MCKINSEY ON PAYMENTS GLOBAL BANKING PRACTICE - VOLUME 12, ISSUE 30, JANUARY 2020
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Global Banking Practice McKinsey on Payments Volume 12, Issue 30, January 2020
McKinsey on Payments is written by experts and practitioners in the McKinsey & Company Global Payments Practice. To send comments or request copies, email us at: paymentspractice@mckinsey.com To download selected articles from previous issues, visit: www.mckinsey.com/industries/financial-services/our-insights/payments Editorial board: Alessio Botta, Philip Bruno, Robert Byrne, Ryan Cope, Olivier Denecker, Vijay D’Silva, Tobias Lundberg, Marc Niederkorn Editors: John Keefe, Glen Sarvady, David Wigan Global Payments Practice manager: Natasha Karr Executive editor: Paul Feldman Copyright © 2020 McKinsey & Company. All rights reserved. This publication is not intended to be used as the basis for any transaction. Nothing herein shall be construed as legal, financial, accounting, investment, or other type of professional advice. If any such advice is required, the services of appropriate advisers should be sought. No part of this publication may be copied or redistributed in any form without the prior written permission of McKinsey & Company. 1 McKinsey on Payments 30, January 2020
Contents
Global transaction banking: The $1 trillion question 3
Market disruption in the once sleepy global transaction banking industry is increasing. New survey results
reveal how banking leaders are planning for change.
US lending at point of sale: The next frontier of growth 11
Growth in US POS financing has accelerated; traditional lenders can use one or more of five business
models to get in the game.
A perspective on German payments 15
For German banks, payments are a key revenue source and a connection to customers. A changing
market landscape could challenge that position.
Are convenience and rewards leading to a digital flashpoint in US payments? 23
The long-awaited inflection point in US digital wallet adoption may finally be upon us. This finding
is among the key takeaways of McKinsey’s most recent Digital Payments Consumer Survey.
McKinsey on Payments 30, January 2020 2Global transaction
banking: The $1
trillion question
Global transaction banking (GTB) is not the kind of business
to generate headlines or draw attention to itself. Over a long
period, it has been seen as the workhorse of the banking
world—a reliable performer that quietly goes about its business.
Despite its sleepy image, however, GTB is a big hitter—
generating around $1 trillion of revenues every year.
Alessio Botta Notwithstanding its success, GTB is subject cost transparency—may exacerbate the
to the same challenges as the rest of the trend. Given the challenges, GTB leaders
Nunzio Digiacomo
financial industry, including low interest must make astute decisions now, which could
Dr. Franca Germann rates, heavy regulations, and a technology be the difference between winning and losing
Reinhard Höll revolution that is reshaping customer in the years ahead.
expectations and the competitive landscape.
Reema Jain Market disruption is increasing, as clients GTB executives expect liquidity
Elia Sasia demand sophisticated products and services management, documentary
that few players can deliver, and as the business, and supply-chain finance
corporate world digitizes, banks are under
to drive growth
pressure to keep pace.
GTB is responsible for more than 40 percent
McKinsey’s most recent Global Transaction of global banking revenues and its key growth
Banking Survey shows that many GTB banks drivers are reassuringly stable, McKinsey’s
are responding to these trends—assigning latest global banking pools estimate shows
budget to digital and customer services, (Exhibit 1, next page). Payments and
consolidating capabilities, and looking to documentary trade-related business have
take on new entrants in key areas such as been the primary growth engines for most
payments and trade finance. In an era where banks over the past three years. Some
partnerships will be important, they are also 71 percent of respondents cite payments
exploring ecosystems, rethinking connectivity, as the number one growth driver in cash
and eyeing the next wave of M&A and private management and 67 percent cite documentary
equity investment. business in trade finance. In second place in
The shifting industry landscape has put cash management is accounts and deposits
pressure on GTB margins. In documentary while in trade finance it is factoring (and
trade finance, for example, they are estimated reverse factoring). Transactional FX is also
to be falling by around 2 percent a year. cited as an important driver of growth, with
Moreover, there is no guarantee the dynamic 57 percent of respondents saying it was a key
will shift anytime soon. Indeed, digitization revenue generator over the past three years.
and regulations such as Europe’s Payment Looking forward, however, there are signs
Services Directive 2 (PSD2)—which increases that perspectives on growth drivers are
3 McKinsey on Payments 30, January 2020Exhibit 1
Global transaction banking annual revenues are nearly $1 trillion.
Wholesale banking global transaction banking revenue pools, $ billion, 2018
Core products Trade finance Cross-border payments Domestic payments % of wholesale
Trade finance: documentary banking
business for international trade, 133 475
supply-chain finance, and 168 ~19%
receivables finance
174
Cash management: domestic
and cross-border payments,
including liquidity management
Other working capital products Overdrafts Deposits
Overdrafts: pre-arranged or
unarranged overdrafts at
domestic banks 57 489
104
Deposits: current accounts 328
and savings deposits at ~20%
domestics banks
502 272 189 963 ~39%
Source: McKinsey Panorama Global Banking Pools; McKinsey Global Transaction Banking Service Line; McKinsey Global Payments Map
starting to shift. A majority of bankers say liquidity but still material, priorities. On barriers to
management, documentary business, and supply- growth, concern areas focus on capital/lending
chain finance are the most promising product lines, constraints, IT system/platform challenges, and
with growth likely to reach 5 or 6 percent annually counterparty risks.
