Following a year of unprecedented, double-digit growth in 2017, global payments returned to its established pattern of steady yet strong performance. Global revenue reached $1.9 trillion in 2018, reflecting 6 percent growth. Several long-standing trends were reestablished, offsetting 2017 outliers—notably, Latin America’s return to above-average growth. As always, however, the composition and dynamics of payments revenue vary dramatically by region, necessitating a disaggregated geographical assessment.
Increasingly, nonbanks and nontraditional players are entering the fray to capture a share of this opportunity. In some cases, nontraditional players leverage payments to increase customer engagement and either expand existing offerings (for example, mobile wallet GrabPay) or establish a foundation for a broader-based model (for example, Stripe and Square). As we note in chapter 2 of the full report (available for download below), a renewed wave of merger activity is blurring the lines among providers serving various stages of the value chain. This article focuses on some of the surprises and key takeaways emerging from McKinsey’s 2019 Global Payments Report (see sidebar, “McKinsey Global Payments Report restatement”). The full report provides deeper analysis on more detailed aspects of the payments landscape.
After an unusual global payments-revenue growth rate of 11 percent in 2017, largely because of a sudden surge in Chinese liquidity, growth returned to a more typical yet solid 6 percent in 2018 (Exhibit 1). That figure is slightly above the global nominal GDP growth of 5 percent projected by both World Bank and Economist Intelligence Unit.
The regional view is more nuanced:
- In North America, payments revenues have been growing two to three percentage points faster than GDP has for the past four years because of a combination of interest-margin expansion and rapid transaction growth. An improving interest-rate environment has enabled net interest margins on current account balances to deliver a small but favorable increase each year. The rate of growth in electronic payments transactions has been nearly twice the GDP growth rate, propelled by the e- and m-commerce boom—as well as the continued shift away from cash and checks.
- Interest income on current accounts is estimated to have provided roughly one-fifth of US payments revenue in 2018, the lowest share among the four primary regions.
- Following a period of tepid growth between 2009 and 2013 (including two years of post-crisis declines), US credit-card balances have resumed an upward trend, increasing by more than 4 percent consistently for the past four years.
- Payments-revenue growth in Europe, in contrast with North America, has remained sluggish and below GDP growth, continuing the trend of the past two to three years (Europe comprises roughly 90 percent of the activity in Africa, Europe, and the Middle East [EMEA]). If many of the underlying trends (for example, rapid growth in electronic transactions) in the two locations are similar, the European picture is dominated by the further weakening of the interest-rate environment, with negative interbank rates having reappeared in the eurozone. As a result, net interest income on account balances in Western Europe has been declining for the past six years, falling by nearly 40 percent over this period.
- Although it remains the slowest growing of the four primary regions, Europe has established a somewhat heartening revenue trend, with consistent growth in the region (in contrast to the contraction experienced in the first half of the decade). Europe continues to lag our estimates, stemming from a slower-than-predicted economic recovery. Despite the encouraging signs in transaction growth and fee revenue (4 percent in 2018), these gains are offset by marginal declines in liquidity revenue. This does not imply an absence of opportunity, however.
- Electronic payments transactions in Europe are growing consistently, at double European GDP growth rates (from 2013 to 2018, 7.9 percent compound annual growth rate [CAGR] versus 3.5 percent GDP CAGR). The continued shift away from cash is partly a result of the strong performance of card transactions in combination with payments solutions enabled by genuine innovation (for example, real-time payments and mobile wallets) and regulation (for example, the second Payment Services Directive [PSD2] and open banking). Account-to-account payments systems at the point of sale are gaining momentum in countries like Denmark, Italy, and Sweden but do not yet add up to a significant volume shift at the aggregate European level.
- Asia–Pacific (APAC) payments revenues grew by 6 percent in 2018, in line with GDP growth for the region (but contrary to what one could expect, slower than in North America). Asian revenues have been very volatile over recent years: their growth significantly lagged behind GDP growth in 2015 and 2016 before sharply exceeding it in 2017. There are three underlying drivers behind this somewhat erratic growth trend:
- Underlying transaction growth remains remarkably strong. Electronic payments transactions have been growing at a staggering rate in the region—upward of 15 percent annually, more than 2.5 times the rate of GDP growth. This growth has been fueled by the adoption and growth of alternative digital-payments mechanisms (migrations of large pools of cash payments) in a strong push from regulators to reduce cash.
- Transaction-fee growth has been more muted as regulatory and competitive pressures have depressed margins (albeit from a very healthy starting level).
- Current account revenues (both consumer and commercial), representing 60 percent of payment revenues in the region, prove to be extremely volatile.
