A VISION FOR THE FUTURE OF CROSS-BORDER PAYMENTS - MCKINSEY
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A vision for the future of cross-border payments
Foreword
The past five years have brought increasing multiple geographies. To encourage a frank
change to the world of cross-border payments. exchange of ideas we assured anonymity of
The trusted and tested correspondent bank- responses. While we found consensus in most
ing approach has encountered challenges from areas, there was no shortage of provocative
emerging alternative solutions and new players ideas or alternative viewpoints.
upending some of the industry’s fundamentals.
The nature and direction of these changes, how- Our ambition with this effort is not so much to
ever, remains unclear in many cases. establish the facts of a new reality, but rather
to foster a discussion on the future and the
SWIFT and McKinsey & Company jointly under- forces poised to shape the industry over the next
took this piece of research not to focus on the decade. We hope you find these perspectives
cross-border industry’s past, but to set out a thought-provoking and informative.
view of how the industry could develop if cer-
tain emerging trends take root. For this effort, Harry Newman
we leveraged the collective experience of both Head of Banking
organizations, and interviewed leaders from SWIFT
firms engaged in international payments. These
Olivier Denecker
interviews—conducted individually—included
Partner
representatives from banks, established nonbank
McKinsey & Company
providers and relative newcomers, representing
A vision for the future of cross-border payments 1The future of
cross-border payments
International payments have long served as Margins have traditionally been robust in
the engine enabling cross-border trade and cross-border; and occasional price pressures
investment, and have been instrumental in the have weighed on margins, but not to the extent
emergence of today’s global economy. An exten- of requiring radical cost transformation observed
sive list of requirements—a ubiquitous network in domestic payments.1 Although cross-border
of trusted parties spanning the entire world, flows represent only one-sixth of total transaction
substantial regulatory and technical infrastruc- values, international payments revenues total
ture, and a mandate for ample liquidity—have up to $200 billion globally, split roughly evenly
historically made banks the natural “owners” between transaction fees and foreign exchange
of the cross-border market (augmented by (FX) revenues. This equates to 27 percent of
some specialized firms active mostly in tertiary global transaction revenues and is increasing by
remittance markets). 6 percent annually (Exhibit 1).
Exhibit 1
Cross-border revenues remain concentrated in business-to-business.
Global cross-border payments revenues, 2017
Cross-border revenue 3 Trade finance
$ billion FX + float
Fee
TO
Revenue margin
(revenue on flow)
Consumer Business2
FROM 6.0% 3.5%
Consumer
54
26 12 24
14
30
1.5% 0.1%
127
21
Business2
50
9 7
16 56
Share of
cross-border in total4 27%
1
Includes payments initiated by treasury for intercorporate and intracorporate lending, investment, liquidity flows, etc.
2
Excluding FI to FI flows and related revenues.
3
Includes transaction fees, F X fees and float income and documentary business fees.
4
Total transactional revenue from payments excluding interest income, annual and maintenance fees.
Source: McKinsey Global Payments Map
1
McKinsey Global Payments Map
2 A vision for the future of cross-border paymentsToday, the global cross-border payment land- ■ ■ ■
scape is at the center of a number of trends 1. There will be many more cross-border
that could fundamentally change competitive payments than today, but growth might not
dynamics: increasing pressure from emerg- come from the expected sources
ing technologies (including distributed ledger
technology—DLT—and card and network Despite geopolitical turmoil, strong global GDP
innovations); shifting regulatory and sanctions and associated trade growth will continue
frameworks; accelerating international commerce to drive increases in international payments
(retail as well as corporate); and, especially, (Exhibit 3, page 5). Today, there are 0.7 annual
changing customer demands. In addition, cross-border transactions per capita on aver-
firms new to the cross-border market, such as age globally (up from 0.5 in 2014) and total
TransferWise, Alibaba and Amazon, are increas- cross-border payments value averaging 1.8 times
ing competitive pressure on incumbents. global nominal GDP. This multiple varies markedly
between geographies, however, ranging from
Although estimated revenue per cross-border 0.7 of nominal GDP in Latin America to 5.50 in
transaction remains healthy at more than $20,2 Western Europe.
evidence of changing dynamics and increas-
ing pressure in the most established segments Large value credit and capital transfers have
(such as B2B and remittances) is growing and experienced narrowing FX margins. At the same
becoming increasingly commonplace across the time, ongoing uncertainty and the accumulation
value chain. With these trends occurring against of international barriers, compliance and cyber
a background of growing investment needs and risks, coupled with growing mistrust among
compliance challenges, the industry needs to countries exemplified by sanctions, compliance
engage in a strategic reflection on a vision for the norms, trade wars, and declining correspon-
future of the industry. dent relationships, are all adding to the cost
and complexity of offering cross-border pay-
Given this outlook, we aim to look beyond next ments. The resilience of the global economy has
year’s incremental changes, exploring a world enabled this category to show continued growth,
where international payments dynamics are fun- although we expect it to slow from 6 to 7 percent
damentally altered; where increasing customer to 4 to 5 percent in the coming years. Overall,
demands serve as the catalyst for technology business-to-business (B2B) transactions remain
replacement, and new partnerships and economic the most relevant category. According to one of
models change service provider expectations. our interviewees, “While the cross-border pay-
ment market might turn out to be smaller one
While this radical future may not yet be a reality,
year from now, in ten years it must be substan-
we believe there are eight longer-term trends for
tially bigger than today.”
which there is significant supporting evidence
(Exhibit 2, page 4). Even if these trends do not This implies that the industry’s accelerated
play out in full, or exactly as described, the mar- growth is being driven by a handful of key factors,
ket’s direction is clear and will shape a new future in particular:
for the sector.
