October 2020
Global Banking Practice
The 2020
McKinsey Global
Payments Report
2The 2020 McKinsey Global Payments Report
The public health crisis triggered by COVID19 has
had an impact on nearly all aspects of daily life for
people across the globe, and has put the world
economy on an uncertain footing. For the payments
industry, the pandemic and its consequences
have accelerated a series of existing trends in both
consumer and business behaviors, and introduced
new developments, such as a restructuring of both
supply chains and cross-border trade. Ongoing
shifts toward e-commerce, digital payments
(including contactless), instant payments, and
cash displacement have all been significantly
boosted in the past six months. And while a degree
of reversion to past behavior is likely for some of
these shifts, the overall trajectory for these trends
has received a strong push forward. Overall, the
crisis is compressing a half-decade’s worth of
change into less than one year—and in areas that
are typically slow to evolve: customer behavior,
economic models, and payments operating models.
As with most structural shifts, challenges will
inevitably arise.
The impact of the crisis has not been consistent
across sectors or geographies, of course. Travel and
entertainment, which had been among the most
advanced e-commerce sectors, was hit particularly
hard and faces an uncertain path to recovery.
Payments providers in regions that have lagged
in digitization, meanwhile, in many cases possess
greater potential for revenue increases in the new
environment. On the other hand, a protracted period
of low interest rates, which began before the current
crisis, will pressure payments revenues, as will a
persistent slowdown in economic activity.
This is the context in which we release our annual
report on the global payments industry. As always,
these insights are informed by McKinsey’s Global
Payments Map and by continuing dialogue with
practitioners throughout the payments ecosystem.
Given the impact of the changes and challenges
in 2020, however, we are taking a different lens to
our analysis, focusing more on the current moment
and on the future, than on examining past growth.
Our first chapter briefly tells the story of 2019—a
solid year with broad-based revenue growth—but
focuses primarily on current developments and
takes a forward-looking view of the payments
landscape. It also details the actions we believe
payments providers will need to take to weather
the pandemic and position themselves for the
“next normal.”
Our “now-cast” analysis of 2020 paints a contrast
between the first and second halves of the year—
namely, an estimated 22 percent payments revenue
decline in the first half will be softened somewhat
by stronger performance in the second half. Still, we
expect full-year 2020 global payments revenue to
be roughly 7 percent lower than it was in 2019—a
$140-billion decline roughly equal to recent years’
annual gains, and 11 to 13 percent below our pre-
pandemic projection. Beyond this, in some countries
and segments, the likely sustained increase in
digital penetration could result in a recovery of
revenue pools to levels matching our pre-COVID19
expectations for 2021.
In following chapters, we explore four areas of
payments we consider critical to achieving success
in the context of accelerated change. Like many
aspects of payments, the merchant-acquiring
business was already undergoing significant
transformation. Consolidation had driven scale
economy imperatives, and non-bank market
entrants were gaining inroads with underserved
verticals. Our experts detail the need to redefine
acquiring offerings to encompass a full suite of
value-added services extending well beyond
payments settlement—including fraud controls and
cart optimization for the fast-growing e-commerce
segment. In a separate chapter we look at the
specific opportunity for small- and medium-size
enterprises, a segment that has historically been
expensive to serve for large incumbents, but which
has been the focus of many fintech attackers and is
well overdue for a closer look.
Supply chain finance has long been considered
to be a source of untapped value, but unlike other
payments sectors, has struggled to develop enough
momentum to address its structural challenges.
Foreword
3The 2020 McKinsey Global Payments Report
Alessio Botta
Leader, Europe Payments Practice
Phil Bruno
Co-leader, North America Payments Practice
Reet Chaudhuri
Leader, Asia Payments Practice
Marie-Claude Nadeau
Co-leader, North America Payments Practice
Gustavo Tayar
Leader, Latin America Payments Practice
Carlos Trascasa
Leader, Global Payments Practice
Given an expected increased focus on working
capital, a step change in digital adoption at scale,
and the potential geographic re-shuffling of roughly
$4 trillion of cross-border supply chain spending in
the next five years—the value embedded in supply-
chain finance will become even more attractive. The
question is whether it will be enough to spur a long-
anticipated transformation.
Finally, in this overview of global payments, we
look at a challenge many established payments
providers are facing—the need to transform the
operating model to meet the growing imperatives
for efficiency, scale, modularity (e.g., Payments-as-
a-Service), and global interoperability. With many
banks likely unwilling to commit the hundreds of
millions of investment dollars needed to modernize
existing payments infrastructure, we outline various
paths worth considering before more focused
players can establish an insurmountable advantage.
We hope you find the insights in these pages
thought-provoking and valuable as you navigate
these uncertain times.
McKinsey’s Global Banking Practice leaders would like to thank the following colleagues for their
contributions to this report: Maria Albonico, Fabio Cristofoletti, Vaibhav Dayal, Olivier Denecker, Nunzio
Digiacomo, Puneet Dikshit, Alberto Farroni, Diana Goldshtein, Reinhard Höll, Reema Jain, Baanee Luthra,
Tobias Lundberg, Yaniv Lushinsky, Pavan Kumar Masanam, Albion Murati, Tamas Nagy, Marc Niederkorn,
Nikki Shah, Lit Hau Tan, and Jonathan Zell.
4The 2020 McKinsey Global Payments Report
For the global payments sector, the events of
2020 have reset expectations and significantly
accelerated several existing trends. The public
health crisis and its many repercussions—among
them, government measures to protect citizens and
rapid changes in consumer behavior—changed the
operating environment for businesses, large and
small, worldwide. For the payments sector, global
revenues declined by an estimated 22 percent in the
first six months of the year compared to the same
period in 2019. We expect revenues to recover (only
to a degree) in the second half of 2020, ending 7
percent lower than full-year 2019. Over the past
several years, payments revenues had grown
by roughly 7 percent annually, which means this
crisis leaves revenues 11 to 13 percent below our
prepandemic revenue projection for 2020.
Given the impact of COVID19 on the operating
environment, we are diverging from our usual
approach of delivering perspectives on the current
year’s global payments landscape relative to the
prior year. Instead, we focus primarily on the state
of the payments ecosystem in 2020 and explore the
actions payments providers need to take to compete
effectively in the “next normal.”
The insights in this report are informed by
McKinsey’s proprietary Global Payments Map, which
for over 20 years has provided a granular, data-
based view of the industry landscape.
A half decade of change in a few
months
For global payments, 2020 stands in dramatic
contrast to the year before, which was a relatively
stable year. Global revenues grew at nearly 5 percent
in 2019, bringing total global payments revenue
to just under $2 trillion (Exhibit 1). Payments also
continued to grow faster than overall banking
revenues, increasing its share to just under 40
percent, compared with roughly one-third only five
years earlier.
Any stability was quickly disrupted in early 2020
by changing geopolitics coupled with reactions
to the COVID19 pandemic, both public (physical-
distancing measures, limits on business activity) and
private (anticipatory and causal shifts in consumer
and commercial behavior). As a result of the public-
health crisis, payments revenues in the first six
months of 2020 contracted by an estimated 22
percent (roughly $220 billion) relative to the first six
months of 2019. We expect full-year 2020 global
payments revenue to be roughly $140 billion lower
than in 2019—a decline of about 7 percent from
2019—a change equal in size to prior years’ annual
gains, which leaves revenues 11 to 13 percent below
our prepandemic revenue projection for 2020.
What we already know
Once COVID19 moved from a local outbreak to
a global pandemic, many governments moved
to protect their citizens, leading to lockdowns
with various degrees of limitation. The immediate
consequence was, of course, a steep reduction
in discretionary spending and a severe demand-
side shock, along with reductions in cash usage.
Discretionary spending initially sank by 40 percent
globally. The impact was especially great on the
travel and entertainment category, which was off 80
to 90 percent. While some categories of spending
The accelerating
winds of change in
global payments
The COVID-19 crisis is having a significant and
widespread effect on global payments across sectors.
The most striking and potentially lasting impact is
an accelerating pace of change in the industry.
Philip Bruno
Olivier Denecker
Marc Niederkorn
5The 2020 McKinsey Global Payments Report
rebounded, consumers’ well-documented shift from
the point of sale (POS) to digital commerce accounts
for the reduced use of cash.
Overall, in retail, the impact was not a decline but
a shift in buying behavior. In the first six months of
the year, consumers spent $347 billion online with
US retailers, up 30 percent from the same period
in 2019—corresponding to six times the annualized
2019 growth rate of online retail.
1
Amazon’s second-
quarter 2020 numbers recorded 40 percent
year-over-year growth, boosted in particular by
the tripling of grocery sales. In Europe, differences
in shopping behavior between geographies were
strongly reduced and differences between age
groups eroded as many consumers (in particular,
older shoppers) turned to online shopping for
the first time.
Consequently, all forms of electronic peer-to-peer
and consumer-to-business payments have been
1
Fareeha Ali, “Charts: How the coronavirus is changing ecommerce,” Digital Commerce 360, August 25, 2020, digitalcommerce360.com.
2
“Payments and cash withdrawals,” Swiss National Bank, data.snb.ch, last modified September 21, 2020.
3
Retail payment: May 2020,” Reserve Bank of Australia, rba.gov.au, July 7, 2020.
boosted. In many regions, this has mostly benefited
debit cards, which typically align with lower-value
transactions and are a logical cash substitute for
contact-averse consumers. Switzerland reported
an increase in share of debit-card spending from
65 percent to 72 percent between January and
May 2020,
2
mostly at the expense of cash. Higher
limits for contactless payments also triggered rising
adoption rates across the globe, making inroads
beyond debit’s typical domain of smaller-value
transactions. For credit cards, the picture is more
nuanced; consumers in certain geographies seemed
to be paying off credit-card balances in preparation
for challenging times ahead. In Australia, for
example, credit-card share among total card
spending fell by five percentage points between
February and June 2020, in favor of debit cards.
3
In
Asia, however, alternative payments, such as instant
and mobile payments, grew, while credit cards
retained their strong incumbent position supporting
Note: Figures may not sum to listed totals, because of rounding.
Source: McKinsey Global Payments Map
Global payments revenue, $ trillion
2010
0.9
0.3
0.4
2014
0.6
0.4
0.1
0.4
0.5
2018
0.2
0.5
0.9
2019
0.3
2.0
0.3
1.9
2020E
0.4
1.1
1.5
1.9
7.4%
6%
4%
7%
4%
Share of banking
revenues
28% 33% 38%
39%
North America
EMEA
Asia-Pacific
Latin America
5%
Current estimate
Pre-COVID-19 estimate
CAGR
2018-19
1.9
2.12
-7%
0.26
Exhibit 1
McKinsey expects global payments revenues to end 2020 down 7% compared to 2019.
6The 2020 McKinsey Global Payments Report
e-commerce and POS transactions.
Logically, given the steep reduction of in-person
purchases, cash transactions and ATM usage
declined—the latter after an initial wave of
withdrawals by anxious consumers. Germany
and the United States each saw spikes in cash
withdrawals in the days leading up to lockdowns.
The fear of contracting COVID19 through high-
traffic ATMs and, in some cases, the refusal of
merchants to accept cash (often despite legal
obligations) nudged consumers toward electronic
payment options to complete purchases. ATM usage
fell by 47 percent in April 2020 in India, while the
United Kingdom experienced 46 percent declines
per month on average from March to July 2020. By
the end of 2020, we expect a shift of four to five
percentage points in the share of global payment
transactions executed via cash—down from 69
4
“Thousands of ATMs in Australia removed, branches closed due to coronavirus,” ATM Marketplace, August 17, 2020, atmmarketplace.com.
percent in 2019—propelled by evolving behavior
in both mature and emerging markets (Exhibit 2).
This is equivalent to four to five times the annual
decrease in cash usage observed over the last few
years. The reduced use of cash benefits banks
overall: the cost of cash handling exceeds cash-
related revenue inflows, and electronic payments
generate incremental revenue.
The pandemic has accelerated the move from
“physical” to “virtual” banking. Banks in multiple
geographies are closing branches (or in some cases
will not reopen branches they closed due to the
pandemic), as well as ATMs. In Australia, the top
four banks have removed 2,150 ATM terminals and
closed 175 bank branches since June.
