Global payments revenues to hit $2 trillion by 2025, emerging economies lead

11 October 2016 Consultancy.uk

The global payments industry is set to enjoy revenue growth of more than $800 billion between now and 2025 on the back of strong growth within emerging markets. While retail payment revenues remain the most dominant, wholesale manages slightly stronger CAGR to 2025, at 5.7% and 6.6% respectively. While credit card payments and account revenues continue to dominate revenues in North America and Western Europe respectively, different e-commerce scenarios may yet change the longer-term outlook.

Regional payment revenue growth

The payments industry is ripe for growth, according to the new The Boston Consulting Group (BCG) report entitled ‘Global Payments 2016’; particularly across emerging economies in the Asia-Pacific region and across the Middle East and Africa, where compounded revenue growth to 2025 is projected at 8% and 9% respectively. North America, building on a relatively large base, will see revenues increase by 5% annually for a total increase of $187 billion in revenues, while Asian emerging economies see absolute growth of $308 billion in revenues in the ten year period.

Payment industry revenues hit $2 trillion

The total payments market will, according to BCG’s projection, see a CAGR of 6% between 2015 and 2025, jumping from around $1.1 trillion to almost $2 trillion. During that period there will be a considerable shift of revenue share between global regions, the Asia-Pacific region will come to generate the highest share at 28% of total to its current 23%, while the current forerunner, North America, sees its share fall from 29% to 25%.

Growth in emerging markets is being propelled, in part, by increased e-commerce transaction and inclusion within the formal banking system – thereby reducing the numbers of cash transactions.

Total revenue growth, retail and wholesale

Global payment revenues

In terms of the payments segment that has the highest growth in revenues in the retail market, debit cards come out on top with a CAGR of 7% between 2015 and 2025, up $94 billion, while credit card revenues are projected to grow at CAGR 6% to $303 billion. The total retail market is set to grow by 5.7%, up from $828 billion last year to $1,446 billion by 2025 – with little change in market share between payment types.

The wholesale payments market will see a slight evolution in favour of debit card revenue growth, which jumps from a 4% share in 2015 to a 7% share in 2025 on the back of a CAGR of 13% in the intervening period. The total market, relative to retail payments, remains relatively low – increasing from $290 billion to $548 billion – all segments in the wholesale market see relatively strong revenues, at above 6% growth.

Granular payment revenues retail

Granular regional retail payment revenues

In terms of payment revenue type within the retail segment, considerable variation exists between different regions across the globe. North America and developing Asia-Pacific countries are currently dominated by credit card transactions revenues, with account revenues generating 10% and 17% of revenues respectively – the coming ten years will see little change. In Western Europe and the Middle East and Africa, account revenues represent 48% and 49% of revenues respectively, which, by 2025 sees a small increase in Western Europe to 51% and a drop in the Middle East and Africa to 39%.

Three scenarios for digital payment development

Digital payment adoption

Increased focus on digital payments is being opened up by a ‘confluence’ of forces, including technological advance, changes in consumer behaviour, and regulatory initiatives. Technologies, from We Chat shopping environments to the expansion of smartphones and internet penetration in markets across the world, has opened up e-commerce – China has since become the world’s largest e-commerce market. Tech giants, like Google and Apple have developed propositions that are transforming consumers’ expectation towards seamless and convenient services across platforms, creating pressures to develop experiences that meet expectations, including easy payments. Finally, regulators are seeking to boost financial inclusion, consumer protection and infrastructure investments – many of which favour digital and traditional banking payment expansion.

The changing landscape could see different levels of expansion of digital payment types across the retail space. In the firm’s bullish analysis, digital becomes more mainstream, as technology adoption increases, resulting in the total share of the retail market increasing from 6% to 26%, with the largest increase stemming from contactless payment methods. In the moderate scenario, in-app payments are less often used, while contactless payment too is not adopted, resulting in a total growth of 19% of market share. The low-ball scenario has low levels of adoption of contactless payment systems, with digital payments limited to browser-based systems.

According to a recent report from PwC, payments companies are being spurred into active change as a result of growing competition from tech players and the rise of FinTech.

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The business and operating models of digital-only banks

04 April 2019 Consultancy.uk

In recent years, several digital-only banks have successfully managed to nestle themselves in the banking landscape, with their popularity continuing to increase. Looking at it from the customer’s point-of-view, there is little difference between these FinTech unicorns; looking at the bigger picture, however, reveals significant variation in their business models. Matyas Fekete, a consultant at KAE, explores some of the main similarities and differences in digi-bank business and operating models. 