2
Across all segments, including niche corridors, all payment methods, all values and any fees.
A vision for the future of cross-border payments 3Exhibit 2
Our fundamental beliefs on the likely nature of change in
cross-border payments.
1 2 3 4
Shifting growth: Customers rule: Integrated Single Global
We expect growth to Customers will experience, Payment Area,
shift towards new define the nature fragmented desired, but unlikely:
corridors and of future services, production: While benefits of a
segments (from trade not providers Fragmentation of the single market and set
to commerce) value chain will of rules is recognized,
continue, but it will be global geopolitics
integrated into user make this
solutions; differences increasingly unlikely
in production might
not be visible to
end users
5 6 7 8
Solutions for A one-dollar Liquidity Regulatory level
fragmenting transaction could differentiates: playing field?
standards: become profitable, Even in a time of A level playing field,
Differentiating for some: low interest rates, including non-banks,
payment solution Making international banks’ capacity to remains elusive as
continue to emerge, payments as efficient provide liquidity to regulators are
thus focus may shift as domestic payments large volume and focused more on
from standard is unavoidable as value payments can customer concerns
setting toward revenue models shift not be overlooked than on competitive
creating connections as a source concerns
between different of differentiation
infrastructures and
payment solutions
Source: McKinsey Global Payments Map
Retail remittances, sustained by increas- mobile consumers is also driving up average
ing migration flows as well as more mobile remittance values and advancing growth of
affluent classes. For instance, China’s urban digital solutions (instead of cash).
upper middle class population will more than
quadruple from 2012 to 2022, while their per- Global ecommerce: Fifteen to twenty percent
sonal consumption grows by 7 times during of ecommerce transaction value in absolute
the same period.3 This group’s increasing terms is already international. This trend is
international focus also leads to cross-bor- steadily progressing across B2B and C2B use
der education and bill payments exceeding cases, driven by low-cost transport, small-item
traditional remittance growth. The growing purchases, increasing comfort with transaction
purchasing power of these internationally security, and the general easing of red tape.
3
Dominic Barton, Yougang Chen, and Amy Jin, “Mapping China’s middle class,” McKinsey.com.
4 A vision for the future of cross-border paymentsExhibit 3
Cross-border payments volume is poised for strong growth.
Ratio of cross-border payments flows1 to global nominal GDP Number of cross-border transactions
Payments flows share of GDP
Number of
Payments flow as cross-border
share of GDP transactions
% Billion
200 6000
150 5000
100 4000
50 3000
0 2000
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
Transactions 0.45 0.52 0.60 0.72
per capita
1
Includes payments initiated by treasury for intercorporate and intracorporate lending, investment, liquidity flows, etc.;
excluding FI-to-FI flows. Data for 45 countries accounting for ~90% of global GDP.
Source: McKinsey Global Payments Map
Cross-border payments growth is particularly benefit the most from cross-border payments’
compelling in marketplace payments and convergence and simplification—given that
the gig economy. Amazon, eBay, Expedia, larger corporates have long had access to
and Airbnb are the drivers behind travel and most of these capabilities. Solutions like
ecommerce, comprising around 50 percent of SWIFT’s gpi and Mastercard’s B2B Hub are
the marketplace disbursements space, while providing more flexible and SME-appropriate
niche players like Etsy and Upwork are also payments options.
growing strongly—fueling cross-border com-
merce and employment and driving C2B, B2C For large corporates, the increasing spe-
and business-to-small-business payments. cialization and internationalization of value
chains will continue, despite potential trade
The growing role of SMEs in international barriers. Aided by increasing payments
business. SMEs have long comprised a transparency, more robust trade and inter-
lower share of cross-border payments than national supply-chain finance platforms,
their share of GDP would indicate. Although and improved logistics, these trends will
scale will continue to pose challenges for lead to the shift of a growing share of large
the international presence of SMEs, break- corporate payments from domestic to inter-
throughs may be on the horizon as SME’s national. Many of our interviewees see the
access to affordable international payments integration of large corporate platforms as a
improves. The SME segment stands to natural evolution. According to one executive,
A vision for the future of cross-border payments 5“A multitude of specialized use cases are likely While large and multinational corporations have
to emerge based on the ‘consolidated infra- always aimed to seamlessly connect to banks for
structures,’ with unified back-end providers international payments needs, they have usu-
delivering solutions to a multitude of smaller ally consented to use only the limited number of
front-end players.” payments partners/rails/standards integrated with
their enterprise resource planning (ERP) systems.