- Current APAC account balances ($20 trillion in our analysis) are an important revenue driver, with China being the “swing factor.” If current account balances have been growing slightly faster than economic growth has in the region as a whole (pointing to additional growth coming from an increasing share of consumers with bank accounts in the region), 2017’s regional revenue “explosion” (21 percent increase) was driven by China.
- Latin America was the fastest-growing region in revenue terms, at 10 percent, in 2018. This result marks a return to growth following a 2 percent decline in 2017. It confirms 2017’s outlier nature, owing to a one-off regulatory intervention affecting Brazil, the region’s largest payments market. With nearly 40 percent of Latin America’s revenue growth coming from fee income, the fundamentals appear to point to continued strength.
China: The largest pool, perhaps not the largest opportunity
At roughly $605 billion of revenue, mainland China is the single-largest contributing country to global payments revenues, surpassing the United States by more than $100 billion and comprising two-thirds of overall APAC revenue (Exhibit 2). At par with the United States as recently as 2012, China has grown at a CAGR of 10 percent, compared with 6 percent for the United States.
The underlying developments are impressive. Both debit- and credit-card usage have grown at greater than 35 percent CAGRs over the past six years. In fact, we estimate that nearly half of all global debit-card spending now occurs in China alone. In addition, the emergence of large ecosystem players, like Alipay and WeChat Pay, has boosted the growth of mobile payments. Mobile payments transactions grew at a 123 percent CAGR in China from 2013 to 2018 and, based on data published by the People’s Bank of China, are estimated to have exceeded 300 billion (or roughly 210 transactions per capita) in 2018.
Transaction revenues in China have “only” grown at a 13 percent CAGR from 2013 to 2018 because of lower transaction margins in China (compared with the United States, for example). Although card spending in China is nearly 1.5 times that of the United States, it generates a revenue margin of roughly 1 percent, compared with 3.5 percent in the United States.
Despite the headline-grabbing developments in Chinese retail payments, more than 60 percent of China’s payments revenue is sourced from commercial activity. This is among the highest shares observed across the 45 countries modeled in McKinsey’s Global Payments Report, which together compose nearly 90 percent of global GDP. Indeed, a large share of China’s revenues is derived from liquidity, which is somewhat shielded from competition as inaccessible to nonbank service providers—and most likely to foreign bank entrants as well.
In 2018, the estimated account-liquidity-related revenue in China was $410 billion, two-thirds of which was derived from the commercial side. This revenue source is extremely volatile, given its sensitivity to interbank rates and interest-rate changes that drive sharp margin fluctuations. For instance, account-related-liquidity revenue jumped 38 percent in China in 2017 before slipping by 1 percent in the current cycle. In 2017, expanding margins and balance increases contributed to a similar degree to liquidity-revenue gains; in 2018, contracting margins neutralized ongoing balance gains entirely.
All in all, despite the size and strong underlying momentum of China’s payments market, it is not easy for nondomestic competitors to play a role in it.
Retail and corporate trends: A matter of location
By segment, global payments revenues in 2018 were split close to equally between retail ($1.02 trillion) and corporate ($930 billion)—similar to the distributions of the past few years. However, this mix has not remained static at a regional level. In Latin America, for instance, retail payments have grown in dominance (63 percent share, up from 59 percent in 2013). On the other hand, in EMEA, commercial payments now account for a majority of the revenue (52 percent, up from 49 percent in 2013).
In Western Europe, which accounts for approximately 70 percent of the EMEA payments-revenue pool, the reasons behind the increase in commercial-payments share are twofold. First, retail-card revenues have taken a hit because of interchange caps. Second, corporate account-to-account payments have exhibited solid revenue growth, driven by both increases in volume and unit pricing as banks seek to counterbalance the loss in liquidity revenue. These developments have offset the fact that commercial account-liquidity revenue has been more negatively affected than retail account-liquidity revenue has.
Large-value payments systems: The backbone of payments infrastructure
Large-value and interbank payments systems—largely domains of corporate activity—are critical parts of any country’s payments infrastructure. Compared with other payments instruments, these large-value transactions (settled in real time over systems like CHAPS in the United Kingdom and Fedwire Funds in the United States) are quite low in volume but significantly higher in average value, at roughly $200,000, compared with $3,500 for an automated clearinghouse (ACH) credit transaction and only $60 for a debit-card transaction. Low volume does not imply lower economic value for providers: the average fee on a large-value transaction is nearly eight times that of an ACH transaction.
Moreover, with a five-year historical CAGR in excess of 10 percent, these large-value transactions offer an attractive growth opportunity. This growth has been fueled by economic factors (especially in emerging economies), an ongoing shift from checks to electronic applications as means of payment for high-value transactions in many countries, and the need for enhanced speed and information that accompanies fund movement in these upgraded systems.
