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Global payments 2018:A dynamic industrycontinues to break new ground

Authored by:Sukriti BansalPhilip BrunoOlivier DeneckerMadhav GoparajuMarc Niederkorn

Global Banking October 2018

1Global payments 2018: A dynamic industry continues to break new ground 1

The prominence of payments in the globalfinancial services system has undeniably risenover the 12 years that McKinsey has formallytracked the sector’s dynamics. Even against thisbackdrop, however, 2017’s results are striking.

The 11 percent growth generated by payments—which topped $1.9 trillion in global revenue—is thelargest annual increase we have measured in thepast five years. The milestone of a $2 trillion globalindustry is set to be surpassed two years soonerthan expected, and a $3 trillion threshold loomsjust beyond our five-year projection horizon.

Although the Asia-Pacific region—and China inparticular—has unsurprisingly been the growthengine, there is no shortage of avenues, bothgeographic and channel-based, for firms of allcountries and categories to pursue. In fact, theheady growth belies an industry in the midst ofsignificant disruption, in which new and redesignedbusiness models pose competitive threats. Evenestablished firms in this robust sector may need toconsider near-term transformation to ensure theirposition in the value chain.

Per-transaction revenue metrics are underintense pressure; fortunately, transaction growthfundamentals are healthy, creating opportunitiesto redesign back-office processes to continue todeliver impressive margins at scale despiteshifting dynamics. This report builds upon a data-driven assessment with insights on the stepsneeded to engage profitably in the emergingpayments landscape.

Following section 1’s quantitative analysis of the$1.9 trillion global payments market—exploringthe factors behind recent double-digit growth aswell as the five-year outlook—section 2 detailsopportunities in the lucrative but complex cross-border payments market. At times overlookedbecause of its relatively minor share of statedrevenue, cross-border operations carrydisproportionate weight due to their significantmargins and connection to lucrative broadercorporate banking relationships.

The importance of ecommerce and the shifttoward digital payments methods has been welldocumented. Section 3 considers the real-timeimplications of this transition and suggestsavenues for engagement, notably the growingomnichannel imperative.

In section 4, we address payments in the globaltransaction banking business, a large andgrowing sector that faces a unique set ofchallenges. The imperative here is for incumbentfirms to proactively update strategies to betteralign with market realities, and, ideally, to findcommon ground for collaboration with fintechs toproduce even more powerful offerings.

The insights in this report are based on the 2017version of McKinsey’s Global Payments Map,which has been the industry’s premier source ofinformation on worldwide payments transactionsand revenues for two decades. The map gathersand analyzes data from more than 40 countries.

Introduction

2 Global payments 2018: A dynamic industry continues to break new ground

Global payments revenues swelled to $1.9 trillionin 2017, the best single year of growth in the lastfive years (Exhibit 1). In last year’s report weforecast that payments would become a $2 trillionbusiness by 2020. Indeed, 2017’s marketperformance was so robust—its 11 percentgrowth rate fueled by continuing strength in theAsia-Pacific corridor—that global revenues arepoised to surpass that $2 trillion threshold in 2018,and to approach $3 trillion within five years.

This rapid growth makes payments an expandingand increasingly important component of the

broader banking industry. After an extendedperiod in which payments generated roughly 30percent of overall banking revenues, this metrichas turned sharply upward. Payments’continued prominence in banking revenuesmight come as a surprise, given the continuedpressure on payments fees—increasingcompetition and regulatory pressure—andongoing low-interest-rate environments in manydeveloped economies. On the other hand, thetrend makes sense, given healthy underlyingfundamentals, including electronic transactionand digital commerce growth, and increasing

Expansive growth, targetedopportunities

13

5

0

12

8

7

6

11

0.3

1.6

0.2

0.4

0.3

2022F

1.3

20142008

0.4

0.3

0.4

0.3

2010

0.4

0.3

0.5

2012

0.9

0.2

0.7

0.3

0.1

0.9

0.4

0.2

1.9

0.3

0.30.3

1.7

0.4

0.8

2016

0.5

2017

0.1

0.4

0.6

0.31.6

LatinAmerica

North America

EMEA

1.1

2.9

2006

1.1

Asia-PaciÞc

+7% p.a.

+11% p.a.

+9% p.a.

0.1 0.1

0.1

Exhibit 1

Global payments revenue$ trillion

2012-17CAGR%

2017-22CAGR%

Source: McKinsey Global Payments Map

Global payments revenues grew 11 percent in 2017, the highest rate in the last 5 years.

3Global payments 2018: A dynamic industry continues to break new ground

cross-border activity. The growth of thepayments component also points to theimperative for financial institutions to developand continually refresh sound paymentsstrategies in order to remain competitive amarket being reshaped by technology, newcompetition, and customer demands.

Not surprisingly, global payments revenue growthis dominated by the Asia-Pacific region, as hasbeen the case for several years. At more than$900 billion, the region now accounts for nearlyhalf of global payments revenue—compared toless than a quarter just six years earlier—as wellas four-fifths of recent growth (Exhibit 2).

Commercial

Consumer

“Credit card and

liquidity driven”“Balanced”

“Credit card driven”

“Commercial driven”

11%

LatinAmerica

9%

12%

16%

NorthAmerica

35%

11%

11%

23%

APAC

10%

1%

33%

17%

Domestic transactions3

19%31%

6%

EMEA

23%

22%

5%

14%

4%

10%

Cross-border transactions1

Account-related liquidity2

Domestictransactions3

21%

9%

Cross-border transactions4

Account-relatedliquidity2

Credit cards

100% = $945 $470 $320 $205

Credit cards 2%

3%

8%

3%6%

12%

5%2%

5%

Payments revenue, 2017$ billion

1 Trade Þnance and cross-border payments services (B2B, B2C).2 Net interest income on current accounts and overdrafts.3 Fee revenue on domestic payments transactions and account maintenance (excluding credit cards).4 Remittance services and C2B cross-border payments services.Source: McKinsey Global Payments Map

Asia-Pacific dominates the global payments revenue pool.

Exhibit 2


Remarkably, double-digit growth has continuedeven as the base of business has grown. The 20percent growth rate for 2017, driven largely byliquidity factors, was Asia-Pacific’s strongestever. Although our forecast calls for inevitablemoderation, revenues in the region shouldcontinue to grow at low double-digit rates overthe next five years, still considerably faster thanany other region.