(Exhibit 2, next page). Around one in five of those
Banks understand transformative change is
surveyed believe liquidity management and deposits
impossible without a significant commitment of
could see growth of more than 10 percent, while
funding and resources. Half of respondents have
around the same number see the same in supply-
set aside IT investment budgets in excess of $100
chain finance.
million for GTB over the next three years (Exhibit
3, page 6). In the past, a significant restraint has
Investment to focus on platforms and been the need to spend large sums of money on
the customer experience maintenance and regulatory compliance. Notably
Transaction banking leaders are aware that they this year the emphasis is shifting to change-the-
will need to change the way they play to grab a bank priorities, with the highest proportion of
bigger slice of the pie. The two areas pinpointed respondents saying 60 percent of their budget is
for investment are the customer experience earmarked for those purposes.
(cited by 95 percent of respondents as an area
When it comes to cost cutting, there is a clear
to build competitive advantage) and platform
bifurcation of strategies. Around 40 percent of
innovation (cited by 89 percent). Products,
respondents aim to significantly cut their GTB
pricing, and geographical footprint are lower,
budgets. However, many others do not see cost
McKinsey on Payments 30, January 2020 4Exhibit 2
Future global transaction banking growth will be driven by elements of cash management
and trade finance.
8% Weighted average theoretical growth1
Products expected Cash management Trade finance
to drive future growth
Question: What is the Liquidity Documentary
revenue growth by management 6 business 5
products driven by & deposits
customer business
volumes that your bank Payments Other trade
can target to achieve 5 finance (eg, 5
over the next three import export
years?; % of respondents finance)
Corporate credit Supply-chain
cards & merchant 4 finance 5
services
Asset finance Security
1 services 2
1
Calculated using different growth brackets and percentage of respondents for each bracket.
Source: McKinsey Global Transaction Banking Survey 2018
cutting as a priority. Where firms do plan to which is the number one IT priority for almost half of
take out costs, commonly cited levers include survey respondents.
automation and straight-through-processing,
When it comes to innovation, the outstanding areas
process consolidation, and standardization of
of focus are product and channel innovation, with the
operational processes. Slightly larger redundancies
largest number of banks also set to prioritize big data
are predicted in trade finance than in cash
and artificial intelligence capabilities (Exhibit 4, page
management, probably because trade finance
7). Among products and channels, the highest survey
offers more opportunities for automation.
scores are assigned to domestic and cross-border
real-time payments and mobile/tablet innovation.
Digital and analytics are more critical Bankers understand that the key to building data-led
than ever capabilities is relevant, standardized, and accessible
Some 95 percent of respondents say they will invest data, and some 75 percent say they plan to invest
more in digital and analytics to ensure clients get a in data lakes for big data applications over the next
better, more tailored, and more seamless service. three years. When it comes to technologies, open
Digitization of the middle and back offices is seen as APIs in cash management are top of the list for 90
almost as important. Many GTB units have already percent of respondents.
made progress—three quarters have digital platform
In Europe, the impact of PSD2 began to make
propositions up and running, relying on a mix of self-
itself felt over the past year. Some 90 percent
build and vendor offerings. A related strategic trend
of respondents say they plan to invest in APIs
is the intention to phase out legacy IT frameworks,
to build their partnership networks and boost
5 McKinsey on Payments 30, January 2020connectivity. Blockchain remains high on the 5, page 8). Respondents again indicate a shift
agenda, with 60 percent seeing distributed ledgers towards improving customer service for future use
as potentially useful tools, particularly in the trade cases. Lead generation is an increasingly favored
finance context. application, and investment in that area is set to
accelerate over the coming years, the survey shows.
Many banks, meanwhile, have started exploring
Liquidity forecasting is seen by four in five banks
artificial intelligence, with half of respondents saying
as having significant analytics potential. Chat bots,
they are active in that area. Three in five banks
meanwhile, are moving into the mainstream, and
plan to invest in machine learning, so that they can
most banks say they will become a core element of
make the best use of data assets to offer smarter
the customer service proposition soon.
customer services. Right now, however, the primary
use case for artificial intelligence is in operations,
where applications such as optical character Organization and coverage: The winds
recognition are being used for standardized tasks of change
and processes such as document reviews. Given its prominence on the balance sheet, it is
not surprising that most banks run GTB through a
The majority of banks are also using advanced
dedicated unit. More than nine in ten operate under
analytics to sharpen their offering and protect
that structure, according to our survey, albeit with
their data, with anti-money laundering and
some nuance around product coverage. Liquidity
cybersecurity use cases at the vanguard (Exhibit
and traditional trade finance, for example, sit
Exhibit 3
Half of respondents have an IT investment budget of more than €100 million for the global
transaction banking unit; in most cases 60% is set aside for changing the bank.
