Payments remains one of the brightest spots in the financial services universe. Propelled by positive macroeconomic tailwinds, continuing technological advances, and expanding digital and noncash mechanisms, payments businesses globally are on track to add $1 trillion in new revenue through 2027. That outlook presents enormous opportunities for retail and wholesale payments institutions. Capitalizing on those opportunities, however, requires that banks and payments providers address lingering customer pain points.
The payments space will be increasingly contested over the next decade, with enormous opportunities for retail and wholesale payments institutions alike.
The quality of the payments experience matters not only because of the strong projected growth across the transactions space but also because payments has an outsize influence on the banking relationship overall. Payments interactions are the most frequent point of customer engagement, giving banks, card issuers, and acquirers significant opportunity to shape customer perceptions, capture valuable data, and build loyalty. The relationships formed through those repeated interactions allow institutions to deepen their customer understanding, foster customer trust, and improve cross-selling and service, all of which significantly influence the overall shopping experience.
As a result, payments companies have begun to play a more active role across the buying journey, going beyond their traditional narrow role in enabling acceptance to forging customer-centric shopping interactions that reduce cart abandonment rates, create omnichannel customer experiences, and make credit easier for customers to access.
These factors, combined with favorable economics, mean that the payments space will be increasingly contested over the next decade. This will lead to a number of fundamental disruptions, including the following:
- Leading retail banks will continue to reimagine the customer experience in payments. They will do so by resolving remaining pain points and further personalizing the customer experience. As a result, digitally savvy first-mover banks will take share from slower-moving competitors.
- Online payments providers will expand into offline acquiring. A structural shift is occurring in shopping, from in-store commerce to e-commerce driven by digital marketplaces and online merchants. With pockets flush from the expected surge in e-commerce purchasing, providers of online solutions will take share from incumbents that have been slow to address customer pain points. We also expect increasing concentration within the online acquiring space, as large acquirers with the capability to serve the dominant, internationally active online retailers take share from smaller ones. The growing dominance of Amazon-like market-places and Netflix-like digital content providers will accelerate this trend.
- Consolidation across the broader payments space will accelerate. Consolidation is picking up speed in the fragmented European acquiring and processing market. This trend will spread to the US, further condensing an already concentrated space, as providers look for ways to address deteriorating margins and fund new digital capabilities.
- Rapidly developing economies (RDEs) will remain a hotbed of innovation. We expect that many of the most disruptive payments business models will come from players in Asia and Latin America that target underserved populations and segments. Examples include GrabPay, Paytm, Ant Financial, and Tenpay.
- Card payments will continue to prosper despite threats. While card payments will continue to benefit from cash conversion tailwinds, the shift to real-time payments combined with the second Payments Services Directive (PSD2) in Europe and the United Payments Interface (UPI) in India have made account-based payments players more competitive. Rapidly growing merchant wallets such as Amazon Pay and MercadoPago and emerging peer-to-peer (P2P) schemes could raise the stakes further if they enter the account-based payments space. Card issuers and networks could counter that threat by promoting contactless payments and embracing initiatives that make authentication easier.
- The US market will become an increasingly attractive target for attackers. Large Chinese players, many of which are keen to expand abroad, are especially likely to target the US for its large revenue pools.
- New digital categories will be on the rise. Although e-retail is still the largest vertical in online commerce with 40% to 60% of spending, new digital categories are emerging. These include subscription services for digital content, a category that is ex-pected to account for approximately 10% to 20% of the global e-commerce market. Other emerging categories include real-time, contextual commerce in social platforms (such as booking a restaurant from within Airbnb or by “searching nearby” on Google Maps) and expanded direct-to-consumer (D2C) offerings for products such as mattresses (Casper) or food (Blue Apron) that were once considered too large or experience-driven to buy without sampling.
Incumbents are in a vulnerable position because many have been slow to address long-standing customer pain points. To hold onto valuable customer relationships and take advantage of the strong growth potential in payments, banks and providers must focus their strategy and resources on the following:
- Improve the consumer payments experience. Providers focused on the retail market must make both e-commerce and the physical point of sale (POS) friction-free. That requires redesigning the online buying journey, innovating smarter authentication standards, and promoting contactless payments to facilitate smoother and faster interactions.
- Provide merchants with integrated and omnichannel payments. Merchants are looking to transaction providers for plug-and-play capabilities that make it easier to incorporate payments systems and functionality within their own operations. This requires merchant acquirers to invest in creating a better buying experience and update their go-to-market models.
- Rethink the wholesale business model to address treasurer needs. Corporate treasurers face an expanding remit that has exposed gaps in many wholesale-banking service portfolios. To maintain treasurer trust, wholesale banks must define a clear digital strategy and upgrade their service approach to optimize human and virtual coverage on the basis of customer value and needs.
- Commit to making needed operational changes. Established players need to mature their data and analytics capabilities, embrace open-banking innovations, improve monetization opportunities, and provide more-tailored services and offerings. They must also forge greater connectivity internally and use data-driven insights to increase sales effectiveness.
These factors are likely to play out in different ways for retail and wholesale payments providers. BCG’s Global Payments 2018 report examines the challenges and opportunities they will create over the next ten years. We look at the state of the market, both globally and in different geographic regions, and explore the pain points that providers must address to turn payments into a long-term avenue for growth.