In India, instant payments are expected to contribute less than 10 percent to future revenue growth because there are currently no fees charged for the Unified Payments Interface (UPI). Image: ShutterstockP
ayments revenue has seen a double digit growth globally, for the second year in a row, as per the latest McKinsey Global Payments Report, titled ‘On the cusp of the next payments era: Future opportunities for banks
’. Payments revenue refers to the income or earnings generated by businesses and financial institutions from various transactions involving the transfer of funds, such as payments for goods and services, money transfers, processing fees, and related financial services. It also includes the fees, commissions, and charges collected for facilitating and processing these payment transactions. Payments revenue can come from sources like credit card transactions, online payments, mobile wallets, wire transfers, and other forms of financial transactions where a fee or a percentage of the transaction value is collected as revenue by the payment service providers or financial institutions involved in the process.
The report covers more than 25 types of payments used in 47 countries, making up 90 percent of the world's economy. It points out that because more people are using digital payments instead of cash, the use of cash dropped by almost four percent worldwide in 2022. In the last five years, electronic transactions have grown almost three times faster than all other payment methods combined. Despite challenges in different parts of the world, payments revenue stayed strong globally, growing by 11 percent in 2022, which is the second year in a row it grew by double digits, reaching a record high of over $2.2 trillion. The report predicts that payments revenue will continue to grow by 7 percent by 2027.
Payments revenue by geography
The report reveals that North America, Latin America, and Europe, the Middle East, and Africa (EMEA) experienced strong double-digit revenue growth. Notably, in 2022, the Asia-Pacific region saw a modest 4 percent increase in regional revenues due to a 3 percent decline in payment revenues within China. However, when excluding China, the Asia-Pacific region grew at an impressive 25 percent rate, outpacing its 2022 performance. An important observation in China's results is a 5 percent decrease in transactional fee revenue, which dropped to $255 billion, which can be attributed to smaller transaction amounts for card payments and fee reductions introduced by payment providers to stimulate small and medium-sized enterprise (SME) activity and counter the economic impact of COVID-19. Also read: Digital currencies: Why the RBI needs to bite the bullet
The largest economies in terms of payments revenue, including Brazil, India, Japan, and the United States, achieved robust outcomes in both interest and fee-based revenues.
Cross-border payments revenue
The report emphasises the strength of cross-border payment activity, which surged to approximately $150 trillion in 2022, marking a significant 13 percent increase within just one year. This substantial movement of money led to an even more substantial boost in cross-border revenues, which climbed by 17 percent to reach $240 billion. Revenues from cross-border consumer payments, including both consumer-to-business (C2B) and consumer-to-consumer (C2C) transactions, saw double-digit growth rates, a notable acceleration from the high single-digit growth observed in 2021. On the flip side, both forms of commercial payments, business-to-business (B2B) and business-to-consumer (B2C), expanded by 10 percent, exhibiting a somewhat slower pace compared to the post-pandemic surge witnessed in 2021.
The rise of Instant payments and Digital wallets
The report forecasts that future revenue growth is likely to be driven by innovations in instant payments and the increasing use of digital wallets in specific regions. It reveals that, over the past five years, the growth in the volume of electronic payment transactions has consistently outpaced the growth in payments revenue, with a 17 percent increase compared to a 6 percent increase. These trends are also reflected in the declining use of cash, which decreased by nearly four percent globally in 2022. This shift away from cash usage has continued even after the pandemic, particularly in cash-dependent economies like India and Brazil, where the proportion of cash transactions dropped by seven to ten percentage points. Also read: Bank Sakhis: Pushing digital payments in rural India
Instant payments are a significant factor in this move away from cash, as per the report. In India, instant payments are expected to contribute less than 10 percent to future revenue growth because there are currently no fees charged for the Unified Payments Interface (UPI). In contrast, in several European countries like Germany, instant payments are considered a premium option, which creates a relatively strong potential for revenue growth.
Entering a new payments era: The Decoupled Era
According to the McKinsey report, the payment industry has evolved through three distinct phases, each dominated by different methods: Paper, plastic, and account-based transactions. Since the 1990s, payments have been operating within the Account Era, where plastic cards are no longer necessary to access funds. This era began with the rise of online capabilities towards the end of the previous century, empowering individuals to manage funds directly from their accounts using internet and mobile technologies, utilising existing infrastructure.
However, the report suggests that we are now witnessing the beginnings of a fourth era, which they term the “Decoupled Era”. This new era is expected to be characterised by payments becoming increasingly independent of traditional accounts and fixed repositories of value. Users will have a stronger say as they prioritise convenience, affordability, and security. The Decoupled Era is expected to rely heavily on technology, with the specific technologies that will prevail still to be determined. Potential contenders in this era include platform-as-a-service (PaaS) models, which enable specialised providers and offer smooth transitions between products and services, and generative AI, which will further customise customer experiences, streamline payment processes, and enhance fraud protection.