The chessboard rearranged: Rethinking the next moves in global payments

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The global payments industry demonstrated its resilience again in 2021, more than recouping the revenue erosion experienced in 2020, which was the sector’s first decline since the 2008–09 financial crisis. Our five-year revenue outlook now exceeds prepandemic expectations, topping $3 trillion by 2026. The factors fueling this expected growth have shifted in unexpected ways.

Payments industry revenues rebounded strongly in 2021, growing at an 11 percent rate—more robust than we forecast last year and reaching a new high of $2.1 trillion globally. Growth was strong across all regions, with both Asia–Pacific (APAC) and Europe, the Middle East, and Africa (EMEA) registering double-digit gains. Fee-based revenue continues to increase at a faster rate than net interest income and comprises more than half of the total (although this trend may soon reverse, as we will discuss).

Looking forward, a confluence of events is reshaping the payments landscape. After more than a decade of low inflation and interest rates, many central banks—particularly in Europe and North America—have shifted their policies, leading to rapidly rising interest rates. Geopolitical factors, capital market resets, commerce expectations, technology advancements, and societal responsibilities are creating more pronounced sector and regional dynamics as well. This rapidly evolving landscape will create new opportunities for incumbents and disruptors alike to win customers, develop new solutions, and claim market share, reshaping the competitive chessboard.

A closer look at 2021

Payments revenues recovered rapidly from 2020’s nominal contraction: Global revenue growth exceeded expectations by not only recouping 2020’s pandemic-driven 5 percent decline but also registering a new high of $2.1 trillion (Exhibit 1). Including 2021’s 11 percent increase, revenue growth over the past two years has averaged 3 percent—below the long-term trend but well above the outcome feared by many.

Global payments revenues increased 11% globally in 2021.

Demonstrating the resilience of the payments industry, overall electronic payment transactions grew at a 19 percent rate in 2021—in line with prepandemic growth rates. Global e-commerce registered growth of roughly 17 percent, primarily driven by China, which now accounts for roughly half of global retail e-commerce sales.1 The most dramatic COVID-19 impact can be seen in cash usage, which plummeted by 15 percent in 2020. As physical stores reopened in 2021, the cash rebound some expected did not materialize. The slight 1 percent uptick in usage indicates that the vast majority of transactions that migrated to electronic channels in 2020 have remained electronic. Within the European Union, for instance, Greece and the Czech Republic had the sharpest reductions in cash usage from 2019 to 2021—15 percentage points and 12 percentage points, respectively.

Revenue growth was strong across all regions in 2021, surging to 13 percent in both Asia–Pacific and EMEA. The robust performance of Asia–Pacific, the largest regional revenue pool, accounted for 57 percent of global revenue growth, and China accounted for 88 percent of Asia–Pacific’s growth, largely centered on account-to-account (A2A) activity (Exhibit 2). EMEA’s increase reflected more broad-based growth in electronic transactions. Latin America and North America each grew at a still-robust 7 percent but were limited by credit card economic headwinds. Average US revolving card balances began to recover in the second half but ended 2021 with a decline relative to 2020, while net interest margins simultaneously contracted. US banks also struggled to deploy a surge in deposits driven by pandemic stimulus, leading to compressed net interest margins on transaction account balances. In Latin America, balances were flat in contrast to historically strong growth, and interest margins similarly tightened.

Asia–Pacific accounts for over half of global payments revenues.

A2A transaction revenues continued to increase their contribution in most geographies, in total accounting for roughly 29 percent of 2021’s rise in global revenue. The expansion of applications built on instant-payment use cases—such as bill payment, point of sale (POS), and e-commerce—fueled the volume increase. Growth varies by country, with Hong Kong, Colombia, and Peru registering increases of roughly 50 percent and a tier of countries including Nigeria growing in the 30–40 percent range. Many European countries continued to grow at rates well into double digits, even from well-established bases. In the US, growth rates for instant payments surpassed 60 percent, albeit off a relatively small base. At this stage of maturity, there remains room for a breakthrough that sparks an even higher US growth rate. In Asia, pricing was a bigger revenue factor than volume growth. In 2021, China rolled back much of the corporate rate concessions implemented during the pandemic; prices moved from approximately $0.79 per transaction in 2019 to about $0.62 in 2020, returning to about $0.77 in 2021. Overall, we project global growth of instant payments to continue at double-digit rates, even faster than the healthy 10 percent growth rates for cards over the past two years.