4
These accelerated behavior changes in response
to the COVID19 crisis caused a fundamental shift
in adoption of technologies, such as real-time
Source: McKinsey Global Payments Map
Cash usage by country
Percent of cash used in total transactions by volume, %
95
86
99
100
100
93
97
79
66
59
51
55
53
56
52
Mexico
Indonesia
Sweden
Argentina
Brazil
Malaysia
Japan
China
United Kingdom
India
Korea
Singapore
2010
United States
Finland
Netherlands
Emerging markets
Mature markets
87
74
41
89
96
72
86
54
34
39
28
23
24
9
14
2020E
Exhibit 2
COVID-19 will likely lead to a further decline in cash usage.
7The 2020 McKinsey Global Payments Report
account-to-account payment infrastructures,
that had been developed over recent years.
Investments in instant payments have begun
to reap greater benefits, both in POS and
e-commerce usage of instant solutions. The trend
comes in response to customer expectations for
speed, price differences, and greater adoption of
customer-facing applications, such as specialists
like GrabPay in Singapore or bank solutions like
MobilePay in Denmark. In the United Kingdom,
as payment speed becomes more important,
consumers and businesses have increasingly
opted to settle bills online; for example, the
average daily value of transactions processed by
the Faster Payments service rose by more than
10 percent from the fourth quarter of 2019 to the
end of March 2020. In India, banks stepped up
their digital propositions, integrating bill payment,
e-commerce links, and Unified Payments Interface
(UPI)—the nation’s local real-time payment
system—into mobile banking apps to present three
digital options in a single customer interface. UPI
spending increased by roughly 70 percent over the
first seven months of 2020.
At the same time, governments have tried to
protect the economy as a whole and the well-being
of companies as well as citizens. Additional easing
of monetary policies led to lower interest rates,
further deteriorating interest margins. Monetary
authorities reduced benchmark rates in Europe
and the United States and then in emerging
markets, including Brazil, India, and South Africa,
to limit the impact of pandemic-related recession,
making net-interest-margin (NIM) compression
a global phenomenon. Large and small markets
alike are experiencing rate cuts of 100 to 300
basis points. Overall, we expect global interest
margins to contract on average by approximately
one-quarter percent in 2020, compared with a six-
basis-point reduction in 2019, shrinking payments
revenues globally by approximately $82 billion.
Digitization benefits must first fill this gap before
generating growth.
Cross-border payments flows also have been
severely affected by the pandemic, as well as
by geopolitical dynamics. In 2019, cross-border
payments totaled $130 trillion, generating
payments revenues of $224 billion (up 4
percent from the previous year). In the first half
of 2020, many cross-border fundamentals
radically changed:
International travel all but ground to a halt, with
more than 90 percent of countries imposing
restrictions. Transaction-fee margins on
remaining volume also declined, due to waivers
offered to stimulate demand to offset the impact
of a reduction in leisure and business travel
flows, which fell by more than 70 percent.
During the pandemic, interregional trade saw
greater impact than intraregional. Drops in
interregional flows for Asia (−13 percent), Europe
(−20 percent), and the United States (−23
percent) directly cut into cross-border payments
volumes, while the prices of oil and other
commodities fell sharply.
Business-to-consumer payouts (often salary
disbursements) and remittance payments
slowed, because of restrictions on movement
of cross-country workers and growing
unemployment.
Cross-border e-commerce volumes provided
a notable exception to the gloomy news: the
second quarter brought double-digit growth as
initial logistic challenges were resolved. UPS
and PayPal, for example, reported double-digit
growth on cross-border shipment volumes and
value of merchandise sold.
Increased volatility and uncertainty have
enabled growth in foreign-exchange-related
revenues and pushed up treasury-related
transactions as companies scramble to mobilize
surplus cash.
In addition to the health crisis, certain geopolitical
forces that began to materialize in 2019 have grown
stronger since. Many companies are realizing the
strategic weaknesses in their existing global supply
chains, given trade frictions and potentially recurring
public-health disruptions, leading to the exploration
of nearshoring and other rebalancing. McKinsey
analysis reveals potential shifts of as much as $4.6
trillion of global trade flows over the next five years
(see chapter 3, “Supply-chain finance: A case of
convergent evolution?”, for more). The value-chain
shifts that began before the crisis are yet to take full
effect—because of the complexity of moving such
supply chains and the challeng e of building new
ones—so this is a longer-term trend.
The rest of 2020 and beyond
The second half of 2020 presents a quite different
outlook. Broadly, we see some pressures from
the first half continuing but with pronounced
8The 2020 McKinsey Global Payments Report
geographic variations.
Our forecast uses McKinsey’s nine COVID19
macroeconomic scenarios.
5
According to a survey
of more than 2,000 executives around the world,
the most likely outcome is the “muted recovery”
scenario (A1), a combination of virus recurrence
and a muted economic recovery, with regional
differences.
Applying the A1 scenario to global payments,
we forecast that most categories of payment
transactions are poised for sharp and rapid
rebounds as lockdowns are lifted and behavioral
shifts from cash to electronic payments are
largely sustained. On the downside, interest-
dependent revenue components are likely to
remain suppressed for an extended period, mostly
affecting banks that provide payment services.
For specialists and fee-based revenues, much will
depend on differences in spend patterns (for both
businesses and consumers) before and after the
crisis. For instance, dining, travel, and entertainment
expenditures, which often carry higher transaction
fees, are unlikely to rebound in the near term.
As we indicated, not all players, countries,
and products will arrive at the same end state
(see sidebar “A regional overview of the year
in payments”). At a regional level, the following
differences are notable:
• Asia–Pacific (excluding China) could suffer
larger declines, as its revenue model is more
affected by NIM contraction, faces increasing
government pressures on mass-market
transaction fees, and has greater exposure to
long-term affected industries, such as travel,
tourism, and international remittance payments.
• Europe may be poised for a swifter rebound,
for two reasons: First, NIMs were already so
compressed before COVID19 that there was
little room for further squeezing; second, volume
growth is being fueled by the acceleration
of digital migration in Southern and Eastern
Europe, and by government stimulus measures.
• In North America, the revenue benefit from an
accelerated shift to digital channels has been
more than offset by credit-card economics—
outstanding balances are down roughly 29
percent from 2019 levels, and increased
5
Sven Smit, Martin Hirt, Kevin Buehler, Susan Lund, Ezra Greenberg, and Arvind Govindarajan, “In the tunnel: Executive expectations about
the shape of the coronavirus crisis,” April 2020, McKinsey.com.
delinquencies are a possibility. Considering
credit cards are the largest source of the
region’s payments revenue, at roughly 44
percent, the decline in outstanding balances
alone will outweigh the benefits of increased use
of digital channels.
• In Latin America, which is characterized by a
significant unbanked population, cash usage
will likely remain resilient. Among the banked,
Visa-supported mobile wallets such as PLIN
and Yape have gained more than a million users
since December 2019, with the pandemic
accelerating this trend.
• Overall, the greatest recovery opportunities
reside in countries with low electronic
penetration (Brazil, India, Indonesia, Thailand),
as the next normal provides impetus for
electronification. However, countries starting
from a high level of digitization (France, Germany,
the United Kingdom) are also seeing COVID-
19-induced behavior push cash usage to the
minimum—fueling payments-revenue growth.
Overall, while the global health crisis leaves banks
and specialists with meaningful revenue concerns,
the real challenge—as well as the real opportunity—
lies in embracing the acceleration of change. If that
issue is addressed properly, the global impact on
payments could be significantly more positive than
the outlook for GDP (see sidebar “The relationship
between GDP and payments revenue”).
Looking forward: New rules for
engagement
Long-term forecasting is unusually difficult in the
current global environment, given the looming
uncertainty on multiple fronts: economic recovery,
interest rates, global trade, and a murky time
frame for public-health breakthroughs. One thing
seems clear, however. The imperative to accelerate
transformations to a digital-first and more agile
organization has never been greater, and it
exists globally.
Still, the current global context removes many
of the long-standing impediments to embracing
transformation. As financial institutions enter this
period of change, we propose five major themes
to which payments and bank executives should be
particularly attentive:
9The 2020 McKinsey Global Payments Report
• Choose where you play wisely. The composition
of your customer portfolio matters more
than ever, as restructuring of consumer and
commercial commerce reshapes where value
is captured in payments. Growth is notably
accelerating in the small and medium-size
enterprise (SME) segment, B2B–to consumer
(B2B2C) business models, and new customer
arenas, such as cross-border e-commerce.
The role of platforms also is growing fast, with
ecosystems a new growth segment. The shift to
digital makes it possible for providers to create
far more tailored solutions, and customers have
shown a willingness to pay for these if sellers
demonstrate value.
• Services and solutions, not financial products.
Commercial customers expect bank and
payments partners to enable greater sales
by improving end-customer experience and
the adoption of new business models—for
1
For countries covered by Global Payments Map
Source: McKinsey Global Payments Map
Payments revenue versus GDP
$ trillion
2010 2018 2019
1.5
1.1
1.9
2.0
2014
+8.6% p.a. +6.7% p.a. +5.0% p.a.
+5.1% p.a. +4.9% p.a. +5.0% p.a.
77.8
2010 2014 2018 2019
50.2
74.1
61.2
Payments revenues
to GDP multiplier
Nominal GDP
1
Global payments revenues
1.7X 1.4X 1.0X
Exhibit A
Growth in payments revenues has outpaced GDP growth.
The relationship between GDP and payments revenue
Over the last decade, payments revenues have grown substantially faster than GDP (Exhibit A). Between 2010 and 2019,
nominal GDP has grown at roughly 5.0 percent in the geographies covered by the Global Payments Map, while payments
revenues have grown at 7.4 percent, or 1.5 times the GDP growth rate. This multiple has, however, been decreasing, largely
as a result of an increasingly global contraction of net interest margins (NIMs), as well as ongoing regulatory pressures,
which mostly affected card fees. In 2019, payments revenues grew at 5.0 percent, roughly 1.01 times GDP growth, mainly
resulting from contraction in NIMs.
10The 2020 McKinsey Global Payments Report
¹ Cross-border payment services (B2B, B2C).
² Net interest income on current accounts and overdrafts.
³ Fee revenue on domestic payments transactions and account maintenance (excluding credit cards).
⁴ Remittance services and C2B cross-border payments services.
Source: McKinsey Global Payments Map
Payments revenue,
2019, % (100% = $ billion)
19%
5%
16%
16%
30%
Latin
America
Cross border
transactions
1
33%
Credit cards
4%
10%
100% = 891 542 371 194
Asia-Pacic
6%
8%
15%
12%
4%
3%
21%
9%
6%
North America
14%
23%
11%
11%
9%
Account-related
liquidity
2
33%
10%
16%
17%
EMEA
14%
2%
12%
3%
3%
Commercial
Consumer
“Commercial driven”
“Credit card driven” “Balanced”
“Credit card &
liquidity driven”
3%
Domestic
transactions
3
Cross border
transactions
4
Credit cards
Account-related
liquidity
2
Domestic
transactions
3
Exhibit A
Asia-Pacic continued to dominate the global payments revenue pool.
A regional overview of the year in payments
The relative contributions to global revenues of all four geographic regions remained consistent in 2019. Each region posted
solid mid-single-digit growth in payments, led by Latin America at 6 percent. Asia–Pacific continued to lead both in growth
and in its contribution to global revenue—45 percent of the total, with China generating the lion’s share (Exhibit A). The
rate of Asia–Pacific payments growth continued to moderate from its double-digit rates of a few years ago, given margin
compression on current-account balances across the region and China’s GDP expansion receding to a more sustainable rate.
At slightly over a quarter of the overall pool, North America remains the second-largest contributor to global revenues and
grew at par with global trends. Growth in Eastern Europe, the Middle East, and Africa (EMEA) slightly exceeded the global
average, mainly due to acceleration in the emerging markets of Eastern Europe and Africa (10 percent growth in revenues).
