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2021 Mckinsey Global Payments Report
2021 Mckinsey Global Payments Report
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Global Banking Practice
October 2021
Contents
2 Foreword
We close with a look at how the new payments- As always, we welcome the opportunity to discuss
adjacent revenue models will help define these essential payments topics with you in
the future of merchant services, as the line greater detail.
The authors wish to thank the following colleagues for their contributions to this report: Ashwin Alexander,
Diksha Arora, Sukriti Bansal, Reet Chaudhuri, Vaibhav Dayal, Ian De Bode, Olivier Denecker, Nunzio
Digiacomo, Puneet Dikshit, Matt Higginson, Vik Iyer, Yash Jain, Tobias Lundberg, Yaniv Lushinsky, Baanee
Luthra, Matteo Mantoan, Ratul Nagpal, Marc Niederkorn, Glen Sarvady, Nikki Shah, Julie Stefanich,
Bharath Sattanathan, and Aparna Tekriwal.
October 2021
4
Undoubtedly, 2020 was a tumultuous year on economies spent significant portions of the year in
many levels. Payments was no exception—the lockdown.
sector experienced its first revenue contraction in
11 years, a consequence of the economic slowdown Looking forward, we see a handful of primary drivers
that accompanied the global health crisis of COVID- influencing the payments revenue trajectory. On the
19. Still, government and regulatory measures such one hand, continued cash displacement and a return
as fiscal and monetary stimulus held the decline to global economic growth will accelerate existing
below the 7 percent we projected in last year’s upward trends in the share and number of electronic
report.¹ At the same time, the continued digitization transactions. On the other, interest margins will
of commercial and consumer transactions likely remain muted. Sustained softness in this key
contributed even greater upward momentum than topline contributor will create greater incentive for
expected. payments players to pursue new fee-driven revenue
sources and to expand beyond their traditional focus
Global payment revenues totaled $1.9 trillion in to adjacent areas such as commerce facilitation and
2020, a 5 percent decline from 2019 (Exhibit 1), as identity services.
compared to the 7 percent growth rate observed
between 2014 and 2019. This result seems fairly Given the above assumptions we expect global
intuitive on the surface; a granular analysis, payments revenues to quickly return to their long-
however, reveals a series of often offsetting trends. term 6 to 7 percent growth trajectory, recouping
Overall, the payments industry proved remarkably 2020’s declines in 2021 and reaching roughly
resilient to drastic economic changes even as many $2.5 trillion by 2025. More importantly, however,
1
Philip Bruno, Olivier Denecker, and Marc Niederkorn, “Accelerating winds of change in global payments,” October 2020, McKinsey.com.
Exhibit 1
Global
Global payments
paymentsrevenues
revenuesdeclined
declinedbyby
5 percent in in
5 percent 2020.
2020.
Share of banking
38 38 39 37 39 40
revenues, %
Exhibit 2
Asia–Pacificdominates
Asia-Pacific dominatesthethe global
global payments
payments revenue
revenue pool.pool.
North Latin
APAC America EMEA America
100%= 900 485 335 155
8 6 5
Cross-border
transactions1 16
11 16
Account- 10
related 10
30
liquidity2 12
Commercial 11
3
24 1
3
9 12
Domestic
transactions3 19
2
3
Credit cards 4 18 17
12
Cross-border 2
transactions4
Account-
related 15
Consumer liquidity
22
Domestic 7
transactions 33 34
Credit cards 15
11
1
Cross-border payment services (B2B, B2C).
2Net interest income on current accounts and overdrafts.
3Fee revenue on domestic payments transactions and account maintenance (excluding credit cards).
4Remittance services and C2B cross-border payment services.
Source: McKinsey Global Payments Map
Note: Figures may not sum to 100%, because of rounding.
Proportionally, the impact was felt even more Enduring shifts in behavior
sharply in EMEA, which traditionally relies more The pandemic reinforced major shifts in payments
heavily on NII, and endured an absolute decline of behavior: declining cash usage, migration from
$42 billion over the past decade (Exhibit 2). Some in-store to online commerce, adoption of instant
banks have begun offsetting the interest revenue payments. These shifts create new opportunities for
loss through higher account maintenance fees, payments players; however, it is unclear which are
while negative interest rates on accounts have permanent and which are likely to revert—at least
materialized in some European markets—mostly on partially—to prior trajectories as economies reopen.
corporate accounts but increasingly on large retail Nonetheless, the long-term dynamics seem clear.
deposits as well.
Cash payments declined by 16 percent globally in
Cross-border payments, a natural casualty of 2020, performing in line with the projections we
reduced travel and global supply chain challenges, made last fall for most large countries (Brazil 26
accounted for the remainder of the revenue decline. percent decline, United States 24 percent decline,
By contrast, the explosion in e-commerce and United Kingdom 8 percent decline). Although the
reduction in cash usage helped minimize the decline pandemic-driven temporary shuttering of many
in domestic transaction fee income. commercial venues was the primary trigger in this
dramatic shift, other actions (such as countries like
We expect pressure on both fee and processing Argentina, Poland, and Thailand increasing ATM
margins to continue in many regions, while withdrawal fees, and the continued downsizing
recovery in interest margins is expected to be slow of ATM networks in Europe) reinforced and
and moderate at best. These combined forces accelerated behavioral changes already under way.
disproportionally affect incumbent players reliant We expect cash usage to rebound to some extent in
on traditional revenue streams, such as card issuers 2021, due to a partial return to past behaviors, fewer
and banks holding significant commercial and lockdowns, and a broader economic recovery, but
consumer deposit balances, and thus spur a need evidence indicates that roughly two-thirds of the
to rethink payments revenue models and identify decrease is permanent.
alternative paths to value.