Latin America’s payments sector has been thefastest-growing among the major regions in therecent past (albeit off the smallest revenuepool); but growth rates flat-lined abruptly in2017. We expect the region to return to averageannual growth of 8 percent over the next fiveyears, second only to Asia-Pacific. While severalLatin American countries continued to deliverdouble-digit growth in 2017, Brazil’s paymentssector—the region’s dominant revenue engine—was hampered by regulatory action targetingcredit card rates (Latin America is reliant oninterest for two-thirds of its card revenues).Credit card APRs in Brazil fell by more than 60percentage points as a result of actionsrestricting the duration of high-cost revolvingcredit lines. The plan is expected to reducedelinquency rates but will also reduce averageAPRs, which remain among the world’s highest.Latin America’s underlying fundamentals remainsolid, particularly for domestic payments.

EMEA revenues were similarly near flat,continuing a trend that has persisted for thepast decade. The developing nations of EasternEurope and Africa have generated high single-digit growth, offsetting nominal declines inWestern Europe. Fee revenues have been theprimary factor in the growth that has occurred,while a persistent environment of low interestrates—reaching negative levels in some cases—acts as a drag on growth. A return to a stablerate environment combined with continued

transaction growth will result in revenue growthin the mid-single digits for Western Europe until2022, while Eastern Europe and Africa are likelyto continue at their present pace. At the sametime, individual firms in the European paymentsarena, such as Adyen and Wirecard, are findinggrowth areas that lead to substantial valuations.

On the surface, cross-border payments mightappear to comprise a low single-digit share ofglobal payments revenues. However, onceliquidity factors such as net interest margins areexcluded—as many institutions do in analyzingtheir own payments P&Ls—this growingcategory of transactions account for a largerslice of the pie (roughly one-quarter) despiteincreasing competition from new entrants andsolutions. Cross-border transactions alsocontinue to generate unusually high margins forpayments products and serve as a foundationfor a broader array of client services. We detailcross-border payments dynamics in the nextchapter, including the prospect of possiblerevenue margin pressure and recent innovationsenabling more customer-friendly solutions.

After a period of tepid results, following thefinancial crisis, North America’s overallpayments revenue growth returned to a healthy7 percent in 2017, and is poised to continue ata similar pace over a five-year horizon. Creditcards comprise more than half of NorthAmerican payments revenues, far more than anyother geography, and will continue to growfaster than other products. More surprising isthat the temporary slowdown in credit cardusage following the financial crisis imposed adrag on North American revenue growth wasonly recently lifted.

The jump in global revenues in 2017 is a directreflection of an improved global economicscenario, reinforcing the close link between


growth in GDP and payments revenue.According to World Bank data, in 2017 globalnominal GDP grew at 6 percent year-over-year,compared to 1.5 percent in 2016. During thesame periods, payments revenue increased insimilar proportions, from 7 percent in 2016 to 11percent in 2017.

Comparing payments revenues across regions,we observe that payments revenue per unit ofGDP (a measure of the cost of payments forconsumers and businesses) in Asia-Pacific andLatin America is 50 to 60 percent higher than forEurope and North America. In addition, the shareof electronic payments transactions in Asia-Pacific and Latin America is 60 to 65 percentlower than in Europe and North America. In otherwords, payments are significantly costlier for theeconomy in Asia-Pacific and Latin America,because the cost of processing cash and checkpayments is higher, as are the fees paid byconsumers and businesses.

Transaction dynamics remain strongAlthough the strong recent growth in globalpayments revenue has been broad-based anddiverse, an increasing share is related totransactions. This as a positive development forbanks and payments providers, as transactionrevenues are more predictable and sustainable,and more readily controlled by financial servicesfirms. Transaction-based revenue now accountsfor 40 percent of global payments revenue, upfrom 37 percent in 2012. We expect this shareto grow to 46 percent by 2022, even in animproving rate scenario.

More specifically, while the overall number oftransactions continues to increase, the truerevenue driver is the electronification oftransactions—namely away from cash—whichmore than offsets the downward pressure onfees (Exhibit 3, page 6). Over the past five years,

the share of the world’s transactions carried outin cash has fallen from 89 to 77 percent. At thesame time, the share of combined debit andcredit card use has nearly doubled, from 5 to 9percent. The decline of cash usage globally isexpected to be even more pronounced over thenext five years, due to an increasing range ofpayments options, the push toward real-timepayments, the growth of digital commerce, andcontinued regulatory focus on paymentselectronification.

Given that the Asia-Pacific region accounts forover 60 percent of the world’s population, it isnot surprising that it is responsible for two-thirdsof global transactions. The fact that Asia-Pacificstill lags behind other regions in overallelectronification at only 21 percent (despitemore than doubling since 2012) illustrates theregion’s ongoing growth potential. The moveaway from cash, as witnessed in markets suchas China, will serve as the single-largest causeof global electronification. The share ofelectronification in China has increased morethan ten-fold over the last five years, from 4percent in 2012 to 34 percent in 2017.

Meanwhile, North America has become the firstregion to execute more than half of itstransactions electronically. At 450 electronictransactions annually per capita, it far and awayleads other regions on this dimension.Meanwhile, individual European countries suchas Sweden and Norway are executing no morethan 20 percent of their transactions in cash,while generating 520 noncash transactions percapita per year.

The shifting digital landscapeThe growing popularity of alternative paymentssolutions, and digital commerce in general,further contributes to the electronification trend.Global digital commerce1 volume exceeded $3


trillion in 2017, and will more than double by2022. Asia-Pacific already comprises over half ofthis $3 trillion and, due to the fast-growingChinese market, will increase its share to nearly70 percent by 2022. Mobile commerce, includingin-app payments and mobile browser payments,is the dominant factor driving strong digital

commerce growth, due to rising smartphoneadoption, an increasing shift towards onlineshopping, and improvements in networkbandwidth. Mobile commerce accounts for 48percent of digital commerce sales globally as of2017, and is forecasted to reach 70 percent by2022 (tripling to $4.6 trillion).

