Boston Consulting Group (BCG) – Global Payments Report 2023: 'Investor scrutiny provokes a moment of truth'

18 / 09 / 2023

The payments industry has come a long way over the past decades. Consumers and companies have shifted from cash to a burgeoning array of electronic payment solutions and value-added services. And innovations such as digital wallets, QR codes, and mobile money are accelerating financial inclusion in developing economies. These developments have propelled strong revenue growth and attracted more than 5,000 fintechs into the payments space. Looking ahead, however, the operating environment is likely to become more difficult, as valuations have dramatically declined over the past two years and the macroenvironment has become more turbulent. This is definitely a moment of truth for the industry.

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In this blog, we dive into some key insights from Boston Consulting Group’s 21st annual Global Payments Report together with Stanislas Nowicki, Managing Director and Partner from BCG’s Paris office and Markus Ampenberger, Partner and Associate Director from BCG’s Munich office. Both are co-authors of BCG’s Global Payments Report 2023 and regularly advise specialized payment providers, banks, and FinTechs on strategy and transformation projects.

What are the biggest trends that you have seen in the payments industry over the last year?

Stanislas Nowicki: We have just published this year’s edition of our Global Payments Report 2023: “Investor scrutiny provokes a moment of truth”. In the report, we analyze the payments industry across all regions and all major sectors in the payments value chain.

Based on our report, we see four major topics for the payments industry:

·        After a decade of increasing valuations, total shareholder returns (TSR) have plummeted in the last two years as in many tech-heavy industries. A sample of 20 large, global payments companies saw their TSR drop by an average of 20% over the past two years. Acquiring and payments processing witnessed the sharpest declines, with TSR falling by roughly 40%.

·        Tech modernization is intensifying, and GenAI is exploding onto the payments scene. Both could transform payments. In product development alone, GenAI-enabled software coding could boost payments productivity by 20%.

·        Regulatory authorities are increasing their scrutiny of payments, expanding the rule set (e.g., with legislative proposals on Instant Payments, or PSD 3 in Europe), and stepping up enforcement including more regular on-site audits. This will put the risk management and compliance practices of both established and nontraditional players to the test.

·        Although M&A continues to be an important lever for the payments industry as in the past decade, it is shifting from mega deals to capability-led moves, with a particular emphasis on embedded finance, value-added services, and loyalty programs.

Markus Ampenberger: With disruption in the payments industry likely to intensify, leaders must now refresh their strategy, revisit their partnership structure, and modernize their tech infrastructure. Operational resilience and cost excellence will be key to preserving and growing shareholder value.

How have global payments changed over the last years? And: In particular, how has the revenue pool of the industry developed?

Stanislas Nowicki: The payments industry has travelled a long way, very quickly over the past 10 years, powered by a steady stream of innovations like mobile payments, instant payments, QR code payments, digital wallets or mobile money that have changed how we transact.

We have also seen that payments and financial services offerings in general such as for example embedded finance are getting increasingly integrated in many online and offline customer journeys. These advances have made payments in the last years one of the hottest and most dynamic sectors in the world.

Markus Ampenberger: Total payments revenues grew at an annual rate of 8.3% from 2017 to 2022, taking the revenue pool to $1.6 trillion at the end of 2022. Key drivers have been the ongoing cash to non-cash conversion, significant growth in digital commerce and financial inclusion giving a larger population access to payments and banking services in developing economies.

And how do you see the outlook for the industry in the years to come?

Markus Ampenberger: We project, that revenue growth is likely to slow down to 6.2% annually over the next five years, with the revenue pool reaching $2.2 trillion by 2027. 

Slowing revenue growth comes from an expected shift in the retail payments mix from cards to account-to-account transactions, along with compressed card margins in some markets. Contributing macroeconomic factors include cooling inflation and normalization in interest rates.

Which development in the payments industry has been the most surprising, and why?

Stanislas Nowicki: The pace at which investor scrutiny has intensified, both on the profitability expectations, and more recently on growth expectations. In this year’s report, for the first time in years, growth in global payments revenues is slowing, falling from 8.3% over the past five years to 6.2% over the next five. This should be a “warning signal” for industry leaders to take decisive strategic action to preserve operational performance, secure pockets of growth and safeguard long term value.

Markus Ampenberger: Another surprising development is how strong the industry is reshaped from multiple, different angles:

·        Customer needs are changing towards convenient, secure, real-time ways to pay combined with value-adding features such as modern consumer finance.

·        Competition is intensifying. For example, payments-focused fintechs now number more than 5,000 globally and account for about $100 billion of total industry revenues. According to our projections by 2030, they could command a revenue pool worth $520 billion, intensifying competitive pressure on incumbents.

·        Payment Infrastructure and technology is in a phase of massive modernization across the globe and all payment sectors. To give a few examples: new payment methods such as instant payments are gaining traction across many countries, new data formats such as ISO 20022 have been introduced for cross-border payments this year, or open banking allows third parties to get access to accounts and initiate payments. In addition, many players across all sectors – Acquiring, Issuing and Banks – have to modernize their payment infrastructure towards a more modular, cloud-ready architecture and implement new ways of working like Agile or DevOps. This requires also entirely new skill sets, for example to make better use of data analytics and GenAI.

·        Digital currencies are moving from concept to reality, as more than 90% of central banks actively experiment with them as a complement to cash. At current rates of development, retail and wholesale central bank digital currencies could be operational in some countries in every region in five to ten years. 

Are there any risks or difficulties that you have surfaced, or perhaps evolved from earlier years and how do you face them?

Stanislas Nowicki: The risk of inaction is higher than ever. I think Markus has described some of the enormous challenges, payment players face around changing customer needs, technology modernization, intensifying competition and stricter regulation. What is critical now is how different categories of payment players react to these challenges, to avoid commoditization and disruption.

In the report we provide a set of recommendations, for example to evaluate and seize the opportunities coming from new technologies like GenAI, conduct a brutally honest self-assessment on risk management and compliance, strengthen cost excellence, or identify opportunities for tech platform modernization.

We also outline actions we would see for the different payment sub-sectors. For example, in Acquiring we suggest to broaden the area of play, by developing differentiating value-added services like embedded finance, digital marketing or loyalty. Incumbent acquirers will also need to invest into core merchant journeys reimagination, front-to-back, to remain competitive versus new entrants.

What is the outlook for the years to come, what are the expectations for 2024?

Markus Ampenberger: 2024 is really a moment of truth for the payments industry. In spite of the relative slowdown in growth, we expect the payments industry to remain a very active space for innovation, technology upgrades and competitive disruption including M&A. In Europe I will be interested to see how initiatives like the Digital Euro or EPI will shape up in 2024 and beyond.

Stanislas Nowicki: More broadly, the speed at which payments players embrace GenAI in their operations, and in their services will be an interesting development.

Markus Ampenberger: On a lighter note, let’s not forget that the payments sector will still experience sustainable growth rates of more than 6% p.a. and continue to be an important daily service for consumers and corporates alike!


For more insights and in-depth information: Global Payments Report 2023, Boston Consulting Group (BCG).