The reduction in cash demand is leading to
As might be expected given 2021’s uneven global increasing unit servicing costs for its distribution
economic recovery, payments trends are showing and collection, prompting banks to review ATM
similar disparity by country and region; for instance, footprints and rethink their cash cycle management.
revenues in Asia-Pacific and Latin America are One response has been growth in ATM sharing
expected to grow in the 9 to 11 percent range, between network banks and greater outsourcing
compared to EMEA and North America at 4 to 6 of ATM servicing to specialized cash-in-transit (CIT)
percent. In aggregate, a likely solid increase in 2021 players—first observed in Northern Europe
should leave global payments revenues equivalent and now in Latin America (for example, a joint
2
“Digital wallets poised to overtake contactless cards as instore payment of choice in Australia,” Finextra, May 19, 2021, finextra.com.
3
Janine Marie Crisanto, “Indonesia e-wallet transaction to reach $18.5 billion in 2021 amid fierce competition,” The Asian Banker, April 9, 2021,
theasianbanker.com.
4
“Global Real-Time Payments Transactions Surge by 41 Percent in 2020 as COVID-19 Pandemic Accelerates Shift to Digital Payments - New
ACI Worldwide Research Reveals,” ACI Worldwide, March 29, 2021, investor.aciworldwide.com.
5
Mari Elka Pangestu, “Harnessing the power of digital ID,” World Bank Blogs, August 20, 2020, blogs.worldbank.org.
1
Revenues include payment and collection fees, FX spread and float revenue, and documentary business fees for relevant trade flows for 46 Payments Map
countries driving approximately 95% of global GDP.
2Estimates, rounded. C2C and B2C not included.
Source: McKinsey Global Payments Map
Financial Stability Board (FSB)—aiming to further As payments become integrated into broader
increase efficiency of cross-border transactions, customer journeys, the sector’s boundaries have
we project 6 percent revenue growth in total cross- naturally expanded. In the 1980s, we defined
border payments revenue over payments as the various instruments, networks,
the next five years. We discuss this further in access and delivery mechanisms, and processes
chapter 3. facilitating the exchange of value between buyers
and sellers of goods and services. But this notion
of payments as a discrete experience is gradually
The next frontier disappearing. The payments industry now
The process of reexamining long-standing encompasses the end-to-end money-movement
payments value propositions is already under process, including the services and platforms
way. While old tenets still hold true—scale still enabling this commerce journey.
matters and “owning” the customer relationship
remains important, for instance—sticking to them For example, while payments as traditionally defined
is no longer sufficient to ensure success. The comprise only 5 to 7 percent of a typical merchant’s
absorption of payments into the full commercial/ software and services spending, payments
consumer purchase-to-pay journey has given rise to providers with solid reputations for execution and
ecosystems demanding new, more robust services; innovation are well positioned to deliver solutions
for example, commerce facilitation rather than a addressing needs constituting 40 percent of such
discrete payment experience. expenses. Such opportunities help explain why less
Asia–Pacific has been the largest and fastest-growing payments revenue region for the past several years. Given the
consistently strong growth rate of China’s economy, this result is not surprising. More interesting, however, is the unique
composition of Asia–Pacific’s payments revenue and its implications for longer-term growth.
It is illuminating to consider the payments characteristics of the rest of Asia-Pacific apart from China. Whereas China
accounts for roughly three-fourths of the region’s revenue—and indeed generates more payments revenues than any of
the individual major global regions—a disproportionate share of its payments revenue is generated by net interest margins
earned on deposit balances—particularly those in commercial accounts. As a consequence, the majority of China’s pay-
ments economics are inaccessible to institutions and providers domiciled outside the country.
The payments dynamics for the rest of Asia–Pacific stand in stark contrast (exhibit). In fact, these characteristics bear
a striking resemblance to Latin America—not only in terms of total revenue (its $210 billion is roughly 35 percent higher
than Latin America’s)—but more importantly in its relative focus on consumer activity and credit cards. Only a third of
Asia–Pacific’s revenues outside of China are derived from account liquidity, as compared to 50 percent for China.
The pandemic has accelerated reductions in cash usage, particularly in key markets like Indonesia and Thailand, creating
new digital revenue opportunities. While some transactions will return as physical storefronts reopen, a solid majority has
likely moved permanently to card and wallet-based forms, as well as to emerging online categories such as telemedicine
and online yoga and fitness.
13
Account-related 35
liquidity2 11
Commercial 4
4
Domestic 22
transactions3 19
Credit cards 4
Cross-border 1 12
transactions4
14
Account-related
Consumer liquidity 5
Domestic 26
transactions 11
Credit cards
China Asia-Pacific
excluding China
1
Cross-border payment services (B2B, B2C).
2Net interest income on current accounts and overdrafts.
3Fee revenue on domestic payments transactions and account maintenance (excluding credit cards).
4Remittance services and C2B cross-border payment services.