100-15 -10 20

5

25

-5 350 30155 25

30

10

15

20

KoreaArgentina

Australia

Austria

Brazil

Canada

Malaysia

Colombia

Peru

Finland

Mexico

Czech RepublicIreland

China

Denmark

Poland

France

Hungary

Germany Hong Kong

India

IndonesiaRomania

Italy

Japan

Morocco

Norway

Netherlands

Belgium

Portugal

Russia

Singapore

Slovakia

USA

Slovenia

South Africa

Nigeria

Sweden

Greece

Switzerland

Taiwan

Thailand

UK

Chile

Spain

Exhibit 3

Growth rate of electronic transactions, 2016-17%

Payments revenue growth rate, 2016-17%

Size of bubble denotes payments revenue in 2017

Developed countries

Emerging countries

Source: McKinsey Global Payments Map

Countries with high revenue growth are also characterized by rapid electronic transaction growth.

1 Digital commerce defined as all consumer remote point-of-sale transactions through online or mobile channels, including retailecommerce and digital travel, but excluding in-store digital wallets.


Consumers and merchants alike are increasinglyembracing app-based commerce and in-apppayments, with retailers ramping up investmentsin mobile apps with innovative use cases toprovide omnichannel shopping experiences forcustomers. Globally, mobile apps accounted formore than 30 percent of total digital commercevolume in 2017, and are expected to continuestrong growth across all regions (Exhibit 4).Digital wallets are estimated to have addedapproximately 40 billion to global paymentsrevenues in 2017.

The outlook for in-store commerce variessignificantly by country and region: In countrieswith NFC infrastructure, tap-and-pay will drivegrowth; in the United States, in-store app usewill grow as consumer use of order-ahead

increases; and in emerging markets, theintroduction of new payments solutions willinfluence how people pay. In the United States,in-person use of digital wallets will increase at a45 percent CAGR to reach nearly $400 billion inannual flows by 2022. Although most of thisgrowth is expected to be on “pass-thru” walletslike Apple Pay, private-label wallets such asStarbucks and Walmart Pay—both of which haveenjoyed impressive early adoption—will alsocontinue to increase in popularity. Even withthese gains, however, digital wallets willcomprise less than 10 percent of US consumerin-person POS payments in 2022. Lack ofubiquitous merchant acceptance will remain abarrier, along with the continued percentage ofconsumers who do not know how to use theirmobile phone to pay at the point of sale.

30%

1,642

91%

38%

62%

North AmericaAsia-PaciÞc

84%70%90

16%

EMEA

9%

Latin America

716644

Global

3,092

31%

69%

Mobile app

Desktop and mobile web browser

Exhibit 4

2017 global digital commerce volume breakdown$ billion

Source: GCI Analytics

Mobile apps accounted for more than 30 percent of global digital commerce volume in 2017.


In the UK, a total of 38 million contactlesstransactions were conducted using a mobiledevice in 2016 (representing roughly $358 millionin spending). While this is significant in absolutevalue, it accounts for only 1.2 percent of in-storepayments, indicating a huge opportunity forgrowth. China leads on this front with 40 percentof in-person spending already on mobile digitalwallets. However, unlike the US, almost all of this is

on closed-loop systems like WeChat Pay andAlipay. China’s ratio is projected to continue toincrease to nearly 60 percent by 2022. Within thesame region, Japan remains a largely untappedmarket. Research has found that close to 70percent of Japanese consumers across all agegroups still prefer to use cash when making in-store purchases, mainly due to security concernswith mobile payments. It is interesting to note,

Volume driven

Margin driven

10

-15

APAC55

EMEA

LatinAmerica

NA

65

10

10

-15

5

Liquidity2


Cross-bordertransactions1

+15

+4

195

+9

64%(125)

4% (5)

32%(65)

Exhibit 5

Payments revenue growth decomposition, 2016-17$ billion4

2016-17 year-on-year growth rate

Growth decomposition, by region,2016-17

1 Trade Þnance, remittance and cross-border payments services.2 Net interest income on current accounts, overdrafts, and credit cards.3 Fee revenue on domestic payments transactions and account maintenance. 4 At Þxed 2017 USD exchange rates.Source: McKinsey Global Payments Map

Growth in liquidity revenues accounted for nearly two-thirds of global revenue growth in 2017, but with regional nuances.


however, that despite the preference for cash,prepaid card solutions like SUICA have found highadoption in Japan. In the third section of thisreport, we look in more depth at the digitallandscape.

Liquidity factors vary by regionStrong transaction fundamentalsnotwithstanding, global liquidity income(inclusive of current accounts, transactionalsavings accounts, overdrafts, and credit-cardlending net interest income) contributed themajority of 2017 growth, and continues torepresent roughly half of total payments-relatedrevenue (Exhibit 5). This growth (15 percent in2017, compared to an average of 6 to 7 percentfrom 2012 to 2017) is the result of both balancegrowth and interest margin expansion. Bothcurrent account deposits (8 percent) andaverage balances for payments-related lendingproducts like overdrafts and credit cards (4percent) registered growth in 2017.

The interest-margin story is more nuanced andregional in nature. Global lending marginscontracted, in part due to the regulatory actionsin Brazil noted earlier. However, margins oncurrent account balances expanded globally,and since these are ten times the size of creditbalances, the combined effect was favorable.Nonetheless, following Europe’s liquidity revenuedecline, Asia-Pacific accounts for 95 percent ofglobal liquidity revenue growth owing to theregion’s disproportionately large current accountbalances and higher interest rate environment.At the same time, North America and LatinAmerica (excepting Brazil) saw 2017 upticks innet interest income.

Continued growth opportunities Projected global average annual paymentsrevenue growth of 9 percent through 2022translates to roughly $1 trillion of net new revenue

available to financial institutions and otherfinancial services firms. Although nearly two-thirds of new revenue will be created inAsia-Pacific, roughly $200 billion of newopportunities in both Latin America and EMEAwill emerge (Exhibit 6, page 10). Roughly half ofthis new global revenue will stem from transactiongrowth (both domestic and cross-border) andrelated fees, opening opportunities for a largergroup of firms in the increasingly open bankinglandscape. Such revenue streams are both moresustainable and predictable than those driven byinterest rates and account liquidity, categorieswhich presently comprise approximately 50percent of the revenue pool.

