The key vision for digital payments has always been that they will be simple, secure, fast, cheap and ubiquitous. With each new technological advance, these characteristics became more and more real. However, behind the scenes, the complexity of the processes, on the contrary, is increasing.
Analytical company McKinsey presented the annual reportwhich examines the global payments ecosystem, covering payment products in 48 countries representing more than 90% of global GDP. What trends will determine the future of the industry in the next five years?
Global payments revenues will continue to grow
In 2023, 3.4 trillion transactions were made in the world for a total amount of 1.8 quadrillion dollars. The combined income of payment market players amounted to $2.4 trillion. It grew by 7% annually from 2018 to 2023, but analysts at McKinsey predict that revenue growth will slow to 5% annually over the next five years. By the end of 2028, it will amount to $3.1 trillion. That’s 35% of total banking revenue, a share that underscores the importance of banks investing in payment technology to stay ahead of other players in the market.
Over the past ten years, the total market capitalization of payment companies has grown from $400 billion to $1.4 trillion. In addition, more than 384 unicorns have appeared in this industry with a total value of $1 trillion, which is ten times more than the 39 unicorns five years ago. All of this is the foundation for six trends that are predicted to define the next five years in payments.
What trends will affect the payment industry in the coming years?
1. The reduction of cash in circulation will continue unevenly
Global cash use is now 80% of 2019 levels and continues to decline by 4% each year. The $26 trillion in payments that are still made in cash represents a huge opportunity for digitization, but the transition will play out differently in different regions.
Instant payments are rapidly displacing cash in emerging markets with low card penetration, such as India, Malaysia and Indonesia. In India, the share of cash payments is expected to decline from 23% of consumer spending to less than 10% by 2028.
In card-dominated markets, such as the United States, where cash transactions account for only 5% of consumer payments, the use of cash will continue the gradual decline that began during the COVID-19 pandemic. Even in developed economies where cash payments are traditional, such as Germany and Japan, consumers will also continue to move away from cash.
2. Instant payments will displace other payment methods
Real-time payment infrastructure is already in place in almost every major market. Analysts believe that this will accelerate the gradual abandonment of cash and checks.
In traditionally card-focused markets such as the UK and US, instant payments may begin to displace cards, but it won’t be a quick process. In historically cash-driven markets such as Brazil and India, instant payments are likely to become the primary payment method in the C2B segment over the next few years. This will be facilitated by the regulatory environment in these countries, which ensures the interaction of players, as well as favorable offers for sellers and consumers, including higher transaction limits and greater accessibility.
It is expected that such measures will contribute to the growth of the implementation of instant payments in the European Union. McKinsey estimates that the number of instant payment transactions in the EU will grow from around three billion today to almost 30 billion by 2028, an average annual growth rate of 50%.
3. The growing adoption of digital public infrastructures will be a catalyst for digital payments
Digital Public Infrastructure (DPI) initiatives in markets such as Brazil, Estonia and India have supported competitive, reliable, inclusive and efficient digital payments ecosystems. Important prerequisites for DPI are a comprehensive digital identification system, common standards for application interfaces, interoperability between financial service providers and the use of non-traditional data sources.
McKinsey analysts expect greater adoption of DPI initiatives in emerging markets such as Indonesia, Nigeria and Peru through a combination of imported technologies such as India’s DPI solution and domestic developments such as the Singapore Financial Data Exchange. Developed economies, in turn, may be limited in their ability to fight fraud or support digitalization of services without such initiatives.
4. Intermediaries will continue to take share away from key players
Commerce is concentrated on platforms such as Shopify, Square, and Toast, as well as marketplaces such as Amazon, eBay, and Etsy. McKinsey estimates that platforms and marketplaces handle 30% of consumer purchases worldwide today. The share is higher in the small and medium enterprise (SME) segment, where players such as Square, SumUp and Toast offer integrated solutions.
Data from a McKinsey survey shows that in 2023 in the United States, industry software solutions will account for more than 50% of spending by SMEs. Existing acquirers and banks are responding with their own solutions, such as Clover from Fiserv and Talech from Elavon, a subsidiary of US Bank.
5. Transaction banking will change according to the needs of consumers
In recent years, transaction banking has become the main source of income for many banks and allowed to strengthen relations with clients. Some, like Santander, have decided to spin off payment processing into a separate business. Others, such as Goldman Sachs and Royal Bank of Canada, have launched new transactional business units.
Analysts expect transaction banking customers to demand intuitive interfaces similar to those they encounter in their daily lives. At the same time, technological advances will help resolve reconciliation issues and streamline supply chain financing through faster and deeper integration of banking and corporate systems. Competition for this business will grow, including between banks and so-called disruptors.
6. CBDC is the basis for the development of digital currencies
More than 90% of central banks in the world are developing or planning to develop central bank digital currency (CBDC) projects, more than 30 have already implemented pilot projects.
Concerns about the disruptive potential of CBDCs have subsided given the limited circulation of these currencies. However, analysts highlight three key roles assigned to CBDCs in payments. First, they will establish a minimum baseline level of functionality that users can expect from a digital currency. Second, they will provide an alternative to often expensive (due to commissions) payment instruments. And finally, they will serve as an alternative to the large but often opaque private stablecoins.
Analyzing the above forecasts, experts identify three main areas in which key players will want to invest to get their share of market growth: instant payments (especially in high-margin segments), improving anti-money laundering (AML) and fraud prevention systems, and development of payment infrastructure and new generation technologies.