At the same time customers are increasingly Increasingly, this is a simple hygiene factor.
demanding transparency, specifically in trade Instead, corporates expect the data embedded in
to disbursement and “request to pay” transac- payments transactions to link into any ecosystem
tions. Such sales totaled $300 billion in 2015 and in which they participate. In the future, payments
are poised to exceed $900 billion by 2020. The will be open-system based and embedded within
situations creating momentum for international corporate processes. At the same time, banks
disbursements are not so much traditional use may need to be wary of platforms or layers
cases like centralized payroll or corporate bene- involved in corporate ERP systems or buy-
fits, but rather marketplaces paying their global er-supplier networks. Service providers in these
participants, wallets collecting for international layers hold the potential to become the new deci-
merchants, and the centralization of customer sion-makers or solution integrators determining
care (including claims). who will process the payment, whether based on
price or convenience (Exhibit 4).
2. Customers, not providers, will shape
future services SMEs in particular need easier access
to international payments. In the age of
International payments used to be defined by
the smartphone, standards are no longer set
agreements between banks for B2B payments or,
exclusively by traditional brick-and-mortar corre-
in the case of remittances, outlined by a few key
spondent players. Even in the corporate space,
providers. It is interesting, however, to imagine a
the end-to-end experience has gained impor-
market in which customers set the expectations
tance relative to individual factors such as price,
and standards. How would the customers design
speed, and time. Ecommerce is a key channel for
such international payment solutions?
smaller retailers, either directly or through plat-
forms such as Rakuten or Amazon. And unlike
In our view, customers are seeking a seamless
those large players, smaller retailers seldom have
and transparent experience. If people value
on-the-ground infrastructure that utilizes local
real-time payments experiences domestically,
payments, instead relying on international pay-
there is reason to believe they will value them
ments channels (including credit cards).
in an international context as well. Examples of
services that customers value include reliable
Retail and corporate customers want trans-
payments delivery, access to preferred payments
actions to be adapted to the use cases and
methods, and the ability to track exchange rates
the contexts to which they are applied. Small-
and schedule payments based on this info. These
value one-click payments, or platform solutions
services are already available for remittances, and
for SMEs, are about seamless integration, while
will become increasingly so for cross-border bill
large transactors expect faster options, delivery
payments and other use cases as well.
guarantees, and solutions embedded into their
processes; for example, trade or procurement,
6 A vision for the future of cross-border paymentsExhibit 4
Many firms have emerged to address a variety of use cases in
cross-border payments.
Accelerated growth
To
Consumer Business
Services Example providers Services Example providers
Ant Financial,
Ecommerce Mastercard,
PayPal
Western
Low-value Union, Online
Ant Financial,
remittances PayPal, marketplaces
Banking Circle,
Mastercard
Amazon
Western Union,
Bill payments
PayPal
Consumer
Physical POS
Mastercard,
PayPal
Verticals (e.g.,
High-value TransferWise, health, education)
Flywire, PayPal
remittances Revolut
Loan repayments Mastercard
From One-time payments/
investments
Marketplace Payoneer,
SME trade TransferWise,
disbursements Hyperwallet PayPal
Salaries Banks
Verticals (e.g., Corporate trade Banks
Western Union
pensions, legal)
Interest payouts and Banks
Business Western Union,
social benefits SME investment
PayPal
Refunds Mastercard, PayPal
Dividends and claims Banks
One-time Corporate investment Banks
Numerous
disbursements
Source: McKinsey
including the ability to add currency-hedging and increasing the number of transactions. It
options. Enabling such functionality may entail also reduces required liquidity for many play-
closed-loop solutions. ers, further pushing growth and inviting entry of
non-banking firms. Examples include Hyperwallet,
The push for transparency, speed, and lower which creates customer journeys based on set
transaction cost is leading to a shift from bulk characteristics, which emerging marketplaces
transactions to individual processing, which can use to pay their consumers or small business
is more likely to be spread across a variety of sellers. Exception items are particularly relevant
payments rails. This results in fragmentation for large corporates, whose nostro/vostro liquidity
across payments rails, lowering average values requirements remain large.
A vision for the future of cross-border payments 7Security and choice remain paramount—not software), and with trade channels. The rails for
only for large value transactions, but for smaller “clean” payments (those that process without
ones as well. In this context, transparency and exceptions) will in many cases disappear behind
real-time execution need to coincide with audit these trade platforms, with rail choices depen-
protocols and transaction recall rights, while also dent on services provided: for those who want
meeting customer expectations. The need for charge-back and delayed payment, card rails
choice differentiates today’s landscape. Cus- offer a suitable solution; if there is a need for
tomers will no longer settle for a single payment substantial reconciliation data, SWIFT remains
option at a set price; they want a choice of pay- the solution of choice; and if the beneficiary is
ments methods, speeds, and costs. in today’s ecosystem, a closed-loop payment
can be used. Customers will make choices
3. There will be a single integrated expe- based on the service they prefer, not on the
rience, no matter how fragmented the underlying infrastructure. Payments solutions
value chain that can’t guarantee clean execution will strug-
gle, possibly migrating to a “legacy” category
It is easy to imagine a world in which most
of solutions, as checks and drafts have done in
payments could be completed through a variety
domestic payments.
