Non-bank digital entrants set disruptive tone, to reshape global payments landscape - report

The industry has recently witnessed the entry of various non-bank digital players, including technology giants and start-ups that are presenting increased competition for banks. The nature of the competitors (companies such as Apple, Google, Facebook, Amazon, Microsoft, Tencent and Alibaba), the prominence of smartphones as a channel and rapidly evolving customer expectations are the main factors which are expected to enable technology titans and start-ups to raise the competition bar. In this context, in order to stay relevant, banks will need to respond to these changes with new strategies, capabilities and operating models.

These are the findings of the Global Payments 2015: A Healthy Industry Confronts Disruption report released by US multinational management consulting firm McKinsey. This disruption will take place in an industry that has been growing steadily, and will accelerate to 6% annual revenue growth until 2019.

According to McKinsey, the modernisation of infrastructure, cross-border players and the push to bring the same convenience to commercial as retail banking are equally important disruptions that will impact the payments landscape in the coming years:

• Modernisation of domestic payments infrastructures is under way. According to research, the payments industry is currently witnessing a wave of infrastructure modernisation that is required to compete with non-bank innovators. Thus, over 15 countries have modernised their payments infrastructures in the past few years, and many others are in the planning stage. However, such infrastructure updates are costly at both the system and bank level and therefore, banks need to find more ways to create value on top of the infrastructure and “accelerate the war on cash”.

• Cross-border payments-related inneficiencies represent one of the big targets for financial technology companies. The entry of nonbank players and new infrastructure demands will also have an impact on cross-border payments, McKinsey reports. So far, banks have made little efforts in improving the back-end systems and processes involved in cross-border payments. Consequently, cross-border payments are still expensive for customers and since non-bank players are increasingly moving from C2C to B2B cross-border payments, they will force many banks to redefine their cross-border payments strategies.

• There is a need for business-facing businesses to support and maintain the convenience and security of the retail sector. As customers grow accustomed to faster and more convenient payments on the retail side, they will soon demand similar conveniences and service levels in transaction banking, the same source indicates.

Overall, McKinsey expects to see a rebalancing of revenue growth at a regional level. During the past five years, payments revenues grew at a CAGR of 18 percent for Asia–Pacific and Latin America combined, comparing favorably with flat revenues in EMEA and North America. During the next five years, however, these growth rates will be 6.5 percent and 6 percent, respectively.