Debit and credit card transactions continued to grow at rates comparable to those before the pandemic (20 percent and 18 percent, respectively, between 2020 and 2021), as A2A growth mainly cannibalized cash and, to a lesser extent, checks, rather than card transactions. Credit cards’ volume growth overturned expectations that 2020’s slowdown in card usage and ongoing pressure on interchange revenue was a sign of a longer-term trend. However, debit cards have extended their lead as the most used card product, with 94 transactions per capita globally, versus 49 for credit. The share of debit card among overall electronic transactions is highest in Russia (84 percent), followed by Norway, Ireland, and Romania (each roughly two-thirds).

There remains significant country-level dispersion in revenue per transaction, driven by a variety of factors, including transaction pricing dynamics and payment instrument mix (Exhibit 3). Our analysis of payments revenue per capita shows that this metric tends to be lower in developing economies, implying ongoing revenue opportunity as these countries’ payment systems continue to mature. In addition, global revenue per non-cash transaction has gradually declined—from $1.88 in 2016 to $1.30 in 2021—as the pool of electronic transactions has grown faster than absolute revenue.

Payments revenues per capita and per transaction vary markedly by country.

Global trade flows recovered in 2021, growing by 27 percent and exceeding 2019’s prepandemic levels.2 Increasing commodity prices were the biggest factor, along with the release of pent-up demand. Emerging markets generated the greatest trade flow increases in 2021, led by Africa (43 percent), Latin America (38 percent), and Asia–Pacific (26 percent), with developed markets growing in the 20 percent range. Following this rebound, however, we expect trade flow growth to slow to 1–2 percent annually through 2026 due to muted global economic forecasts. The developing global macroeconomic context might further reduce this expectation. For instance, geopolitical headwinds will reduce Eastern European flows by a projected 4 percent in 2022.

Our five-year revenue outlook anticipates average annual growth of 9 percent over the period—well above the historical long-term trend of 6 to 7 percent. Much of the incremental gains are fueled by interest-related income, a by-product of inflationary pressures and a rate environment many regions have not experienced for decades (Exhibit 4). Although interest rates are notoriously difficult to forecast, we consider the payments sector to be well positioned to exceed the $3 trillion mark by 2026 or sooner. These macroeconomic factors are among several rearranging the chessboard and calling for a renewed strategic focus.

Revenue growth is dominated by credit cards in the Americas and by account-related revenues in Asia–Pacific and EMEA.

Looking ahead: Six forces reshaping the landscape

At a top-line level, our outlook for global payments through 2026 is remarkably favorable, with projected average annual revenue growth of 9 percent. These gains will be distributed quite differently than in the past, however. Which players will capture the future revenues will depend on actions they take to capitalize on the opportunities created by six forces reshaping the landscape.

1. Macroeconomic environment

In many regions of the world, inflation is at its highest level in decades, potentially calling for changes in the business models of payments providers and other financial services firms alike. In this context, a central bank response to inflation may serve to expand interest margins, generating more income from this side of the payments equation, primarily for deposit-holding parties such as banks. The combination of inflation and interest margins, in turn, will require changes in the cash management strategies of businesses and consumers. At the same time, factors like the global energy and commodities environment create economic-growth uncertainties and increase the likelihood of recession, differing by region. This, in turn, will have impact on the liquidity and investment strategies of many companies and households, altering payments economics on both the demand and supply sides.

2. Geopolitical environment

Geopolitical disruptions are altering the long-standing trend toward globalization, prompting moves to greater payments regionalization and localization. Instances of regional and domestic networks with local control over key infrastructure are proliferating, challenging the standardization of solutions across geographies. An increasing number of countries are looking to ensure local instances of payment services and key infrastructures, likely leading to increased complexity in local regulations and requirements.

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3. Capital markets reset

While “attacker” payments companies significantly outperformed both the broader market and “incumbent” payments players over the last few years in the capital markets, 2022 saw a significant reset in valuations. In the 12 months ending August 2022, these same attackers delivered a negative 70 percent return to shareholders, compared to negative 26 percent for incumbents. This valuation reset creates opportunities across the landscape as incumbent companies consider acquisitions and attackers focus on sustainable growth and a path to profitability.

4. Commerce expectations

A main driver of the past high valuations of fintechs and attackers was the expectation of revenue growth through expanding customer relationships. This opportunity persists as payments increasingly serve an integrated, value-added commerce role rather than merely executing a stand-alone 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, or integrating finance products into nonfinance ecosystems. Players that can monetize services and data are poised to capture a larger share of revenue pools.

5. Technology modernization

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 de novo infrastructure improvements. For instance, banks are aggressively modernizing 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. We forecast that several regions will enter the next S-curve on instant-payment transaction growth. In addition, with the continued growth of embedded finance, digital natives’ expectations for how those services are delivered will continue to exert pressure on providers to modernize their payments infrastructure.