Source: McKinsey Global Payments Map
Although China has served as Asia–Pacific’s primary growth driver over the past decade, India’s payments revenues are
now growing at a faster rate, and in 2020, surpassed Japan as the region’s second-largest revenue generator. Indonesia is
another impressive growth story, posting a 2014–19 CAGR of nearly 9 percent, coinciding with multiple payments-related
reforms launched by the regulator. A decline in NIMs reversed this trend for 2020, but indicators point to a return to rapid
growth in 2021. We project India and Indonesia alone will generate $34 billion of incremental annual revenue by 2025, rep-
resenting annual growth of nearly 8 percent.
Despite low single-digit revenue growth in mature payments countries such as Japan and Australia, we forecast the Asia–
Pacific region excluding China to grow at nearly 7 percent between 2021 and 2025—a rate only slightly slower than China’s.
The growth rates of strategically important payments categories like cross-border and instant payments are also expected
to remain on similar trajectories.
The region is filled with opportunity: from rapidly expanding B2B activity to an explosion in digital wallets supporting small
businesses as well as consumers, accelerated digitization fueled by rapid infrastructure developments, and integrated
platforms providing access to multiple ecosystems. Increased access to real-time payment rails has fueled rapid growth in
bilateral cross-border payment activity: notable early successes span the Singapore, Indonesia, and Thailand corridors—an
area with significant potential for value-added services.
Players interested in the Asia–Pacific market should not overlook growth engines in countries beyond China, many of which
offer clearer paths to foreign participation.
Philip Bruno is a partner in McKinsey’s New York office, Olivier Denecker is a partner in the Brussels office, and
Marc Niederkorn is a partner in the Luxembourg office.
The authors would like to thank Sukriti Bansal, Baanee Luthra, Glen Sarvady, Yash Jain, Aparna Tekriwal, Diksha Arora,
Vaibhav Dayal, and Ratul Nagpal for their contributions to this chapter.
© Sunyixun/Getty Images
October 2021
14
Cryptocurrency has been touted for its potential (blockchain-based) ledger for transaction
to usher in a new era of financial inclusion and execution and record keeping, and by creating a
simplified financial services infrastructure globally. (now) widely traded currency outside the control
To date, however, its high profile has derived more of any sovereign monetary authority. Thousands of
from its status as a potential store of value than as similar decentralized cryptocurrencies now exist,
a means of financial exchange. That disconnect is collectively generating billions of dollars in global
now evolving rapidly with both monetary authorities transaction volume every day.
and private institutions issuing stabilized
cryptocurrencies as viable, mainstream payments Although the aggregate market value of such
vehicles. cryptocurrencies now exceeds $2 trillion, extreme
price volatility, strong price correlation to Bitcoin,
The European Central Bank announced recently it and often slow transaction confirmation times
was progressing its ‘digital euro’ project into a more have impeded their utility as a practical means of
detailed investigation phase.¹ More than four-fifths value exchange. Stablecoins aim to address these
of the world’s central banks are similarly engaged shortcomings by pegging their value to a unit of
in pilots or other central bank digital currency underlying asset, often issued on faster blockchains,
(CBDC) activities.² Concurrently, multiple private, and backing the coins wholly or partially with
stabilized cryptocurrencies—commonly known state-issued tender (such as the dollar, pound,
as stablecoins—have emerged outside of state- or euro), highly liquid reserves (like government
sponsored channels, as part of efforts designed to treasuries), or commodities such as precious metals.
enhance liquidity and simplify settlement across Collectively, nearly $3 trillion in stablecoins such as
the growing crypto ecosystem. Tether and USDC were transacted in the first half of
2021 (Exhibit 1).
Although the endgame of this extensive activity that
spans agile fintechs, deep-pocketed incumbents, With the rapid rise in circulation of stablecoins
and (mostly government-appointed) central over the past couple of years, central banks have
banks remains far from certain, the potential for stepped up efforts to explore their own stable
significant disruption of established financial digital currencies (Exhibit 2). Some efforts to
processes is clear. Against this backdrop we offer a create CBDCs have been born out of reservations
fact-based primer on the universe of collateralized about the impact of privately issued stablecoins on
cryptocurrency, an overview of several possible financial stability and traditional monetary policy,
future scenarios including potential benefits and and with the goal of improving access to central
obstacles, and near-term actions that participants bank money for private citizens, creating greater
in today’s financial ecosystem may consider in order financial inclusion and reducing payments friction.
to position themselves.
Various public statements indicate that central
banks envision CBDCs as more than simply a
The digital currency landscape digital-native version of traditional notes and
The basic notion of a digital currency (replacing coins. Beyond addressing the challenge of greater
the need for paper notes and coins as a means financial inclusion, some governments view CBDCs
of exchange with computer-based money-like as programmable money—vehicles for monetary
assets) dates back more than a quarter of a century. and social policy that could restrict their use to basic
Early efforts at creating digital cash—such as necessities, specific locations, or defined periods
DigiCash (1989) and e-gold (1996)—were issued of time.
by central agencies. The emergence of Bitcoin
in 2009 dramatically altered this model in two Implementing such functionality will be a complex
important ways: by establishing a decentralized and multilayered undertaking. Meanwhile, central
1
“Eurosystem launches digital euro project,” press release, European Central Bank, July 2021, ecb.europa.eu.
2
Codruta Boar and Andreas Wehrli, Ready, steady, go? Results of the third BIS survey on central bank digital currency, Bank for International
Settlements, BIS Papers, number 114, January 2021, bis.org.
