Global Payments Report: Simpler interfaces in a more complex reality
McKinsey recently released its annual Global Payments Report, which examines the evolving global payments ecosystem and current trends. It notably highlights that “global payments are becoming simpler for users, but complexity keeps growing behind the scenes”.
As explained in the report, the promise of global payments being “safe, simple, quick, inexpensive and ubiquitous” is coming closer thanks to the different and successive technological innovations. And this will continue with the advent of instant payments. But, with the growing number of players and providers, the value chain is more fragmented, which increases complexity.
In this context, with global payments revenues continuing to grow, the McKinsey experts have isolated 6 trends that will define the next five years:
1. “The decline of cash will continue unevenly”
Global cash usage keeps on decreasing at around 4% per year, and the cash payment transactions “represent a massive opportunity for digitization”, and the replacement of cash with instant payments will continue in developing markets with low card penetration
Cash is also expected to decline in card-dominated markets, like the US for instance, as well as in economies that have, historically, a strong cultural preference for cash, like Japan and Germany.
2. “Instant payments will continue to displace other payment methods”
As highlighted below, the fact that instant payments have been established in most geographies, or soon will, will accelerate the decline of cash, and checks.
In Brazil and India, heavy-cash markets, IPs will capture an important share of consumer to business transactions.
The McKinsey experts also highlight that they “expect similar interventions in the European Union to boost adoption there, and estimate that the number of instant-payment transactions in the European Union will increase from around three billion today to almost 30 billion by 2028, an average annual growth rate of 50 percent”.
3. “Growing adoption of digital public infrastructures will catalyze digital payments”
Digital Public Infrastructure (DPI) initiatives have enabled the development of competitive, robust, inclusive, and efficient digital payments ecosystems, as is the case in Brazil, Estonia and India.
McKinsey foresees a “broader rollout of similar initiatives in emerging markets like Indonesia, Nigeria and Peru, through a combination of imported technologies”.
4. “Intermediaries will continue to take share from incumbents”
McKinsey estimates that platforms and marketplaces like Shopify, Square, Amazon, eBay, etc., process today around 30% of global consumer purchases.
They note that “digital-native merchants are growing more rapidly than their offline counterparts, capturing a larger share of total commerce and driving down acquiring fees”. Moreover, these players are often leveraging the services of global acquirers (Adyen and Stripe, for instance), and are thereby increasingly relegating traditional acquirers to commoditized payment processing.
5. “Transaction banking will mimic consumer experiences”
Over the last years, several leading institutions have innovated by running payments as stand-alone businesses, in order to capture larger shares of revenues and strengthen client relationships.
In the future, “commercial customers of transaction banking services might demand and receive intuitive interfaces like those they encounter in their personal lives”. Also, “technological advances will help solve reconciliation problems and streamline supply chain finance with faster and deeper integration of bank and corporate systems”. In this context, corporates could very well see an important improvement in functionality and user experience in their back offices.
6. “CBDCs will set the baseline for digital currencies”
To this day, more than 90% of central banks have considered working on developing a Central Bank Digital Currency project. More than 30 pilots have been launched.
“Nonetheless, McKinsey foresees CBDCs playing three roles in payments as they will set the minimum base level of functionality, cost, and services that users can expect from a digital currency”. Moreover, CBDCs could provide an alternative to help keep the price of commercial offerings in check, and could serve as an alternative to large but often opaque private-sector stablecoins”.