6. Social responsibility

The overall momentum for social responsibility in business—often characterized under the environmental, social, and governance (ESG) banner—also is changing the context for payments. Governance covers the need for banks to act as gatekeepers against money laundering, fraud, and other unauthorized access to payment systems, and it is a major driver of investment and operational change across the industry. Inclusion and customer protection also are increasingly central to the missions of payments players.

In the following exploration of these six forces, we will assess their projected impact on payments revenue and offer ideas of how players across the ecosystem can adjust to and thrive in the new landscape.

The macroeconomic environment: Higher interest rates and inflation

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, China, which accounts for roughly three-quarters of Asia–Pacific payments revenues, is reducing its interest rates as of this writing.

Higher rates typically correlate with larger net interest margins on transaction account balances, which, in turn, generate liquidity-related revenue. These effects tend to materialize gradually, partly because of the rolling averages and maturity matching applied to calculate revenues. At the same time, offsetting effects may come from consumers and businesses shifting balances away from transaction accounts to other deposit vehicles in pursuit of higher rates—and from banks responding by paying higher rates to retain deposits. One example is the expected near-term elimination of negative interest rates on client deposits, which creates an immediate negative impact on bank revenues.

Inflation, in contrast, will create an organic uplift for the transactional components of payments revenue priced as a percentage of value, such as credit card interchange. Fixed transaction-based fee components might remain unchanged, potentially creating a drag on profits as related costs are rising under influence of the same inflation. Consequently, inflation could disproportionately hurt business models relying on per-transaction pricing (such as processing or most A2A services) while leaving volume-based revenue models (like credit card merchant acquiring) unscathed.

Many current payments leaders have not yet navigated a high-interest-rate, high-inflation environment, and some emerging payment products and models—for example, buy now, pay later (BNPL)—are similarly untested under such conditions. Assuming the credit challenges of a potential downturn can be managed, traditional players like banks and card issuers could be well positioned for this macro environment, given that liquidity primarily accrues to account-holding institutions. Higher interest rates can partially soften profitability pressure on banks and may provide headroom to invest in strategic initiatives, such as payments and digital. However, an economic downturn, the potential for which varies by region, would alter this equation.

Geopolitical environment: Payments regionalization and localization

Recent geopolitical events in 2022 have reinforced a growing trend of electronic payments infrastructure taking on heightened importance for national and regional governments. As discussed in prior Global Payments Reports, many countries have invested in modern instant-payment systems and are championing the use of these domestic schemes compared with nonnative alternatives. The focus is shifting to building applications and value-added services (such as functions that issue requests for payment) that leverage these rails to boost uptake and usage after sometimes-slow adoption starts.

In addition to instant payments, local networks are being established to reduce dependency on international providers or to support local policy agendas. Deployment of POS and online applications of local payment solutions, using economic models and access rules that differ from those of international solutions, allow countries to boost inclusion and grow local e-commerce—for example, Pix in Brazil, UPI in India.

A by-product of the focus on regional and national payments infrastructures will be the increased complexity of regulations across markets. Fragmentation and the need to localize will likely create continued disconnections across compliance and security requirements, despite ongoing international dialogue to standardize. This creates opportunities for payments providers that can simplify cross-border payments for customers or create turnkey solutions for related services—say, know your customer (KYC) as a service, digital ID, and security.

Geopolitical events and sanctions have also had an impact on trade and treasury international payments, strengthening regional bonds and creating shifts in segments and geo-corridors. The trend toward reshoring and nearshoring that emerged in 2020 continues to develop. What was initially believed to be a temporary strain on global supply chains has proven to be a persistent issue, with disruption affecting several sectors, including automotive and electronics. Ongoing logistic disruptions, elevated shipping costs, and stress on global supply chains are prompting initiatives to diversify suppliers and simplify shipping requirements. The trade corridor mix may shift as a result, although such transitions develop over years rather than months. For example, a number of the world’s largest tech manufacturers have recently shifted a significant share of their production of hardware peripherals and small electronic devices to different countries.

In this environment, banks active in the arenas of trade finance and supply chain finance need to consider how to reposition their strategies. As companies reconsider their supply chains, what is the best way to capture this reshoring trend? Which products and what differentiation can help maintain or increase relevance in a complex trade finance environment?