IT investment budget ($ million)
Question: Question:
Does GTB unit have a specific IT investment budget for the next What is the approximate split of run versus
3 years? If yes, please pick a range to choose the average yearly change1 the bank in terms of IT investment
IT budget; % of respondents budget over the next 3 years?; % of
respondents
100 40 Other 18
1
Run the bank refers to day-to-day activities required to support ongoing activities within a bank. Change the bank refers to activity aimed at improving how the bank operates, including
enhancements to IT, operations, customer service, sales and marketing, and other areas.
Source: McKinsey Global Transaction Banking Survey 2018
McKinsey on Payments 30, January 2020 6squarely within GTB, whereas cards/acquiring, business and the majority are strong in factoring,
asset finance, and transactional FX are often shared and import and export finance.
with other units or sit outside GTB (for example
The overwhelming majority of GTB units provide
cards in retail and FX in the investment banking
services to all corporate segments except small
unit). A common ambition, however, is to bring these
businesses and micro-enterprises, which are usually
capabilities under the GTB umbrella.
the preserve of retail units. Indeed, between 80
Most global transaction banks cover a full menu and 100 percent of banks cater to non-banking
of services (Exhibit 6, page 9). On the cash financial institutions, correspondent banks, banking
management side that includes payments, accounts financial institutions, multinational corporates, large
and deposits, and transactional FX, while in trade corporates, and mid-corporates. On most counts
finance almost every bank offers documentary there is very little variation between regional and
Exhibit 4
Priorities across innovation portfolio.
Innovation priorities Products & channels Capabilities Technologies
Question: In terms Mobile/tablet Data lake for PSD2/APIs
75
of investment in channel big data for cash
90
innovation, which are applications management
75
the identified priorities
for the bank in next
3 years? Please Domestic
select all that apply; real-time 70
% of respondents payments
Distributed
ledger
technology 60
Crossborder for trade
real-time 70 finance
payments
Machine
learning
for GTB 60
Next-generation
web channel 60 APIs for 45
trade finance
Multi-bank
platforms 55
for cash
management
Identity
Mass management 45
Third-party
55 customization for ecosystems
supply chain
of client 55
finance platforms
solutions
through digital
enablement
Multi-bank
platforms for 50
trade finance Turn-key
IT platforms 20
Next-generation
SCF (e.g. dynamic 45
discounting)
Distributed
Dedicated
Proprietary ledger
SME-tailored 15
automated 25 40 technology
value
SCF platforms for cash
propositions
management
Source: McKinsey Global Transaction Banking Survey 2018
7 McKinsey on Payments 30, January 2020domestic banks, though regional banks tend to focus and delivery and operations, which are typically
more heavily on correspondent banks than their covered at bank level by centralized IT functions and
domestic peers. shared service centers, often with dedicated GTB
operations teams acting as “business partners” for
Contrary to the widely held perception, mid-corps
the GTB unit. It is less usual to take on responsibility
remain a priority segment, while around half of
for the entire value chain.
banks say large corporates and multinational
corporates are their dominant area of focus. GTB coverage models vary by customer segment,
with banks tending to lead with RMs supported by
From a coverage perspective, GTB units tend to
specialists for clients with simple needs (model A
focus on product development and management,
in Exhibit 7, page 10) but to use services teams or
business development, sales, and implementation
specialist-led models for clients with more complex
and onboarding, rather than customer support, IT,
needs (models B and C in Exhibit 7).
Exhibit 5
Advanced analytics will play an increasingly important role in global
transaction banking.
Advanced analytics
Question: Please choose which AA use case your bank is currently using and which are interesting for
future (please choose all that apply); % of respondents
Present Future
Cybersecurity 75 25
AML and money mule 63 56
account identification
Lead generation
44 63
engine
Credit EWS based
on transaction analytics 38 56
Liquidity forecasting 38 81
or corporates
Value chain analytics 25 69
FX analytics and
exposure management 25 63
Automatic reconciliation
of collections for merchants 25 56
Chat bots for customer
19 81
service automation
Advanced CRM systems
for merchants 13 44
Demand forecasting based 13 56
on supply chain information
Source: McKinsey Global Transaction Banking Survey 2018
McKinsey on Payments 30, January 2020 8Exhibit 6
Most banks offer a wide range of transaction banking products.
Transaction banking product offerings
Question: Please choose all the global transaction banking products offered by your bank; % of respondents
Cash management Trade finance
Payments 90 10 Documentary business 90 10
Accounts and E-billing, e-invoicing
76 24 67 33
deposits and account receivables
Cash pooling and Factoring and
liquidity management 86 14 67 33
reverse factoring
Transactional FX Automated platforms
55 45 87 13
for working capital financing
Corporate credit Import and export
45 55 85 15
cards finance
Merchant acquiring Export credit 17
67 33 83
instruments
Advanced analytics Structured trade and
62 38 57 43
services for treasurers export finance
17
Securities services 67 33 Correspondent banking 74 26
Asset finance 27 73
1
Coverage implies either revenue responsibilities lies with the unit and/ or resources within the unit dedicated to this particular product; refers to hierarchical reporting.
