The end of 2020 for the world of payments and what will happen next: the key points from McKinsey analytics

When there are two months left until the end of the year, a person usually begins to analyze the performance, summarize the results and construct strategies for further development. It’s clear that 2020 has changed a lot, showed and taught us a lot. And the most important is that it taught us to adapt quickly to new normal — even those who didn’t really want to. McKinsey is traditionally ahead of the curve and publishes its analytics with forecasts. I’ve chosen the main points from it.

The state of the payments ecosystem

Generally, we see some events from the first half of the year continuing and have a further impact. The McKinsey study offers nine macroeconomic scenarios on recovery from the coronavirus pandemic. According to a survey of more than 2,000 executives around the world, the most likely outcome is a “muted recovery” scenario (A1), which includes virus recurrence and a muted economic recovery of an economy with regional differences.

Applying the A1 scenario to global payments, according to McKinsey analysis, most categories of payment transactions will have sharp and rapid rebound, as quarantine restrictions are partially lifted and new behavioral habits in the use of electronic payments are largely sustained. On the other hand, interest dependent revenues are likely to remain suppressed over the long term. Much will depend on differences in spend patterns before and after the crisis. For example, dining, travel, and entertainment expenditures, which often include higher transaction fees, are unlikely to rebound in the near future.

In terms of the global payments sector, the 2020 events have changed expectations and significantly accelerated some existing trends. The Covid-19 crisis and its consequences, including government measures to protect citizens and rapid changes in consumer behavior, have impacted the operating environment of large and small businesses around the world. For the payments sector, global revenues declined by an estimated 22% in the first 6 months of 2020 compared to the same period in 2019.

But, as noted, regional differences play an important role for players, countries and products.

Asia-Pacific (excluding China) may suffer larger declines as its revenue model is significantly affected by NIM contraction, increasing government pressure on transaction fees and has greater exposure to such industries as tourism and international remittances payments.

Industry rebound in Europe is likely to be swifter for two reasons. First, NIMs were already compressed as much as possible prior to the Covid-19 crisis. Second, growth is being fueled by the acceleration of digital migration in Southern and Eastern Europe, and by government stimulus measures in the industry.

In North America, the revenue benefit from the accelerated digitalization has been significantly offset by the credit-card economics, with outstanding balances are down roughly 29 percent from 2019 levels. Considering credit cards are the largest source of payment revenue in the region (roughly 44 percent), the decline in outstanding balances alone will be enough to outweigh the benefits of increased use of digital channels.

In Latin America, where a significant share of the population is unbanked, the use of cash will likely remain resilient. However, the popularity of mobile wallets such as PLIN and Yape is growing among the banked population: since December 2019, they’ve gained more than a million users, with the pandemic accelerating this trend.

What is worth paying attention to?

This year, the real challenge (as well as the real opportunity) is to embrace the acceleration of change. If properly addressed, the global impact on the payments market could be quite positive. Long-term forecasting is extremely difficult in the current circumstances. There are many things to consider — from economic recovery to global trade and pandemic uncertainty. However, the privileges of companies with flexible and adaptive work systems are obvious. McKinsey points out key areas that financial leaders should focus on.

Choose wisely the vector of work. The composition of your customer portfolio matters a lot. The growth is accelerating notably in the SME segment, B2B2C business models and among new customer platforms (cross-border e-commerce). The digital transformation is enabling providers to create more tailored solutions, and customers have shown a willingness to pay for them.

Services and solutions, not financial products. Commercial customers expect banks and payments partners to increase sales by improving end consumer experience and introducing new business models such as B2B2C credits and loyalty services. In short, the introduction of tools that provide advanced functionality, and not just the possibility to manage cash flow. For consumers the payment step is moving into the background in the buying process — they need a “helper”, not just a payment method.

Sales excellence. Transaction banking and acquiring are nearly a decade behind the technology and telecom sectors in sales and customer-management practices. These other industries have an entirely different skill set and language for sales and service that provide the best solutions for the market. Closing this ten-year gap over the next two years will bring significant benefits.

Banking services client experience. New challenges in supply chains and growing trade pressures are helping to address gaps in international payments and trade. The long-promised step-change improvement will require fundamental organizational change

Changing the focus from “time value of money” to “money value of time.” Going digital requires significantly redefining the institution’s operations through the lens of customer journeys. Most players have a development plan for the next five to six years to implement this transformation. But given the modified revenue context and market expectations spurred by the new environment, the best will find a way to deliver on this transformation within 1,5–2 years.

The events and trends of 2020 have undoubtedly changed the meaning of payments. Transformation in 2020 is happening four to five times faster than before. This forces all payment ecosystem participants to quickly improve and adapt their processes to new normal in order to maintain their positions and results.