The development of real-time low-value payments and alternate payments solutions over the past few years has set the stage for retail-payments disruption. In a new wave of activity, many countries, including Denmark, the United Kingdom, and the United States, have started upgrading (or have launched plans to upgrade) their large-value payments systems, given their systemic importance to financial systems around the world. The need to modernize these systems cannot be ignored; fortunately, markets have begun to take notice.
Cross-border payments: Stable, with high-growth pockets
The estimated 2018 global cross-border-payments revenue was $230 billion, a 4 percent increase from 2017 and slightly below nominal GDP (Exhibit 3). Trade flows as a percentage of global GDP have remained stable over this period. Growth has mostly been volume driven, as margins remain under pressure from stiff competition, the emergence of new solutions, and disintermediation from ecosystem players. WorldLink by Citigroup, which recently expanded coverage, allows clients to make payments via a single window without having to maintain local currency accounts. This and the cross-border-payments solution by TransferWise, an online money-transfer system based on peer-to-peer matching, are examples of solutions that are competing with traditional correspondent banking.
B2B trade and nontrade payments, the largest share of cross-border payments by both volume and revenue, also grew by 4 percent. B2B cross-border revenues are expected to grow at a tepid 3 percent CAGR for the next five years.
Nearly half of the 2018 growth stemmed from C2B and B2C cross-border payments, despite the fact that these payments represented only around 25 percent of the revenue, in absolute terms.1 In 2018, estimated C2B and B2C cross-border revenues were $37 billion and $18 billion, respectively. The high growth rates make these segments very attractive for new entrants. For example, Hyperwallet is a platform targeting B2C cross-border payments that addresses the need for global mass payouts over a variety of payments rails, including wallets, cards, and bank transfers. The fastest-growing segment in cross-border payments, however, is C2B, fueled by cross-border e-commerce, which we expect to grow at a 7 percent CAGR from 2018 to 2023. This is in part because of cross-border e-commerce payments, which are the fastest-growing subsegment in cross-border payments.
Looking forward, expected average annual growth in payments revenues over the next five years is 6 percent, with total revenues increasing by $715 billion and surpassing $2.7 trillion by 2023 (Exhibit 4). This growth rate is slightly above the expected global GDP growth rate of 5 percent, the result of a combination of factors.
The first is strong growth in account-liquidity revenue at a 7 percent CAGR. Roughly 45 percent of revenue growth is expected to be derived from account-liquidity revenue—an increase from approximately 40 percent over the past five years. This is primarily fueled by the increase in volumes in countries like China and India, which together hold about one-third of global account balances and for which GDP growth is expected to be higher than the global average. Additional growth is also expected from some margin recovery in Europe. Notably, 95 percent of liquidity-revenue growth stems from higher balances—a source more predictable than margin changes, given the volatile interest-rate environment.
The second factor supporting payments-revenue growth is the increase in electronic payments transactions, especially in emerging countries. Electronic payments transactions have been growing at a staggering rate of 22 percent in emerging countries over the past five years. While this growth rate is unsustainable over the long term, it is projected to remain fairly high at a 14 percent CAGR for the next five years, well above GDP growth, based on our analysis of historical trends and projected macroeconomic growth in these countries. Growth will be fueled by the continued shift from cash and increased adoption of digital payments solutions.
Credit cards alone will add an additional $160 billion of revenue (23 percent of global growth) over the next five years, as the largest credit-card market—the United States—will continue to deliver stable growth, while emerging markets will contribute increased penetration and usage.
In our base-case forecasts, we do not anticipate a significant change in average fees per transaction for domestic payments. Cross-border payments are expected to face some margin erosion as a result of increasing competition from fintech companies. However, given already-low margins in Europe (after the recent imposition of interchange-fee limits) these new challengers are less likely to affect pricing. In Asia as well, account-to-account and credit-card fees per transaction are already comparable to those in developed countries and are not expected to undergo major shifts.
There will, of course, continue to be further differences by region and segment. By customer segment, retail payments are expected to fuel growth in the Americas, while commercial payments are expected to predominate in APAC and EMEA, extending the current revenue mix in the regions. Although nearly three-fourths of APAC’s growth will come from China, growth rates in India and Indonesia (9 percent CAGR for each) are expected to outpace China’s growth rate of 7 percent. Revenue growth in Latin America is expected to moderate to a more sustainable 7 percent over the next five years—approximately half of its historical growth rate.2
Download The 2019 McKinsey Global Payments Report, the report on which this article is based (PDF–1MB).