The next frontier in Asia payments

Five fundamental themes are reshaping Asia’s payments landscape, requiring a swift response—and in some cases, self-reinvention—from players across the value chain.

Asia has outpaced all other regions in terms of payments revenue growth over the past several years. 1 It is also the largest contributor to global payments revenue, generating over $900 billion in 2019, nearly half the global total identified in McKinsey’s Global Payments Map. The role of payments in Asia’s overall banking landscape has expanded as well, now representing 44 percent of the region’s aggregate banking revenues, compared with one-third as recently as 2007.

Revenue is only a fraction of the story, however. Payments remain the bedrock of the customer relationship for both consumers and businesses in Asia, representing financial services providers’ most natural opportunity for ongoing engagement, keeping brand top of mind, and giving customers a reason to keep a healthy level of funds on account.

Heading into 2020, numerous trends had set a path for continued payments growth across Asia. Chief among these was the rapidly expanding number of connected and digitally active consumers, with booming e-commerce markets reinforcing the need for digital solutions. The competitive landscape was simultaneously heating up, with the entry of formidable new players—including telecommunications firms, fintechs, and “big techs”—spurring incumbents to step up their own innovation efforts. Meanwhile, regulators sought to standardize infrastructure while encouraging competition, fostering the introduction of real-time payments, digital know your customer (KYC), and various local payments schemes.

The emergence of COVID-19, and the resulting economic shock affecting both supply and demand—led to an unprecedented drop in discretionary spending, shifts in spending patterns for remaining outlays, lower trade volumes, and a suppressed interest-rate environment. For example, India recorded no car sales in the month of April, 2 foreign tourism to Thailand declined by 78 percent from the prior year in March and fell to zero the next month, and Singapore’s construction industry contracted by 55 percent in the second quarter while its overall economy declined by 41 percent.

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The impact of COVID-19 also accelerated several ongoing trends in Asia’s payments landscape. Notably, there has been a sharp rise in contactless payments, with digital users growing by up to 20 percent in select Asian markets over the last three months. Nonetheless, macroeconomic headwinds are likely to lead to a decline of 1 to 8 percent in Asia’s 2020 payments revenue—roughly 10 percent lower than our projection for 2020 prior to the pandemic (Exhibit 1). However, the industry is poised for a relatively rapid return to mid-to-high single-digit growth rates and to exceed $1 trillion in annual revenue by 2022 or 2023.

In our view, five fundamental themes are reshaping Asia’s payments landscape (Exhibit 2). These trends are not new, but they are evolving rapidly, and COVID-19’s impact over recent months has reinforced several of their trajectories. For instance, the pace at which acquirers are onboarding small merchants to accept card payments—creating a true “connected commerce” environment—has accelerated. As a result, cash usage, which remains well above global averages in most Asian countries, is dropping rapidly, with significant opportunities for further reduction. The next decade will see the continuation of these trends, which include industry consolidation as well as the emergence of specialized players addressing evolving needs and capitalizing on business models built on adjacent revenue streams.

Industry participants need to respond swiftly to these developments. The actions required will differ based on a given firm’s position in the value chain and stage of evolution. Banks possess an incumbent advantage, for example, but face the challenge of reinventing themselves, adopting a growth mindset, and offering a value proposition attuned to the new competitive landscape. Some banks have made solid strides in this journey, while others are just getting started. Fintechs, by contrast, have largely embraced growth and reinvented value propositions—for example, providing digital ecosystems and wallet capabilities. Their challenge now is to build scale and ubiquity in highly fragmented markets.

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Naturally, significant interdependencies exist between payments sector participants. While banks and fintechs get most of the attention, the success of merchant acquirers in profitably building broader acceptance for noncash payment forms will likewise be critical to continued growth. Payments networks are in a position to shape the sector’s future by diversifying their infrastructure capabilities (to include real-time payments, for instance) and integrating cross-border volumes at scale across the global economy. Regulators and government policy makers will also play key roles in a region keenly focused on digitization and fueled by cross-border activity.

The insights here and in the full Asia Payments report are based on McKinsey’s Global Payments Map as well as our Asia Payments Practitioner Survey, which gathers input from payments business leaders in the region on their strategic perspectives. Our insights are also informed by ongoing dialogue with industry leaders and with McKinsey’s global network of payments experts, and on our work with payments providers across Asia.

Despite the near-term disruption to revenue growth related to the COVID-19 pandemic, Asia’s payments sector remains positioned for long-term success and is poised for a swift return to healthy growth. Although significant effort lies ahead for the sector, the imperatives facing each group of players are rarely in direct conflict with one another.

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