There are plenty of reports out there about global payments, but there are a couple that are particularly noteworthy. One of them is the McKinsey offering – this year the McKinsey report is titled Global Payments 2015: A Healthy Industry Confronts Disruption. The Global Payments report hits upon all of the key happenings in the industry and makes some forecasts for the next 5 years. As the title suggests a large portion of the report is dedicated to disruption, read the report for full details. There are some very interesting statistics and examples – well worth a read! In this post, I will outline 4 of the key disruptive themes from the McKinsey Global Payments 2015 report:
Global Payments Trends over the next 5 Years
Overall, McKinsey forecast the following trends in global payments over the next 5 years:
- New entrants will disrupt financial services
- Domestic payment infrastructures are being upgraded
- Cross border payments will be rejuvenated
- Digital will disrupt transaction banking
- Digital is waging war on cash
1. Non-bank digital newcomers are making a BIG impact
- Technology leaders such as Facebook, Samsung, Apple and Google are moving into the payments space
- Analysis from CB Insights reveals that global investments in financial service start-ups has gone from $3billion in 2013 to $12 billion in 2014
- Innovation in the financial services is focusing on payments
A lot of people are saying this is just a bubble and it will soon pass. But McKinsey propose that this time it is different:
- The new comers arent minnows, instrad they are “technology titans” such as Facebook, Apple, Google, Alibaba… with huge revenues, highly engaged users whose lives revolve around their their platforms
- Global Smartphone penetration according to Forrester will exceed 50% by 2017, this coupled with changing customer demands (particularly millennials) and adoption by merchants is changing the way in which people can make, process and receive payments
- Evolving customer expectations which leverage technology to do things like making a payment in a faster, simpler and more efficient manner
- Interestingly McKinsey explain how payments allow newcomers to take control of the customer interface, which would result in “banks being relegated to the ‘pipes’ that other players use to move money”
2. Payments infrastructures are being revamped
The challenge as McKinsey put it is that payments are evolving with the introduction of digital channels and technologies, cloud computing, big data, analytics, agile development…..the list continues. But a lot of the worlds clearing systems being used by banks are still running on pre-digital technology that cannot compete or meet the demands of the modern digital and connected world.
As a result, the industry is recognising the shortfall and embarking on modernising its infrastructure. According to McKinsey if the current projects and anticipated payments infrastructure improvement projects happen, within the next few years over 90% of todays credit transfers would run on “modernised rails”.
But banks are also running on legacy systems and they too must modernise!
3. Cross border payments are finally getting some attention
McKinsey explain how cross border payments help to accumulate a significant portion (40%) of the payment industry’s transaction related revenue, but constitutes a relatively low volume (20%). Also, cross border payments are the poor cousin of payments – they haven’t received the same level of attention and investment as domestic payments have, and meanwhile customers continue to have a terrible experience.
That is ripe territory for “attackers”. Over the last 5 years digital newcomers have come into the cross border space and it is now becoming a more competitive arena. Innovation in this space is resulting in a 2 pronged attack for incumbents via:
- The customer interface – addressing customer pain points when making cross border payments
- Behind the scenes infrastructure – which is seeking to interconnect infrastructures, or more interestingly through investigating and deploying the distributed ledger (blockchain) technology
4. Transaction banking will go digital
In and amongst all of the hype with retail and consumer payments, corporate payments are still somewhat lagging. Corporates are demanding the digitalisation of their transaction banking. McKinsey cite 2 examples that many corporates ask on a very regular basis:
- Why arent my reports up to date?
- Why does it take weeks to set up a new account?
Digital, multi-channel, real time, fast, flexible and convenient are words that you wouldn’t traditionally associate with corporate banking. But this is changing according to McKinsey. A Economist Intelligence Unit survey of 208 banking executives revealed that 46% consider implementation digital strategies a priority. – Surely its too late to only now be considering implementing a digital strategy….?!?!
There is reference to SWIFT’s Electronic Bank Account Management (EBAM) service and their 3SKEY product, which is interesting!
McKinsey acknowledge that no bank has wholeheartedly made the plunge and transformed itself into a digital champion. Time will tell if this digital transformation happens. The question is, do incumbents have time….? Or, could it be that by the time the incumbents make the plunge it – will it be too late….?