Capital markets reset: Turning unicorns into workhorses

Although payments companies’ return to shareholders has markedly exceeded that of financial institutions over the past decade, the story over the most recent year has been quite different. Many payments companies have been greatly affected by changes in investor expectations and macroeconomic conditions, as evidenced by an average 38 percent decline in total shareholder returns (TSR) in the 12 months spanning August 2021 through August 2022—significantly greater than the decreases experienced in the banking sector (10 percent), the overall market (13 percent), and among technology companies (26 percent). Market environment changes have had a particularly strong impact on attacker payments companies, which generated negative 70 percent TSR over the same 12 months (versus 26 percent for incumbent payments companies) and experienced sharp reductions in EBITDA multiples3: from approximately 80 times in August 2021 to 29 times in August 2022 (Exhibit 5).4

Attacker payments companies have given back their shareholder gains of the prior two years.

One cause of the change in valuations is a stark moderation in growth expectations: After attackers grew revenues 68 percent per year from 2019 to 2021, consensus analyst growth estimates for 2021 to 2023 have receded to 19 percent annually. Meanwhile, analysts expect the revenue growth rates of incumbent payments companies to remain relatively unchanged at 10 percent, compared with 11 percent from 2019 to 2021. In essence, attacker firms relinquished the disproportionate shareholder returns realized since early 2020 and are now performing roughly on par with incumbent payments firms over a two-and-a-half-year horizon.

Within payments, some segments have shown greater resilience than others. In particular, “payments scheme” operators have felt the least impact from changes in investor expectations and appetite, with a TSR decrease of 9 percent over the past 12 months and a relatively limited reduction in multiples, from 27 times EBITDA in August 2021 to 21 times in August 2022. This could be due to the more balanced business models and strong market positioning enjoyed by traditional leaders in the sectors, which better insulates these companies from macroeconomic disruptions and changes in interest rates and inflation. In contrast, incumbent payments technology providers (for example, processors, merchant acquirers) fared worst of the subgroups, with a TSR decrease in 2022 of 44 percent and EBITDA multiples decreasing from 32 times in August 2021 to 15 times in August 2022, in response to radically revised growth expectations (26 percent for 2019–21, versus 11 percent for 2021–23), notwithstanding their traditionally high margins.

This 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 strategic approach, moving from “growth at all costs” to a fundamentals-focused and cost-conscious operating model with renewed focus on profitable customer and account growth, cash flow, and operating performance. These companies will likely revisit monetization opportunities—for example, partnerships with incumbent payments companies and companies in other sectors—while maximizing the efficiency of their existing operating models. When the going gets tough, adept unicorns can quickly pivot into workhorse roles.

Wavy chess board. Chessboard concept. Wave distortion effect. Vector illustration. - stock illustration

The 2022 McKinsey Global Payments Report

Commerce expectations: From payments to commerce facilitation

High valuations for payments attackers were based in part on the promise of converting the frequency of customer touchpoints and engagement into monetization across both consumer and commercial customer journeys. This would require tapping into payments-adjacent revenue pools such as marketing and personalization through payments data, commerce enablement optimizing the shopping journey beyond the payments experience, and software and services surrounding the payment. Such initiatives have been under way for several years.

The reset in valuations reflects, in part, a recognition that not all payments specialists will succeed in expanding their market reach beyond payments. Business models, such as neobanks employing debit and prepaid card products to acquire customers, will increasingly resemble traditional financial institutions if they cannot succeed in building customer ecosystems. Business models like small-business merchant services have proven more successful at creating platforms combining software and services that enable commerce for merchants. Our 2022 survey of US merchants shows the average spending on value-added services ranges from $11,306 for a small merchant to $112,067 for a large merchant, with the most common services for small merchants by spend including insurance, marketing, and customer relationship management (CRM).

Players in the landscape that can monetize services and data are poised to capture an outsize share of revenue pools. Nonbanks and technology players with a large captive audience are increasingly using embedded finance to enhance their role in the commerce experience, increase their engagement with end users, and gather additional customer data. Providers using embedded finance may continue to have the competitive edge, given the relationship with the customer and their larger ecosystem of services beyond financial services and payments. Extending into payments revenue pools may ultimately be easier than extending outside payments revenue pools. Meanwhile, opportunities are created for traditional financial services providers to provide the infrastructure enabling embedded finance, albeit without the customer relationship.

Technology modernization: From incremental to structural

Payments providers have always required regular investments in infrastructure and systems technology. However, the high relative cost of changing complex and entrenched systems that have proven resilient has led many participants to limit investing to a long period of incremental improvements.

This is changing. Payments infrastructures are now undergoing full redesigns, and banks are making fundamental adjustments to their core payment systems. According to McKinsey’s 2021 Cloud Survey, the share of IT spending by banks on legacy infrastructure is expected to decrease from roughly 50 percent in 2021 to about 10 percent in 2024, thanks to private cloud and true multi-cloud solutions. This step change in infrastructure modernization is a result of increasing pressure to support the transition to instant, open, integrated, and cloud-based solutions to meet continuously rising customer experience expectations across the commerce journey.

