mckinsey global payments trends challenges amid rebounding revenues

Payments revenue will grow fasterthan overall banking revenues

In 2011, global payments revenues accountedfor 33 percent of total banking revenues.This figure is impressive, but perhaps a bitmisleading, since more than 60 percent ofglobal payments revenue derives from inter-est revenue, including current account de-posits (59 percent), overdraft lines (16percent) and credit card revolving loans (22percent). North America is the only regionwhere the share of interest revenue is lessthan 50 percent.

Because interest revenues are dependent oninterest rates, payments revenues are in-creasingly under pressure. Case in point: Be-tween 2008 and 2011, banks suffered asharp decline in payments revenues as a re-sult of the collapse of interest rates. Changes

in interest rates continue to be unpre-dictable. Continuing troubles in the inter-bank lending market and new financialregulatory measures (e.g., Basel III and theVickers rule) are also pressuring revenues.As a result, banks will have to become lessdependent on interest revenue. This willlead to increasing competition to capturecustomer deposits (which will put downwardpressure on net interest margins).

These trends mean that payments revenuewill only increase in importance for banks.In fact, we expect that payments’ share ofbanking revenues will increase to 37 percentby 2016.

As interest rates face continued volatility,growth in revenue is expected to be drivenby fee – rather than interest – income. InAsia, for example, we expect that more than

34 McKinsey on Payments September 2013

Global payments trends:Challenges amid reboundingrevenues Global payments revenue rebounded to $1.34 trillion in 2011, a steep increase

from 2009’s $1.1 trillion. According to McKinsey’s Global Payments Map, global

payments revenues will grow at a CAGR of 5 percent between 2011 and 2016,

with emerging countries in Asia and Latin America contributing more than half

of global payments revenue growth (Exhibit 1). The latest payments map reveals

a number of trends in the global industry.

Sukriti Bansal

Philip Bruno

Florent Istace

Marc Niederkorn

75 percent of the increase in payments rev-enue will be in fee revenue. Not all regionswill grow at the same rate, of course. Emerg-ing regions of Asia and Latin America, forinstance, are expected to grow at nearly dou-ble the rate of Europe and North America.The sources of growth will also differ. NorthAmerica and Latin America will benefitfrom the continued growth of retail creditcards, with cards likely accounting for 30percent and 46 percent of growth respec-tively. Asia and Europe, on the other hand,will benefit from the rise in corporate trans-action fees – about 34 percent and 39 per-cent respectively.

Mobile revenues still a question mark

Banks and non-banks throughout the worldhave invested heavily in mobile payments

products and solutions, but it is not yet cer-tain that mobile payments actually increaseoverall payments industry revenues, orwhether they reallocate revenues across newchannels and instruments. The answer reallydepends on geography.

In emerging countries, mobile payments fre-quently provide formal banking and finan-cial services to previously unbankedpopulations, thus creating additional rev-enue. Mobile payments in developed coun-tries have not changed the landscape to thisextent. Here, mobile is merely more conven-ient than online channels, or, as in the caseof QR codes, an alternative to traditionalcards. This shifts revenues, but doesn't gen-erate new revenues. The pie can be in-creased, but mostly by boosting revenue

35Global Payments trends: Challenges amid rebounding revenues

1,742

305

2011

1,339

2016F

639

390

407

198

476

315

349

2010

1,162

163

352

325

323

2009

1,099

149

270

329

351

2008

1,219

139

362

321

397

2007

1,085

112

303

316

354

2006

945

97

251

291

306

28% 30% 33% 29% 30% 33% 37% Share of total banking income

+5% p.a.

+15% p.a. -2% p.a.

+14% p.a.

Payments revenuesU.S.$ billion

Europe and Middle East

North America

Asia-Pacific

Latin America

Source: McKinsey Global Payments Map

Exhibit 1

Global payments revenue is expected to grow at 5% over the next 5 years

from marketing and advertising, loyalty pro-grams and analytics.

