McKinsey Global Payments Report 2021 - It’s the questions, stupid
by Jack Large
McKinsey’s 2021 Global Payment Report, as always, contains important fundamental analyses of the global payment business and how this affects banks. The report for 2020-2021 is split into four parts:
- Global payments 2021: Transformation amid turbulent undercurrents
- CBDC and stablecoins: Early coexistence on an uncertain road
- How transaction banks are reinventing treasury services
- Merchant acquiring and the $100 billion opportunities in small business
They show the areas McKinsey feel are important which we summarise below, but it is the questions - that are asked throughout the report – which are vital.
McKinsey predict that the global payments sector is poised for a quick return to healthy growth, but the benefits will not flow evenly to all participants with:
- The pandemic reinforcing major shifts in payments behaviour: declining cash usage, migration from in-store to online commerce, adoption of instant payments which will probably endure
- New form factors and faster payments emerging very rapidly, viz:
- Digital-wallet usage surged worldwide
- Real-time payments played an increasingly important role in the global payments ecosystem, with the number of such transactions soaring by 41 per cent in 2020 alone
- Cross-border payments: the results were mixed due to nuances in the underlying segments:
- The next frontier will be that commerce facilitation rather than a discrete payment experience will come to the fore as:
- Digital ID will increasingly enable payment solutions
- ecosystems will emerge demanding new, more robust services, e.g. already less than one-third of Square’s revenue can be strictly categorized as payments. Similarly, within five years, expect 40 per cent of merchant acquirer revenues to stem from activities other than payment processing.
- Payments and banking-adjacent software, infrastructure, and services
- Commerce, sales, and trade enablement.
The payments industry now encompasses the whole end-to-end money-movement process, including the services and platforms enabling this commerce journey. McKinsey recommends that for players with established credibility in the provision of core payments functionality, the following areas offer attractive natural extensions, although these opportunities will not be evenly distributed across regions:
- Payments and banking-adjacent software, infrastructure, and services.
- Commerce, sales, and trade enablement.
- Balance-sheet-based offerings
McKinsey conclusion is that “Players electing not to adapt their strategies—whether by choice, inaction, or lack of investment capacity—are likely to endure below-peer growth and risk being displaced on key customer experiences.” So, the only question is: Are you going to get stuck in or are you going to get out of the business? Anything else is a waste of time.
CBDC and stablecoins: Early coexistence on an uncertain road
McKinsey describes the rapid rise in circulation of stablecoins over the past couple of years, and how central banks have stepped up efforts to explore their own stable digital currencies. And how many see the current development of CBDCs as a response to the challenge private-sector stablecoins could pose to central bank prerogatives and as evidence of the desire of institutions to address long-term goals such as payment systems efficiency and financial inclusion. Cash usage in many countries continues to dwindle, while the cost to maintain its infrastructure does not.
Importantly, McKinsey believes that central banks envision CBDCs as more than simply a digital-native version of traditional notes and coins. Beyond addressing the challenge of greater financial inclusion, some governments view CBDCs as programmable money—vehicles for monetary and social policy that could restrict their use to basic necessities, specific locations, or defined periods of time.
McKinsey ask two fundamental questions about the development of CBCDS (Central Bank Digital Currencies):
- will central banks focus first on retail or wholesale use cases, and emphasize domestic or cross-border applications?
- how rapidly will national agencies pursue regulation of stablecoins prior to issuing their own CBDCs?
Not surprisingly McKinsey points out that the co-evolution of stable coins and CBDCs will directly impact society. After stressing that the future is not clear, McKinsey then lists several key questions.
The closing paragraph after these questions is vital: “We expect answers to many of these questions to become clearer over the next few years as both stable coins and CBDCs become more widely available, and the payments industry confronts perhaps the biggest disruption in its history. While the use cases of CBDCs and stable coins are still emerging, McKinsey stress that it is not too early to prepare for such disruption.”
How transaction banks are reinventing treasury services
McKinsey clearly understands the increasing role of cash and liquidity as key indicators of financial health with liquidity metrics receiving as much focus as more widely publicized measures like operating margins and EBIT. Of course, they point out that banks are increasingly partnering with fintechs and software players. And found increasing emphasis by corporate treasurers on cash flow forecasting and liquidity management. In the development of new bank-fintech partnerships, McKinsey’s key success factors are:
- Document a commercial approach determining both ownership and roles with regard to customer engagement
- Develop a go-to-market strategy tailored to customer segments
- Identify and agree on an IT implementation and delivery road map to serve as the baseline from which the bank will develop its commercial campaigns
- Establish a dedicated IT-business governance team with recurring meetings to address commercial challenges as well as technology enhancements, potential change requests, or new deployments
- Develop internal expert capabilities in the partnership products (likely in product specialist and relationship manager roles) as well as new digital tools the fintech may bring to the table as key assets
- Identify KPIs by which the overall partnership will be valued and establish the proper time frame for KPI monitoring and assessment.
Merchant acquiring and the $100 billion opportunity in small businesses
McKinsey have spotted a $100bn opportunity in merchant acquiring for small business by providing merchants with value-added services and solutions for enabling e-commerce. Merchants are increasingly willing to pay for commerce-enablement services, such as loyalty programs, gift cards, and affiliate marketing, as well as for payments performance improvements such as enhanced authorization rates and chargeback mitigation.
McKinsey outline four strategies for acquirers pursuing growth in which they are recommended to employ a mix of four strategies:
- Optimize the performance of Independent Software Vendors (ISV) partners
- Target a broader share of merchants’ expense wallets
- Focus on specific industries such as restaurants, education, etc.
- Develop solutions for platforms, e.g. eBay, Etsy, etc.
McKinsey concludes that: “To keep growing, merchant acquirers will need to expand beyond core payments acceptance to offer merchants solutions for enabling e-commerce. With disruptive players already investing heavily in this arena, failure to move fast could come at a high cost in lost growth.”
CTMfile take: The 2021 Global Payments Report is essential reading for banks and other suppliers in the payment industry who all need to recognise that: The payments industry now encompasses the whole end-to-end money-movement process, including the services and platforms enabling this commerce journey. AND that: the only question is: Are you going to get stuck in or are you going to get out of the business? Anything else is a waste of time.
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