Payments modernization is well underway, but older infrastructure is still an obstacle. Image: Shutterstock
McKinsey’s Global Payments Report in 2015 was the shot heard around the fintech world. It followed on a year of extraordinary growth in payments revenues, as new rails opened up all over the world for corporates and individuals. Competition for payments services began to heat up, with new technologies fueling the fire. Last year’s report concluded that the modernization of domestic payments was underway, with major inefficiencies in cross-border payments opening the door to new players.
McKinsey Report: by 2020, #payments will generate $400B more per year. Tweet This
While interest in blockchain and distributed ledger solutions was already under scrutiny a year ago as being over-hyped, many experts like McKinsey still postulated that the technology would be a significant factor in the future of payments in particular and banking in general.
In the McKinsey 2016 Global Payments Report, the management consultant giant discusses the major trends for transaction banking and the role of digital innovation in payments to fuel future growth. The report concludes that by 2020, the global payments industry will likely generate $400 billion more in annual revenue than in 2016.
A few important points, specific to the role distributed financial technology plays are underscored:
- The payments landscape is shifting rapidly, separating the key functions of banks and non-bank providers
This is echoed in a decreased focus on retail payments from fintech competitors, most of which have aimed their solutions at corporate and commercial banking use cases. Even traditional money transfer operators (MTOs) like Western Union have shifted from a primarily C2C and C2B payments focus to working to disintermediate larger banking relationships. Customer expectations are formed from the bottom up, McKinsey explains. Corporate treasurers who use real-time payments in their individual experience are frustrated that their jobs are still so difficult thanks to a slow and antiquated infrastructure.
- The implementation of blockchain technology will require many banks to upgrade core systems
In lockstep with the implementation of blockchain technology, McKinsey advises that firms also revamp their underlying operational processes to provide more efficient bank-end fulfillment that could eliminate payment delays.
Another facet of this transformation, according to McKinsey, is in the end-to-end digitization of services for banks, which is best supported by solutions that companies like Ripple provide. The report calls out customer expectations of improved digital service in one of the most cumbersome manual processes: trade finance.
“Correspondent banking—particularly its trade finance functions—remains one of all transaction banking businesses, making it ripe for transformation.” Corporate clients increasingly question why a domestic payment can be executed in real time at very low cost, while it can take two or three days for a higher-priced cross-border transaction to be executed.”
- Regulations and local behavior change everything
Like nearly all reports focused on the challenges facing banks in 2016-17, McKinsey’s findings speculated on the effects of the new Payments Services Directive 2 (PSD2) regulations that will be enacted next year in the EU, opening up third-party account access and banking APIs to payments providers. This regulation has the potential to encourage innovation through competition and remake the payments sphere in Europe based on the demands of the market. This is in no small part due to the extreme variability of digital payments behaviors by local access and custom, as explained by table 13 in the report. McKinsey argues that any single solution cannot meet such diverse needs, but that innovators that take this nuanced behavior into account can benefit from the specific conditions of each different environment.
- Banks must defend their position in order to stay competitive
There is money to be made, especially in cross-border payments where banks currently favor high-value, low-volume payments and fintech challengers have largely chosen to watch over high-volume, low-value. Banks and fintech challengers alike stand to benefit from this, but strategies in the nascent world of real-time payments could determine to what degree:
“New cross-border models stand to erode lucrative commercial margins unless proactive steps are taken. Fast-growing digital commerce firms could begin usurping banks’ positions in customer wallets. Non-bank attackers could take advantage of modernized national infrastructure capabilities to open new revenue streams. In each case, however, established payments providers that act decisively can turn a changing landscape to their advantage, and the rewards for successful payments strategy and execution will be considerable.”
Read the full report here.
Source : Ripple