Western Europe grew at just 1 percent, although it had already largely absorbed the effects of interest-margin compression
that had affected the region in earlier years.
Globally, the number of electronic-payment transactions continued to grow at healthy rates in 2019, just shy of 20 percent
annually (at 10 percent in terms of value conveyed). Disproportionately high contributions came from China (56 percent
11The 2020 McKinsey Global Payments Report
Source: McKinsey Global Payments Map
Size of bubble denotes
payments revenue in 2019
Countries where growth rate of
electronic transactions is 10% or higher
Countries where growth rate of
electronic transactions is less than 10%
Growth rate of electronic transactions,
2018-19, %
Payments revenue growth rate,
2018-19, %
2-15 4
14
4
-3-5 19-2 20-1 0 1 65 15
2
187 8
22
119 1712 13 16 93
0
6
18
8
10
12
16
20
24
26
50
52
54
3
56
10
58
-4 14
Denmark
France
Germany
Greece
Hong Kong
Hungary
India
Norway
Romania
Indonesia
Nigeria
Ireland
ItalyJapan
Korea
Malaysia
Mexico
Morocco
United Kingdom
Netherlands
Pakistan
Peru
Poland
Portugal
Russia
Singapore
Finland
Slovenia
Switzerland
South Africa
Sweden
Taiwan
Argentina
Thailand
Australia
United States
Spain
Austria
Belgium
Canada
Chile
Colombia
Czech Republic
Slovakia
Brazil
China
Exhibit B
Countries with high revenue growth are also characterized by rapidelectronic transaction
growth.
growth), India (48 percent), and Russia (19 percent). Despite a reduction in fee margins per transaction globally (from an average
of $0.97 to $0.89 per transaction for electronic payments), these additional volumes propelled overall fee-based revenues from
electronic payments to new highs (a 9.75 percent increase in fee income for all products except cash and checks).
Alternative payment methods (APMs), such as e-wallets and instant-payment-based solutions, continue to play a key role in
accelerating cash substitution, particularly in developing countries. APMs have particularly gained traction in China, where they
generated about $43 billion in 2019 revenues, far exceeding the approximately $22 billion for the rest of the world collectively
(Exhibit B).
12The 2020 McKinsey Global Payments Report
instance, marketplace onboarding, B2B2C
credit, and loyalty services—that do more
than move money and manage cash flow. For
consumers, the payment step is moving into the
background of the shopping journey, and they
expect support with conducting commerce and
avoiding negative consequences, not merely a
means to pay.
• 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: sales motions,
agile sales, inside sales, customer success—all
made possible by data and algorithms delivering
the best adapted solutions for the market.
Closing this decade-wide gap over the next two
years will deliver significant value.
• Transaction-banking client experience. New
challenges in supply chains and growing trade
pressures are accelerating what has been a slow
disruption in international payments and trade.
Delivering the long-promised step-change
improvement to corporate clients will require
fundamental organizational change, particularly
for siloed banks.
• Changing the focus from “time value of money”
to “money value of time.” Becoming digital
by default requires significantly redefining
the institution’s operations through the lens
of customer journeys. To plan that digital
transformation, most players have built road
maps spanning the next five to six years.
But given the modified revenue context,
continued investment requirements, and
market expectations spurred by the new
environment, winners will find a way to deliver
on this transformation within 18 to 24 months. In
chapter 4 of this report, we explore the various
models that such a payments modernization
could leverage.
The events and trends of 2020 have undeniably
created a changed global context for payments.
What is most significant about this change is not
so much the importance of the payments business
or the kinds of trends transforming the market,
but the speed at which the change is occurring.
Change in 2020 takes place four or five times faster
than before. This puts all actors on the payments
landscape under pressure to transform and adapt in
order to preserve their positions and results.
Philip Bruno is a partner in McKinsey’s New York
office, Olivier Denecker is a partner in the Brussels
office, and Marc Niederkorn is a partner in the
Luxembourg office.
The authors would like to thank Vaibhav Dayal and
Baanee Luthra for their contributions to this chapter.
13The 2020 McKinsey Global Payments Report
Merchant acquiring:
The rise of merchant
services
The shift to electronic transactions has placed front
and center the need for merchant acquiring companies
to update and differentiate their service offerings.
Globally, merchant acquiring has evolved over the
past decade from a legacy processing and hardware
business to a full-stack software and merchant-
services solution. This shift, coupled with the
fragmentation of the merchant-facing payments
value chain, is dramatically affecting the economics
and business models of merchant acquisition
as it was done in the past, favoring instead the
value-added approach of the new merchant-
services players.
The evolution of merchant services typically
involves a pattern in which revenues from merchant
processing are being commoditized, and in
response, players seek to differentiate, either by
expanding their product suite or by building scale—
mostly through acquisitions—across geographies,
distribution (e.g., integrated software vendors, bank
led), and delivery channels (e.g., digital, point of
sale). Although the trends and trajectory are similar
across regions, certain geographies are further
ahead. As acquirers shape their priorities for the
next decade, the transformations spurred by 2020’s
public-health crisis will play a big part in the way
they rethink their vertical focus, platform strategy,
and investment priorities.
New winners and complex needs
compel a reevaluation of focus and
value propositions
As detailed in Chapter 1, one of the COVID19
pandemic’s most visible impacts on financial services
has been the dramatic acceleration in shifts toward
e-commerce and digital payments. This is true not
only in more mainstream verticals, such as fashion
and groceries, but also in merchant segments like
healthcare, professional services, and education,
which historically have not received a material portion
of payments through B2C digital channels.
This has led to an unprecedented digitization of
small-business commerce across geographies,
mostly through marketplace platforms. Marketplace
Platforms like Amazon, eBay, Etsy, Flipkart, and
Shopify have seen seller sign-ups increase by 70 to
150 percent since the start of the pandemic, based
on their most recent filings and public statements
(Exhibit 1), while proprietary platforms are losing
share. In healthcare, there has been a surge in
provider participation for services like telemedicine,
which in turn is highlighting a growing need for B2C
digital payments in professional services, education,
and other areas.
This shift to digital is driving up merchants’
payments-acceptance costs, which are expected
to rise by an incremental $8 billion to $15 billion
(about 6 to 10 percent) as commerce migrates to
these higher-cost channels. Just as importantly,
merchants also face higher decline and fraud
rates on digital transactions, with ramifications for
customer experience.
As these at-scale marketplaces and platforms
consolidate their share of digital sales, they naturally
seek to lower their cost of acceptance, which in
turn adversely impacts margins for acquirers. At
the same time, however, digitization of commerce
has created greater willingness to pay for enhanced
services and solutions. Merchants are willing to
accept higher fees for demonstrated value, such
as improved authorization rates, a more seamless
payments experience, or improved cart conversion
through point-of-sale financing. Even in sectors like
grocery, where acquirer margins have approached
Puneet Dikshit
Tobias Lundberg
14The 2020 McKinsey Global Payments Report
structural floors over the past few years, merchants
are willing to pay 20 to 30 percent higher rates
for better payments performance, particularly
when the impact on the business is positive and
significant. Higher-margin verticals, such as fashion
and accessories, are seeing increased demand for
financing solutions and affiliate marketing products.
As an example, within the fashion and accessories
verticals in the United States, the number of
merchants signed up for buy-now, pay-later
solutions has nearly tripled.
Leading acquirers are starting to transform in
two distinct directions: adding targeted value
propositions and becoming marketplaces
themselves. Industry-focused value propositions
address market needs for service and risk levels,
fees, value-added features, partnerships, and back-
end integration. This approach is not necessarily
industry specific; acquirers are increasingly
segmenting industries into groups based on
specific needs, such as a pay-later segment,
delivery segment, prebook segment, and repeat-
visit segment. Just as importantly, acquirers
themselves are beginning to resemble marketplaces
by offering solutions like payments disbursement,
financing and onboarding for small and medium-size
enterprises (SMEs), commerce marketplace know-
your-customer services, sub-merchant account
creation and management, and SME-facing risk and
identity solutions.
Most large acquirers have invested heavily in core
payment-enablement services like authentication,
fraud, and alternative-payment-method (APM)
acceptance and in creating omnichannel
acceptance and settlement, but relatively few have
capitalized on the opportunity to deliver enhanced
value-added services to large retailers (Exhibit 2).
Given the growing willingness of large retailers to
pay for such services and to seek these from their
current providers, this is a significant opportunity
for current portfolio monetization and margin
protection. The focus of these investments in add-
on services will be influenced by the vertical focus of
each merchant-services provider.
1
Includes retail; travel, media, and entertainment; food and beverages; bill payments; and others.
Source: McKinsey Global Payments Map; McKinsey Digital Commerce Benchmark
Global digital-commerce market,
1
platform sales breakdown,
$ trillion
6.1
(40%)
9.2
(60%)
2.6
(38%)
4.3
(62%)
2.7
(74%)
0.9
(26%)
2015 2019 2023E
3.6
6.9
15.3
Proprietary
platform sales
Marketplace
platform sales
22%/year18%/year
Exhibit 1
Digital marketplaces are expected to account for about 60 percent of digital-commerce volume
in the next few years.
15The 2020 McKinsey Global Payments Report
Acquisitions have helped build
geographic and capability scale, but
not solution scale
The consolidation in merchant acquiring over the
past several years has enabled acquirers to build
scale across geographies and to enhance their
suite of capabilities to stay competitive in the face
of next-generation merchant-services platforms,
including Adyen, Checkout.com, and Stripe.
However, this spate of acquisitions has also led
to acquirers being laden with numerous regional,
duplicative, and subscale solutions, adding to
technology overhead. Over time, this will impede
efficiency and interfere with acquirers’ ability to
serve multi-geography merchants, especially in
digital segments. Some of the largest acquirers are
saddled with 12 to 15 different regional gateways or
platforms that leave them, unlike next-generation
acquirers, ill-equipped to offer their clients an
at-scale, multi-geography solution.
Although continued consolidation is likely, an
increasingly important tactic is for acquirers to
invest in building a set of scalable solutions fit
for purpose for priority merchant segments. As
margins on traditional payments services continue
to be compressed, solution scalability will become
increasingly critical to sustain the business’s
economic viability.
In addition to the scalability of solutions, significant
untapped opportunity lies in enhancing the
scalability and sophistication of data infrastructure
to enable targeted use cases around enhanced
authorization, fraud, and performance-based
payments arrangements. For example, payments-
services providers are offering performance-based
arrangements that include authorization warranties,
which are fee constructs linked to fraud reduction
based on advanced analytics.
Source: McKinsey Payments Practice
Total
91%
34%
5,175
9%
66%
94%
644
3,853
518
495
299
92
1,771
OtherCustomer
support
Tax,
accounting,
and legal
Payroll,
employee
management
Loyalty
and gift
Marketing
support
Software,
cloud,
and design
FinancingEnhanced
payments
FraudData
analytics
41%
88%
1,955
4,025
18,975
59%
93%
150
Large
Small and medium size
Value-added services (VAS) revenues captured by merchant services providers,
by type of service and business size, 2019
$ million
~70% of all VAS
Merchant size: Mostly large
Growth rate: 8–10% per year
Gross margins: 40–60%
~30% of all VAS
Merchant size: Mostly small and medium
Growth rate: 40–45% per year
Gross margins: 50–70%
Exhibit 2
Small and medium-size enterprises are contributing to a growing share of value-added services
in payments revenue.
16The 2020 McKinsey Global Payments Report
The acceleration of SME digitization
has further underscored the value in
the long tail
Even prior to COVID19, most of merchant-services
providers’ revenue growth came from the long tail of
SME customers. Most acquirers have targeted this
opportunity through indirect distribution channels
(e.g., integrated software vendors and web-store
providers), as scaling through direct channels poses
a more complex challenge. In markets with bank-
owned acquirers, this transition to indirect channels
has been slower, given the ability of bank-owned
acquirers to sell directly within their own base.
Regardless of the channel, however, SMEs have
accounted for about three-quarters of all new
revenue growth in the merchant-services space
over the past three years, especially in established
markets (Exhibit 3). Serving SMBs requires
hyperregional strategies for distribution and scale.
