September 18th, 2023 | Updated on November 18th, 2023
In the fast-paced world of finance, staying ahead of the curve is paramount.
The 2023 McKinsey Global Payments Report provides valuable insights into the ever-evolving payments industry and outlines how banks and other stakeholders can seize opportunities in this dynamic landscape.
The 2022 performance of the payments industry showcased continuous transformation, presenting promising avenues for growth and improved margins across different regions and products.
A deeper examination of revenue patterns reveals significant structural changes, particularly in the realms of instant payments and digital wallets.
This year’s edition of McKinsey’s Global Payments Report draws from extensive market intelligence collected in the Global Payments Map, encompassing over 25 payment products in 47 countries, representing a substantial 90 percent of global GDP.
Some of the key findings from this report include:
- Global Payments Revenue Soars: Global payments revenue experienced double-digit growth for the second consecutive year, reaching an all-time high of over $2.2 trillion.
- India’s Ascendance: India’s payments market witnessed sustained growth, propelled by the displacement of cash, catapulting it into the top five countries for payments revenues.
- Interest-based Revenue Surges: For the first time in several years, interest-based revenue contributed nearly half of the total revenue growth.
- Decline in Cash Usage: Globally, cash usage decreased by almost four percentage points in 2022. Over the past five years, electronic transactions have grown nearly three times faster than overall payments revenue.
Resilient Revenue Growth Across Regions
Payments revenue growth displayed remarkable resilience, surpassing long-term trends despite regional challenges.
In 2022, payments revenues surged by 11 percent, marking the second consecutive year of double-digit growth.
Notably, North America, Latin America, and Europe, the Middle East, and Africa (EMEA) all experienced substantial growth.
The Asia-Pacific region, which has been a primary growth driver in recent years, faced a unique situation in 2022.
While regional revenues grew by only 4 percent, this was largely due to a 3 percent decline in payment revenues in China.
Excluding China, the Asia-Pacific region grew at a remarkable rate of 25 percent.
Countries with the largest payments revenue pools, such as Brazil, India, Japan, and the United States, posted strong results in both interest and fee-driven revenues.
A Shift Towards Interest And Commercial Segments
Interest rates played a pivotal role in driving revenue growth in many markets, with approximately half of the revenue growth in 2022 stemming from rising interest rates.
This shift was most pronounced in the EMEA region, where net interest margins experienced significant growth.
The balance between commercial and consumer segments also shifted, with commercial accounting for 53 percent of revenues and consumers contributing 47 percent. While this mix varied across regions, commercial revenues have been on the rise globally.
Cross-Border Payments Thrive
Cross-border payment dynamics witnessed robust growth, with flows reaching approximately $150 trillion in 2022, a 13 percent increase from the previous year.
This surge in cross-border transactions translated into a 17 percent rise in cross-border revenues, totaling $240 billion. Notably, cross-border consumer payments increased at double-digit rates.
The US-Latin America corridor emerged as a prominent hub for C2C remittances, representing 11 percent of the total value of such flows.
Central America also gained relevance as a destination for remittances and humanitarian aid from the United States.
Future Growth Drivers: Instant Payments And Digital Wallets
The report suggests that future revenue growth will be fueled by innovations in instant payments and the proliferation of digital wallets in specific regions.
Electronic payment transaction volumes have consistently outpaced payments revenue growth over the past five years, reflecting evolving preferences, a shift toward lower-fee options, and declining margins with scale.
Instant payments are central to the transition away from cash, with Brazil expected to witness significant growth in this area.
In contrast, the growth of instant payments in India is projected to be more modest due to the absence of fees for the Unified Payments Interface (UPI).
Several European countries, like Germany, see instant payments as a premium option, offering strong potential for revenue growth.
By 2027, cash-dependent developing economies are likely to make substantial shifts toward instant payments, comprising roughly half of all payment transactions.
Meanwhile, mature markets like the US and the UK are expected to experience more gradual adoption, with the launch of the Federal Reserve’s FedNow real-time payment rails in July 2023 potentially acting as a catalyst.
The Dawn Of The Decoupled Era
Looking beyond the immediate future, the report identifies the potential emergence of a fourth era in the payments industry, termed the “Decoupled Era.”
This era will likely witness payments becoming increasingly detached from traditional accounts and fixed repositories of value, offering users greater convenience, affordability, and security.
The Decoupled Era’s success will hinge on technology, with contenders like platform-as-a-service (PaaS) models and generative AI poised to shape the landscape.
Fintechs may pivot toward traditional financial services or pursue partnerships, while banks are expected to seek greater independence and control across the payment value chain.
Opportunities On The Horizon
As the payments industry continues its transformation, numerous opportunities beckon. Cross-border transactions, especially those involving low-value payments in consumer and SME segments, offer substantial growth potential.
Automating and digitizing various banking functions, along with enhanced fraud detection using generative AI, present avenues for efficiency and profitability.
Furthermore, banks can focus on optimizing deposit strategies, modernizing technology stacks, and addressing the evolving landscape of financial fraud. These strategic moves are essential for staying competitive and ensuring that banks remain central to customers’ financial ecosystems.
In conclusion, the 2023 McKinsey Global Payments Report underscores the resilience and potential of the payments industry.
As we navigate the transition to the Decoupled Era, stakeholders in the finance sector must be agile, innovative, and prepared to embrace new technologies to thrive in this ever-evolving landscape.
The future of payments is exciting, and those who adapt proactively will undoubtedly reap the rewards of this transformative era.