As of 2016, commercial payments revenuessurpassed consumer revenues. Morespecifically, the prominence of business-to-business payments continues to grow. In thethird section of this report we explore howglobal transaction banking incumbents canmaintain their leadership role in an increasinglydigital environment.

China will continue to serve as the driving forcefor revenue growth (albeit at a slower pace thanin recent years) for Asia-Pacific as well as theworld. At current fee levels, China alone willgenerate half a trillion dollars in net new annualpayments revenue by 2022—as much as all non-Asia-Pacific countries combined. While China willstill account for four-fifths of new Asia-Pacificrevenue, countries such as India and Indonesiawill contribute a greater share of growth as well,driven by both account-related liquidity and feesfrom electronic transactions. Anotherencouraging sign is that the composition of Asia-Pacific’s new revenue is shifting toward moresustainable transaction sources and away fromliquidity-driven ones. By 2022 Asia-Pacific willjoin EMEA and North America in generating themajority of its payments revenue through fees.


The $2.9 trillion of global payments revenueanticipated in 2022 by McKinsey’s GlobalPayments Map represents a significant share ofoverall banking revenues. Naturally, growth willbe unevenly distributed by country, byinstrument, and by segment (retail versuscorporate, as well as the subgroups within

both). In EMEA, for instance, payments willcontinue to represent a stable one-quarter ofbanking revenues. The rapidly growing paymentsmarket in China and other Asian economies,meanwhile, will push payments to over half ofAsia-Pacific banking revenues—a level alreadyreached in recent years in Latin America.

6410

9

17

APACEMEA

North America

LatinAmerica

Exhibit 6

Payments revenue growth decomposition1, 2017-22% (100% = $1,022 billion)

Payments revenue growth decomposition1, 2017-22% (100% = $1,022 billion)

5

44

28

19


Account fees

3

Credit cards

Account-relatedliquidity4

Cross-bordertransactions2

1 At Þxed 2017 USD exchange rates.2 Trade Þnance and cross-border payments services, including remittance services.3 Fee revenue on domestic payments transactions.4 Net interest income on current accounts and overdrafts.Source: McKinsey Global Payments Map

APAC and domestic transaction revenues will drive revenue growth.


Cross-border payments: Growthdespite pressures

Cross-border commerce has continued on ahealthy growth trajectory. Despite pricepressures from increasing competition, cross-border payments of all types remain far moreeconomically attractive for providers than theirdomestic equivalents. International cross-border payments revenues exceed $200 billion

globally (Exhibit 7), split roughly evenlybetween transaction fees and foreign exchange(FX); estimated revenue per transactionremains healthy at nearly $45 per transaction(e.g., 600 vs. 6 basis points for a person-to-person payment; 11 vs. 5 for abusiness-to-business payment).

6% 3.5%

1.5% 0.1%

Consumer Business1 Consumer

Consumer

FROM

TO

Business2

Business2

0.4

1

1.5

124

109

FeeFX + ßoatTrade Þnance

1214 26

542430

169 56

21

50

127

7

Exhibit 7

Cross-border volumes$ trillion

Cross-border revenue3

$ billion

1 Includes payments initiated by treasury for intercorporate and intracorporate lending, investment, liquidity ßows, etc. 2 Excluding FI to FI ßows and related revenues.3 Includes transaction fees, FX fees and ßoat income and documentary business fees. 4 Total transactional revenue from payments excluding interest income, annual and maintenance fees.Source: McKinsey Payments Practice

Revenue margin (revenue on ßow)%

16% 27%Cross-border share of total4

6% 5%CAGR

Cross-border payments activity is concentrated in B2B.


Different avenues exist to capture the benefits ofthe growth of the cross-border transactionmarket. On one hand, major opportunities persistfor improving the traditional correspondentbanking model, whether on customer service,efficiency, or infrastructure performance. On theother hand, since cross-border volume growthhas not been evenly distributed by geography orby segment, focusing on high-growth areascompatible with an institution’s business profilewill maximize return on investment.

High-growth areas While transaction growth in traditional cross-border payments segments such as thecash-to-cash remittance business betweenindividuals (growing at 2 percent) and corporatecross-border transaction flows to bothconsumers and businesses (nearly flat) isstruggling to compensate for intensifying pricepressure, other areas such as cross-borderconsumer-to-business (C2B) payments aregrowing at nearly 20 percent due to rising globalconsumption and increasing expenditures onitems like tourism and investments by a rapidlyexpanding global affluent class.

Even the slower growth categories containpockets of opportunity, such as higher-ticketaccount-based remittances (for affluentconsumers and small and medium sizeenterprises) and cross-border disbursements tomicro-enterprises (driven by the growingprominence of online marketplaces). The marketfor trade and treasury B2B payments is beingreshaped by global transaction banks and theirpartners through initiatives such as SWIFT’s gpi,while others, such as Banking Circle, aretargeting an increasingly promising opportunityserving payments service providers (PSPs).Options like Earthport and Inpay combine localclearing solutions with cross-border batchprocessing, providing straightforward and low-

cost access to multiple countries without theneed to maintain numerous account endpointsfor low-value payments. Likewise, C2B,business-to-consumer (B2C), and consumer-to-consumer (C2C) payments represent fertileground for nonbank cross-border innovation inareas such as tuition, real estate transactions,royalty/insurance payments, and wages to on-demand workers (Exhibit 8).

Improving the correspondent movementCross-border payments, which have laggedbehind domestic payments in terms of efficiency,transparency, and innovation, have recentlybegun to show progress. Introduced by SWIFTin 2017, gpi allows for faster transactions (nearlyhalf are credited to end beneficiaries in less than30 minutes, according to SWIFT), increasedtransparency on payments delivery status, andimproved fee clarity compared to traditionalcorrespondent payments. A late 2018 releasewill add features such as the ability to stoppayment at any point in the payments chain (incase of fraud or error) as well as live transactiontracking. While gpi stands to help banks addressmany pain points associated with cross-borderpayments, it still operates within the establishedcorrespondent banking frame and requiresadjustments of processes and systems, whichcreate hurdles for some players in the industry.

Three areas of accelerated cross-borderpayments stand out:

Cross-border e-commerce: A growth championRetail cross-border ecommerce sales totaled$300 billion in 2015 and are poised to exceed$900 billion by 2020, representing a 25 percentannual growth rate. Currently, one-fifth of thesetransactions involve high-ticket orders (over$200), although this ratio is trending downwardas casual online purchases (e.g., $5 staples)become more commonplace. This means


transaction counts are poised to grow at rateseven greater than 25 percent.