In mature markets, acquirers are increasingly
focusing on distribution through ISOs (independent
sales organizations), ISVs (integrated software
vendors), and other indirect channels, relinquishing
40 to 80 percent of revenue margins as residuals
to their channel partners. As COVID19 has
accelerated a flight to digital for SMEs across
verticals, some of banks’ ISV-led models have been
taken a financial hit. Within the restaurant space,
for example, at-scale food-delivery apps like Just
Eats, Uber Eats, and Zomato have gained scale, and
transaction volume has shifted from the in-store
ISV to the food-delivery applications, meaning
those transactions are no longer processed by
the restaurant’s acquirer or processor. Under
those conditions, acquirers need to rethink their
1
Total excludes network assessment fees.
2
Small and medium-size enterprises, classied as businesses with <$100 million in revenues or sales where the cost of payments acceptance is directly borne by the SME; excludes marketplace-like
models that do not directly pass on acceptance costs.
3
Growth from underlying growth in sales; value-added service revenues attributed to services linked to processing a transaction but sold separately (eg, enhanced authorization).
4
Growth linked to price changes. Recent pricing pressure has led to price declines.
Source: McKinsey Payments Practice
Value-added services
(including hardware)
Core processing
Deconstruction of revenue growth, merchant services, US market example
$ billion
Share of growth
coming from SMEs
2
71%
29%
23.7 1.8
1.8
-0.1
18.7
Revenues,
2017
1.5
74%
26%
76%98% 27% 72%0%
Revenues,
2019
From new
merchants
From
volume growth
of existing
merchants
3
From new
VAS sales
From price
changes
4
Exhibit 3
Most revenue growth in merchant services is from small and medium-size enterprises.
17The 2020 McKinsey Global Payments Report
approach to partnerships and develop models that
deliver more value to merchants through their ISV
partners—for instance, merchant cash advances,
point-of-sale financing solutions, analytics, and
omnichannel reconciliation.
In emerging markets, ISVs are steadily gaining
share, but most of the sales still leverage
traditional agent-based or direct models. Bank-
owned acquirers have an advantage in many of
these markets but often lag in sales and product
sophistication. In these markets, acquirers still have
the opportunity to invest in building a point-of-sale
platform-based business that enables them to serve
a broad swathe of merchant needs and monetize the
SME relationship in a more holistic fashion.
Trade barriers and government
intervention hinder market expansion
and enable local wins
The economic slowdown has increased many
governments’ willingness to accept additional
investment avenues, somewhat counterbalancing
the impact of recent trade disputes. The competing
priorities of regional governments are likely to
interfere with companies’ ability to enter into new
markets organically. Acquirers will need to consider
regional sponsorships, acquisitions, or joint ventures
to enter priority markets.
This “slow-balization” is also expected to fuel the
growth of regional supply chains. This will create a
need for regionally integrated solutions, especially
in B2B payments. Acquirers that have been slower
to pursue the value pools in B2B digital commerce,
due to its multi-geography complexities, may now
be able to pursue opportunities at a regional level.
Preparing for 2021 and beyond
As acquirers and merchant-services players reorient
to prepare for the next decade, several key areas
require focus:
• Investing to transform into a platform business
for larger merchants. Most large merchants
are grappling with the accelerated shift
to e-commerce, which has created more
pronounced payments digitization needs
at the point of sale, including contactless
payments, enhanced authorization, fraud and
chargeback mitigation solutions, financing at
point of sale, sub-merchant onboarding, and
payments remittances. Acquirers have a unique
opportunity to shift from being a traditional
payments acquirer or processor and bring
together proprietary and partner solutions into
a single platform for larger merchants, which
also enables bundled economics and better
value creation.
• Investing in SME channels in emerging
geographies to capture share. The shift toward
ISV-led models across markets is imminent;
acquirers need to assess their strategic posture
to address this trend. The build-out and scaling of
direct-to-SME models will be capital intensive but
potentially more lucrative if acquirers can create
SME-focused one-stop-shop platforms. Investing
in these channels and value propositions over
the next 18 to 36 months, before these markets
tilt toward ISV-led models, will position them to
compete much more effectively.
• “De-cluttering” infrastructure. The spate of
acquisitions has led to often redundant data and
software platforms that are burdening at-scale
merchant acquirers, hindering their ability to
compete with next-generation players that have
built more integrated, scalable solutions. There
is a dramatic need for rationalization of software,
data platforms, infrastructure, etc. to enable
acquirers to support merchants efficiently
across geographies, verticals, and devices.
• Aligning and simplifying organizations to
mirror emerging and at-scale merchant profit
pools and needs. Segmenting customers into
enterprise (and within this marketplace models,
pure-play subscription, travel, at-scale retail)
and SMEs (and within this direct, bank-led,
ISO/ISV/VAR led, partner-led) and organizing
the business around segments based on how
customers buy is critical to compete effectively.
Such alignment will enable acquirers to invest
appropriately in sales effectiveness and
commercial enablement, thereby improving
go-to-market and pricing approaches as well as
progress tracking.
• Directing investments to digital ISVs and
payments-adjacent offerings. With traditional
processing revenues under sustained pressure,
acquirers should focus investment on scaling
integrations with digital ISVs and creating
payments-adjacent offerings where they have a
value-added play (e.g., POS financing, rewards
redemption at point of sale, SME financing)
Acquirers should better monetize their role
within the value chain as an enabler between
1
Total excludes network assessment fees.
2
Small and medium-size enterprises, classied as businesses with <$100 million in revenues or sales where the cost of payments acceptance is directly borne by the SME; excludes marketplace-like
models that do not directly pass on acceptance costs.
3
Growth from underlying growth in sales; value-added service revenues attributed to services linked to processing a transaction but sold separately (eg, enhanced authorization).
4
Growth linked to price changes. Recent pricing pressure has led to price declines.
Source: McKinsey Payments Practice
Value-added services
(including hardware)
Core processing
Deconstruction of revenue growth, merchant services, US market example
$ billion
Share of growth
coming from SMEs
2
71%
29%
23.7 1.8
1.8
-0.1
18.7
Revenues,
2017
1.5
74%
26%
76%98% 27% 72%0%
Revenues,
2019
From new
merchants
From
volume growth
of existing
merchants
3
From new
VAS sales
From price
changes
4
Exhibit 3
Most revenue growth in merchant services is from small and medium-size enterprises.
18The 2020 McKinsey Global Payments Report
issuers/service providers and merchants, e.g.,
explore the material opportunity to act like a
marketplace or and “app-store.”
• Differentiating through data. Differentiate
solutions on data and monetize data more
effectively to enable enhanced authentication,
fraud, and chargeback use cases. The shift
to digital has created a much greater demand
for enhanced authorization, real-time data
connectivity, better data-enabled fraud, sub-
merchant underwriting decisions etc. Acquirers
possess a gold mine of data but the complexity
of disparate platforms, unclear data strategy,
poor data architecture, and limited build-
out capabilities have impaired the ability to
effectively monetize this asset.
• Avoiding complacency on alternative payment
methods. The growth of APMs, fueled by
evolving regulation, ongoing innovation and
retailer interest, will necessitate their inclusion
in acquirer portfolios. APM strategies must
evolve to a point where acquirers have a clear
view on when and how to directly integrate
vs. license through APM aggregators or other
consolidators. In addition, as APMs capture a
growing share of transactions, acquirers will
need to refine pricing/revenue/fraud models to
drive value.
• Rationalizing customer processes. As the
number of devices, interfaces, payment means,
and channels continues to increase, acquirers
are in a privileged position to aggregate,
triage, and monetize a “guaranteed best route”
experience. A customer journey-based view of
payments evolution is critical to its enablement.
The merchant acquiring industry will likely see
continued consolidation on the acquiring side and
sustained fragmentation on the distribution side.
Growing commoditization of processing will need
to be offset by improved sophistication of solutions
and enhanced back-end efficiencies. Competing
effectively will require scale not just across
geographies and verticals but across solutions
as well. As merchants across sectors rethink their
acceptance and payments needs and journeys post-
COVID19, the acquirers who orient themselves to
innovate around these needs and journeys are best
positioned to win.
Puneet Dikshit is a partner in McKinsey’s New
York office, and Tobias Lundberg is a partner in the
Stockholm office.
The authors would like to acknowledge the
contributions of Diana Goldshtein and Tamas Nagy
to this chapter.
19The 2020 McKinsey Global Payments Report
Supply-chain finance:
A case of convergent
evolution?
The complexity of the supply-chain finance industry
poses difficulties in a time of economic turmoil, but
innovative players have opportunities to seize.
Alessio Botta
Reinhard Höll
Reema Jain
Nikki Shah
Lit Hau Tan
Significant value in the global supply-chain
finance (SCF) market remains untapped. Nearly
80 percent of eligible assets do not benefit from
better working-capital financing, and the remaining
one-fifth of assets are often inefficiently financed.
Despite improvements made in recent years,
advances have been largely incremental.
We now see change accelerating in the market in
response to a convergence of factors: an increased
focus on working capital, structural changes in
financing for small and medium-size enterprises
(SMEs), a step change in digital adoption, and the
potential geographic relocation of $2.9 trillion to
$4.6 trillion in spending on cross-border supply
chains (for 16 to 26 percent of global goods exports)
over the next five years. Could these events spur the
long-anticipated transformation of the landscape?
The answer may be yes. In this chapter, we outline
key drivers and how they could lead to real change
in access to and availability of SCF. We then offer a
vision of what such a transformation could look like
and what it would mean for market participants.
Supply-chain finance: An age-old need
Supply-chain finance may well be one of the earliest
commercial-payments activities. It has enabled
every major trade and supply-chain flow through
time, from trade exchange in early Mesopotamia to
receivables credit in the 1800s Industrial Revolution,
to letters of credit and even blockchain for global
supply chains today (see sidebar “What is supply-
chain finance?”).
1
See “Risk, resilience, and rebalancing in global value chains,” McKinsey Global Institute, August 2020, on McKinsey.com.
The industry fulfills banking’s basic promise of
financing the working capital necessary to run any
business. When successfully delivered, supply-
chain finance benefits the entire ecosystem: it
enables corporate buyers to secure inventory
by extending payments terms, and it improves
certainty on forward orders for suppliers. Banks
and nonbank SCF providers generate stable, short-
duration (and hence lower-risk), often recurring
transaction volumes while creating an avenue for
broader offerings such as foreign exchange, cash
management, and capital-markets products.
SCF has only partially delivered on this promise,
however. Often it is focused on larger, well-financed
multinational corporations and their supply chains,
whereas smaller and less well-financed enterprises
face barriers to access. Many catalysts—including
digital delivery, fintech innovation, industry
utilities, blockchain, and API technologies—could
stimulate cheaper and more accessible SCF, but
change has been slow. Now in 2020, the impact of
COVID19 has contributed to accelerating digital
adoption and reconfiguration of trade and supply
chains—for example, to improve resilience and
diversify sourcing.
1
A promise made but not (yet) kept
While supply-chain finance fulfills an age-old need,
its potential continues to be limited by its complexity.
We can measure this complexity along four major
axes: fragmentation of delivery, fragmentation of the
underlying assets, limited credit and expertise, and
geopolitical turmoil.
20The 2020 McKinsey Global Payments Report
Hidden text
2
2
fake footnote
Source: McKinsey Global Transaction Banking service line
Value of assets
nanced,
$ trillion
Expected
CAGR,
2019-24
Description Model
Total trade and
SCF turnover
Seller-side
nance
Documentary
business
Buyer-led SCF
Reverse
factoring
Dynamic
discounting
FUNDER
BUYERS
SELLER
FUNDER
PLATFORM
BUYER
SELLER
PLATFORM
BUYER
SELLER
Seller provides all information linked
to receivables nancing; suppliers
typically sell/borrow against full
accounts receivable
Platforms facilitate nancing on the
basis of buyer-approved invoices
Platforms can be supplied by individual
banks, ntechs, and other industry
players (eg, consortia)
Platforms facilitate modied
payments terms (invoice discounts)
between buyers and suppliers directly
No funding involvement – “platforms” are
typically supplied by ntechs
7.3
3.0
0.4
0.1
3–5%
Seller provides all transaction-related
shipping documents to their bank,
which works with the buyer's bank to
process the payment
3.8
1-2%
15–20%
25–30%
Exhibit A
Buyer-led solutions are the fastest-growing part of the $7 trillion trade and
supply-chain nance landscape.