of alternative payments rails, as users perceive
ever fewer differences between card payments, 4. A Single Global Payment Area may be
correspondent transfers, new options like Alipay desirable, but is unlikely
and PayPal, or emerging distributed ledger tech-
nology-based exchange mechanisms. Customers The creation of a Single European Payments
could then pick and choose among solutions, Area (SEPA) created substantial benefits for
opting, for example, for low-cost rails or provid- trade within Europe, at the same time generat-
ers that offer specific services (like FX), linking ing positive momentum for payments providers,
them to different purchasing journeys. Access to particularly regarding efficiency. From a customer
these payments rails would in turn be provided by service, efficiency, and transparency point of view,
an increasingly differentiated set of players. The it is likely that a Single Global Payment Area would
value chain might fragment, but the customer deliver similar benefits, particularly in a world
would hardly notice. where “open banking” has become standard.
Examples include bank partnerships with high- However, in the words of one executive we
value remittance specialists to power their interviewed on the topic, “the idea of global
smaller-value international payments. While this macro-harmonization is still utopian.” While
approach may initially be restricted to C2C and many regulators are pushing for the adoption of
ecommerce, it will eventually mean that even aspects of open banking, the alignment neces-
large corporates would not be required to differ- sary to create a single common regulatory and
entiate between bank rails and newer solutions. market supervisory agenda is unlikely to be real-
ized in the near term.
It is imperative that the customer experience is
integrated, with seamless integration into corpo- Given the volatility of present-day trade rela-
rates’ back-end systems, with commerce and tions and the pushback against globalization on
trade platforms (e.g., booking and accounting several fronts, regional schemes may hold an
8 A vision for the future of cross-border paymentsadvantage for the time being. This is true for card Firms that embrace this scenario and respond
schemes, where local initiatives are regaining quickly will be well-positioned to provide customers
ground, but also for clearing solutions, where with access and security; that is, full connectivity
multi-country initiatives (such as P27 in Scandi- through APIs across multiple payments rails (e.g.,
navia) are creating momentum for a shift away cards or local closed-loop systems) and to manage
from domestic schemes, and also from global/ compliance across multiple jurisdictions. Stan-
pan-regional efforts. Recent appeals of political dardization itself is becoming more difficult as the
leaders to create regional payments and trade speed of innovation increases, so the importance
platforms, and to create more resilient regulation of these intermediate layers will increase. However,
in other areas of the world or in other currencies, the existence of alternative solutions will make it
push in the same direction. While not a desirable easier to gradually test and implement new stan-
outcome, payments service providers will need dards, rather than having to fix them in advance.
to address the trend toward localism as they
develop new interoperability solutions. 6. A one-dollar transaction could
become profitable
5. Will solutions be needed for fragmenting
standards and infrastructures? Transaction prices for international payments are
under increased pressure, mimicking to some
Clarity and uniformity of standards have been extent the recent trajectory of domestic payments.
essential preconditions in global transaction To date most cross-border payments continue
banking, and are part of the core mission of to carry price premiums, justified by their under-
organizations like CLS and SWIFT. However, lying complexity, regulatory constraints, and
the nature of global interoperability will inev- value-added services such as FX. However, if the
itably evolve, driven by diverging customer current trajectory holds, we envision an end state
requirements, fragmenting global trade rules, in which the base price of international payments
and the multiplication of technology platforms will continue to decline, with even micropayments
and acceleration of innovation. Meanwhile, the being executed profitably. In reality, some provid-
healthy growth of numerous payments meth- ers, particularly fintechs, are already moving toward
ods—both via corresponding banking and even the $1 target today, though mainly for narrow solu-
faster-growing alternative methods—seems des- tion corridors that may be difficult to scale.
tined to continue.
The true $1 scenario could become true, how-
Solution focus may change from common ever, under two conditions (Exhibit 5, page 10):
standards to secure and easy interoperability to
cater to this emerging fragmentation. Conse- The “average” applies only to “normal”
quently, global infrastructure players may need to cross-border transactions. Higher price points
expand their focus from standards setting toward will persist for specialized or out-of-norm
creating connections across various (external) transactions, with extra charges applying for
infrastructures, communication standards, and premium service levels. Already today, “clean”
payments rails. Moreover, the fragmentation payments on main corridors (such as USD/
across payments rails does not hold across all EUR) occur at very low rates and for cer-
cases. Consolidation within channels is still favor- tain use cases closed-loop solutions can be
able as scale remains a decisive factor. applied. As cross-border payments volume
A vision for the future of cross-border payments 9Exhibit 5
Although lower unit pricing is likely, even a one-dollar transaction
could be profitable for some firms.
