The global payments industry is facing four major disruptions – non-bank entrants, modernization of infrastructure, cross-border players and the push to bring the same convenience to commercial as retail banking, according to McKinsey.
This disruption will take place in an industry that has been growing steadily, and will accelerate to 6% annual revenue growth until 2019.
This growth is forecast to continue even as Asia Pacific is projected to slow down. The biggest driver of revenue growth to date has been from increasing payment volumes, but there will be a “re-balancing” of revenue sources, and the disruption will be a part of it.
“Nonbank digital entrants”, companies like Square and Stripe are increasingly taking over the payments sphere. They are leveraging the smartphone’s role as a primary computing device, and, according to McKinsey, “rapidly evolving customer expectations”.
“Things will be different this time due to the nature of the attackers” McKinsey notes.
As a result, banks are modernizing their payments infrastructure. McKinsey notes incumbents in 15 countries have already begun the process and others are in the planning stages. But because of the cost of upgrades, banks need to find more ways to create value on top of the infrastructure and “accelerate the war on cash”. The war on cash is important, as encouraging more money being held in transaction and other accounts is already a huge source of revenue and could be bigger.
The inefficiencies in cross-border payments is one of the big targets for financial technology companies. Companies like Transferwise are raising huge amounts to tackle the pain points in this space – cost, lack of transparency, low processing times etc. “Banks have done little to improve the back-end systems and processes involved in cross-border payments,” McKinsey notes.
The last disruption highlighted is the need for business-facing businesses to mimic the convenience and security of the retail sector. This process has already taken place in some areas, the rise of Xero’s cloud accountancy software for example. But incumbents in the business-facing payments space need to mimic the usability of companies like Venmo.
“Transaction bankers are becoming more aware of the nonbank threat in their own backyard and of the potentially major downside of failing to invest in digital infrastructures and services.”
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