Source: McKinsey Global Transaction Banking Survey 2018
In some client segments the preferred service model service teams supported by RMs and specialists
may be set to change, while in others it is more stable. or by specialist-led models. The latter model is
Where units serve small and medium size enterprises, emerging as the fastest-growing option for GTB
a majority of banks (around 60 percent) prefer to run executives and may account for around 40 percent
teams of RMs supported by specialists. Only around of coverage models in future, compared with around
one in ten currently run client-services teams with 15 percent at present.
RMs and GTB specialists, but executives say that
There is some geographical variation, with more
model may become more popular in future. The mid-
than half of banks leveraging centralized capabilities
corps segment, meanwhile, appears to be on an even
for product development but tailoring coverage
keel, with service teams accounting for around two-
models to individual countries. Around one in
thirds of offerings, and RMs supported by specialists
three banks surveyed run the same coverage
for around a third, amid little sign of change.
model globally.
Large corporate services are a different matter. Our
survey suggests that a regime change is imminent Navigating a shifting landscape
(based on executive preferences), with the RM/
GTB is set over the coming years to continue to
specialist model potentially becoming obsolete
make a significant contribution to the banking
as banks operate with client-service teams or
industry bottom line. The quantum of that
specialist-led models. The majority currently
contribution will depend on multiple factors; not
employ client-service teams and around 70 percent
least the trajectory of interest rates in core GTB
of respondents see it as the most favored model
markets. Assuming interest rates recover in the next
for the future.
three years and moderate pressure on margins,
A similar pattern plays out in the multinational we expect annual growth (CAGR) of as much as 7
corporate segment, with RMs and specialists percent in cash management and 6 percent in trade
increasingly likely to be replaced over time by client- finance. Under a gloomier scenario of flat interest
9 McKinsey on Payments 30, January 2020Exhibit 7
Global transaction banking service models are set to change depending on client size.
Present Future
What is the coverage model for each client segment?
A. Specialist RM owns client relationship, GTB SMEs Mid-corps Large-corps MNCs
supporting specialists involved reactively
RM
58 30 24 25
33 31 0 7
Client RM
GTB specialists
B. Client service RM owns client relationship, jointly
team with with a team of specialists incl. GTB
11 60 57 60
RMs and
GTB specialist
GTB 33 56 69 53
specialists
Client RM Product
Product
C. Specialist-led GTB specialist owns relationship
model for GTB products
RM 31 10 19 15
34 13 31 40
Client
GTB specialist
Source: McKinsey Global Transaction Banking Survey 2018
rates and significant margin pressure we still expect as blockchain). We also see a new needs-based
to see annual growth in cash management of around approach to client segmentation taking center
5 percent, but a slightly more moderate 2 percent stage, leading to reformed operating and service
expansion in trade finance. Under both scenarios we models. (For a more in-depth discussion please refer
expect deposit and overdraft businesses to perform to McKinsey’s 2019 Global Payments Report). As
reasonably well. these trends play out, leaders must make strategic
choices to ensure the business can perform to its
GTB executives in our survey echo these views.
maximum potential in the years ahead.
In particular, they highlight liquidity management,
payments, documentary business, and supply-chain
finance as areas of outstanding opportunity.
Alessio Botta and Nunzio Digiacomo are partners
Still, as executives plan to move forward, they should in McKinsey’s Milan office, where Elia Sasia is
take into account several key trends. These include an associate partner. Dr. Franca Germann is an
the rising influence of nontraditional players with associate partner in the Frankfurt office, Reinhard
new models (such as tech giants and fintechs, which Höll is a partner in the Dusseldorf office, and Reema
may be enablers or competitors), and technology Jain is a knowledge expert in the Gurgaon office.
innovation, likely to be manifested in new channels,
increased connectivity, and opportunities in data
and analytics and artificial intelligence (as well
McKinsey on Payments 30, January 2020 10US lending at point-
of-sale: The next
frontier of growth
Unsecured lending volumes in the United States are at an all-
time high, thanks to improving eligibility rates, enhanced
awareness and access, and continued investments in new lending
models and start-ups. A key source of growth for some lenders
and worry for others has been the acceleration in use of point-
of-sale (POS) financing. Most traditional issuers are still in the
early stages of assessing their POS lending strategies, so many
are not entirely aware of the scale and pace of disruption.
Puneet Dikshit We see four key factors having an impact on cards and traditional lending models, worth
the POS lending segment: shifts in consumer more than $10 billion in revenues.
Diana Goldshtein
and merchant awareness and preferences,
Although a recession would test the viability of
Udai Kaura a broadening market share in smaller ticket
certain business models within POS lending, the
purchases and higher prime segment,
underlying shift in consumer awareness is here
increasing competition, and a more important
to stay. So is borrowers’ growing preference
role for integration of POS financing into the
to borrow at point of sale and get a line of sight
pre-purchase phase of the customer journey.
to paying down balances, potentially at lower
Several business models offer a choice of
rates subsidized by merchants. Additionally,
tactics for seizing the opportunities that result.
as emerging digital merchants rely on POS
financing to drive growth, larger merchants also
Consumer and merchant are more willing to engage with and integrate
awareness and preferences are POS financing solutions, as Walmart is doing
shifting with Affirm.