Cost per international payments transaction
$25-$35
Payments operations
Nostro-vostro liquidity
-90-95%
Claims and treasury operations
$1-$2
Compliance
FX costs
Network management
Overhead
Existing Full migration
Source: McKinsey Global Payments Map
continues its rapid growth, the share of clean commodity from service-based pricing, combined
transactions will also increase. with an aggressive stance on efficiency for stan-
dardized payments, will allow providers to realize
The cost of providing international payments margins on a par with historical levels, even as
can be reduced to a level comparable with top-line revenues decline. This will require a fun-
domestic payments, particularly in areas such damental commercial and operational redesign of
as exception handling, liquidity management, many incumbents’ businesses, however.
and claims and treasury operations. This will
require new approaches to fraud, anti-money Our interviewees agreed that “premium banking
laundering, and straight-through processing and pricing for professionals will continue,” and
(STP) requirements, enabling costs to decline that “price competition will increase strongly in
in parallel with prices. the B2B context.” However, consensus seemed
to be that a $1 price in B2B “is unlikely within five
The ability to price effectively for high-touch years, although the gap is narrowing.”
niches and exception items, thereby differentiating
10 A vision for the future of cross-border paymentsExhibit 6
Liquidity remains key for international payments.
As of 2017, global payments involved With billions of turnover daily held
0.6 extra correspondent banks on average at such correspondent banks
to get to their destination
Average # of country changes Daily turnover of loro transactions,1
$ billion
868
1.6 794
752 728
0.6
1.0
All corridors
The 0.6 indicates an extra stop that the 2010 2012 2014 2016
payment takes in addition to the original
sender and the final beneficiary
1
Daily turnover for correspondent banking service providing large banks based on ECB survey of select correspondent banks.
Source: SWIFT BI Watch
7. Liquidity cannot be overlooked as a source Since only banks can sustain these large transac-
of differentiation tions, and this service is a prerequisite for market
evolution, opportunities arise for banks not only
Most new non-banking firms in international in optimizing prices for these transactions, but
payments promise a better transaction expe- also in crafting improvements to global settlement
rience or FX proposition. With few exceptions, schemes, possibly including consolidated nostro/
however, these firms cannot accommodate vostro set-up, more effective cash management,
liquidity requirements necessary to manage large and quicker transfers. This may also address
or intense payments flows such as international issues such as differences between geographies
trade, direct investments, or high-volume com- in corporate current account balances and inter-
merce. Banking executives should bear in mind bank balances vs. GDP.
that their ability to move large amounts of money
across multiple currencies is very difficult for firms 8. A level regulatory playing field remains
without balance sheets to emulate (Exhibit 6). elusive, but there is progress
This also implies that an interbank network
remains necessary to sustain these large global Despite new technologies offering more trans-
flows; in fact they are employed by many of the parency and control, including to regulators,
alternative providers to enable the aggregated banks will need to continue to invest in regulatory
transaction processing that sustains their efficient initiatives, likely driving compliance costs up to as
smaller transactions. much as 10 percent of revenues. Recent cyber
events and growing money-laundering concerns
A vision for the future of cross-border payments 11have raised costs for all banks, at times resulting incorporating compliance terms and aligning with
in smaller banks losing the status to maintain changing payments infrastructures. At the same
connection to larger correspondent banks. time, pure payments players are entering the
regulated banking world, often by getting banking
Non-banks, on the other hand, have until now licenses, as PayPal and Adyen have done. While
enjoyed lower compliance spending requirements firms like these that are new to the cross-border
(averaging 3 to 5 percent of total revenues), market may not plan to offer all banking services,
having experienced fewer fines overall and having a license allows then to have an active
lacking risk-based direct-clearing relationships dialogue with regulators.
to maintain. Non-bank firms have collectively
paid about $65 million over the past three to Our executive interviews revealed the desire for
four years as fines for AML and FX irregularities regulatory distinctions to be made across the
spread across a large range of players; banks, value chain. “Regulation will really have to dif-
meanwhile, have been fined over $1.5 billion in ferentiate between the ‘front end’ and the ‘back
the first seven months of 2018 alone—mainly end.’ On the front end, players should really
accruing to a handful of institutions. Over time, be treated like tech companies, looking a lot
the regulatory pressure on banks and non-banks at the ‘data’ aspects, with lighter requirements
is likely to converge. Recent initiatives such as as to AML/sanctions, in order to stay effective
PSD2 in Europe and open banking in the UK and agile. The back-end should be more ‘ring-
impose some degree of supervision on these new fenced,’ in particular with regard to balance-sheet
firms (while also increasing compliance costs for commitments, counterparty exposure and liquid-
banks), although still not at par with banks run- ity. This is the place to apply more ‘Basel-type’
ning similar businesses. regulation and compliance logic.”
On the other hand, smaller or less involved While the regulatory environment for banks,
banks are increasingly finding options to reduce payments specialists-cum banks and non-banks
regulatory pressure, for example by working may not merge entirely, the result of these two
with fintechs to tap into regulatory arbitrage or shifts would be that the competitive advan-
by working with other banks to build utilities to tage from regulation for non-bank players will
insulate against payments standard changes, gradually erode.