What is supply-chain finance?
The overall trade finance market can be roughly differentiated into three segments, each with unique product dynamics
(Exhibit A):
— Documentary business includes traditional off-balance-sheet trade finance instruments, such as letters of credit,
international guarantees, and banks’ payments obligations. These instruments are typically used to cover the two
corporate parties against potential transaction risks (e.g., an exporter protecting against country-related risks of its
importer’s domestic market).
— Seller-side finance includes two main financial instruments: factoring and invoice finance.
2
These instruments
address the financing needs of corporate sellers by anticipating liquidity related to commercial transactions.
— Buyer-side finance (referred to as supply-chain finance throughout this article) is typically aimed at large buyers
and their suppliers. It covers the financing needs of suppliers originated by large buyers, like reverse factoring, where
suppliers can access third-party financing for buyer-approved invoices, as well as dynamic discounting, where buyers
pay suppliers early in exchange for discounts on the invoice. This has traditionally been a smaller and more fragmented
market (roughly $500 billion of turnover financed), but is now growing at double-digits, driven by increasing interest
and new offerings by players
2
Some market participants also include variations of invoice finance, including receivables finance, pre-shipping finance, and even
commercial overdrafts and commodities finance.
21The 2020 McKinsey Global Payments Report
Fragmentation of delivery
While SCF providers are increasing in scale and
product range, delivery tends to be fragmented. A
fully digital, seamless experience is held back by
several remaining barriers:
• Manual and fragmented process flows.
There are technology solutions that can
streamline the financing process, e.g., by
allowing automated data flow via integration
with enterprise-resource-planning (ERP) and
procurement systems and with core systems.
However, many corporates shy away from
fully digitizing procure-to-pay and invoicing
processes. For example, ERP integration
of a single SCF system usually takes two to
four months or more and requires upfront
investment and resources, which increases the
difficulty of justifying automation and speeding
up supply-chain financing triggers.
• Fragmented data sharing. Companies continue
to work on developing data-sharing utilities
such as standard application programming
interfaces (APIs) and arm’s-length data
repositories. But these solutions have not
yet demonstrated sufficient ease of use and
earned the confidence customers seek before
they will share ERP and invoice data at scale.
As a result, SCF providers must bear the
costs and delays of cleansing and shaping
invoice data before making onboarding and
financing decisions.
• Slow onboarding and credit decisions. SCF
processes still involve long cycle times and
uncertain time to decisions. As payments
expectations move to real time, SCF will need
to accelerate the typical multiday cycles that
inhibit corporates from accessing working-
capital relief.
Fragmentation of underlying assets
Along with delivery, underlying assets tend
to be fragmented. Payables and receivables
vary widely in terms, duration, and underlying
creditworthiness. Much of SCF has focused on
higher-rated, larger corporates and recurring,
high-value invoices, especially given the higher
costs attributable to fragmented delivery. Often,
less than half of total spend is eligible for financing,
with uptake at about 60 to 70 percent of eligible
3
Susan Lund, James Manyika, Jonathan Woetzel, Jacques Bughin, Mekala Krishnan, Jeongmin Seong, and Mac Muir, “Globalization in
transition: The future of trade and value chains,” January 2019, Mckinsey.com.
volumes. Furthermore, small and medium-size
corporates, as well as one-off, more variable
invoices, struggle to access SCF.
Limited credit provision and SCF expertise
With a limited secondary market, provision of
supply-chain financing is restricted by the number
of individual banks and nonbank providers with
sufficient risk appetite and know-how. Many
institutions cannot offer the full range of SCF
assets, because they have limits on exposure or risk
and limited expertise in underwriting and because
they lack existing processes. As a result, large
segments of corporates—for example, those where
most SMEs are customers of small banks—have no
access to SCF.
Fundamental shifts in global trade
Global trade volume grew by 6 percent (CAGR)
between 1990 and 2007. From 2011 to 2018, the
trade volume grew at a 3 percent CAGR, pushing the
absolute trade volume to new heights, according
to the World Bank. According to McKinsey’s latest
report
3
on global trade and value chains, in 2017,
total global trade stood at $22 trillion, with trade
in goods at $17 trillion. Trade in services, though
smaller at $5 trillion, has outpaced growth in goods
trade by more than 60 percent over the past decade
(CAGR of 3.9 percent).
We believe there are three fundamental forces that
will affect global value chains in the near future:
As domestic consumption grows in countries like
China, global demand—which historically has
tilted toward advanced economies, is shifting to
a greater focus on developing nations. Emerging
markets are expected to consume almost
two-thirds of the world’s manufactured goods
by 2025, with products such as cars, building
products, and machinery leading the way. By
2030, developing countries are projected
to account for more than half of all global
consumption.
Developing economies are building
comprehensive domestic supply chains,
reducing their reliance on imported intermediate
inputs and thereby reducing cross-border
trade flows.
Global value chains are being reshaped by
cross-border data flows and new technologies,
22The 2020 McKinsey Global Payments Report
including digital platforms, the internet of things,
automation, and AI.
Why this time is different
While many of the drivers of SCF growth are long-
standing, ongoing changes might signal a structural
shift in the ecosystem. Corporates, both small
and large, have structurally increased their use of
supply-chain finance, systematically considering
how to support smaller suppliers’ working-capital
needs. In a May 2020 McKinsey survey, 93 percent
of global supply-chain leaders expressed plans to
increase supply-chain resilience, with 44 percent
willing to do so at the expense of short-term savings
(Exhibit 1). This could double historically low SCF
eligibility and uptake levels from below 40 percent
to as much as 80 percent.
Unsurprisingly then, the recent supply shock from
COVID19 led to the increased use of supply-chain
financing. For instance, Prime Revenue saw growth
of more than 25 percent in the number of corporate
users in the first half of 2020 relative to the prior
year, with the share of financed invoices exceeding
90 percent in some months, compared with the
more typical 70 to 75 percent.
Supply-chain diversification as a catalyst for
holistic SCF
A once-in-a-generation supply-chain diversification
creates a catalyst for modern, holistic SCF solutions.
The McKinsey Global Institute estimates that up
to $4.6 trillion of global exports (26 percent of the
total and up to 60 percent in industries such as
pharmaceuticals) could be in scope for relocation
over the next five years. This will structurally
shift the ecosystem, likely in favor of players
with holistic offerings across receiving corridors,
whether in intra-domestic trade, in regional
trade, and/or across a more diverse set of global
corridors. This may result in additional support for
solutions catering to the needs to domestic bank
customers. Examples include Deutsche Bank and
Commerzbank targeting automotive value chains.
Tackling fragmentation with digitization
Digitization resolves issues arising from
fragmentation of delivery as corporates are actively
focusing on their supply chains. The aforementioned
2020 survey across industries identified 79 percent
of respondents planning investments in digital
supply chains. One corporate executive stated that
COVID19 has forced “a change of mindset” from
the historically slow pace in digitizing supply-chain
activities. Similarly, banks are forced to develop truly
end-to-end digital capabilities, from onboarding
and application through approval and execution to
improve servicing, capacity, and ability to automate
underwriting and risk management.
Changing competitive forces
Many nontraditional players are aggressively
targeting attractive niches in this business,
threatening banks’ revenue streams:
— Fintechs are developing value propositions
centered on digital platforms to provide
Source: McKinsey survey of 60 senior supply-chain executives , 2Q 2020
Percent of total respondents
Plan to increase level of resilience across supply chain
93%
Expect changes to supply-chain planning after COVID-19
54%
Plan to increase in-house digital supply-chain talent
90%
Exhibit 1
Supply-chain leaders will focus on resilience and digitization.
23The 2020 McKinsey Global Payments Report
Source: McKinsey Global Transaction Banking service line
Assets eligible for SCF programs
$ trillion, 2018
Global COGS Spend
addressable through
buyer-led SCF
Excluded spend
Managed directly
(not nanced)
Currently addressed by seller-side
nance solutions
(eg, factoring, invoice discounting)
Unaddressed short-term
gap for nancing
Addressed through buyer-led
solutions
Global supply-chain spend
of addressable buyers in
relevant industries, payable
to addressable suppliers
for buyer-led SCF
Excludes industries with
limited supply-chain spend
and fragmentation,
non-supply chain spend, and
un-addressable suppliers
Cost of goods sold of
global public and private
institutions with spend
>$500 million
~48
17
~14
~2.5
~0.5
3
~65
~17
Exhibit B
There is signicant room for growth in supply-chain nance programs.
Room for growth in supply-chain finance?
Conceptually speaking, the potential market for supply-chain finance encompasses every invoice and receipt issued
by corporates—up to $17 trillion globally (Exhibit B). In practice, however, there is a large global gap in trade finance,
estimated to be $1.5 trillion, rising to $2.5 trillion by 2025. This estimate was forecast by the World Economic Forum before
the start of the COVID19 pandemic. The trend is likely accelerating as the pandemic and trade conflicts prompt further
reshuffling and nearshoring.
To date, several practical constraints have impeded the financing of these balances:
• lack of coverage of buyer-led solutions, which typically target only the largest suppliers
• manual and fragmented processes for supplier-led solutions, leading to inefficiencies that erode the business model
for many financing opportunities
• inability to address invoices for non-investment-grade suppliers, less than 10 percent of which are financed
non-financial services, directly connecting
corporates. For instance, fintechs (e.g.,
Us-based C2FO) are offering dynamic
discounting, an innovative nonlending-based
supply-chain finance product enabling buyers
to make early payments to suppliers in return
for a discount. Tradeshift, another example,
4
For example, Taulia received a new strategic funding round led by Ping An and JPMorgan, and Deutsche Bank invested in Traxpay, an SCF
fintech.
offers an integrated platform to large buyers and
SME suppliers spanning the procurement value
chain. Recent partnerships and investments
in companies like these are signs that model is
catching on.
4
24The 2020 McKinsey Global Payments Report
— Several consortia have emerged in trade finance
leveraging technology such as blockchain
to make processes faster, simpler, and more
transparent. Marco Polo has onboarded roughly
30 banks and offers an API-based platform
for banks and corporates. Logistics company
Maersk partnered with Tradelens and IBM to
offer real-time, blockchain-powered supply-
chain tracking and optimization via event
tracking and distributed document sharing.
Komgo, a consortium of 15 financial institutions
including Dutch banks, trading companies,
and oil giant Shell, was leveraged by MUFG to
conduct its first transaction on blockchain.
— E-commerce companies like Amazon and
Alibaba have moved into the SME value chain
and now the supply-chain as well. Companies
leveraging these solutions are generally digitally
active and receptive to financing via digital
workflows and products embedded in payments
and process flows. Ecosystems are starting
to integrate financing capabilities or partner
with banks and other parties to develop such
functionality, providing access to corporates
previously out of scope for these forms of
financing. Alibaba and Kinnek are pursuing this
model in traditional B2B marketplaces, while
Amazon and Predix are doing so for digital ones.
Innovative decision making
Bank and nonbank providers are innovating in
credit decision making, especially through rapid
improvement in the application of advanced
analytics and machine learning to financing
decisions and pricing. SCF platforms and banks are
increasingly augmenting payables information with
historic information, as well as additional private
and public data to drive innovation in financing
decisions. This leads to better risk pricing, but also
improves speed and certainty of credit provision,
two key drivers for corporate customer satisfaction
and retention.
Delivering on the promise: What real
change could involve
Given the persistent fragmentation of the SCF
ecosystem, our view is that current converging
trends will trigger a structural change as corporates
accelerate their digitization of supply-chain finance
and constantly assess their financing setup to
fully benefit from the shifts outlined. Winning them
over will likely require heavy focus on their digital
interfaces. This could take the form of industry
libraries of APIs and data exchanges, or it could
involve open standards to make ERP, invoice, and
supplier data portable across platforms. Here are
four possible future models and what each would
mean for market participants (Exhibit 2):
• Model 1: Bank led. Banks improve end-to-
end delivery by reimagining client journeys,
renovating technology, and delivering
AI-enabled financing. By effectively drawing
upon the strength of their corporate client
portfolios and established processes for
credit decisioning and provision, they resolve
longstanding challenges such as onboarding,
distribution across the full set of suppliers and
invoices, and scaling of their overall ability to
provide credit.