While point-of-sale financing is a proposition
that has been around for a while, the pace POS financing is capturing greater
of its growth has accelerated in response to shares of smaller-ticket purchases
enhanced integration of POS financing offers and higher-prime segments
into purchase processes, better application
Initially, POS loans mostly targeted lower-
experiences, and newer business models.
prime or higher-ticket segments, such as
Based on McKinsey Consumer Finance pools,
those seeking a loan for home remodeling.
the total US outstanding balances originated
Today, however, newer entrants, such as
through POS installment lending solutions
Afterpay, Klarna, and Sezzle, are displacing
stood at $94 billion in 2018 (Exhibit 1). Those
credit card spending more directly. Purchasers
balances are expected to exceed $110 billion in
with ticket sizes as low as $200 to $300 are
2019 and to account for around 10 percent of all
shifting to shorter-tenure (four- to six-week)
unsecured lending. This volume has more than
POS financing. These smaller-ticket (less than
doubled between 2015 and 2019 and has taken
$500) POS loans, which are estimated to total
three percentage points of growth from credit
11 McKinsey on Payments 30, January 2020Exhibit 1
US point-of-sale financing is growing at a much faster rate than traditional
unsecured lending.
Unsecured lending, outstanding balances, US
$ billion
2015-18 2018-21F
CAGR CAGR
Revolving products Installment products
General-purpose cards Personal loans 1,444 9% 8%
Private-label cards POS lending
1,156
905 946 7% 6%
794
655
142 5% 3%
130
194 16% 12%
113
138
88
49 94 162 24% 20%
2015 2018 2021F
Share of POS lending 5% 8% 11%
in total unsecured lending
Source: Transunion; Experian; McKinsey Consumer Lending Pools
$8 billion to $10 billion in 2019, are growing at rates of acquisition and high margins, such as jewelry
exceeding 40 to 50 percent. and luxury retail, merchants are willing to fully
subsidize APRs.
Additionally, a rising number of premium merchants
are offering financing at 0 percent APRs from POS As POS lenders are starting to partner with smaller
financing providers. These services, combined with merchants, risk models also are changing. For smaller
a seamless application experience, are starting to merchants, lenders are now underwriting both the
attract prime customers. In 2019, around 55 percent merchant and the consumer.
of origination volume is expected to be from the prime
segment (buyers with credit scores above 680). Integration of POS lending into the
pre-purchase phase of the consumer
Increasing competition is transforming journey is now essential
the economics of POS lending Around 75 percent of consumers who finance
As consumer and merchant awareness increases, large-ticket purchases decide to do so early in
so does competition, and this results in changing the purchase journey, before the actual purchase.
economic and risk models in POS financing. Around Embedding their offerings earlier and more directly
50 to 60 percent of loans originated at point of in the consumer’s purchase journey increases the
sale are either partially or entirely subsidized by likelihood of consumer adoption. And integration of
the merchant. As merchants become more willing financing offers throughout the consumer journey,
to bear interest costs, lenders are experimenting from research to checkout, increases the conversion
with new pricing models. In sectors with a high cost rate by two to three times, relative to a simple
McKinsey on Payments 30, January 2020 12Exhibit 2
Conversion rates in point-of-sale financing vary greatly based on depth of
integration, so strong merchant partnerships are critical to success.
Conversion rate of financing plan offered at leading digital furniture retailer based on depth of integration
%
4.9%
+3.2 pps
1.7%
0.1%
No integration Minimal (offered Throughout
(marketed only on at checkout only) website
lender’s website)
Source: McKinsey Digital Commerce Benchmark
integration at checkout (Exhibit 2). Additionally, to originate loans. This strategy offers only
deeper integration drives stickiness, so it is tougher limited and indirect access to consumers but
for competitors to displace lenders at point of sale. nonetheless permits entry to the market with
minimal investment.
Key business models are emerging in 2. Join a marketplace. Banks can lend in online
POS financing ecosystems that bring multiple lenders to
As the players engaged in a land grab for merchants merchants. This avenue offers greater consumer
increase in quantity and diversity, the competition access and brand presence at a low initial
for merchant access in POS lending also is growing. investment. It also affords greater control over
Traditional players exploring a play in POS financing underwriting. For merchants, it offers higher
have a limited period to enter the market and grow. approval rates and limited integration fatigue.
In 18 to 24 months, laggards either will be unable to
3. Rent a technology platform. Banks can rent
compete, because most merchants will already have
existing POS financing technology platforms
POS financing partners, or will need to pay a heavy
to monetize their merchant relationships and
premium to get into the market.
balance sheet without needing to invest in
To get into POS lending, traditional lenders typically building a POS lending infrastructure in-house.
explore a mix of five business models. Some of This path monetizes existing merchant
these also apply to acquirers and entities with direct relationships but requires greater investment in
merchant access: business development.