12 A vision for the future of cross-border paymentsHarnessing the opportunity
We may soon live in a world where not only large Understand future revenue models
corporates, but also retailers, SMEs, and individ- И волки сыты, и овцы целы/Both the wolves
uals use international payments regularly, using a have eaten much and the sheep have not been
range of solutions and providers through inte- touched—have your cake and eat it
grated commerce or trade interfaces. Execution
will be smooth, particularly for regional business. Or: Think beyond pricing for profits and treat the
Extra services (such as FX quotes or hedging) customer holistically
will generate additional revenue, supplementing
By 2025, per-transaction pricing for cross-border
reduced price points for basic services.
payments will have eroded to a fraction of their
Although a Single Global Payment Area is not historic levels, even for large value transactions,
likely to emerge any time soon, parties should making low single-digit dollar transactions a likely
nonetheless be able to pay everywhere, despite outcome. Such developments have been seen in
varying standards and infrastructures. As one other industries, such as the cross-border tele-
interviewee observed, “There will be much communications “roaming” model of the 2000s,
stronger parallels to consumer behavior going where the industry displayed an efficiency gain
forward; one can already see Apple’s impact of 40 to 60 percent between 1995 and 2005.
on domestic payments and digitalization; the Empowered by the availability of VoIP solutions,
rumored ‘consumerization’ of business payments large clients now pay close to cost-plus arrange-
is happening.” ments, which have fallen effectively to nil. Carriers
reacted by slashing costs, but also by developing
Despite pricing pressures, the introduction of new new revenue models in data, mobile phone, and
players and models, and the need for back-office infrastructure provision (e.g., fiber cables).
transformation, banks will continue to play a role
in cross-border payments and may even flourish Similarly, revenues from music in traditional
as the intensity of change increases. recorded forms fell from $25.2 billion in 1999
to barely over $5 billion in 2017. Although
For today’s cross-border leaders, and potential the recorded music industry has still suffered
entrants, we see several imperatives for success: declines, after bottoming in 2014, annual sub-
scriptions and revenues from other new models
Understand future revenue models like streaming have helped the overall figure
rebound to $17.3 billion.
Revisit client propositions
Extending this scenario to cross-border payments
Upgrade the engine room
implies a radical repositioning from transaction
fees and FX margin toward a service-based
Explore collaborative solutions
approach and focus on high-growth areas.
Establish a clear role in the value chain and
While such price erosion may take longer to
establish a partnership ecosystem
evolve in payments, providers must investigate
alternate revenue models and pricing strategies
to drive profitability, including:
A vision for the future of cross-border payments 13 Provide payments services to third parties, providers, banks, telecom companies, retail-
particularly where private and SME customers ers, and digital firms in terms of their access
are using ecosystems that use cross-offerings to costumer and merchant data shows that
or data to drive revenues. Services that can payments providers are well placed to capture
use data to generate insights into consumer emerging data monetization opportunities.
and corporate purchasing behavior, and (See “Monetizing data: A new source of
couple these insights with supplemental data, value in payments,” McKinsey on Payments,
can provide better services to customers; but July 2017.)
they can also go a step further by capturing
new opportunities to extract value through the Consider adopting a 1-to-1 pricing strat-
monetization of the data itself. egy. This would require a deep understanding
of client elasticity and needs (leveraging the
Focus and expand service offerings. For large amount of data at banks’ disposal), to
example, physical transfer operators may elect tailor highly specific value-based price points.
to adopt an ethnic focus such as support-
ing foreign subsidiaries serving out-of-region While core revenues might fall, the key question
workers and their families. Such a model for cross-border providers is whether the industry
could then be linked to other bank offerings; will see SEPA-like growth and whether firms can
for example, trade or structured finance, price effectively for niche, value-added services
allowing providers to insulate themselves in or ecosystem offerings. It seems likely that not all
part from downward price pressures through successful firms will be traditional players.
the expansion of value-added services.
Revisit client propositions
Double down on niche pricing, as in the 顾客是玉，商品是草/Customers are jade; mer-
overall payments world revenues are concen- chandise is grass—it is customer, not the trade.
trated disproportionally in areas where the
Or: It is not about the technology.
greatest value is created or where the least
efficient transactions congregate. These can
Customer-facing firms must deal not only
be in hard-to-serve trade corridors or indus-
with increasing standardization, but also with
tries where the payment enables the mere
ever-shifting customer demands. Customer
existence of the business, such as online
expectations will be set by state of the art digital
products like digital content or gambling.
domestic developments and niche players. For
These niches will also increasingly become the
example, while DLT is unlikely to provide an
domain of high-value specialists rather than
international payments infrastructure at scale in
mainstream providers.
the short term, an expectation of low prices may
well be established as consumers and corporates
Price for relationships and data. The value
experience these offerings. As a result, prices
of access to payments information in a data-
might fall to marginal cost levels quite rapidly.
based economy makes it critical for banks and
providers to retain access to account or wallet
That said, banks and payments specialists still
information (as opposed to aiming for higher
own most of the customer relationships and can
profit margins by prioritizing payment fees). An
defend them with ambitious propositions such as:
analysis of the relative strengths of payments
14 A vision for the future of cross-border paymentsExhibit 7
Cross-border payments flows—B2B trade in particular—are shifting
towards southern corridors.
