Banks are finding themselves under increased pressure from Fintech and technology companies, each of which are looking to leverage their technical and/or social prowess to nibble away at aspects of banks’ value chains. Banks continue to have various advantages, including strong regulatory oversight, loyal customers that trust their propositions, as well as considerable clout to transform their operations to meet new challenges.
In a new report from The Boston Consulting Group, titled ‘Global Payments 2017: Deepening the Customer Relationship’, the strategy consulting firm explores current trends in the payments markets, as well as areas in which competitors may be able to get a foothold.
The payment segment remains lucrative in terms of pure revenues. The market has increased from $860 billion in 2010 to around $1.2 trillion in 2016. Growth is projected to continue apace, with CAGR of around 6% to 2025. The total revenues for the segment are projected to hit $2.1 trillion by 2025.
The growth is not even, however, with emerging markets set to represent around 60% of the total market share of revenues, up from 50% in 2016 and 38% in 2010. The rapid growth in emerging markets, relative to developed markets, reflects the considerable per capita difference between markets as its stands: $900 in North America and $100 in the Asia-Pacific, thereby highlighting considerable growth potential in the latter as incomes increase and the middle class expands.
The firm also found differences between revenues in the retail and wholesale payments segments. Retail payments are set to grow from $897 billion in 2016 to around $1.6 trillion in 2026. The largest growth segment for the category is card transaction revenues, which are projected to represent 39% of total growth or $263 billion, while card interest and other revenues follow closely at 36% of the total or $244 billion.
In the wholesale segment, growth of 7% is projected (above retail’s 6%), with an increase from $290 billion to $555 billion. Card transaction revenue will see relatively modest growth of $61 billion or 23% of the total, while account revenue will increase by $151 billion or 57% of the total.
The study notes that one of the areas that is likely to show considerable resilience in the face of uncertainties are wholesale payments. The segment will see a considerable boost from emerging market demand, which is projected to account for around 73% of total growth to 2026.
The market is likely to be a two speed one, with emerging markets growing considerably more quickly (8% compound) than developed markets (4%), according to the firm. Trade flows, influenced by geopolitical conditions, may come to further affect the market’s growth outcomes. The firm notes three different models: a bearish case in which growth of 4% on 2014 figures is achieved, a present case, and a bullish case, whereby an 80% increase is noted.
The study also suggests that banks in the wholesale segment are likely to face pressure from innovators, largely as a result of new technologies, such as Blockchain. FinTechs may find ways of picking off high-margin aspects of traditional banks, such as corporate payments and cross-border capital flows.
The authors write, “New entrants from inside and outside the financial services arena are taking advantage of open banking and new technologies and successfully vying for market share in high-margin niches. Despite these challenges, banks that leverage their longstanding client relationships and balance sheet strength can win in this environment. The first step is fine-tuning their strategic focus.”