• Model 2: Bank-led partnerships. Banks partner
with platform providers to develop solutions
(ERP integration, third-party data) but retain
control of the customer interface. Banks then
move beyond numerous (but often superficial)
partnerships with fintech or technology
platforms to create truly seamless and digital
SCF journeys spanning procurement, invoice
creation, and financing. This is accomplished
through APIs and connectivity across suppliers
and buyers in the value chain spanning digitally
native, invoice-agnostic SCF platforms covering
a buyer’s full set of suppliers and the seller’s full
set of invoices.
• Model 3: Platform led. Nonbank platforms
scale to provide SCF across the full industry
value chain of suppliers and buyers, linking into
banks and nonbank financing providers. They
draw on established capabilities, including
rapid distribution and onboarding of suppliers’
invoices and platform flexibility to cater to
different invoice types and SCF products and
enable the platform providers to become the
go-to source for invoicing data and financing. In
this model, banks and other ERP platforms are
reduced to serving as secondary sources and
underlying “pipes.”
• Model 4: Diverse supply-chain finance
ecosystem. A broad range of providers coexist,
each catering to different needs. Given
existing fragmentation, we can envision a
continued niche-based evolution of SCF (e.g.,
in e-commerce or textile distribution), catering
to the full set of suppliers and specializing in
credit assessment for selected industries.
25The 2020 McKinsey Global Payments Report
Platforms could build out digital, easy-to-use,
self-serve management of invoices for SMEs,
aggregating the range of SCF products and
financing sources.
Platform-led models and diverse supply-chain
finance ecosystems are more likely to be multi-
bank compared to the current, typically single
bank-led models. Multi-bank models allow wider
solution penetration across various corridors and
customer segments and, by definition, create some
solution standardization. They require more effort
to implement, however, and finding an approach
that satisfies multiple banks’ requirements is not a
trivial matter. In determining whether to join multi-
bank efforts, banks should assess the benefits and
risks, including the trade-off of increased scale
and reach vs. distinctiveness of the offering. This is
especially relevant for those who consider supply-
chain finance a differentiating feature for their
corporate customers.
Now for the hard part
As highlighted, the existing trends around
digitization, platforms, and finance provision
Source: McKinsey Global Payments Practice
Better integrate bank and
ntech systems and processes
Invest in end-to-end customer
journey redesign
Widen scope of platform to
bring full set of SCF products
to corporates
Increase platform investment
and accelerate coverage for
full value chains in key
geographies
Develop secondary market for
SCF assets to increase
penetration of non-bank
lending
Industry-wide support for
common standards and
approaches (including API
libraries, data sharing)
Develop secondary market
for SCF assets to increase
penetration of non-bank
lending
Reinvest in technology
platform
Reimagine onboarding and
set-up of customers and
credit-decisioning process to
increase eciency, decrease
risk, reduce cycle time
Banks
Banks ERPs
Banks
Banks Banks
BanksFintech
platform
Fintech
platform
Fintech
platform
Non-bank
nancing
Non-bank
nancing
Providing SCF
Model 1: Bank delivery
end-to-end
Enterprise
resource
planning/
procurement
mandate
Distribution
and onboarding
of suppliers/
invoices
Data sharing
and integration
Credit
decisioning
Credit
provision
(and risk
sharing)
What will
create
transformative
change?
Model 2: Banks and
platforms partner for
digital-led delivery
Model 3: Platform
delivery with bank/
provider nancing
Model 4:
Diverse supply-chain
nancing ecosystem
Exhibit 2
There is room to accommodate multiple future SCF market models.
26The 2020 McKinsey Global Payments Report
are supercharged by COVID19. Of course, the
underlying growth drivers of SCF will remain intact,
even if selected niches, particularly along some
corridors, are affected by economic or geopolitical
developments. Overall, while corporates will benefit
from increased, more seamless, and likely cheaper
access, this is a fundamental threat for banks. In
either case, the likely next phase will see significant
shifts between banks and toward nonbanks.
Banks now need to decide whether to fight for
a share of a much-expanded bank-led model or
whether a retreat is more likely. It is likely that
only a few large banks will be able to provide all
services described and effectively compete in the
bank-led model 1. In servicing their customers,
they would need to draw on learnings from fintechs
and platforms, e.g., by reimagining onboarding to
reduce cycle times to approval by 90 percent while
increasing adoption rates, or by fully automating
credit decisions. This entails heavy investment in
technology, expanded breadth of services, and
broad customer reach.
More likely, most banks will need to trigger a shift
into the bank-led partnerships of the second model
listed. In this scenario, banks would no longer need
to be the end-to-end provider of SCF products.
For customers in given verticals or for selected
steps of the value chain, banks may elect to enter
partnerships with other providers to achieve scale
and reach. This is likely the default mode for many
banks and is particularly suitable for regional
and smaller players. However, it still requires
significant focus on partnerships, integration, and
digitization, as banks will need to scale quickly
and accelerate their partnerships—not only with
fintechs or other technology players, but also with
each other in order to gain scale. Success in this
model cannot be achieved alone: banks should
foster the development of a secondary market for
SCF products, as well as initiatives to enable the
financing journey, including common standards for
data sharing and API integration.
Meanwhile, platform providers should aim to
displace banks at scale in a platform-led model.
It requires them to scale coverage across several
key value chains (e.g., major automotive suppliers
in North America, major textile intermediaries
in Southeast Asia), integrate a broader range of
financing providers to cover the full set of invoices,
and develop a secondary market for SCF assets
to increase penetration among corporates. They
will likely need to link into banks as sources of
funding. Particularly for smaller banks, this may
appear to be an attractive route to generate income
without building an SCF engine. It is possible
that large e-commerce orchestrators (such as
Alibaba and Amazon) will coalesce into this model
over time and gain significant SCF market share,
particularly in serving SMEs. Other providers,
particularly fintechs and consortia, will likely have
a tougher time achieving scale but should not be
counted out, as they can always partner with bigger
players or banks.
All said, we expect this will not be a “winner takes
all” market and that different solutions will co-exist
in the future landscape. There is sufficient market
breadth for multiple networks, technologies and
business models to succeed. A comparison can
be seen in FX trading market automation, where
mono-bank, multi-bank and network solutions have
evolved to address historical inefficiencies. Even
in the multi-polar model, however, participants
will need to focus heavily to retain and potentially
improve their positioning.
It’s worth noting that the past decade has been a
period of persistent economic growth and relatively
stable supply chains. Volatility will cause much
greater market turbulence. This pressure may be
felt most strongly among banks that did not focus
their sizable SCF franchises in recent years. Time
will tell whether their stand-alone status proves to
be a sustainable or model or—more likely—drives
corporate customers to other SCF providers. In the
end, a multi-trillion-dollar financing opportunity
is at stake.
Alessio Botta is a partner in McKinsey’s Milan
office, Reinhard Höll is a partner in the Dusseldorf
office, Reema Jain is a knowledge expert in the
Gurgaon office, Nikki Shah is an associate partner
in the London office, and Lit Hau Tan is an associate
partner in the New York office.
The authors would like to acknowledge the
contributions of Pavan Kumar Masanam to
this chapter.
27The 2020 McKinsey Global Payments Report
A burning platform:
Revamping bank
operating models
for payments
The payments segment is performing well for
banking—but not for banks. Under pressure from
multiple forces, successful banks will develop a new
operating model better suited to changing times.
Payments remains among the best-performing
financial-services product segments around the
globe. Despite the direct impact of COVID19-
related lockdowns, leading payments players have
rebounded surprisingly quickly, and many aspects
of commerce resumed relatively uninterrupted
in most regions almost as soon as lockdowns
were lifted. Payments providers’ central role in
the economy—and their business potential—is
illustrated by their healthy total shareholder
returns (TRS) even amid the economic downturn
(Exhibit 1).
Although some segments of the payments
industry—including travel-related services,
international remittances, and specialty integrated
point-of-sale solutions—face deeper and longer-
term impact, digital payments volumes have soared
overall, partially driven by accelerated consumer
migration to digital channels and payments forms.
This momentum is expected to persist as a next
normal develops.
Unfortunately for banks, historically the main
providers of payments services, this momentum
does not extend to most of them. Traditional
revenue sources, such as interest margins on
current accounts, revolving credit lines, interchange
revenues, and cross-border fees, are under
pressure in the current environment. Interest rates
are at historically low levels globally and are not
expected to rebound soon. Credit-card losses
are exacerbated by the economic downturn. And
interchange and cross-border payments fees
are pressured by regulation and competition. As
a consequence, the bank side of the payments
revenue model has substantially declined over the
past year, especially because of compressed net
interest margins and attrition of bank-specific fees
such as interchange. Recovery is not imminent.
In a highly competitive market where it remains
difficult to charge substantial transaction fees, the
payments P&L outlook for many banks is challenged
in the near to midterm, absent significant cost
rationalization. Success for banks will depend on
thoughtfully assessing capabilities, determining
the role of payments in market strategies, and
appropriately aligning payments operations to
achieve the required performance improvements.
More than traditional cost optimization, this may
involve unit carve-outs, payments as a service,
outsourcing, and/or partnerships to ensure
appropriate performance.
Investment needs challenge banks’
ambitions
Payments remain a substantial factor in banks’
operating cost base, sometimes representing as
much as 30 to 40 percent, partly because of the
high technology spend associated with providing
payments services. A disproportionate share
of effort and resources is required to maintain
and improve infrastructure, manage upgrades,
implement rule changes, and rationalize legacy
technology. This often leaves insufficient resources
for sorely needed digitization efforts and investment
Olivier Denecker
Yaniv Lushinsky
Albion Murati
Jonathan Zell
28The 2020 McKinsey Global Payments Report
in new customer services and applications.
The complex nature of integrations between
payments and many other bank systems add to the
cost of change.
All signs point to the expectation that for banks, the
cost of ownership of payments services will remain
high, given the ongoing number of regulatory, IT,
and market-driven sector changes (e.g., instant
payments, open-banking adoption, PSD2—and
perhaps 3—proliferation of alternative payments
methods). The majority of these investments
focus on staffing supporting projects, ensuring
compliance with external requirements, and
shielding the customer experience from disruption,
rather than freeing up capacity to allow banks to
develop new products and enable new customer
experiences.
However, given that payments represent the most
frequent touchpoints between a bank and its
customers, the need for digital investment to remain
competitive also is growing. In the context of lower
bank payments revenues, concern is increasing over
the ability of leading banks to continually harness
the capital resources required to pursue market
leadership, particularly given the demonstrated
investment capabilities of the leading nonbank
payments specialists.
COVID19’s impact on the top and bottom lines
of bank P&Ls (including payments) and the need
to continue investing in technology to offer a
compelling value proposition require banks to
determine the strategic role and their level of
ambition in payments. While some banks view
payments as a differentiating factor, others do not
1
Based on an analysis of public companies; custom indices (market-cap weighted) based on identied public European peers: payments N=27, retail banking N=20, asset management N=17, corporate
banking N=5; 2019 data as of October.
2
TRS CAGR for Jan 2009July 2020.
Source: S&P Capital IQ; McKinsey analysis
TRS performance of public companies
1
Indexed to 100 = January 2009
CAGR
2009-202
%
25
2
5
13
2015201320122009
1,400
2010 2011
600
20162014 2017 2018
200
2019 2020
800
0
2021
400
1,000
1,200
1,600
Asset
management
Payments
Corporate and
investment banking
Retail banking
Exhibit 1
Payments companies continue to outperform other banking sectors in value creation.
29The 2020 McKinsey Global Payments Report
see their payments value proposition as a core
component of their unique product offering.