1. Rent out the balance sheet. Banks can 4. Become an end-to-end solution provider.
partner with established POS financing players With a greater up-front investment and market
13 McKinsey on Payments 30, January 2020development effort, banks can construct their be an industry disruptor, and first movers will be own end-to-end POS financing operations and able to see significant upside in wallet share. engage the fintechs head-on. 5. Innovate around the card platform. For a simple alternative that grants consumers lower Puneet Dikshit is a partner, Udai Kaura is an interest rates and line of sight, banks can associate partner, and Diana Goldshtein is a enhance their card offerings with installment knowledge expert, all in McKinsey’s New York office. loans within existing credit card accounts to capture a larger share of consumer borrowing and monetize unutilized credit lines. Integrating card-enabled installments at point of sale can McKinsey on Payments 30, January 2020 14
A perspective on
German payments
Germany has a reputation for being a high-tech country with
a cash-dominated economy. Its cash usage is indeed high (67
percent of total number of consumer-to-business transactions in
2018), but the payments infrastructure is well developed, with
approximately 165 million cards, roughly 1.1 million terminals, and
a well-established processing landscape (Exhibit 1, next page).
Dr. Franca Germann For incumbents, payments are an important current accounts, generating approximately
source of revenue and the most important €12 billion in associated revenue in Germany.
Reinhard Höll
customer touchpoint. The question now is Leaving aside interest rate effects on the
Marc Niederkorn whether developments such as Apple Pay net interest income on current accounts, the
or Alipay, ubiquitous card acceptance, and revenue from payments has increased in
emerging specialists such as Adyen and recent years (Exhibit 2, next page). The growth
Wirecard lead to a leapfrogging moment has been driven by the following trends:
that relegates banks to the role of high-cost
— A steady 1 to 2 percent annual decline
providers of cash, cards, and infrastructure,
in cash usage across all age groups,
pushing them further away from the heart
leading to an increase in use of card and
of the vibrant payments industry. Or more
digital payments
succinctly, will nonbanks and fintechs
be able to reap the benefits of the shift — A steady 5 percent annual increase in
away from cash? card usage, albeit with moderate revenue
growth (mostly due to regulations such as
Noncash payments are growing MIF—Multi-Interchange Fee—regulation )
Payments can be defined as covering — An increase of approximately 10 to 15
issuing activities—transactions made percent per year in e- and m-commerce
through accounts, credit and debit cards, channel usage
and (new) payments types such as PayPal, In a European context, German payments
Apple Pay, and Amazon Pay. It also covers revenues are lower than average; at about €22
payments acquiring (terminals, merchant billion, they amount to 0.7 percent of German
payments solutions) and ranges from the GDP, compared with the 1.0 percent European
“traditional” point of sale (POS) to the growing average and the 1.3 percent US average.
e- and m-commerce channels, as well as the German banks rely more on account-related
underlying processing and current-account, liquidity than most other markets (Exhibit 3,
cash supply, and logistics activities. More than page 17), making them more vulnerable to the
80 percent of payments revenues in Germany current low-interest-rate environment.
are fee based (either directly or usage
based from merchants, current accounts, or While German payments behavior is unlikely
instruments); the remaining 20 percent are to suddenly rival that of China, where mobile
generated from interest margins. payments methods such as Alipay are now
used for 28 percent of consumer-to-consumer
Importantly, most customer touchpoints with and consumer-to-business payments, some
their bank are payments related and linked to trends are evident:
15 McKinsey on Payments 30, January 2020Exhibit 1
An overview of the German payments market.
Payments in Germany
50 Cash is still highly relevant . . . >15%
billion Transactions by payments type, % 5 of bank revenues
consumer- 12 are payments
to-business Cash related
transactions Direct debit 16
per year 67 >90%
Cards
of banks’
Transfer
165 customer
million touchpoints are
cards payments
. . . but used mostly for small payment amounts related
1.1 Ø transactions volume in € 74
million >70%
terminals 49 of payments
revenues in
13 Germany are
generated by
Cash Debit card Credit card banks
Source: McKinsey analysis
Exhibit 2
German domestic payments are dominated by current accounts, transactions, and
debit cards.
Growth p.a. Growth p.a.
Revenues in the German payments market, in € billion1 2012-17 2017-22
27
24 25
22
-4% 1%
Current accounts 19 132
15 12
2% 2%
Transactions3 6
Credit cards 6 2% 3%
5
5 2 0% 5%
Debit cards 2
1
Alternative payments4 1 0 0 2 0 3 1 20% 16%
1 2
2007 2012 2017 2022E
1
Excluding cross-border business.
2
€13 billion assuming constant interest rates, 2017-22; €17 billion assuming rising interest rates.
3
Includes cash, checks, transfers, direct debit, documentary business, remittances.
4
E.g., AmazonPay, PayPal, Sofort, paydirekt, giropay, ApplePay, GooglePay.
Source: McKinsey Global Payments Map
McKinsey on Payments 30, January 2020 16Exhibit 3
Germany falls into the current account-related-liquidity-driven country archetype.
Payments revenue drivers for different country archetypes in 2017, share in %, total in € billion
28 57 78 40 60
12 7 7
5 12 2
14 Retail Revenues from
29 30 11 payments1 payment type
24 11
12
10 9 7 Cross-border
26 8 transactions
11 15 23 Current
24
13 6 12 Business accounts
22 12 payments1
22 13 Transactions
9 26
9 5 11 8 5 5
6 3 6
Cards
Germany Liquidity Cards Retail Commercial
driven driven driven driven
Austria Finland France Czech Republic
Belgium Spain Hungary Greece
Denmark Sweden Ireland Poland
Italy Switzerland Norway Russia
Netherlands UK Slovenia
Portugal
Romania
Slovakia
1
Retail versus business split dependent on revenue recipient.