Much of the C2B cross-border market ischaracterized by complexity—for example, a lackof familiar local payments options oninternational websites—as well as limitedinfrastructure and lack of transparency on foreignexchange fees. Non-traditional firms offer digitalsolutions that provide a seamless experience,putting pressure on incumbents to improve. Forexample, Uber and Lyft let business travelers usecharge codes for expense reimbursement ratherthan card settlement.

Cross-border ecommerce is not the only C2Bpayments category with double-digit growth rates(Exhibit 9, page 14). International bill payments—for items such as tuition, rent, orsubscriptions—are growing substantially, as theyremain hard to manage if not facilitated from an“in-country” bank account. The same is true forloan repayments (for instance, the mortgage on asecond home abroad) or investments.

The new face of remittances: Higher customervalue While the traditional cash-to-cash remittancemarket, serving low-to-middle income migrants,

C2B

B2B

B2C

C2C

Real estate investments by individuals

Online e-commerce

Marketplace payouts to SMEs

Accounts payable by SMEs

Non-periodic payments (e.g., dividends)

Individual remittance to individual (excluding pass-through bill payments)

Other bill payments (tuition, healthcare, air travel, taxes, etc.)

>10

5-10

~5

5-10

~5

~5

5-10

~ 5

5-10

350-450

100-150

6,000-7,000

5,000-8,000

150-250

500-700

200-300

400-500

250-350

Periodic payouts (e.g., interest and social contributions)

Wages and salaries

Type Use case CAGR2017-21Size of payments !ows, 2017

$ billion

Source: McKinsey GCI Cross border Model

Exhibit 8

Cross-border �ows will continue to grow—especially in ecommerce.


remains an important market, it has been undersignificant economic pressure due to increasingadoption of digital solutions by migrants andgrowing price competition.

To date, digital disruption has beenconcentrated in specific geographies andsegments. According to McKinsey’s disruptionreadiness index, which assesses 13 indicatorsincluding technology adoption, financialinclusion, and demographic factors, the largestsender markets are among those that are likelyto transition to digital faster—for example, theUS, UK, Canada, and Saudi Arabia. Majorreceiver markets such as India, Mexico and thePhilippines, are poised to stay cash-centriclonger. High banking penetration in the largesender markets also implies that the account-to-

cash transfer arena is ripe for disruption andpresents real opportunities

In this context, affluent segments are a lucrativegrowth space. Although affluent transactionsmay be less frequent, they relationship andconvenience focused, and thus less subject toprice elasticity. Digital firms such asTransferwise, OFX, and HiFX are targeting thissegment with advantageous FX pricing, digitalease of use, and high-touch customer service—and encroaching on banks, which still own 60to 70 percent of the high-end market ($5,000average principal per transaction, comprisingapproximately 55 percent of total global moneytransfer market flows). It is more difficult toscale money transfer than e-commerce acrosscorridors, however, so these firms must

10

80

73 40

3030

Global banks

Regionalbanks

Domesticbanks

Other C2X/B2X ßows

Trade ßowsOpen account

Trade ßowsdocumentary

Inter- and intra-corporate treasury ßows

12

82

33

Exhibit 9

Percentage share, (Total = $127 trillion)

Percentage share, (Total = $127 trillion)

Source: Coalition; ECB Correspondent banking survey 2017; SWIFT; McKinsey interviews

Trade accounts for 15 percent of cross-border payments flows, with domestic banks accounting for 30 percent.


continue to innovate to maintain their above-market growth.

Client acquisition cost poses a major hurdle fordigital remittance newcomers lacking a customerbase. This makes partnerships with banksincreasingly likely, allowing access to a betterintegrated customer experience while shieldingfintech bottom lines from high acquisition costs.

Accelerated growth in SME B2B paymentsAlthough they account for nearly 30 percent ofglobal imports and regularly execute internationalpayments, the needs of SMEs are frequentlyunderserved. Currently treated as either simplecorporates or complex consumers, SMEs areoften lost between correspondent banking andthe premium affluent cross-border market.Evidence from the creation of SEPA, however,indicates that with the right payments experienceSMEs will represent a growing share of cross-border trade, and therefore revenues. In Europe,SME-related cross-border revenues more thandoubled following the creation of a singlepayments market.

Addressing evolving needsSuccess will require different strategiesdepending on use case, ranging from expandedroles in payments processing to custom APIsintegrated with existing technologies to alleviatepain points and create unified global solutions.C2B and C2C offerings will require paymentsproviders to focus on renewed value propositionswith global and emerging affluent consumers atthe core, presenting them with a truly borderlessservice supporting expanding needs.

For incumbents—banks and nonbanks alike—maintaining or growing market share will requirecompeting with a rising tide of digital firms tomeet an evolving set of demands. Success willhinge not only on price differentiation, but also onembracing a larger role in reshaping the end-to-

end payments experience and creating newplatforms with features such as receipt validation,supported with a robust marketing budget orpartnership strategy for customer acquisition.

Within C2C payments, research indicates that 43percent of first-time users search online for aservice aligned with their delivery preferences,such as account, mobile wallet, and merchantpayments capabilities. Banks serving thissegment must craft solutions across dimensionsincluding currency, ticket size, validation ofreceipt, and transaction tracking. Targetedmarketing may also be needed to attract first-time users and to dispel the perception of banksas expensive and non-transparent.

An enhanced payments experience in the SME-linked B2B payments space will involve linkingpayments to purchase orders or embedding a linkfor payments to connect with a range ofaccounting systems, providing the ability to solicitearly payments or financing from buyers or othersin the value chain. Banks can achieve this goal byexpanding corporate-to-bank connectivity andincorporating treasury tools enabling seamlessconnectivity. Third parties focused on B2Bpayments involving SMEs may choose to connectwith enterprise resource planning systems orcreate wallet-style accounts offering instanttransfers, both in and out of network, with fullreconciliation. While some existing solutionsleverage a background bank account, theexperience can be upgraded by addingfunctionality to centralize payments and offer truemulti-bank capabilities, including transparencyand cash-flow forecasting. Third-party firms canpartner to offer such features; for example,selective dynamic discounting.