Given the industry’s rapid evolution, payments
leadership requires the willingness to commit
significant investment. As a point of comparison,
leading payments specialists each committed
between 3 and 13 percent of their revenues
to capital expenditures in fiscal year 2019,
representing annual budgets ranging from $250
million to nearly $1 billion. While a “fast follower”
strategy to capture real growth—for instance, by
casting one’s organization as a disruptor or service
champion at a lower price tag—certainly has appeal,
it too places added requirements on the operational
capabilities and systems of banks and still triggers
the need for investment.
In this context, the one truly negative option is to do
nothing in the face of market upheaval. Whatever
role payments play in a bank’s overall strategy,
the industry’s rapid changes coupled with the
increasing investments required to play in this
space require banks to rethink their payments
operating models.
Changing the operating model: Four
options
Today, for banks to retain their central position in
customer journeys and the payments business,
they will need to reflect on the fundamentals of
their operating model. Incremental efficiency
gains will no longer be enough to maintain banks’
structural advantages in the space. We believe cost
improvements of 30 percent or more will be needed
for banks to create the necessary headroom
for investment and acceptable profitability. And
although that target might seem daunting, we
believe it is within reach.
The urgency to fundamentally rethink the payments
operating model is heightened by the confluence
of several market factors. These are increasing
pressure on margins; growing international
standardization, enabling potential scale gains
and the emergence of technologies supporting
change; and growing regulatory pressure to revamp
operations to enable services like instant banking
and open banking.
But change to what? Four potential operational
models, each with appeal to banks facing particular
strategic circumstances, offer potential. These
are a carve-out and scaling of payments, a
partnership to share payments utilities, offers of
payments as a service, and outsourcing of selected
payments services.
Carve-out and scale-up
In certain cases, a payments business operating
within a bank organizational structure may suffer
from underinvestment and lack of scale. This
condition may result partly from serving a small set
of internal customers and partly from the absence of
an outward payments market focus. In such cases,
banks should consider whether a carve-out and
scale-up of the payments business, operated as a
separate P&L, may create more value for customers
and other stakeholders.
As payments services commoditize and margins
contract, payments businesses need to drive
scale quickly to reduce per-transaction cost and
improve profitability profiles. That can be difficult
to accomplish within a bank structure, as payments
services are mostly limited to bank customers.
Treating payments as a stand-alone entity allows for
the expansion of services to other banks and direct
offers of services to a broader array of customers,
thereby driving scale and improving profitability.
A successful carve-out will also empower
entrepreneurial leadership within the new entity,
which can prompt development of new skills and
create an appetite for growth.
Eventually, this approach typically enables greater
investment in the business and introduction of more
innovative and value-added services to customers
than a purely in-house operation would likely have
achieved. It’s an appealing strategy for banks
that view payments as an operational strength
and a competitive differentiator; it can further
bolster these advantages by driving additional
investment. Carving out the payments business
enables a more flexible approach to growth while
also establishing a currency that makes subsequent
consolidation possible, as carve-outs can tap into
the higher valuation afforded payments companies.
Historically, the carve-out of Worldpay from RBS
in the United Kingdom and the carve-out of Vantiv
from Fifth Third Bank in the United States are
key examples of how value in payments can be
generated through carve-out and scaling of the
payments asset.
Shared payments utilities
Banks can consider partnering with one or more
peers to establish shared payments utilities that
improve and expand upon services provided to their
joint customer base while reducing the investment
30The 2020 McKinsey Global Payments Report
that would have been required if each bank had
developed the solution on its own. Such pooling of
resources and coordination between consortium
members leads to the development of superior
payments products with a higher probability
of wide-scale adoption, enabling banks to win
customer relationships and protect them from
nonbank payments specialists.
By nature, sharing payments utilities limits banks’
opportunity to differentiate based on product
features. Therefore, the strategy is best suited for
products benefiting from a common core feature
set and/or institutions looking to compete based
on service, rather than banks with the objective of
being a “payments leader.” In addition, banks can
still differentiate from other banking players by
leveraging the shared utility to introduce innovative
solutions or address specific use cases not offered
by other banks. For instance, a real-time-payments
(RTP) scheme can be developed as a shared utility
but allows each bank to develop unique RTP use
cases for different customer segments.
Examples include the establishment of electronic
alternative payments methods that have helped
reduce merchants’ payment costs. A consortium
of banks established P27, a pan-Nordic real-
time payments scheme, while six large Swedish
banks, in cooperation with the Central Bank of
Sweden, launched the mobile payments platform
Swish. Neither of these undertakings would have
been likely to gain sufficient scale if it had been
approached independently by a single bank. Similar
shared-utility opportunities exist in national debit
schemes and in joint know-your-customer (KYC)
and fraud-prevention initiatives.
Payments as a service
While outsourcing of the full payments stack
is a possibility, a new generation of technology
providers has emerged allowing banks to expand
quickly and modernize their payments product
portfolio without incurring high upfront investment.
Payments-as-a-service (PaaS) players operate
cutting-edge cloud-based platforms to provide
specialized services, such as card issuing, payments
clearing, cross-border payments, disbursements,
and e-commerce gateways.
Banks wishing to offer these services can integrate
these platforms via application programming
interfaces (APIs), which allow the institutions to link
these products into their core banking platforms,
in effect building a cloud-based payments services
stack of their own. Banks can then offer these
services to end customers and can update and
swap out services more readily. The ability to rapidly
add or replace specific solution providers is key to
this model, as it allows the bank to realize the “fast
follower” vision of capitalizing on best-of-breed
solutions. Therefore, it essential to confirm that such
plug-and-play interchangeability is truly attainable.
This allows banks to enjoy several advantages. First,
they can expedite time to market for new payments
products—say, launching a new credit-card program
in two or three months rather than two years.
They also can reduce capital investment; instead
of building a credit-card stack in-house, they
pursue a much simpler integration with the cloud
platform. In addition, they can ensure that products
are continuously updated and upgraded without
disproportionate maintenance investment, since
the PaaS partner handles platform maintenance
and upgrades, ideally in collaboration with bank
product leaders. Finally, they can forger a stronger
link between cost and revenue, since the majority
of PaaS fees are transaction based and/or based
on API usage.
Prominent institutions have adopted this approach.
JP Morgan recently partnered with Marqeta, a PaaS
card issuer, for virtual commercial credit cards.
Oxbury Bank has chosen to work with ClearBank,
a PaaS payments clearing and agency-banking
provider, to clear its UK wholesale payments.
Outsourcing
Banks that do not wish to—or cannot afford
to—invest in building or upgrading a full
payments technology stack can still offer best-
of-breed payments products to end customers
by outsourcing select services. This approach
is applicable to a variety of services, including
merchant acquiring and processing (especially for
small and medium-size enterprises [SMEs]), cross-
border payments, B2B payments, and card issuing.
Outsourcing enables the rapid expansion of service
breadth, even for banks unable to justify the cost of
developing the service in-house. Banks can mix and
match to create a broad suite of payments services
suited for their customers. While outsourcing leads
to some loss of control over product and service
quality and can inhibit the marketing of a holistic,
integrated product portfolio, banks do retain control
over critical customer touchpoints and, in many
cases, valuable transaction data.
31The 2020 McKinsey Global Payments Report
Although large banks like Chase in the United
States and Lloyds in the United Kingdom offer their
own merchant acquiring and processing solutions,
many other large brands rely on external providers
to support their SME merchants payments needs.
Transferwise now offers remittance services to
banks, a solution that reduces the cost of operations
for cross-border payments and often expands
payment corridors offered to customers for banks
lacking global reach.
Banks also have the option of a full outsourcing of
their payments stack. Many smaller US institutions
have done this with players like Fiserv. In Europe,
Commerzbank and UCI have done this recently
with Worldline.
Moving to a decision
Changing the operating model of a business that
typically represents one-quarter to one-third of the
bank’s business is difficult (see sidebar, “Lessons
from experience”). Nevertheless, for most banks, it
is a necessary step to ensure long-term success in a
critical and rapidly evolving market.
Deciding on a bank’s future payments operating
model first requires determining the bank’s level
of ambition in payments. Bank leaders should
ask themselves what is critical to their bank in the
payments arena. Is it strategically important to
retain control of customer touchpoints and data, or
is it enough simply to ensure provision of a full suite
of essential payments products? Which payments
products and services are critical to differentiation?
Is the bank meeting this desired standard today?
Given the high investment required to lead in
payments in the future, banks should also take
a brutally honest look at their current level of
payments capabilities and consider these questions:
What is our stand-alone potential for improvement?
What are the bank’s realistic prospects for in-house
development and innovation, including its ability to
earmark sufficient investment funds?
For banks that are ambitious in payments and at a
solid starting point in terms of in-house payments
capabilities, we consider carve-outs of the
payments business as a potential development for
the mid- to long term. Carving out the payments
business could create long-term value by attracting
top-notch talent free of the constraints of banking
labor agreements, creating a clearer path to scale
by attracting other banks’ volumes, and building
out stand-alone operations in an environment that
generates high-multiple valuations.
Lessons from experience
We reviewed our experience with outsourcing, utility, PaaS, and carve-out operations to uncover a few lessons that banks
should consider applying when choosing a new operating model:
Convincing the bank to outsource operations can be difficult and requires a strategic discussion at the executive level
from day one. Continued executive involvement will be necessary to keep the process from stalling in operational layers
of the organization.
Understanding the bank’s interest and pain is the key. Services that do not address a specific pain point are
mostly irrelevant.
Decisions about which services to provide must weigh provider capabilities and identify where the providers can
outperform the market.
Options can—and in many cases, should—include legacy and low-margin services. Creating a value proposition in these
spaces is often more beneficial than pursuing innovations.
Assuming the bank intends to scale the service beyond an initial set of clients, it should pursue easy integration and
management of a variety of interfaces.
Decision makers might need to consider different types of providers to obtain the required value proposition. Multiple
types of partnerships may be necessary for acquiring the needed scale.
Building commercial capabilities in payments may involve either building an in-house sales force or partnering with
outside providers.
32The 2020 McKinsey Global Payments Report
If the bank lacks the investment capabilities
required to keep pace with the competition or
hasn’t committed to being unique in its payments
offerings, an attractive alternative is to investigate
the wide array of available outsourcing plays. A full
complement remains incomplete in many markets
outside the United States, however, although
some players are developing in this space. Before
choosing which route to take, banks should ask
themselves several questions: What scope of
partnering and outsourcing is my bank willing
to consider, and in which areas? How much cost
savings could be gained from each outsourcing
option? Is there a reliable payments supplier in the
market to outsource to, or is there a need to build
a common utility? What will be the impact of the
transaction on my HR and social situation? How
would the bank mitigate associated risks, ensure
sufficient input in future product decisions, and
retain flexibility for potential future changes?
Whatever level of ambition and starting point in
payments a bank may have, now is the time for
its leaders to take a close look at its payments
operating model. With several options available,
strong players are already creating the new
generation of payments. Those that cling to old ways
will be left behind.
Olivier Denecker is a partner in McKinsey’s
Brussels office, Yaniv Lushinsky is a consultant in
the Tel Aviv office, Albion Murati is a partner in the
Stockholm office, and Jonathan Zell is an associate
partner in the New York office.
33The 2020 McKinsey Global Payments Report
Closing the gap:
Matching attackers on
B2B sales for SMEs
In times of crisis the most resilient players gain
disproportionate benefits. Innovating and offering better
products are important, but not enough to realize the full
gains. In a highly competitive market such as the small
and medium-size enterprise (SME) space, the ability to
structurally enhance sales capabilities through advanced
analytics is paramount for providers of payments services.
Maria Albonico
Nunzio Digiacomo
Alberto Farroni
Tamas Nagy
The increasing digital sophistication of SMEs and
the impact of COVID19 on technology adoption and
ecommerce have heightened the need for payments
providers to offer more advanced yet easy-to-
use solutions, while simultaneously expanding
into adjacent sectors to create broader offerings
enabling a straightforward, customer-oriented
delivery model.