Source: McKinsey Global Payments Map
— The number of digital payments methods will A short-term proliferation in digital
continue to increase in the near term, enabled payments methods
by increased adoption of mobile technology.
Online, Germans still mostly pay through traditional
However, other than in niche applications,
means: direct debit and bill pay account for 63
this growth in payments methods will likely be
percent of all transactions, with PayPal and credit
temporary, with merchants and consumers
cards carving out most of the rest (20 percent and 11
pushing for convenience and less complexity.
percent, respectively). Meanwhile, mobile payments
— Germany may follow the trend in other European are still seen as distinct from online and brick-and-
markets and experience a continuing decline in mortar payments. Actual mobile payments are still
cash usage to 30 to 50 percent in the next three very low (less than 1 percent of all transactions)
to five years, as increasing numbers of people pay in Germany compared with countries such as
by smartphones or cards. Denmark, where mobile payments now make up 14
percent of total noncash payments.
— The customer interface remains the competitive
focus of banks, card schemes, and payments However, digitization, the advent of PSD2, and
specialists. Nonbanks—that is, payments strong e-commerce growth have paved the way for
specialists and utilities—will continue to gain the development of many new payments methods
ground, particularly in non-customer-facing (Exhibit 4). The emergence of Apple Pay, Google Pay,
areas such as cash logistics and processing. and mobile payments solutions from banks, such as
Banks will continue to hold the balance sheet, Kwitt, are likely to fuel mobile growth. It remains to
and big technology firms are likely to focus on the be seen, however, how deeply digital payments will
customer interface to support their core business. penetrate, given German consumers’ skepticism
toward new providers. Experiences from other
We believe that customers, not technology, will be
markets such as Switzerland, where the increased
the key driver of change, as they increasingly expect
usage of TWINT has not led to a fall in card usage,
seamless experiences across channels.
imply that cards are here to stay (mostly at the
17 McKinsey on Payments 30, January 2020expense of cash) and are likely to continue growth in To succeed in this race, many payments providers
either physical, contactless, or digital form. have already started to enhance their offers with
omnichannel service and more seamless shopping
Overall, we expect both mobile and online payments
experiences—for example, allowing consumers to
volumes in Germany to continue to grow in the high
use the same PIN and password credentials online
single digits. However, the number of payments
and on mobile. PayPal has significantly updated
methods may decline, given that merchants and
its mobile payments app; Visa and Mastercard
customers prefer simplicity and that payments
are facilitating connectivity to multiple channels
solutions are highly scale sensitive. This may
including third-party digital wallets; and Alipay is
even lead to a leapfrogging moment when market
working with acquirers to offer an omnichannel
volatility leads to more fluid customer preferences
experience (so far focused on Chinese tourists).
where alternative payments methods may gain
Admittedly, banks have not yet been able to
a significant market share. In this competitive
translate their relevance in POS transactions to the
environment, it is unlikely that payments providers
online and mobile arena. Still, girocard as a national
will be able to charge payers significantly, as a
debit system has around 58 percent of noncash
large user base will be crucial in gaining scale and
transaction volumes, and banks have led several
ensuring enough merchant access. Moreover, in
initiatives to upgrade girocard (for example, by
some very specific, niche use cases (e-gambling,
allowing contactless payments) and their digital
for example), distinct digital payments methods are
assets such as paydirekt.
likely to endure.
Exhibit 4
The estimated number of payments methods in Germany has grown significantly,
but in the midterm future, we expect this number to decline.
> 50
> 15 ?
>5
1990 2005 2020E 2025-30
Examples Plus Plus
Cash1 Maestro/VPay6 VisaDebit/Debit Kwitt
Bank transfer2 Geldkarte Mastercard Transferwise
Checks OLV/ELV Masterpass ApplePay
Eurocheque Cards3 giropay6 paydirekt GooglePay
Mastercard/Visa/ PayPal Amazon Pay AliPay
American Express T-Pay7 BarPay bluecode
ClickandBuy8 RatePAY Payback Pay
Paysafecard MyBank Paymorrow
Sofortüber-weisung4 Skrill Barzahlen
… BillPay5 …
Billsafe
Klarna
1
Includes cash on delivery.
2
Includes payments in advance.
3
Later girocard.
4
Since 2014 part of Klarna.
5
Since 2017 part of Klarna.
6
Since 2006.
7
Until 2010.
8
Until 2016.