Banks and non-banks alike should pursueseamless connectivity and thought partneringwith customers for improved experience, full


transparency (e.g., into payments methods,transaction details), and simplified onboarding ofaccounts, suppliers, and platforms. Improvedstraight-through processing will also reduce theincidence of, for example, costly manual

exceptions, claims, and Office of Foreign AssetsControl checks. The resulting customerexperience and expense savings should drive thevolumes necessary to counter margin pressureand heightened competition.


Digital commerce and alternativepayments methods open newhorizons Consumer digital payments—that is, browser-based ecommerce and “in-app” purchases—aregrowing rapidly. Global digital commerce volumeexceeded $3 trillion in 2017—13 percent of totalcommerce—and will more than double by 2022.Mobile commerce is the dominant factor in thistrend, already accounting for 48 percent of digitalcommerce sales, and forecasted to reach 70percent by 2022.

The growing popularity of ecommerce ingeneral—digital checkout solutions as well asnew payments solutions—further contributes topayments’ overall trend toward electronification.Additionally, there are new B2B paymentsopportunities arising from the digital commerceecosystems developing today.

It is instructive to understand how we reachedthis point. Early-stage shifts to digital commerce(Internet 1.0) provided a boon to the cardbusiness, given the lack of viable paymentsalternatives and the substandard experience (forboth payor and payee) of the few that did exist.Further complicating matters, debit cards areblocked from online transactions in manycountries and credit card penetration variesmarkedly by region.

While the online card experience has improvedover the past decade, particularly with regard tosecurity, alternative payments methods (APMs)have gained far greater traction by tackling avariety of pain points. Alipay began as an escrowservice, addressing the fact that many Chineseconsumers lacked trust that sellers would fulfilltheir order. The “cash on delivery” model was aperceived gap for traditional card networks, onethat provided an opening for APMs.

Also, the early stages of online commerce werealmost entirely browser based, a model wellaligned with traditional card functionality. The

evolution of in-app and omnichannel order-aheadmodels gives rise to a host of adjacent services.Digital firms define the commerce value chainmore broadly than traditional firms, creating newuse cases covering the “consider-shop-buy-bond” value chain. We have identified more than140 new APMs globally that are fueling digitalcommerce.

The primary impetus for most APMs is to deliveran improved shopping or checkout experiencewith payments as a component, rather thanapproaching payments as a business in itself. Forinstance, some firms see owning the checkoutexperience as their top motivation (Amazon,Flipkart, Mercado Libre), while others (Walmart,Starbucks) are focused on lowering acceptancecost. Still others (Adyen, Klarna, Shopify, Stripe)approach payments as a platform business andaim to supplement it with value-added services.

The result is that significant portions of the fast-growing digital commerce segment are opting forsolutions that operate outside the traditional cardsystem to fulfill their payments and adjacentneeds (Exhibit 10). For instance, Ideal—a bank-driven solution leveraging transfers rather thancard rails—executes 40 percent of ecommercevolume in the Netherlands. Leading pizza brandsin the both the UK and US originate more than 60percent their orders either in-app or online, a ratefar exceeding even well publicized leaders likeStarbucks and demonstrating the perceivedconsumer benefit of an order-ahead model.

While these solutions have helped to fuel overallgrowth in ecommerce, and arguably growth incommerce overall, the improved experience hasinevitably cannibalized existing form factors—mainly credit and debit cards. Based onMcKinsey’s analysis, US card revenues wouldhave been nearly $5 billion higher in 2017 ifAPMs had not diverted volumes; this figure is


expected to grow to as much as $20 billion by2022. Similarly, McKinsey analysis indicates thatif APM volumes in China were run acrosstraditional channels, banking system revenueswould be roughly $20 billion higher.

Consumers and merchants alike are increasinglyembracing app-based commerce and in-apppayments. Retailers are ramping up investmentsin mobile apps with innovative use cases toprovide omnichannel shopping experiences forcustomers. Over 70 percent of US customerjourneys are already omnichannel. Mobile appsaccounted for more than 30 percent of total

digital commerce volume (as compared todesktop and mobile web browsers) globally in2017, and are expected to continue stronggrowth in all regions. Asia-Pacific alonecomprises over half of global digital commerce,due to the fast-growing Chinese market, and willcontinue to deliver robust growth through 2022.Digital wallets are estimated to have addedapproximately 40 billion to global paymentsrevenues in 2017.

Retail examples blurring the line between on-and offline shopping experiences are plentiful.The Gap has launched “virtual dressing rooms”

57%

59%

16%

33%

16%

In app2

Online3

P2P5

In store4

Non-digitalpaymentsuser

22%

49%

24%

50%

17%

42%

35%

8%

12%

40%

18-34 35-54 55 and up

46%

22%

49%

13%

27%

Total

Age groups1

Exhibit 10

In the past 12 months, have you performed any of these activities?% of respondents, US

1 N= 18-34 (283); 35-54 (396); 55 and up (422); total (1,101)2 Buy things and/or pay for services using a retailer’s app on my device (e.g., Amazon, Starbucks, Uber).3 Buy things through a website on my device (e.g., Target.com).4 Use my device to pay at retail locations by interacting with a terminal (e.g., Apple Pay, Android Pay, Samsung Pay, LevelUp).5 Transfer money to friends, family, or acquaintances through an app (e.g., PayPal, Venmo, Square Pay).Source: McKinsey Digital Payments Survey, 2016

In the US, digital payments penetration is highest among younger users, especially for in-app and online payments.


for specially enabled smartphones, enablingcustomers to “try on” clothing in augmentedreality before purchasing online. Lotte SmartShopper, in South Korea, addresses the “lastmile problem” through on-site shopping viascanners (without the need to fill a cart), promptcheckout at dedicated terminals, andguaranteed prompt delivery. Hema food storesin China employ e-labeling for fresh producespanning 3,000 SKUs and 103 countries,enabling efficient price management. RetailHema outlets double as warehouses and“picking” centers (where staff “shop” forcustomers), enabling online orders to bedelivered within 30 minutes.

The outlook for in-store mobile payments variessignificantly by country and region. In the US, in-person use of digital wallets will increase at a 45percent CAGR to reach $400 billion in annualflows by 2022.

