Facing tough challenges both from small fintech startups and from global digital giants, incumbent transaction-banking leaders must improve customer journeys, maximize security, minimize complexity, and add value beyond pure payments if they hope to survive and thrive, according to a new report by The Boston Consulting Group (BCG).
The report, BCG’s fourteenth annual study of the global payments business, offers a comprehensive overview of the industry, including detailed looks at revenue trends, retail payments by region, and shifting dynamics in wholesale transaction banking.
In conjunction with the report, BCG is launching the third edition of its Global Payments Model Interactive, available on bcgperspectives.com, which explores how regions and segments of the payments market will shift from year-end 2015 through 2025. This feature provides interactive charts on the volume and value of noncash transactions worldwide.
For five consecutive years, BCG has collaborated with SWIFT, the global provider of secure financial-messaging services, in preparing the report.
“It’s critical for incumbent banks to map out diverse scenarios with some key questions in mind,” said Stefan Dab, a coauthor of the report and the global leader of BCG’s transaction-banking segment. “How will payments behavior change over the next decade? How will control of customer engagement and brand image diminish as the Internet of Things evolves, as so-called open banking grows, and as commercial clients interface with more third-party providers? Banks must also foster a culture of innovation and resolve tough dilemmas such as whether or not to collaborate with fintechs that can become competitors.”
Industry Overview. According to the report, payments industry revenues hit $1.1 trillion in 2015, representing 29% of global banking revenues. By 2025, they are projected to reach nearly $2 trillion, a compound annual growth rate of 6.0%. The growth engines will be transaction-related revenues (an estimated 40% of the total) and account revenues (34%). The report also says that a confluence of forces is reshaping the payments industry and that three forces in particular will continue to influence the pace and path of transformation: technological advances, shifting customer expectations and behavior, and regulatory initiatives. Further, current pain points and poor user experiences with many types of transactions have made payments businesses ripe for ongoing disruption by fintechs and digital giants, as well as for the emergence of new industry dynamics. However, disrupters will not necessarily triumph over banking incumbents, BCG says.
Retail Payments Trends. According to the report, retail payments trends differ significantly by region.
Europe. Although European payments providers are still digesting the interchange regulation that came into force in 2015, they are already bracing for the next regulatory initiative, PSD2, which is likely to have an even more profound impact — not only on payments but also on overall daily banking services. PSD2 will cause the retail banking landscape to be more open and competitive by enabling new value propositions and business models.
North America. With a retail-payments revenue pool of $242 billion (nearly 30% of the global retail total), it’s no surprise that North America was home to 60% of payments-related investment in fintechs from 2010 through 2015. The largest source of revenue (63%) is being generated by the credit-card value chain, providing a strong rationale for banks to focus on this particular area. BCG also believes that incumbents should dedicate attention and resources to faster-payments initiatives, which are in various stages of development but are likely to be mainstream within five to ten years in the US and Canada.
Rapidly Developing Economies. RDEs are showing robust overall expansion in payments-related businesses despite the slowdown in GDP growth in some countries. Growth has been driven by generally stronger macroeconomics (compared with mature markets), government initiatives that are expanding the banked population, private-sector investment that is fueling card penetration and the growth of point-of-sale (POS) terminals, and a mobilization of consumers that is broadening browser-based and in-app commerce. These drivers, in turn, are continuing to propel the migration from cash to noncash payment types. Indeed, the estimated annual growth in the value of bank-card payments in emerging markets from 2015 through 2025 is estimated to be almost double the rate in mature markets (11% versus 6%).