The challenge for payments acquirers aiming
to compete in the SME market is two-fold: the
disparate needs of various segments, and rapidly
changing channel preferences. The result is that
the segment is often perceived as “difficult and
costly to serve.” Legacy providers should explore
the potential of advanced analytics and revamped
distribution approaches as avenues to successfully
and profitably serving this sizable market.
While SMEs have been gaining in technological
sophistication for several years, the current crisis
has emphasized and accelerated two trends:
1. SMEs have recognized the importance of
technology to solve both short- and long-term
needs, therefore are accelerating adoption.
2. E-commerce has become an operational
imperative rather than a “nice to have.”
In this context, nonbank payments companies have
rapidly emerged as go-to partners for SMEs, fueling
digital transformation through high-tech solutions
addressing payments needs and beyond.
What an SME client values varies significantly based
on their size and digital channel penetration. For
example, a small physical merchant may require
an excellent in-store payment experience and
integration with store management platforms.
Multichannel players, on the other hand, may prefer
a seamless customer journey integrated across all
channels and devices, along with loyalty, customer
engagement, and marketing services. Purely digital
SMEs typically need an all-in product suite for
the most effective and seamless experience, with
special attention to tools and analytics to increase
conversion (Exhibit 1).
From a distribution perspective, the landscape is
likewise heterogeneous, with go-to market models
spanning from purely digital and self-serve to
in-person direct and intermediated models relying
on account service providers.
SME needs differ substantially from those of larger
corporates in terms of user experience, the latter
typically requiring higher levels of personalization
and differentiation, as well as physical coverage,
while SMEs prioritize features such as self-serve
access, simplicity, and consumer-centric interfaces.
Traditional banks and merchant acquirers often
face barriers that limit SME market success. They
frequently rely on “one-size fits all” distribution
models with little differentiation for merchant size
or sophistication level. They only seldom leverage
technology at scale either to improve distribution
34The 2020 McKinsey Global Payments Report
channels—instead leaning heavily on outbound
phone calls and inbound branch visits—or to use
advanced analytics (only a few players have adopted
machine-learning models to spot opportunities
for cross-selling and for preventing churn). Many
traditional players also appear reluctant to leverage
partnerships to complete their product offering.
On the other hand, attackers like Square, Stripe, or
Mollie have rapidly advanced from offering a single
innovative service to building integrated ecosystems
of differentiated high-tech products powered by
partnerships and analytics.
Distinctive and innovative product offerings,
integrated across the value chain and designed
for an exceptional user experience, have become
necessary to compete with digital attackers, but
products alone are not sufficient to win the SME
market. They must be combined with a superior
service model and effective use of analytics to
enable simple and differentiated pricing models.
Acquirers seeking to innovate in the SME segment
must establish effective direct distribution of
products with self-serve access through digital
channels. Acquirers relying on distribution models
intermediated by universal banks should also ensure
their sales force is equipped with the support
materials and training they need to enable SMEs to
realize the potential of the products offered.
A successful low-cost distribution model
combines the digital and physical to create a
compelling customer journey
A fully digital distribution and service model is
uncommon among banks and incumbent acquirers,
but can be the key to tapping into multiple levels
of customer excellence. Best practices include
automated, rapid onboarding, webshop setup,
simple user experience, and easy post-sales data
reconciliation.
Even for traditional payments acquirers, effective
use of digital channels and partnerships is key to
winning in the SME market. In fact, online is the
preferred channel for purchasing payments for
SMEs, while physical stores and branches are
the least preferred, closely followed by the phone
channel (Exhibit 2).
Due to the increasing technical advancement of
payments products and the growing opportunities
for cross-selling, SME service models are also
shifting from a reactive to a proactive stance,
continuously offering new products to answer
Source: McKinsey analysis
SME distribution model Main needs Example oerings
All-in-one suites for
payments and customer
journeys to deliver
seamless digital
experience
Purely digital
Companies with fully
digital business model (eg,
ecommerce-only players)
In-app payments
Subscription-based
payments
Tools and analytics to
increase conversion
Integration of experience
across all channels for
seamless customer
journey
Multichannel
Companies with both
physical and digital
channels (eg, wine
producers)
Marketplace integration
Omni-device payments
integration
Integrated customer
engagement, loyalty, CRM
Physical
Local companies with only
a physical presence (eg,
corner stores, taxis)
IIntegration with ERP
and inventory
management
Working capital
nancing
Exhibit 1
SMEs present dierent needs according to their channel strategy.
35The 2020 McKinsey Global Payments Report
evolving company needs. While depending on
geography and economics, human-based first sales
and renewals may still be acceptable, including
leveraging partnerships with platform players
and cash register/enterprise software providers,
cross-selling should be done mainly through direct
channels with self-serve access. Day-to-day
customer service activities can also be handled
mainly through self-serve access tools, with physical
specialized coverage reserved for the most valuable
clients with the most complex needs.
UK payments fintech SumUp, which offers portable
and user-friendly card readers to small merchants,
has partnered with customer service provider
Solvemate to design an AI-powered chatbot
enabling merchants to receive assistance through a
direct channel and scale up their customer service.
The chatbot has achieved a 72 percent resolution
rate (no further interaction required), allowing
the firm to reduce demand for agent assistance
by 22 percent.
Advanced analytics and effective sales are keys
to increasing revenues and retaining customers.
Accessible technology and increasing demand
for payments solutions have enabled new players
to enter the payments landscape, competing on
pricing and innovative solutions. Digital attackers
are creating products that are easy to use and setup,
satisfying the most important buying factors for
B2B payments products. They have also developed
advanced products at competitive prices, making a
compelling case for companies to switch payments
providers (Exhibit 3). Furthermore, the current
challenging economic environment is applying
existential pressure on many SMEs, creating even
greater price sensitivity for payments services.
In this context, accurate segmentation of the SME
customer base is crucial. Advanced analytics can
play a substantial role here, improving pricing,
cross-selling, and retention. For example, a large
acquirer with a history of non-standardized
pricing with little differentiation and infrequent
adjustments, and a merchant population widely
varying in profitability, boosted revenues by roughly
17 percent with a pricing strategy combining
traditional commercial excellence levers with
advanced analytics. These results were heavily
reliant on machine learning to segment customers
based on target margin and churn propensity. The
segmentation enabled improved execution of more-
for-more (MFM) repricing, targeting merchants
1
Revenues: small ($0-$2.5M); medium ($2.5M–$50M); large (>$50M). US and UK overall, N=1,109; small, N=366; medium, N=322; large, N=331 .
Source: McKinsey Merchant Survey of 1,000+ merchants in the US and the UK in 2018.
7%4% 6%
8%7% 6%
13%9% 9%
29%4% 30%
43%59% 48%Online
Small SMEs
1
Medium-size
SMEs
Large SMEs
By phone
From a sales person
who came to my location
In my bank branch
In a retail store
US and UK overall
28%
40%
50%
27%
13%
8%
12%
10%
6%
6%
Current Channel
Preferred Channel
If you had a choice, how would you prefer to purchase payments products and services?
% respondents selecting answer
Exhibit 2
Online channels expected to supplant phone and in-person forSME sales.
36The 2020 McKinsey Global Payments Report
below their segment’s target margin and with low
churn propensity. The repricing was implemented in
three waves per year and paired with detailed and
effective communications conveying the benefits.
The acquirer also developed an analytics model that
could extract true churn signals in order to identify
SME customers at high churn risk that should be
excluded from repricing (and enabled the acquirer to
take actions to win those customers back).
Advanced analytics can be also used to optimize
subscription payments, including boosting digital
collections. Card expiry is one of the most vexing
challenges for merchants in retaining customers,
given cumbersome legacy processes to update
cards on file. A number of companies in the market
automate payments credential updates, leveraging
algorithms to reduce customer churn.
Finally, advanced analytics can help uncover cross-
selling opportunities with existing clients. For
example, website traffic data can be used to update
client dashboards, automatically recommending
upgrades to a plan or other products. Companies
like Cardlytics and Affinity offer white-labeled
services that help financial institutions and
merchants better understand their customers and
target them with actionable offers.
Swedish bank Klarna provides an array of financial
services extending beyond payments for online
storefronts, and uses advanced analytics to
increase sales while minimizing financial risks.
Klarna has created accurate algorithms based on
millions of purchase events gathered over time,
enabling their Pay Later service (post-purchase
payments in which Klarna assumes all financial risk
of customer non-payment) to deliver the market’s
highest acceptance rate and near- immediate
purchase approval.
Kabbage also offers to support cross-selling
opportunities. Its advanced analytics models
support the micro-segmentation of SME clients
based on their needs, and the creation of bundles of
products addressing each microsegment, including
value-added services like business and competitive
insights and merchant financing based on billing
Source: McKinsey Merchant Survey of 1,000+ merchants in the US and the UK in 2018.
57%
44%
39%
34%
Which buying factors are most important when choosing between products/solutions?
% respondents selecting answer
What are the main reasons that would lead your company to change payments service vendor?
% respondents selecting answer
Exhibit 3
SME merchants demand ease of use/setup, and are willing to change providers for better
prices and technology.
Ease of use. Product/service is easy to customize
(eg, applications), has minimal downtime, etc
Ease of setup. Product/service set up is straightforward,
is done quickly, and does not disrupt business
Other vendors oer a better price
A better technology is available in the market
(eg, faster, easier to use)
37The 2020 McKinsey Global Payments Report
trends. Kabbage has a fully automated platform
that enables underwriting decisions in under seven
minutes, leveraging real-time data from sources
including social media, payments data, orders from
ecommerce platforms, and shipping info to assess
company risks.
While advanced analytics can help spot cross-
selling opportunities through customer micro-
segmentation, the extensive use of digital
marketing paired with enhanced sales and
technology capabilities and a systematic approach
is what converts those opportunities into recurring
revenues and fuels success (e.g., state-of-the-art
digital sales channels with sales teams comprised
of tech-savvy salespeople and/or technical
resources with customer-facing experience, relying
on systematic sales routines with a successful
track record).
Human-based sales are still relevant in certain
geographies and economies, and can even be
turned into a competitive advantage against
attackers that rely solely on digital channels. But
human-based sales need to be supported by
superior technical knowledge that helps SMEs
realize the full potential of modern payments
solutions, and a systematic approach to converting
leads into new customers. Traditional banks and
acquirers relying on in-person sales but lacking
specialized salespeople and effective sales
routines must rapidly catch up to compete with
the state-of-the-art digital attackers. A major
European bank successfully implemented a sales
network capability program, achieving significant
results in terms of products sold (increase of 20
pecrcent), customer satisfaction (a nearly nine-fold
NPS improvement), and employee satisfaction (up
27 percent). The program was largely designed
from the bottom up, leveraging the involvement of
top-performing employees and sales leaders to
build capabilities through workshops and trainings;
it also involved the use of a multichannel viral
communication to foster adoption of sales best
practices and routines.
Three imperatives for capturing SME
market share
While digital attackers are gaining scale and price
pressure is increasing, the evolving needs of SMEs
create unprecedented opportunities for payments
providers. Three important imperatives for success:
- Understand SMEs in depth. Leverage internal
and external data to segment SMEs based on
their specific needs, and models that improve
pricing, spot cross-selling opportunities, and
predict customer churn.
- Give SMEs what they need. Develop product
offerings (e.g., bundles of payments and non-
payments products and services) that answer
the specific needs of each segment, leveraging
partnerships and focusing on ease of use and
intuitive setup.
- Let SMEs serve themselves, but deliver
knowledge when they need it. Set up direct
channels with self-serve access tools for
cross-selling and day-to-day service activities,
while increasing the technical knowledge and
effectiveness of the salesforce.
These actions require investments in new
technologies and capabilities, but these
investments can be well worth it. The SME segment
is more attractive and essential than ever, and
may represent a key success factor for acquirers
going forward.
Maria Albonico is a partner in McKinsey’s London
office and Tamas Nagy is a specialist in the
Budapest office. Alberto Farroni is an associate
partner and Nunzio Digiacomo is a partner, both in
the Milan office.
The authors would like to thank Fabio Cristofoletti
for his contributions to this chapter.
39Retail banking in Latin America: How leaders outperform in a buoyant banking market
October 2020
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