global payments infrastructure cross-border payments

The global payments industry has been experiencing steady growth over the past few years. According to McKinsey & Company, in 2011, revenue from global payments was $1.2 trillion and increased to $1.6 trillion in 2014. What’s more, McKinsey predicts that those numbers will continue to rise through 2019, peaking at $2.3 trillion in annual revenue.

Another interesting trend to note is that Asia-Pacific and Latin America have been leading the way in terms of compound annual growth rates of 18 percent over the last five years, while revenues have remained relatively flat for North America, Europe, the Middle East, and Africa. Over the next five years, however, the numbers are expected to balance out, with the former regions seeing 6.5 percent growth rates and the latter seeing 6 percent.

Besides the rebalancing of the global distribution of revenue growth, there are four areas where McKinsey expects to see disruptions that will impact the payments industry in the near future. Factors such as more non-traditional digital payments entrants, infrastructure overhauls, cross-border payments, and retail bank digitization are all expected to drastically change how payments are handled.

Disruption by Nonbank Digital Players

Until recently, payments were traditionally regarded as the sole domain of financial institutions. That has all changed with the advent of financial technology (fintech) startups entering this space. These nonbank digital companies are quickly gaining ground with payments, especially as customers expect greater convenience using their smartphones. Banks are faced with the challenge of trying to keep up with these agile newcomers as competition continues to heat up for the greatest payment market share.

Disruption through Domestic Payment Modernization

In industrialized countries around the world, the established banking system is struggling to deal with its aging and long-outdated information systems. Most of these systems were first delivered more than 30 years ago, putting banks at a great disadvantage in terms of dealing with transactions in the modern digital age. However, over 15 countries, including Denmark and Sweden, have already updated their payments infrastructure in recent years, and several others are currently planning for major upgrades. Having invested such large sums into rebuilding their systems in order to keep pace with consumer demands, banks will need to provide innovative products and services running on the new infrastructure, allowing them to recuperate their expenses quickly.

Disruption through Cross-Border Payments

Research and studies have shown that cross-border commerce is a phenomenon that is not expected to decline any time soon. At the end of 2014, a global study revealed that online cross-border shoppers spent twice as much as their domestic counterparts. More recently, reports have shown that 70 percent of global consumers have bought from merchants in other countries. As a result, there is a huge opportunity for fintech innovators to leap ahead of traditional banks that continue to use legacy systems and archaic processes to handle cross-border payments. Cross-border commerce, both online and on mobile devices, is seeing tremendous growth, which means that there will also be a growing need for more efficient and affordable ways for consumers to pay for their international purchases.

Disruption through Retail Bank Digitization

Every aspect of the banking experience is inevitably being affected by advances in digital technology, and retail banking is certainly no exception. The digitization of retail payments and the speed and ease with which they can be made will cause customers to demand the same streamlining for their everyday banking transactions. Once consumers realize just how much faster, easier, and cheaper making payments can be, they will undoubtedly raise the bar for banks, expecting all of their financial services to meet the same performance standards.

Regulating the Nonbanks

Although financial institutions are expected to follow strict customer due diligence compliance requirements by industry regulators, it may not always be clear for fintech startups. The risks and dangers of payment fraud affect fintech companies no less than banks, therefore, consumers need assurance that their information is safe whenever they transact online, regardless of payment service provider.

There are many reasons why fintech startups should be concerned about regulatory compliance. Some of those reasons include fraud detection and prevention, building brand reputation, earning customer trust, and avoiding regulatory fines. Whatever the reason, the safety and integrity of the payments ecosystem must be maintained through the enforcement of strong rules.

As the global payments industry shifts into high gear, both in terms of revenue and technology, we can expect to see many changes. Digitization and the entry of fintech startups is revolutionizing the way that we pay.

What challenges are payment companies faced with today and how should they prepare for the years ahead?