700
2500
600
2000
500
1500 400
300
1000
200
500
100
0 0
Aug-17 Jan-18 Jan-19 Jan-20 Jan-21
1
Volume of stablecoins exchanged represents all transactions recorded on the relevant blockchains. These volumes are distinct from the volume of crypto traded
on exchanges, some of which may be transacted between accounts off-chain.
Source: Theblockcrypto.com
Exhibit 2
proportionofofcentral
The proportion centralbanks
banks actively
actively engaged
engaged in CBDC
in CBDC workwork is growing.
is growing.
Share of respondents conducting work on CBDCs, %
90
80
70
60
50
40
30
20
10
0
2017 2018 2019 2020
Source: Codruta Boar and Andreas Wehrli, “Ready, steady, go? – Results of the third BIS survey on central bank digital currency,” Bank for International
Settlements, January 2021, bis.org.
Potential future scenarios: Coexistence Many see the current development of CBDCs
or primacy? as a response to the challenge private-sector
It is too early to confidently forecast the trajectory stablecoins could pose to central bank prerogatives,
and endgame for CBDCs and stablecoins, given the and as evidence of the desire of institutions
multitude of unresolved design factors still in play. to address long-term goals such as payment
For instance, will central banks focus first on retail systems efficiency and financial inclusion. Cash
or wholesale use cases, and emphasize domestic usage in many countries continues to dwindle,
or cross-border applications? And how rapidly will while the cost to maintain its infrastructure does
national agencies pursue regulation of stablecoins not. Similarly, many countries’ existing electronic
prior to issuing their own CBDCs? payment systems are relatively inefficient to
operate and often not instantaneous or 24/7.
To begin to understand some of the potential Perhaps most importantly, proper deployment of
scenarios, we need to appreciate the variety and a regulated digital currency accessible through
applications of CBDCs and stablecoins. There mobile devices without the need for a formal bank
is no single CBDC issuance model, but rather a account could potentially enhance payments
continuum of approaches being piloted in various security and efficiency (ensuring transaction finality
countries. One design aspect hinges on the through distributed consensus with private key
entity holding CBDC accounts. For instance, the cryptography), while satisfying central banks’ goal
account-based model being implemented in the of increasing financial inclusion and advancing the
Eastern Caribbean involves consumers holding public good.
deposit accounts directly with the central bank. At
the opposite end of the spectrum, China’s CBDC By contrast private stablecoins have flourished,
pilot relies on private-sector banks to distribute perhaps in part through being unencumbered by
and maintain eCNY (digital yuan) accounts for their such an expansive mission. They’ve delivered value
customers. The ECB approach under consideration as a source of liquidity in the crypto ecosystem,
involves licensed financial institutions each often providing a “safe haven” for investors
operating a permissioned node of the blockchain during times of heightened volatility by obviating
network as a conduit for distribution of a digital the need to enlist a regulated venue to convert
euro. In a potential fourth model popular within the cryptocurrency holdings back into fiat deposits.
crypto community but not yet fully trialed by central Indeed, the emergence and growth of supply of the
banks, fiat currency would be issued as anonymous prominent stablecoin Tether first coincided with the
fungible tokens (true digital cash) to protect the rapid increase in cryptocurrency transaction volume
privacy of the user.
3
“From the payments revolution to the reinvention of money,” speech by Fabio Panetta, Member of the Executive Board of the ECB, at the
Deutsche Bundesbank conference on the “Future of Payments in Europe,” Frankfurt, November 27, 2020.
4
Paul Vigna, “Risks of Crypto Stablecoins Attract Attention of Yellen, Fed and SEC,” Wall Street Journal, July 17, 2021, wsj.com; Tory Newmyer,
“SEC’s Gensler likens stablecoins to ‘poker chips’ amid call for tougher crypto regulation,” The Washington Post, September 21, 2021,
washingtonpost.com.
5
Daniel Runde, “M-Pesa and the rise of the global mobile money market,” Forbes, August 12, 2015, forbes.com.
6
Aaron Klein, “China’s Digital Payments Revolution,” Brookings, April 2020, brookings.edu.
7
Santiago Pérez and Caitlin Ostroff, “El Salvador becomes first country to adopt Bitcoin as national currency,” Wall Street Journal, September 7,
2021, wsj.com.
8
“G20 confirm their support for the FATF as the global standard-setter to prevent money laundering, terrorist financing and proliferation
financing,” Financial Action Task Force, April 7, 2021, fatf-gafi.org.
9
Wolfie Zhao, “China publishes first e-CNY whitepaper, confirming smart contract programmability,” The Block, July 16, 2021, theblockcrypto.
The most advanced market application of CBDC to date has been the People’s Bank of China’s (PBoC) multicity pilot of its
digital version of RMB, called eCNY. ¹
From late 2019 the PBoC began to pilot test eCNY in Shenzhen, Suzhou, Xiongan, and Chengdu, initially through app and
wallet-based payments. The pilot gradually expanded to Shanghai, Hainan, Xian, Qingdao, and Dalian. As of June 2021, the
pilot test included over 20 million personal wallets, more than 3.5 million merchant wallets, and aggregate throughput of
more than 34 billion RMB ($5.2 billion). Initial focus has been on cash replacement for payment scenarios covering trans-
portation, shopping, and government services.