Instant-payments volumes are increasing 40 to 60 percent globally and showing signs of reaching an inflection point on the S-curve. Instant-payments usage continues to nearly double annually in India, Spain, and Thailand, among other countries, and it is increasing by roughly 50 percent per year in Australia and Singapore. Even in China and the United Kingdom, where the technology has already achieved broad adoption, growth continues at double-digit rates.

Continued open-data requirements from regulations (Europe) and market pressures (US) are forcing financial services providers to enable API-based access to payments data. Digital natives expect the benefits and efficiency of an API-based integration, so financial services providers that want to participate must create an orchestration layer on top of legacy systems. Retailers moving to the cloud are demanding payments networks and acquirers to support this shift with commensurate infrastructure upgrades of their own. Further, innovative infrastructure providers (for example, Cross River Bank and ClearBank) are delivering new capabilities through de novo payments infrastructures, raising the competitive bar even higher.

These forces are accelerating the potential decoupling of payments from the large legacy providers as payments increasingly shifts to outsourcing and software-as-a-service (SaaS) models. Providers that make the technology investments to offer payments as a service could benefit while legacy providers grapple with the changing economics of their frontline business.

Meanwhile central banks and national payments communities are likely to continue to consider modernizing their national payments infrastructures even beyond instant payments for a range of reasons, including financial inclusion, global trade and competitiveness, and currency considerations. The exploration of central bank digital currencies (CBDCs) will continue to progress, albeit at an evolutionary rather than revolutionary pace.

Social responsibility: Heightened expectations

As noted in our Global Banking Annual Review of 2021,5The great divergence: McKinsey Global Banking Annual Review 2021, December 2021. that year saw increasing pressure from governments, investors, regulators, and consumers to address climate risk and sustainability issues. The impact of ESG will extend to nonbank payments providers as well.

Environment will greatly influence the area of trade, where support to polluting commodities or industries comes under scrutiny. Relatively emission-heavy payments products, such as cash and checks, may face revision in the quest for carbon-neutral systems. At the same time, consumers are looking to their merchants and payments providers to understand the environmental impact of their purchases.

Social responsibilities also affect payments, particularly given the role of payments in financial inclusion and data privacy. Digital payments and wallets in emerging markets have played a key role in bringing financial services to the underserved in cash-based economies. In developed markets, scrutiny of the role of payments in emerging verticals, such as gaming and cannabis, will likely continue in parallel with increasing consumer demand.

On governance, payments companies play a key role, given their obligation to contribute to the stability, security, compliance, and resilience of economic systems. Investments required to support this gatekeeper role for the transactional system—through KYC and anti–money laundering, for instance—impose growing costs and challenges. Though historically more of a factor for international payments, the ESG role increasingly weighs on domestic providers of payment services as well.

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. We explore examples of this further in our chapter on sustainable global transaction banking.

The payments industry is poised for significant growth over the coming five years; we expect an average annual revenue growth rate of 9 percent, exceeding the already-healthy prepandemic long-term trajectory of 6 to 7 percent. This growth will partly be in response to the changing interest rate environment, and partly to increasing dollar volumes resulting from inflation. In some regions, however, there is a greater chance that payments providers will face the headwinds of an economic contraction. Changes in the composition of revenue growth, along with other new sector dynamics, should prompt players across all regions and categories to revisit strategies and adjust courses of action.

The rare confluence of dynamics presents an opportunity for competitors to reposition themselves on the payments chessboard for long-term advantage. For instance, players that can adapt their revenue and risk models and capabilities to macroeconomic factors like higher inflation and interest rates will emerge better positioned, protecting margins from higher operating costs while creating the right balance in revenue sources.

Incumbents may enjoy the balance sheet flexibility to make strategic acquisitions and significant technology modernization investments that position the company to capture future revenue pools. Conversely, attacker payments companies will need to adapt rapidly to new market realities. All players will need to reassess their business models and value propositions to capture opportunities emerging from payments regionalization, embedded finance, and the rising importance of sustainability.

The payments providers that adjust their operating models and platforms in a timely way to be both global and local will stand to benefit from the resulting scale and flexibility. They will also be well positioned to help customers navigate the growing complexity of the payments and commerce landscape, both cross-border and domestic. Those establishing early leadership in purpose, mission, and social impact will have the opportunity to win with consumers and mitigate reputational risk—and to monetize these value-added capabilities.

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