What about the profit?

Unlike in the UK, in most of continental Europe, bank accounts and corresponding banking services are historically paid-for services. The fact that digital banks offer most of their services free of charge has undoubtedly helped them build a large customer base. On the other hand, despite comparatively low set-up and minimised operational costs compared to that of traditional banks, and given the lack of revenue stemming from the typically no-fee model, profitability has proved difficult to achieve. Monzo, for instance, recorded a net loss of £30+ per customer in its most recent financial year. 

In the start-up world, it is customary to focus on expansion rather than profit – see the case of Uber, for instance. Still, while profitability might not be their number one priority in their early stages of development, it must be a long-term goal of any business. With their ever-growing customer base, digital banks are increasingly under pressure to turn their business from loss- to profit-making. 

Credit where credit is due

Digital banks pride themselves on their fair (often meaning “free”) proposition and have so far stayed clear of offering loans (including credit cards & overdrafts), traditionally amongst the most lucrative products for traditional providers. Though somewhat reluctantly, newcomers are also realising that offering lending products is one of the most straightforward ways to offset losses made on their free, often high-cost services (e.g. overseas ATM withdrawals). Monzo, N26 and Starling have recently started offering credit products to their customers, with their loan offering expected to be extended to a wide range of services, from mortgages to overdrafts. Correspondingly, creating a lending portfolio can also pave the way for launching an interest-paying savings offering – a proposition seen as a basic banking product that is yet to feature in most digital banks’ portfolios. 

The business and operating models of digital-only banks

The premium customer

While most digital banks offer most of their products for free, some have extended their offering by paid-for premium services in order to create a revenue stream. As these premium features – including different types of insurance, unlimited free transfers/withdrawals, faster payment settlement or concierge services – are often offered in a subscription format, customers are typically prompted to pay for the full package rather than just the desired service(s), providing a significant revenue stream for the bank. Revolut, for instance, was amongst the first digital banks in Europe to break even earlier this year, a feat largely due to revenue from its premium subscription.

SMEs like digital too

Traditional banks typically service small and medium sized businesses under their retail rather than corporate banking arm. Having their product offering tested with consumers, and consequently gaining a reasonable customer base, digital banks have also identified SMEs as an ideal segment to extend their target audience to. The five FinTechs profiled have already gone, or plan to go, down this path by following up their consumer solution with a business account. While both propositions are typically built on similar features, some providers charge businesses a monthly subscription (e.g. Revolut), while others apply additional fees to specific services (e.g. TransferWise), banking on the expectation that businesses are more likely to be willing to pay for banking – something they are already used to doing. 

The marketplace model

While most digital banks offer a wide range of banking services, some of these tend to come from partnering with third-party providers. For instance, Starling Bank’s only proprietary product is its current account, which serves as a basis for the provision of ancillary services, ranging from loans to insurance, to investment opportunities. Instead of developing these services in-house, Starling enables a select group of partnering financial service providers access to its platform in exchange for a fee. In effect, Starling is using its customer base to create a market for its partners, charging a commission for each acquired customer. 

In such cases of digital banks applying this marketplace model, the majority of their income often comes from partners rather than customers. Naturally, only banks with a large enough customer base can be successful in this set-up, underlining the current intensity of competition amongst digital banks.

Banking as a Service

While customer-centricity is heralded amongst the main USPs of digital banks, some are looking beyond offering consumer-facing services to diversify their revenue streams. Starling, which is among the few digital banks built on its own proprietary platform, has recently leapt into the Banking as a Service (BaaS) industry, making its technology available to other start-ups looking to launch a digital bank. Naturally, this raises the question whether the two offerings could threaten each other’s success. Generally, as long as such partners operate in different markets, the two business lines should be able to thrive alongside each other. Further along the line, however, such partners could easily end up expanding their banking solution into the same market(s) as they aim for global success, and by doing so, becoming direct competitors. 

Different approach, same result?

It is fair to say that consumers in Europe looking to bank with a digital-only provider would have a difficult time finding relative advantages/disadvantages amongst the leading players in the industry. Still, despite the limited surface-level variety, exploring the business models of leading digital banks reveals different approaches to the challenge of making money. Alongside the more straightforward method of offering paid-for premium features/subscriptions, some are banking on the value that access to their customer base offers to third-parties, while others outsource their technology to neobanks wanting to focus on the Fin rather than the Tech. With competition amongst digital banks heating up, it will be interesting to see which business model(s) prove to be the winning formula in the long term.