By Patti Murphy
ProScribes Inc.
Payments is a growth business, not just in high-growth economies, but worldwide. That's the message from a new McKinsey & Co. report, Global Payments 2015: A Healthy Industry Confronts Disruption.
"Global payments revenues have been growing at rates in excess of expectations," the report stated. "Asia once again – particularly China – is the primary engine propelling the global numbers, but all regions, even those where revenues have recently been in decline, are contributing to the surge. Payments growth is currently a truly global phenomenon."
Sagging growth (about 6 percent a year) is expected in the Asia-Pacific region through 2020. "However, the turnaround in other markets will make up for some of this decline," McKinsey wrote.
In related news, Capgemini reported that noncash payments have been growing at 7 percent per year, and that trend should continue. According to the company's World Payments Report 2015, noncash payments generated 389.7 billion transactions globally in 2014. China now accounts for the fourth largest share of noncash payments globally, Capgemini said. The top three largest regions for noncash payments are America, Europe and Brazil, respectively.
Growth in payments exceeds gross domestic product across all geographic regions, propelled by a number of factors including robust growth in emerging Asian markets (where noncash payments grew by 27 percent in 2014) and widespread adoption of mobile payments in mature markets (such as the United States and Europe).
"New technology is accelerating change in the payments industry, offering holistic solutions as customers move from physical to digital payments, as evidenced by the adoption of contactless in the U.K. with 53 million transactions in March 2015," said Marion King, Director of Payments at the Royal Bank of Scotland, which partnered with Capgemini in producing the report. "As the digital economy transforms innovation in technology, it in turn gives customers greater choice and convenience in how they pay and conduct business."
And it's not always with banks. Hidden payments, that is, payments processed through nonbank systems, accounted for more than 10 percent of noncash transactions in 2014, or about $40.9 billion. These include payments made through closed-loop programs for prepaid cards and mobile apps, some mobile wallet programs and virtual currencies.
The existence of these programs makes it difficult for incumbent players to compete in some markets, the report noted. But that's not all. "As hidden payments are not subject to regulation, there are also concerns about the lack of consumer protection on data privacy, information security, dispute resolution as well as fighting fraud and money laundering, and regulation is needed to minimize these risks," Capgemini said.
Despite the rise of nonbank competitors, banks remain in a stronger position vis-à-vis customer acquisition and retention, according to Capgemini. Banks are better positioned to provide holistic solutions that cut across instruments and channels, which makes them more efficient at creating immediate (or same-day) payment systems. However, 86 percent of the bankers interviewed for the Capgemini report said they believe regulators will need to issue new rules to support immediate payments and assure worldwide interoperability of real-time payment systems.
"Each year banks face new and greater challenges in innovating to meet consumer demands for more convenient, faster, more secure and more mobile payment methods," said Andrew Lees, Global Sales Officer at Capgemini. "Facing this pressure and the need for new regulatory initiatives to support innovations like immediate payments, payment services providers must take a long-term approach for payments processing by building a holistic set of offerings that can deliver value on a global scale."
Blockchain technology is one recent challenge, Capgemini noted. This is one of the underlying technologies supporting bitcoin and other crypto-currencies; it relies on federated independent computing power to capture and record transactions. "This technology could accelerate the velocity of money and provide an alternative for legacy banking systems in the future," the consultancy wrote.
In its report, McKinsey suggested the evolution of electronic payments in China will have a significant impact, and the role of disruptors in that market may portend trends for the future of global payments. "To the extent these nonbank players use payments to gain control of the customer interface 'front door,' they will then own the customer relationship," the report stated. That puts banks at risk of being relegated to being nothing more than the "pipes" that other players use to move money, McKinsey added.
The McKinsey paper also addresses infrastructure modernization, initiatives like the Federal Reserve's current efforts to press banks to invest in systems and processes that support real-time payments. "More than 14 countries representing 45 percent of global credit transfers have already migrated to modernized infrastructure," the paper stated. "If countries currently building or designing new infrastructure are added to the mix, more than 90 percent of today's credit transfers could benefit from modernized 'rails' within the next few years."
These changes will have a profound impact on POS payments, "where card-based solutions are expected to encounter growing competition from ACH-based solutions supported by mobile applications," McKinsey said.
The move to same-day settlement of automated clearing house (ACH) payments, slated to begin in 2016 under a plan adopted by NACHA – The Electronic Payments Association, is in keeping with this trend and with what the Fed wants in terms of faster payments for the United States.
Additionally, The Clearing House is working on a new payment system that can support all types of transactions in real time. Recently, TCH said it is hiring VocaLink Ltd., a U.K.-based company, to help with the project. VocaLink's technology has already been field tested: it built and manages the U.K.'s Faster Payments Service. "I am confident that working with VocaLink we can build the most innovative and widely used real-time payment system in the world," said Jim Aramanda, THC's President and Chief Executive Officer.
International collaboration will be critical to the ability of banks to confront disruptors. As McKinsey noted, 20 percent of global payment flows and 40 percent of transactional revenues are cross-border payments. Yet from the end user perspective, cross-border payments are pricey and slow, typically taking three to five business days to complete, McKinsey noted. Banks need to address these issues, and soon, before nonbanks take over. 
Patti Murphy is Senior Editor of The Green Sheet and President of ProScribes Inc. She is also the founder of InsideMicrofinance.com. Email her at patti@greensheet.com.
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