Financial inclusion is a key use case targeted to drive end-user adoption. A bank account will not be a prerequisite for
consumer use of eCNY, unless a user desires to replenish a digital wallet. eCNY will carry the same legal status as cash; the
PBoC will distribute the digital currency to six authorized state-owned banks, which will circulate it to consumers. Consum-
ers are able to download and deploy a digital wallet from these banks without holding an account with them.
Potential benefits include mitigated KYC risk and reduced compliance cost related to transaction monitoring and reporting,
given eCNY’s “controlled anonymity” (only central banks will have full access to trading data). Enhanced technical under-
writing capabilities are also anticipated, creating competitive differentiation for participating banks. As a social benefit, the
digital currency is expected to streamline the distribution of targeted subsidies.
Although no timelines for formal launch have been announced, plans are proceeding to feature eCNY capabilities at the
2022 Beijing Winter Olympics.
1
Formerly Digital Currency Electronic Payment or DC/EP.
— Investors in highly popular and speculative emerge as a global currency? To what extent will
cryptocurrencies—and their issuers—should citizens resist the full traceability of payments? And
anticipate the impact of CBDCs on their assets. to what extent will citizens be comfortable
The emergence of any single central-bank obtaining familiar banking services—such as high-
solution and related regulation could deter yield deposits, collateralized lending, working
private-sector innovation and hinder the growth capital, and payments services (all available in DeFi
of crypto ecosystems, potentially unsettling today)—without reliance on a traditional bank?
investors in an asset class driven so much by And finally, how quickly will we see innovation
sentiment. in blockchain protocols (e.g., proof of stake)
that dramatically reduces their environmental
Most of all, the co-evolution of stablecoins and impact?
CBDCs will directly impact society. While the future
is not yet clear, certain behaviors could well signal We expect answers to many of these questions to
the direction of this evolution: to what extent will become clearer over the next few years as both
physical cash still be used—and accepted—in stablecoins and CBDCs become more widely
society? In what medium of value will employees and available, and the payments industry confronts
bills be paid? Through what means will commerce perhaps the biggest disruption in its history. While
be conducted, particularly if digital currencies the use cases of CBDCs and stablecoins are still
issued on public distributed ledgers lower the cost emerging, it is not too early to prepare for such
of hosting accounts and speed payment delivery, disruption.
and to what extent could a single digital currency
Ian De Bode is an associate partner in McKinsey’s San Francisco office, Matt Higginson is a partner in the Boston office,
and Marc Niederkorn is a partner in the Luxembourg office.
© Baac3nes/Getty Images
October 2021
22
Cash and liquidity have long been considered important route to market and therefore potential
key indicators of corporate financial health, and partners. For their part, banks are clearly motivated
the pandemic has confirmed the continued to provide broad-based state-of-the-art support
relevance of this fundamental metric. During the for commercial banking functions that generate
crisis, “cash excellence” proved crucial in enabling over $550 billion in annual revenue, according to
continued operations for enterprises still early in McKinsey’s Global Payments Map.
their development; and as a business matures, it
becomes a key lever for releasing capital to invest Banks face several strategic decisions on this front.
in growth. Recently, liquidity metrics have received They must first determine their desired role in this
as much focus as more widely publicized measures evolving ecosystem: integrators and orchestrators
like operating margins and EBIT. of a full suite of services, background service
providers, or developers of proprietary front ends
Meanwhile, underlying trends in digitization built in-house. Factors such as geographic footprint,
and increased investor scrutiny are setting new client sector focus, and investment appetite will
standards for corporate treasury professionals. inform the best path for a given bank.
Cash forecasting is regularly cited among the
most inefficient processes by small and large Although the classic build-buy-partner decision
organizations alike. CFOs and CEOs are seeking remains relevant, recent years have seen a decided
partners to help them navigate the shift from tilt toward the partnership model within the treasury
reporting to predicting. Solution providers (whether space. Banks and third-party solutions usually
banks or software and fintech firms) able to solve offer different functionality and strengths, with
this problem will be well positioned to reinforce or all groups increasingly realizing they can exist in
extend commercial relationships. harmony. With speed to market a unifying objective,
bank distribution paired with software-firm agility
Historically, bank-provided treasury platforms has proven to be a potent combination, whether
have focused on core transaction execution central for the white labeling of third-party technology or
to their corporate relationships. The advent of in scenarios where banks serve as a channel for
software as a service and API connectivity has branded providers of these services.
made robust, multifunctional workstations far more
feasible; in response, software firms and other In this article we’ll explore the evolving needs of
third-party providers have grasped this opportunity corporate treasury functions, and the complex and
to create solutions that are gaining ground with fragmented provider landscape that has developed
corporate clients of all sizes across an array of to address them. Based on direct input from
sectors. practitioners we’ll also detail the factors that should
inform each bank’s decision on how to proceed in
Banks recognize the importance of being close the space, and offer examples of the components of
to decisions around core underlying payments, successful bank-provider partnerships.
investment, and financing flows that their corporate
customers are making. Liquidity management
tools—including treasury management, cash Evolving needs of the treasurer
forecasting, supply-chain finance (SCF)—are Forward-thinking CFOs and treasurers have begun
increasingly being embedded into the new to fundamentally rethink the treasury function,
generation of corporate global transaction shifting its role from custodian of historical cash
banking (GTB) portals. For fintechs and software activities to encompass a more strategic and
players with a focus on customer acquisition and expansive approach of “owning” the full suite of
retention, banks are increasingly viewed as an enterprise liquidity. In support of this mandate,
fully into the corporate workflow reduces the Banks face the ever-present decision of whether
risk of disintermediation from the underlying to build, partner, or acquire these capabilities.
