.

Emerging opportunities

Given that payments has become a technology business, API-driven solutions and other next-generation technologies factor into many opportunities to scale business impact, both in building new digital businesses for top-line growth (often capitalizing on the trend toward embedded finance) and in driving operational efficiencies.

One of the biggest business-scaling opportunities is cross-border transactions, particularly those with ticket sizes less than $100,000 in consumer and SME segments. Although low-value payments represent 8 percent of cross-border payment flows, they account for roughly one-third of revenue because of extensive retail networks and higher margins.

Pressure to digitize extends throughout the enterprise. With an uncertain economic environment and companies keeping less excess cash in operating accounts, leaders need better visibility into real-time account positions and access to efficient financing. Banks have a unique opportunity to extend valuable automation and digitization services to the office of the CFO, bringing their underwriting expertise and balance sheet access to the table.

Several other opportunities await. Deposits represent one of a bank’s most critical resources and among the most important revenue streams for corporate transaction banks around the globe. Corporate deposits generate 40 to 45 percent ($500 billion to $550 billion) of transactional bank revenues globally. Additionally, retail deposits continue to be 43 percent of current account balances. Investors are closely monitoring banks’ resilience in pivoting their deposit strategies to address the new market realities, given recent withdrawals and increasing market volatility in response to rising interest rates, credit restrictions, and liquidity gaps.

Banks can double down on internal productivity in three ways: generative AI, technology modernization, and the ongoing battle to prevent financial crime. Banking has already made great strides with “traditional” AI in marketing and customer operations. McKinsey Global Institute estimates that generative AI could further increase productivity in banking by 2.8 to 4.7 percent, equivalent to $200 billion to $340 billion in annual revenues.

Modernization of banks’ technology stacks can reduce operating costs by 20 to 30 percent and halve time to market for new products. McKinsey’s Operating Model Index, compiled from research across 150 leading financial institutions, finds that those scoring higher on operating-model maturity tend to grow faster—by 20 percent on average—and to be more profitable (69 percent higher TSR) than the others. Incumbents’ technology gap with fintechs and native digital players continues to widen; banks must identify where paying down technical debt will deliver the most benefit, and they may want to consider partnerships as another opportunity.

The face of financial fraud has changed. Today’s financial criminals are sophisticated, leveraging low-cost tools that exploit recent technological advancements, but these new technologies, including generative AI, also offer new avenues for defending against fraud. Early examples indicate that using generative AI to automate or accelerate currently manual activities could boost productivity in fraud detection by 30 to 50 percent. Payments companies will likely need to upgrade their fraud operations from back-office functions to an actively managed competence center, but doing so should reduce losses and enhance customer experience.

The outlook for the payments sector remains strong, with five-year growth projected at or above the long-term average. The vectors of growth are evolving, however, and banks must optimize the profitability of such growth. This requires a detailed evaluation of their business, making clear and difficult investment decisions in building an efficient payments operating core that delivers a share of that growth to both the top and bottom lines.

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