Cross-border trade flows,1 CAGR
$ trillion 2017-22
100% = 14 18 17 24
25 26 24 6%
North - North 32
37 38 37 7%
North - South 38
38 37 39 8%
South - South 31
2007 2012 2017 2022
1
Includes trade in goods only, services excluded.
Source: McKinsey Global Payments Map
Fast and predictable as domestic payments, convenient compliance: automated con-
with transaction operational costs approach- trols (e.g., taxation, AML) coordinating
ing $1 per transaction, using a real-time disparate tax laws and addressing regula-
international payments infrastructure and tory implications for both buyer and seller,
making pricing much more transparent and enabling unprecedented confidence in secu-
predictable, with limited exception fees. rity safeguards.
Focusing on rapidly growing payments Payments as adaptable as cash, with much
corridors, which are largely clustered in higher versatility: providing clients with
southern regions (Exhibit 7). control, visibility, and traceability into the
transaction process, e.g., with solutions that
Convenient purchase functionality (think allow recoverability or the use of smart data.
Amazon’s “one click”), with high usability:
providing more pay-in/pay-out options (akin Services embedded in daily life and routine.
to cryptocurrencies), but also supporting
use cases accommodating preferences for Such propositions will likely first emerge in niche
cash-on-delivery models in emerging markets, segments—for example, retail, remittances and
e.g., Russia and India. select SMEs. Disruption in the field of remit-
tances has been led by user experience and
Service as secure and reliable as the prom- online technology, moving the transaction from
ise of distributed ledger technology, with cash-collection use cases to account-driven
A vision for the future of cross-border payments 15digital interfaces. A number of new firms (e.g., Reduce exception costs for claims of pay-
Worldremit, Azimo) have built viable businesses, ments services billing e.g. by introducing
shifting competitive dynamics for estab- standardized billing formats and predefined
lished businesses. charging formats.
One suggestion that arose from our interviews: Ease the cost of financial crime investiga-
“Banks need to address the failure to connect tions, for example by using financial crime
smaller emerging market situations (use case and utility services like common KYC directories or
geography) to access the global financial network advanced analytics solutions based on trans-
and to leverage their systems.” action trace retrieval vaults.
Upgrade the engine room Cut expenditures in treasury operations,
يجرفنت ةمزأ اي يدتشا/A problem is solved when focusing on intra-day liquidity reporting and
it gets tougher—when the going gets tough, the artificial utilization of liquidity. Particularly with
tough get going. rising interest rates, an enhanced clearing and
settlement model to complement the existing
Or: The rising tide will lift some boats, but others nostro-vostro system could prove valuable,
will run aground. as would a settlement set-up (centralized
versus decentralized), new messaging (single
In light of likely price erosion, international pay-
standard versus proprietary set-up) and tech-
ments schemes must close an efficiency and cost
nology (point-to-point or distributed ledger).
gap of over 90 percent versus their domestic
counterparts. The main inefficiencies are linked This transformation will require more than dis-
to lack of alignment across back-office opera- cipline. It calls for a fundamental upgrade of
tions, the costs of managing interbank claims capabilities in the areas of automation and robot-
and pricing, and fraud and AML management. ics, data and analytics, and customer design.
Cost categories inherent to the cross-border This applies to technology as well as core people
nature of payments, such as FX, network man- skills, organizational health, customer focus,
agement, and compliance are also a factor, but and agility.
less onerous. The cost of liquidity trapped in the
nostro-vostro network can also be high, but it Agile operating models need to emphasize a
is less relevant in low-interest currency zones. customer experience mindset, with go-to-market
Lastly, scale is as important in cross-border times of three to six months, minimizing cam-
payments as it is domestic payments and further paign development time, testing costs and
consolidation will likely be required. We believe increasing marketing effectiveness. A select
the main priorities for banks to close the perfor- group of global transaction banks is already
mance gap between domestic and cross border moving in the direction of stringent, agile cus-
payments are: tomer experience.
Increase STP and serviceability by creating “The banks capable of operating in real time,
transparency to reduce inquiries, automate error-free, with services structurally integrated
date completion with standard reference data with the channels, will be the players that will
or simplified customer input formats, or by
pre-validating.
16 A vision for the future of cross-border paymentsoperate and earn sufficient margin in the coming particularly as transaction size continues to shrink
years. Other banks, particularly the small ones, (Exhibit 8, page 18). A few firms will be able to
will be disintermediated by the players still in strengthen their position across the entire value
the market.” chain. More often, firms will concentrate on
certain points of the value chain and may need
Explore collaborative solutions to consider significant divestments as well. Likely
‘Union fait la force’/Unity makes strength focal points include:
As standards are complicated and central Customer front-end providers must offer
infrastructures remain hard to set up, focused better connectivity to the payment rails, which
collaboration by groups of banks can deliver a will expand the universe of players to include
strong step toward the aspired service levels and banks, tech firms, payment specialists and
efficiency. This has been part of driving payments even new adjacent players such as export
efficiency for domestic payments across much of credit agencies, supply chain providers and
the world, and could have the same effect in the administrative software providers. The model
cross-border area. will still favor banks for servicing large cor-
porates, but also create potential openings
SWIFT’s gpi is one example of such an industry
for ecommerce gateway providers such as
collaboration, connecting more than 250 banks,
Wirecard and Adyen, and fintechs addressing
and currently sending more than $100 billion
SME needs.