payments, investment, and financing flows of Recent years have seen a material increase in the
corporate customers. Accordingly, corporate partnership model, for white labeling of third-party
liquidity-management tools—including treasury technology as well as banks acting as a channel
management, cash forecasting, and SCF—are or seller for such services. This model enables
increasingly embedded into the next generation of quicker time to market and faster introduction of
corporate GTB portals. new customer functionality. Fintechs and software
players with a focus on customer acquisition and
Some banks have developed vertically focused retention increasingly view banks as a priority
solutions with functionality and integrations channel and an efficient path to market (Exhibit 2).
designed to meet the unique needs of strategically
important customer segments. The rise of open In McKinsey’s experience, the following key success
banking, the ongoing search for new banking factors optimize the potential for bank-fintech
revenue models, migration of services to the cloud, partnerships to accelerate their time to market as
and client demand for integrated experiences are well as commercial impact.
also informing these strategic decisions. DBS has
been particularly active in this arena in Singapore; — Document a commercial approach determining
for instance, using APIs and mobile apps to enable both ownership and roles with regard to
real-time payments to online merchants and customer engagement. As an example, while
delivery-service drivers (see sidebar, “Asia–Pacific initial contact might be conducted by the fintech
focus”).
Payments 54
Fraud/risk management 38
Investment management 11
Insurance 6
International remittances 3
Source: Cornerstone Performance Report for Banks 2019, Cornerstone Advisors, 2019, crnrstone.com
While the Asia–Pacific payments sector has benefited from extensive fintech activity focused on digitizing small merchants
and enhancing overall business efficiency, there has been relatively lighter emphasis on modernizing treasury solutions for
large corporates. Such opportunities are limited in part by divergence in infrastructure and regulatory standards across
countries (currency convertibility, real-time payment rails, and market access, for example) making it challenging for banks
or software providers to create solutions capable of delivering sufficient scale and value for multinational clients operating
across the region.
Some banks in the region have taken the initiative to develop bespoke solutions addressing specific client needs,
however—for example:
— Singaporean multinational bank DBS implemented a fully automated real-time payment system for drivers at ride-
hailing firm Gojek. This created a differentiating feature recognized by the client as a recruiting advantage. Rather
than waiting until the end of the week for payment (as with other taxi firms), Gojek’s drivers can now transfer funds
to their bank account after each trip.
— ICICI Bank’s STACK offering provides customized digital banking services to companies in over 15 sectors, with
the goal of facilitating operations across these clients’ entire ecosystem. The Indian bank also established eight
“ecosystem branches” to support and expand the rollout of these capabilities across channel partners, employees,
vendors, and other counterparties.
Going forward, large Asia–Pacific corporate entities are likely to enjoy features such as dynamic cash-flow forecasting,
source-to-pay solutions, and multi-funder models, similar to their counterparts in more developed markets. In preparation,
banks in the region should stay ahead of the curve by rethinking their treasury-services strategies. This involves determin-
ing which client groups to target (as not all capabilities will resonate equally across sectors), which features are likely to gain
the most initial traction with that segment, and whether these solutions are best developed in-house or via partnership with
a fintech firm.
1
“Citi Partners with Fintech HighRadius to Launch Citi® Smart Match Powered by Artificial Intelligence and Machine Learning,” July 12, 2018,
highradius.com.
Alessio Botta is a senior partner, Nunzio Digiacomo is a partner, and Matteo Mantoan is a specialist, all in McKinsey’s
Milan office. Reet Chaudhuri is an associate partner in the Singapore office, and Nikki Shah is an associate partner in
the London office.
October 2021
30
Over the past decade, core payments processing affiliate marketing platforms and buy now, pay
has become commoditized, squeezing the margins later (BNPL) providers that position themselves as
of merchant acquirers. Their future growth is likely partners to help close a sale or drive more traffic
to come from providing merchants with value-added through the door.
services and solutions for enabling e-commerce.
Merchants are increasingly willing to pay for Meanwhile, as the payments business becomes
commerce-enablement services, such as loyalty more integrated into software, merchant-
programs, gift cards, and affiliate marketing, as services providers can address larger value pools.
well as for payments performance improvements According to data from a McKinsey analysis of card
such as enhanced authorization rates and charge- transactions at US merchant acquirers, payments
back mitigation. What’s more, enterprises that performance and commerce enablement could
have scaled globally or digitally are prepared to account for approximately 80 percent of revenue
pay a premium for sophisticated multi-country growth in payments-related merchant services over
processors, local support, enhanced reconciliation, the next five years (Exhibit 1).
payments-adjacent services, and better payments
performance in general.¹ This shift is even more Most of this expected revenue growth is likely to
pronounced in merchant categories where come from SMBs and the platforms that serve
digitization has recently accelerated, such as food them. Categories such as real estate, education,
and beverages, grocery, and homeware. and professional services include significant
numbers of small businesses that can be expected
After a decade of consolidation among scale to drive substantial growth in integrated payments
players, integration of payments and software, rapid solutions. This growth will be further fueled
digitization of small and medium-size businesses by the continuing expansion of marketplaces
(SMBs), and emergence of powerful disruptors— and social commerce, as small and even micro
independent software vendors (ISVs), fintechs, businesses (such as content creators) start to use
and innovative merchant acquirers—this arena is payments software and services. In total, SMBs
strongly contested and set to become even more are expected to spend more than $100 billion on
so in the coming years. In this chapter, we draw on payments services by 2025²—an opportunity that
McKinsey research and interviews with payments merchant acquirers must address quickly, given the
practitioners to assess the scale of the opportunity intensifying competitive pressures in the market.
in serving smaller merchants, and we outline four
strategies for acquirers pursuing growth.
