Banks payment revenues to hit $1 trillion by 2026

05 January 2018

Banks’ payment segments are set to see strong growth in retail and wholesale markets on the back of booming emerging markets, boosting revenues by $1 trillion to 2026. Performances may be impacted due to changes in trade demand in emerging economies and the rise of FinTechs in the high-margin payment segment.

Banks are finding themselves under increased pressure from Fintech and technology companies, each of which are looking to leverage their technical and/or social prowess to nibble away at aspects of banks’ value chains. Banks continue to have various advantages, including strong regulatory oversight, loyal customers that trust their propositions, as well as considerable clout to transform their operations to meet new challenges.

In a new report from The Boston Consulting Group, titled ‘Global Payments 2017: Deepening the Customer Relationship’, the strategy consulting firm explores current trends in the payments markets, as well as areas in which competitors may be able to get a foothold.

Payments revenue is expected to grow

The payment segment remains lucrative in terms of pure revenues. The market has increased from $860 billion in 2010 to around $1.2 trillion in 2016. Growth is projected to continue apace, with CAGR of around 6% to 2026. In the same year, total revenues for the segment are projected to hit $2.1 trillion.

The growth is not even, however, with emerging markets set to represent around 60% of the total market share of revenues, up from 50% in 2016 and 38% in 2010. The rapid growth in emerging markets, relative to developed markets, reflects the considerable per capita difference between markets as its stands: $900 in North America and $100 in the Asia-Pacific, thereby highlighting considerable growth potential in the latter as incomes increase and the middle class expands.

Wholesale revenue is expected to grow

The firm also found differences between revenues in the retail and wholesale payments segments. Retail payments are set to grow from $897 billion in 2016 to around $1.6 trillion in 2026. The largest growth segment for the category is card transaction revenues, which are projected to represent 39% of total growth or $263 billion, while card interest and other revenues follow closely at 36% of the total or $244 billion.

Wholesale success

In the wholesale segment, growth of 7% is projected (above retail’s 6%), with an increase from $290 billion to $555 billion. Card transaction revenue will see relatively modest growth of $61 billion or 23% of the total, while account revenue will increase by $151 billion or 57% of the total.

Wholesale payments growth

The study notes that one of the areas that is likely to show considerable resilience in the face of uncertainties are wholesale payments. The segment will see a considerable boost from emerging market demand, which is projected to account for around 73% of total growth to 2026.

The market is likely to be a two speed one, with emerging markets growing considerably more quickly (8% compound) than developed markets (4%), according to the firm. Trade flows, influenced by geopolitical conditions, may come to further affect the market’s growth outcomes. The firm notes three different models: a bearish case in which growth of 4% on 2014 figures is achieved, a present case, and a bullish case, whereby a 70% increase is noted.

The study also suggests that banks in the wholesale segment are likely to face pressure from innovators, largely as a result of new technologies, such as Blockchain. FinTechs may find ways of picking off high-margin aspects of traditional banks, such as corporate payments and cross-border capital flows.

The authors write, “New entrants from inside and outside the financial services arena are taking advantage of open banking and new technologies and successfully vying for market share in high-margin niches. Despite these challenges, banks that leverage their longstanding client relationships and balance sheet strength can win in this environment. The first step is fine-tuning their strategic focus.”


The business and operating models of digital-only banks

04 April 2019

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.