Another key development is the increasinglycross-border nature of digital commerce. Indeveloped countries, more than half of all retailsales volume is transacted by companies thatsell in at least two other countries, pointing to asignificant opportunity. Similarly, McKinsey’sDigital Commerce Benchmark reveals that of thetop 200 US merchants, over 60 percent dobusiness in at least two cross-border markets.

Events that previously had been processed ascross-border retail transactions—and which hadalso been less frequent—are now processed in-country, with enhanced security and higherauthorization rates, creating wholesale paymentsand cash management opportunities that banksand card companies are well positioned to fulfill.

In several countries, real-time payments systemsare fuelling commerce. In Denmark, Mobile Pay,launched as a peer-to-peer system, is now

employed at the point of sale and has developeda digital commerce solution. Solutions such asSofort in Germany and Ideal in the Netherlandshave sprung up to fill the gap, as Alipay hasdone with Taobao. M-Pesa remains the shiningexample of mobile penetration, its transactionthroughput accounting for 23 percent of KenyanGDP. Combined, Kenya’s six leading mobilewallet providers play a role in facilitating nearlyhalf of GDP. Three-quarters of Chinese digitalcommerce employs “nontraditional” paymentsforms like Tencent and Alipay; and this share isexpected to reach 85 percent by 2020.

Add to this shift the emergence of solutions like“pay-by-loan,” in which instant decisioningenables providers to extend dynamic installmentpayments offers in real time (a particularlypowerful product in regions with limited creditcard penetration), and the potential forincremental gains becomes evident. McKinsey’sDigital Payments Survey finds that more thanone in five US digital shoppers have pursued adigital POS loan to complete a purchase.Millennials are unsurprisingly the most frequentusers, but adoption exceeds double digitsacross all age brackets. PayPal is the mostcommon solution, but Swedish challengerKlarna has developed a solid US followingamong Millennials.

More than half of overall global purchase volumegrowth over the next five years will be generatedby digital channels. Digital payments will doublein volume over the next five years to representapproximately 29 percent of consumer POSpayments, with in-app payments exceedingbrowser based e-commerce by 2021 (with POS“tap and pay” a distant third). Consequently,issuers and networks must ensure brandacceptance across the key digital environments(e-commerce, in-app, “tap & pay” at the POS),particularly for bank wallets.


Card issuers cannot afford to maintain their strictfocus on the payments event itself while APMsbuild a broader value proposition across the valuechain. We estimate that half of global digitalcommerce volume is already inaccessible totraditional issuers/networks, with that sharepotentially growing to two-thirds over the nextseveral years (Exhibit 11). Many of these APMsare bank-led initiatives, however, and thepotential to tap into adjacent value-addedrevenue streams in a rapidly growing marketprovides ample opportunity.

Many payments service providers and gatewaysare offering merchants the opportunity to processcross-border transactions locally; for instance,when a Brazilian customer makes a purchase ona Spanish website, the transaction can beauthorized and processed in the consumer’shome market rather than the seller’s. This modelimproves the consumer experience, and at thesame time creates an opportunity to extend themerchant relationship with commercial cashmanagement services such as cashconcentration, commercial FX, and hedging.

~50%

~$2.7-2.8

~50%

~$6.0-6.2

~35%

~65% 25%

13%

~55%

~60%

~40%

~$430

~$750

~45%

~40%

~$2,000

~60%~$750

~75%

~25%~75%

~$1,000

~15%

~85%

~25%

~$2,500

23%

7%

28%

25%

~65%

~$40

~40%~30%

~$130

~60%

34%

17%

19%

6%

Likely non-accessible Likely accessible

Exhibit 11

Digital commerce (including travel) and accessibility forecast

Global digital commerce$ trillion

US digital commerce$ billion

Europe digital commerce$ billion

India digital commerce$ billion

China digital commerce$ billion

CAGR ofvolumes

CAGR ofvolumes

CAGR ofvolumes

CAGR ofvolumes

CAGR ofvolumes

2016 2021E

2016 2021E2016 2021E2016 2021E

2016 2021E

S M k t [China, India, EU]; McKinsey US bottom-up model [US]

The share of digital volume inaccesible to issuers and networks will increase from 50 to 65 percent by 2021.


Global transaction banking:Defending the incumbentadvantageGlobal transaction banking (GTB) is a thrivingbusiness, with revenues approaching $1 trillion in2017—nearly 50 percent of total paymentrevenues and half of wholesale banking revenues(Exhibit 12). Institutions apply various definitionsto these revenue pools, some focusing on “core”products like trade finance and cashmanagement while excluding the largely liquidity-derived inflows that are a byproduct of suchservices. Both categories are growing nicely;nonetheless, incumbent banks face difficultchoices as the pace of digital disruptionaccelerates across the commercial payments

value chain, with digital attackers and otherfintech firms chipping away at barriers to entry.

Banks can safeguard their client relationships,expand advisory services, and strengthenmargins only if they take the lead in developingnew strategies to address digital disruption inGTB. There is significant risk that banks will cedeimportant aspects of the business to emergingdigital challengers if they do not take advantageof recent advances in technology, regulatorychanges, and new partnership models.

APAC

Deposits

Americas TotalEMEA

425

Overdrafts 320

9050 460

605 230 150 ~985 ~43%

~20%

~23%Cashmanagement

10025

500

TradeÞnance

285

140

525

35

Trade finance: All documentary business for international trade, including letter of credit conÞrmation.

Cash management: domestic and cross-border payments, including liquidity management.

Core global transaction banking products

Other working capital instru-ments

Overdrafts: Pre-arranged or unarranged overdrafts at domestic banks.

Deposits: C/As and transactional savings deposits at domestic banks.

Exhibit 12

Global wholesale transaction banking revenue pools by product and region, 2017$ billion

Percent of wholesale banking

Source: McKinsey Panorama Global Banking Pools; McKinsey Global Payments Map

Global transaction banking revenues are estimated at nearly $1 trillion, or 43 percent of wholesale banking revenues.


Since the financial crisis, global fee-basedrevenue for core GTB products has grown 9percent per year. Asia-Pacific is the largestmarket and is creating the most growth, at 20percent per year over the past five years. TheAmericas (5 percent) and EMEA (4 percent) havealso performed well.