Four strategies for success
Serving SMBs effectively will be critical for
The continuing rise of value-added merchant acquirers pursuing growth across a range
services of markets. To accomplish this, acquirers should
As acquirers and other merchant-services providers investigate a mix of four strategies.
begin to offer software and services focused on
commerce enablement, they are also tapping Optimize the performance of ISV partners
into merchants’ marketing budgets, where price In large, developed markets such as the United
sensitivity is lower and the perceived value of States, ISVs derive a sizable portion of their
services is higher. Brands that negotiate hard revenues from payments. The rise of ISVs is putting
over each basis point of merchant discounts are pressure on acquirers’ margins and shrinking their
prepared to pay several percentage points to share of the merchant wallet. As a result, most
1
Puneet Dikshit and Tobias Lundberg, “Merchant acquiring: The rise of merchant services,” 2020 McKinsey Global Payments Report, October
2020, McKinsey.com.
2
Based on McKinsey analysis of SMB expense wallets (spending by addressable SMBs on addressable categories).
Revenue for payments-driven merchant services Core transaction processing and transaction
in the United States,1 $ billion CAGR, % enablement
Revenues linked to domestic and cross-border
transactions, including interchange, scheme,
606 1,202 processing, settlement, and authorization fees
61
150 8–10 Payments software, infrastructure, and services
170 Software and services for enabling payments (eg,
wallets) and enhancing payments performance
379 12–13 (eg, gateways, fraud and charge-back mitigation,
333 analytics and advisory services, digital ID and
596 trust, risk solutions)
42
Commerce enablement
89 Solutions for enabling commerce (eg, affiliate
209 marketing, loyalty schemes, subscription
589 18–20 commerce platforms) and managing a business
(eg, e-invoicing platforms, B2B trade directories,
256 expense management)
42 84 14–16
Balance-sheet-based offerings
2020 Growth 2025 Financing and deposit models subject to more
regulation and greater risk (eg, BNPL,
supply-chain financing, SMB2 financing)
1
Includes revenues from all providers of merchant services that offer payments as a core part of their proposition.
2Small and medium-size business.
Source: McKinsey Payments Commerce Cube
leading acquirers are targeting ISVs as distribution in ISV sales and production journeys, and how to
or product partners, as seen in First Data’s (now avoid them”).
Fiserv) purchase of Clover in 2012 and U.S. Bank’s
2019 purchase of talech.³ Further, as acquirers Target a broader share of merchants’ expense
increasingly serve merchants through ISVs, they wallets
need to invest heavily in enhancing their partners’ Disruptive players in merchant services, recognizing
performance across key channels. that payments represents only a small share of the
SMB wallet, are targeting much bigger opportunities
From our observations and conversations with in software and services. A typical SMB merchant
industry participants, we have identified recurring spends less than 10 percent of its budget for
issues with ISV sales and production journeys software and services on payments acceptance.
that acquirers should avoid. For each set of issues, The remainder goes to a range of services from
acquirers can apply a set of best practices that help point-of-sale (POS) and business-management
prevent problems (see sidebar, “Common missteps software to loyalty advertising, logistics, and
3
U.S. Bank’s payments subsidiary is Elavon.
Our experience suggests that at every stage in an acquirer’s relationship with ISVs, there are issues to avoid and best
practices to observe.
— The acquirer’s business development teams fail to engage with the ISV’s management and technical teams,
leading to misaligned expectations on core capabilities, growth goals, and timelines.
— Business development teams rush the sales process and engage only one or two executives at the ISV, failing to
secure the broader organizational buy-in needed to ensure the ISV is willing to invest and drive volumes to the
acquirer.
— The acquirer and ISV fail to articulate shared goals that the ISV’s engineering and other teams will co-own and
track.
Best practices: Shortly before the deal is signed, bring in implementation and partner management teams to agree
on estimates, expectations, and integration plan, and begin building relationships. Align the incentives of business
development teams with deal signing, volume sales, and achieving full-scale production within 15 percent of
expectations.
— Multiple handoffs across business development, implementation, and partner management result in poor
accountability and a subpar experience for merchants, which may then defect.
— Incentives for business development teams are based on deals signed, not actual payments volumes processed.
When this occurs, the teams have little involvement beyond implementation and provide only limited support for
ISV onboarding.
— The acquirer and ISV tech teams are not aligned on the resources needed to meet integration milestones and
timelines, so they miss targets.
— No clear plans exist for getting the ISV to scale through co-marketing, targeted campaigns, key performance
indicators (KPIs) for the first 180 days, and so on. Consequently, growth goals are never reached.
— Merchant onboarding lacks the speed and flexibility necessary to ensure a smooth experience. For instance,
tasks are performed sequentially, rather than in parallel.