per day in cross-border payments, representing
over 30 percent of SWIFT’s total cross-border Service aggregators will work with firms
payments traffic.4 Participating banks commit to create connector models for banks, cus-
to adhere to a set of multilateral service level tomers and potentially others, insulating
agreements (SLAs) to provide fast, transpar- them from ongoing payments standards and
ent and traceable cross-border payments. The formats or regulatory changes and offering
secure end-to-end tracking significantly reduces a consistent experience without the need to
the number of interbank investigations and the continually change or upgrade systems. For
common rulebook and real-time processing example, a fintech might partner with two or
allows over half of these international payments three banks to create an API solution linked to
to be credited to the beneficiary’s account in less the banks’ existing net banking or corporate
than 30 minutes, many within seconds. direct connections (e.g., host-to-host); the fin-
tech would maintain and upgrade the solution
Establish a clear role in the value chain and es-
as domestic payments systems or standards
tablish your partnership ecosystem
and formats change.
A new “Zollverein” 5/Alliances for a new era
Infrastructure providers may continue to
There will be significant pressure on the value
dominate the bulk of cross-border payments.
chain to fragment, particularly at the back
Regional market utilities or outsourcing provid-
end, where economies of scale matter most,
ers may also emerge, akin to earlier moves in
4
Data from SWIFT.
5
German Customs Union formed in the early 19th century.
A vision for the future of cross-border payments 17Exhibit 8
Growth is increasingly driven by lower-value payments, mirroring past
EU experience.
Average ticket size of transactions involving EU correspondent banks,1
$ thousand
61
-6% p.a.
45 46
38
33
2007 2010 2012 2014 2016
1
Domestic and regional banks.
Source: SWIFT; ECB Correspondent banking survey; McKinsey
security services with the DTCC, Euroclear, payments can be built into a variety of ser-
and Clearstream. In addition to CLS, SWIFT, vices, such as B2B (particularly cash and
and card schemes, large global transaction liquidity management, but also documentary
banks also participate in this space. They face business), global corporate services, travel
specific constraints as this model is depen- and digital content.
dent on digitization and economies of scale. In
an extreme scenario of market evolution, they ■ ■ ■
face stark choices: becoming a top-ten player; You don’t stop playing because you get old, you
finding a regional, product, or segment niche get old because you stop playing.
(for instance, SMEs); or pursuing partnerships
to gain scale and reach. Over the past 15 years, international pay-
ments have grown dramatically, yet the
Ecosystem providers may bundle an over- underlying industry remains largely intact and
arching portfolio of services. Open banking fairly fragmented.
will accelerate such moves both in the retail
and corporate world. Intensifying partnerships Now, new payments rails, innovative technology,
with fintechs and digital banks (particularly in and shifting customer demand threaten to upend
the SME space) may also drive such bundling. this model. The associated volatility presents a
Incidentally, such ecosystems are unlikely substantial opportunity to develop more effective
to be anchored on cross-border payments. customer propositions, economic models, opera-
According to McKinsey research, international tional systems, and segment focus.
18 A vision for the future of cross-border paymentsIncumbents must treat these shifts as a call for banks can succeed without rethinking their place reflection. To succeed, they will need to lever- in the cross-border sector, and committing to the age account ownership and weave cross-border changes necessary to adapt. The focus will be payments into the commerce flow. Several of on customer experience versus pure payments, our interviewees made statements to the effect and success will require integrating the payments that “banks are here to stay, particularly for large process and rails into the end-to-end process. corporates.” This does not mean however, that A vision for the future of cross-border payments 19
Authors
For McKinsey & Company: For SWIFT:
Nunzio Digiacomo Luc Meurant
Associate Partner, Rome Chief Marketing Officer
nunzio_digiacomo@mckinsey.com Luc.MEURANT@swift.com
Olivier Denecker Harry Newman
Partner, Brussels Head of Banking
olivier_denecker@mckinsey.com Harry.NEWMAN@swift.com
Reinhard Höll Wim Raymaekers
Associate Partner, Dusseldorf Global Head of Banking Market
reinhard_holl@mckinsey.com Wim.RAYMAEKERS@swift.com
Marc Niederkorn
Partner, Luxembourg
marc_niederkorn@mckinsey.com
The authors would like to acknowledge the contributions of Phil Bruno, Jonathan
Brugge, Pavan Masanam, Glen Sarvady, and Sebastian Scheurle. We would also like
to extend our thanks to the executives who agreed to be interviewed for the report.
20 A vision for the future of cross-border paymentsGlobal Banking Practice October 2018 Copyright © McKinsey & Company www.mckinsey.com/clientservice/financial_services
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