Credit versus debit

Most of the developed markets continue tobe dominated by debit cards. Even in theU.S., UK and Korea, where credit cards havebeen dominant, credit cards have been out-paced by debit cards of late. In the UnitedStates, for example, debit card spending in-creased at a CAGR of 12 percent between2006 and 2011, while credit card spendingincreased at only 3 percent during the sameperiod (Exhibit 2).

Just 10 nations account for more than 80percent of global credit card issuing rev-enues. The United States and Brazil are thelargest of these by revenue, accounting formore than half of global revenues (Exhibit

3). Despite the economic crisis, credit cardrevenue has continued to increase. This islargely due to growth in Brazil, China andother emerging markets (China and Brazilaccounted for 74 percent and 271 percent re-spectively of the absolute growth between2009 and 2011).

It is worth noting that behaviors and growthdrivers differ widely across emerging mar-kets. In Brazil, interest rate revenue con-tributes 73 percent of credit card issuingrevenues (issuers levy high interest rates tocompensate for high risk). In China andmost of Asia, credit cards are built almostexclusively around transactions. In China,68 percent of credit card issuing revenuesderive from fee income (annual subscriptionfees and interchange fees), a stark contrastfrom the Brazilian model.


Slovakia

Singapore

Russia

Romania

Portugal

Poland

Peru

Norway

30%20%15%10%5%0%-5%

United States

United Kingdom

Thailand

Taiwan

Switzerland

75%

25%

20%

15%

10%

5%

0%

-5%

-10%

Debit card spend increase, 2006-2011 CAGR, percent

95%45%

Netherlands

Mexico

Malaysia

South Korea

Japan

Credit card spend increase, 2006-2011 CAGR, percent

Sweden Spain

South Africa

Slovenia

Italy

Ireland

Indonesia

India Hungary Hong Kong

Greece

Germany France

Finland

Denmark

Czech Republic

Colombia

China

Chile

Canada

Brazil

Belgium

Austria

Australia

Argentina

Moderate debit & high credit growth

High debit & high credit growth

Moderate debit & moderate credit growth

High debit & moderate credit growth

Increase in credit card spending is higher

Increase in debit card spending is higher

Source: McKinsey Global Payments Database; McKinsey Global Payments Map

Exhibit 2

Debit card spending has grown faster than credit card spending

On the other hand, in the U.S., the most sig-nificant credit card market in the world,credit card revenue declined between 2009and 2011, as customers cut back on debt andissuers slashed credit lines and eliminatedaccounts. Recently, the share of transactionfee income has increased, however. This isdue to flat interest income from revolvingloans and transaction growth.

We anticipate revenues from global creditcard issuing will increase from $328 billionin 2011 to $445 billion in 2016, a CAGR of 6percent (Exhibit 4, page 38). Credit card feerevenues will increase faster than credit cardinterest revenue. While fees are expected togrow at a CAGR of 9 percent between 2011and 2016, we expect that interest incomewill increase at a CAGR of 5 percent in thesame period. Whereas fees accounted for 42

percent of the global credit card issuing rev-enues in 2011, they are expected to accountfor 47 percent in 2016.

Emerging economies will be the primarydrivers of credit card revenue. Brazil andChina, growing at 14 percent and 29 percentCAGR respectively, will account for 50 per-cent of total global growth. Argentina, Indiaand Indonesia will also experience highgrowth in credit card revenue. Australia,Canada and the United States will continueto grow as well, albeit at a much slower pacethan the emerging markets.

The shift in trade to Asia isaccelerating

Top-level global trends show that interna-tional trade is growing faster than globalGDP. In 2012, exports represented 31 per-


43%

14%

8%

4%

4%

4%

2%

2%

2%

2%

14%

Share of total revenue

Korea 14

UK

Brazil

U.S.