Best practices: Before the deal is signed, ensure that goals are jointly owned with the ISV; plans are in place for tech
integration and ramp-up; and key owners, check-ins, and KPIs are identified. Simplify, test, and refine onboarding
and implementation to create a seamless hands-off process, with complete transparency on timelines, targets, and
accountability.
— The tracking of the highest-impact service-level agreements (SLAs) is not sufficiently disciplined to ensure the
success of integration and ramp-up.
— A linear (rather than parallel) approach to transaction processing slows down testing, discovery, and the tackling of
issues.
Best practices: Quickly get the first few percent of transactions live to identify and address issues. Track satisfaction of
key client executives at deal signing, 45 days, 90 days, and 180 days to ascertain the trajectory and address emerging
issues. Set up a small working team with two or three people from each organization; schedule monthly meetings for this
team to track growth, volumes, and so on. With larger ISVs, commit a member of the sales team to spend time with the
relationship manager to drive leads from the ISV.
— Poor responsiveness and inflexibility in changing SLAs results in attrition and/or an inability to ramp up processing
volumes.
— Unclear ownership between the acquirer and the ISV, the use of legacy processes for merchant servicing, and poor
accountability and tracking lead to service issues and higher attrition rates.
— A lack of clear metrics or processes to act as leading indicators of dormancy or poor merchant experience results in
lower satisfaction and higher churn.
Best practices: Set up quarterly meetings at senior executive level for the top 30 to 40 percent of ISVs. Hold joint
meetings with ISV tech teams to ensure clear reporting and to understand the tech road map, new deployments, and
expansions.
Cross-cutting issues
Some additional issues may arise at any point in this journey:
— Implementation can stall if the acquirer sources multiple solutions from one ISV without planning how to align and
prioritize them; neglects outreach, leading to limited buy-in at the ISV; and fails to develop internal champions.
— A cultural and talent mismatch between slow-moving incumbent acquirers and small and nimble ISVs tends to impede
responsiveness, damaging the merchant experience.
We estimate that, as a result of these common issues, between 30 and 50 percent of ISVs become dormant or drop off
during implementation or later. What’s more, among the ISVs that get as far as ramping up, 40 to 45 percent will either go
dormant subsequently or fail to reach their expected production level for the first two years.
For incumbent acquirers, the larger the share The opportunity to target a larger share of wallets
of residuals they hand over to their ISV and is greatest in mature SMB acquiring markets such
bank partners, the more critical it is to target a as the United States and the United Kingdom.
bigger portion of merchants’ expense wallets by However, it is growing slowly in other markets
broadening their range of offerings. How readily where merchants’ expectations are rising and local
they can do so depends on whether they have solutions are evolving.
direct-to-merchant access and a merchant-facing
portal or interface, instead of relying on other Focus on specific industries
platforms and ISVs to reach SMBs. Those with Over the past two years, payments providers
direct-to-merchant access need to expand their serving SMBs have started to organize their
product suite through proprietary or third-party products, services, and go-to-market approach
products and adjust their economic and sales by industry. The convergence of payments and
models to boost product penetration. Those that software, coupled with merchants’ desire to procure
Exhibit 2
Acquirers
Acquirers can
canincrease
increasetheir
theirshare
shareofofmerchants’
merchants’wallets by by
wallets offering broader
offering services
broader
beyond
servicespure payments.
beyond pure payments.
Typical expense-wallet breakdown of a small and medium-size business (SMB) with >$100,000
in sales, %
Addressable software and
100 services spend
15 Unaddressable Financial services
Nonfinancial services
58 20 Software and platforms
20 45 3
11 3 11 7
7
21 21 11 2 4 5 3
10 10 3
Total Cost of Addressable Business Logistics Payments Insurance6
expense goods sold software and management and shipping3 acceptance4
wallet services spend software1
1
Includes software for accounting, ERP, inventory management, and expense management.
2Includes expenses incurred on marketplace platforms, SEO/SEM, social media, affiliate marketing, loyalty programs, and promotions.
3Includes payments to marketplaces and directly to services providers, including returns handling.
4Includes all costs related to payments acceptance, including fraud, charge-back, and point-of-sale financing.
5Includes interest payments on loans, merchant cash advances, net credit term payments, invoice discounting and receivables financing, and equipment financ-
ing but not payments related to commercial mortgages.
6Includes group insurance and healthcare.
7Includes expenses related to banking and professional services such as cleaning, taxes, and utilities.
Source: McKinsey analysis of the expenses of approximately 5,000 SMBs from retail, food and beverages, manufacturing, personal services, home and repair,
B2B services, professional services, and healthcare
Exhibit 3
Merchant acquirerspursuing
Merchant acquirers pursuing anan industry-focused
industry-focused strategy
strategy must assess
must assess the the
attractiveness
attractiveness ofof each
each vertical.
vertical.
Consumer services
6–8
(eg, spas, salons)
Healthcare 5–7
B2B 5–7
Education 6–8
Subscription 12–15
1
Compound annual growth rate.
Source: McKinsey Payments Commerce Cube
Ashwin Alexander is an associate partner and Puneet Dikshit is a partner, both in McKinsey’s New York office; Vik Iyer is an
associate partner in the San Francisco office, where Julie Stefanich is a consultant.
The authors wish to thank Tobias Lundberg, Yaniv Lushinsky, and Bharath Sattanathan for their contributions to this chapter.
4
A submerchant is a merchant that sells on a marketplace that handles purchases on its behalf.