This growth masks underlying structural shifts,however. The transaction banking industry isfacing six main challenges in the short- tomedium-term:

Determine who will be the next■competitor in a fast-moving and crowdedglobal digital business buffeted by numerouscompetitive forces. The number and diversityof organizations competing in the transactionbanking market—among them fintechs, digitalC2B payments platforms/ecosystems, ITcompanies, export credit agencies, logisticscompanies—have risen significantly over thepast decade. These firms have distinctobjectives and value propositions; the openquestion is which will resonate in themarketplace.

Harness the next digital innovation in a■sustainable way, striking a balance betweenthe scarcity of capital and developmentresources and proliferation of technologiesand initiatives. Two innovations in particularmerit closer inspection: proprietary and third-party automated supply-chain financeplatforms and the integration of openbanking/PSD2 with real-time payments andadvanced analytics.

Leverage digital platforms to meet clients’■expectations for a seamless end-to-endexperience. Today’s transaction bankingmodel is constrained by highly specializedproduct sales and high-touch processes,

which are ripe for digital disruption. Theseshifts are particularly evident among SMEsand mid-cap corporations. Banks mustapproach the market with a coherentecosystem strategy.

Digitize to improve operational■efficiencies to counterbalance pressure onmargins, potentially adopting new partnershipmodels. Finding the appropriate partner andbest industry model are essential steps.

Develop digital services to create new■revenue streams that extend deeper into thepayments value chain, applying advancedanalytical tools to proprietary data sets.

Manage change and attract new talent to■develop an agile culture and evolve toward a“test-and-learn” model of digital innovation toaddress challenges in execution and an agingworkforce. Developing the next generation ofGTB leaders will be a key factor in long-termsuccess.

Improving the operating model with newtechnologyRecent advances such as machine learning,robotic process automation (RPA), naturallanguage processing, and predictive analytics holdthe potential to reduce costs and provide thefoundation for a new operating model (Exhibit 13).Looking at trade-finance use cases, we estimatethat banks can improve productivity by between30 and 40 percent through well-planned adoptionof advanced analytics and artificial intelligence.

The distributed ledger, or “blockchain,” standsout as a technology with the potential to catalyzechange in these areas. Smart contracts aremerely the highest-profile opportunity to leverageblockchain technology in trade finance. Not onlydo distributed ledgers rely heavily on digital data,


but they constitute closed data ecosystems,creating new avenues for bank collaboration, ahigh-potential area that has long lacked aneffective mechanism due to the need for end-to-end transparency and integrity.

Boosting sales effectivenessWhile each of these technology levers offers theopportunity for significant operational efficiencyimprovement, they also afford banks the chanceto draft a new blueprint for technologyarchitecture, process optimization, and solutionsinnovation. This depends on the broad application

of predictive analytics to optimize data assets anddeliver a commercial payments value propositionthat addresses the full scope of customer activity.To be effective, value propositions must be basedon a precise understanding customer behavior,emerging service needs, and price elasticity.Banks can use these tools to create value andstrengthen relationships. Channel analytics canboost the impact of cross-sell recommendations,with tailored automated communication anddigital workbenches to support specialist andrelationship manager interactions.

Documentarybusiness

Receivable Þnance in open account

Estimated productivity increase

100% = 30-40% productivity improvement

0 -5%

55 -60%

15 -20%

35 -40%

15 -20%

30-40%1

+

+0 -5%

Exhibit 13

Virtual workforce for automation of repetitive manual tasks

Execution of workßow and business orchestration rules

Robotic process automation

Advanced calculation engines and predictive analytics to automate support for decision-making

Machine learning

Automated processing of structured text through NLP/document digitization for the end-to-end process, including data extraction, document classiÞcation, veriÞcation, and storage

Artificial intelligence/natural language processing

Smart contracts through distributed ledger technology can allow for full end-to-end transparency for all participants

Smart contracts and other distributed ledger technology

1 DLT also facilitates syndicated participation of third-parties in open account transactions (e.g. credit insurers, export credit agencies) improving not only operations but also risk proÞle.

Source: McKinsey Panorama Global Banking Pools; McKinsey Global Transaction Banking Service Line

New technologies could reduce costs significantly and provide the foundation for a new operating model.


While transaction banks often struggle to craft aholistic data strategy, large digital ecosystemfirms capitalize on data reserves and predictiveanalytics to build scale rapidly in new markets.Digital challengers, including B2B logisticsproviders and B2C retailers, are chipping away atprofitable links in the financial supply chain andseeking to own client relationships. We believethat the winners will act decisively to address theneeds of an increasingly diverse market of SME,mid-corporate, and large corporate clients atvarying stages of the digital transformation.Laggards will be left with the unprofitable piecesof clearing and settlement systems.

The pace of digital disruption is acceleratingacross all components of the GTB value chain,placing traditional business models at risk. Ifthey fail to pursue these disruptive technologies,banks could become laggards servicing lesslucrative portions of the value chain as digitalattackers address the friction points. To avoid

this fate, banks must embrace digitizedtransaction banking with a goal of eliminatingdiscrepancies, simplifying paymentsreconciliation, and streamlining infrastructure tooperate profitably at lower price points. Theymust take proactive strategic steps to leveragetheir current favorable market position, or watchnew market entrants pass them by.

Banks and fintechs have shown increasedwillingness to collaborate in bringing these newsolutions to market, as opposed to engaging inmarket-slowing and costly head-on competition.Both parties bring meaningful knowledge andexpertise to the table—banks with complianceplatforms, network infrastructure, andestablished data-rich client relationships,fintechs with agile development capabilities andfresh perspectives on meeting customerexpectations. This powerful combination willserve to speed the realization of benefits for allin a changing business scenario.

For more information about this report, please contact:

Philip BrunoPartner, New [email protected]

Olivier DeneckerPartner, [email protected]

Marc NiederkornPartner, [email protected]

Madhav GoparajuSenior Expert, [email protected]

Sukriti BansalKnowledge Expert, [email protected]

The authors would like to acknowledge the contributions of Aaron Caraher, Octavio Gonzalez, ReemaJain, Vishakha Khemka, Baanee Luthra, Pavan Kumar Masanam, Tamas Nagy, Glen Sarvady, andMichelle Zhou to this report.

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