26

139

47

Japan

Australia 6

15

France

46

Canada

7

China

14

7

Mexico

Other

7

Total $328 billion

Global credit card issuing revenues U.S.$ billion


Exhibit 3

Ten countries contribute more than 80% of global credit card issuing revenues

cent of world GDP, up from 20 percent in1990. We expect the share of exports relativeto GDP to continue to rise, reaching 36 per-cent by 2020. The long-term growth in in-ternational trade can be attributed to thegrowth of the middle class in emerging mar-kets (especially in Asia) and trade liberaliza-tion, among other factors.

Asia is the undisputed center of global tradegrowth, and is expanding trade rapidly intoAfrica and other emerging markets. Accord-ing to HSBC Global Research, growth inAsia has contributed more to global GDPgrowth in each of the past five years than theEuropean Union, Japanese and U.S. marketscombined. In fact, 2013 will be the year ofthe “big cross-over,” when emerging marketswill generate more than half of global GDP,based on purchasing-power parity.

McKinsey’s granular trade analyses showthat intra-Asia trade already contributes

more to global trade growth than intra-Eu-rope trade. If growth continues at this pace,Asia should surpass Europe by 2016 as thelargest regional trading area, altering thestructure of the trade finance industry.

The emphasis is increasingly on corridorslinking Asia to fast-growing markets inLatin America, Africa and the Middle East.Trade among these emerging markets grewby an impressive 14 percent between 2007and 2012 (while trade among developedcountries grew by 1 percent). Asia’s impacton growth in Africa is particularly striking:Trade between Asia and Africa grew twice asfast at that with Europe, in absolute terms;Asia is on track to replace Europe as Africa’smain trading partner by 2017. China aloneaccounts for 16 percent of all African trade,compared with 9 percent for the UnitedStates and 6 percent for France, Africa’s sec-ond- and third-largest trading partners.


2011 2016F20102009200820072006

+5% p.a.

+6% p.a. CAGR (2011-16)

251

138

114

445

238

207326

196

130

324

134

272

148

125

198

126

300

166

328

190

138

Global credit card issuing revenuesU.S.$ billion

Interest

Fee8.5%

4.6%


Exhibit 4

Credit card fee revenue will grow faster than credit card interest revenue

Even with the steady, long-term rise of openaccounts, the traditional trade finance (doc-umentary) business is unlikely to fully bene-fit from overall trade growth. Therefore,banks should take the perspective of corpo-rate CFOs, making their risk mitigation so-lutions simple, straightforward and cheaper.A fully electronic risk mitigation procedure(e.g. the Bank Payment Obligation, which isan initiative of both SWIFT and ICC) couldhelp meet this need. Additional workingcapital solutions are also required, especiallyfor SMEs. Enhanced and simplified supplychain finance solutions could also help plugthe working capital gap, generating addi-tional revenues on open account transac-tions. (Today these already account for 75percent to 85 percent of all trade transac-tions, depending on the region.)

* * *

Payments are expected to grow at a healthy 5percent until 2016, but this growth will notbe evenly distributed. The developed mar-kets will grow at a more modest pace. Futuregrowth, furthermore, will be driven more by

transactions than in the past. What does thismean for banks and issuers? Retail banksneed to join the digital revolution, tappinginto such additional revenue streams as ad-vertising. They must have the right solutionfor their markets (such as credit cards inNorth America and Latin America). Com-mercial banks should ensure that they areproviding working capital solutions for theirSMEs. Global commercial banks should en-sure that they are well positioned to capturegrowth in Asia and other emerging markets.In short, the future is bright, but only forplayers that are innovative, nimble, and at-tuned to the digital revolution in payments.

The McKinsey Global Payments Map provides

granular information on global payments

transactions and revenues. It offers extensive detail

about payments business in 43 countries.

Marc Niederkorn is a director in the Luxembourg of-

fice, Philip Bruno is a principal in the New York of-

fice, Florent Istace is a payments knowledge expert

in the Brussels office, and Sukriti Bansal is a senior

research analyst in the Gurgaon office.


mckinsey global payments trends challenges amid rebounding revenues

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