Source: McKinsey analysis
McKinsey on Payments 30, January 2020 18The future of cash in Germany billion on services to support cash transactions:
a combination of setup and maintenance of ATM
Although the number of cards per capita in Germany
networks, cash logistics, and other related costs. It
is comparable with that of other European countries,
is likely, therefore, that banks will cut cash-related
domestic card usage is comparatively low, with 75
costs aggressively while actively managing potential
transactions per capita per year, versus 84 in Spain,
public reactions. While market forces may prefer
173 in France, 279 in the United Kingdom, and
no use of cash at all, this seems unlikely, as there
401 in Norway.
are some groups (tourists and senior citizens,
Cash usage in Germany today is like that of Sweden for example) who lack easy access to noncash
in 2003, Italy and Poland in 2015, and Europe payments methods, and access to ATMs is often
overall in 2006 (Exhibit 5). Cash remains a major seen as a public good.
value proposition for most banks: ATMs are a key
Germany’s banks will therefore need to address the
customer touchpoint and major reason for charging
costs of running the roughly 50,000 ATMs in the
current-account fees.
country. The number has been relatively stable, as
The trend in cash usage in these markets has been falling usage is counteracted by branch substitution
a steady decline. In some countries (for example, (ATMs replacing bank branches). Banks could follow
the Netherlands, Poland, and Sweden), this decline the example of payments markets in Sweden and
accelerated in recent years. Germany will likely the Netherlands and pool their existing networks.
follow the same trend with an acceleration of This approach could likely start with banks’ non-
noncash usage within the next three to five years. customer-facing, back-office areas, and potentially
As cash becomes less relevant, so too do the result in a model like the Dutch Geldmaat, in which all
existing cash/ATM value propositions, particularly banks pooled their cash/ATM activities in 2015 and
at a time when supermarkets are offering free rebranded all ATMs under a common brand in 2019.
cash withdrawals. According to McKinsey analysis,
banks in Germany currently spend about €2
Exhibit 5
Strongly declining cash usage in Germany expected given experience from other
European countries.
Cash usage in selected European countries, in % of card and cash consumer-to-business transactions
100
90
For Germany, cash usage in
80 2022 will be ~ 30-50% if
70 development follows that of
other European countries.
60
50
Germany
40 Italy
30
Poland
20 Europe overall1
10 Netherlands
France
0 Sweden
2004 2006 2008 2010 2012 2014 2016 2018 2020 2022
1
Includes Austria, Belgium, Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Netherlands, Norway, Poland, Portugal,
Romania, Russia, Slovakia, Slovenia, Spain, Sweden, Switzerland, and the UK.
Source: McKinsey Global Payments Map
19 McKinsey on Payments 30, January 2020A value chain of specialists: Are banks Digital and mobile payments are growing
falling behind? rapidly from a low base, with only small market
shares for bank-based solutions.
Germany has mirrored European trends toward
a non-bank-driven consolidation in payments as — Acquiring is mainly performed by nonbanks,
banks’ value chain share has steadily decreased which account for more than 80 percent of these
over the past decade (Exhibit 6). This is particularly revenues. It has not been a focus for banks of
the case in digital payments and non-customer- late, either in Germany or across Europe. The
facing areas: bank-owned Concardis was divested in 2017,
and currently only the Sparkassen continue
— Issuing revenue shares are dominated by
to own a significant (albeit minority) share in
bank-related entities and nonbanks. In debit
Ingenico’s German operations after Ingenico’s
cards, girocard—the national debit card
acquisition of BS PAYONE.
run by the banks—is the market leader, with
cards held by around 95 percent of the adult — Payments processing in Germany is still
population. However, girocard has very limited relatively fragmented, mainly between
online and mobile capabilities, which constrains bank-related entities and nonbanks. While
its contributions to related bank-internal Commerzbank and the cooperative banks
revenue growth. Germany has low credit card have partially outsourced processing to larger
penetration, serving around 36 percent of European nonbank players, the market-leading
the adult population. International schemes Sparkassen still run their own system (i.e., near-
(Mastercard, Visa) have focused on their debit bank), as do some of the private banks, such as
solutions (for example, Debit Mastercard) and Deutsche Bank.
started to add online/mobile capabilities that
— Current accounts, cash supply, and logistics
were originally developed for credit cards.
have remained firmly in the hands of banks,
Exhibit 6
German banks’ share of revenue generation in payments is declining.
Revenues,1 € billion Contribution to revenues, by channel, %
100% = 27 24 22 252
61 Banks
67
82 77
Bank-related entities (revenues of bank-related
22 entities; ie, subsidiaries or near-bank utilities;
18 eg, FinanzInformatik, paydirekt, BCB)
14
11 Nonbanks and external third parties (eg, First
15 17 Data, Mastercard, Concardis)
7 9
2007 2012 2017 2022E
1
Excluding cross-border business.
2
In the event of rising interest rates 2017-2022, total revenues reach €29 billion (67% banks, 19% near-bank, 14% non-bank).
Source: McKinsey analysis
McKinsey on Payments 30, January 2020 20with the help of their contractors; related be payments related, and banks should make sure
revenues are mainly earned by banks and to have clear management responsibility. Similarly,
bank-related entities. Unlike in other European all banks should focus on achieving operational
countries, such as the Netherlands, the United excellence, particularly pricing power (for example,
Kingdom, Sweden, and Finland, cash supply and considering fees for cash usage by businesses), the
logistics utilities across sectors have so far not ability to accelerate sales, new product and service
emerged at scale. propositions, and further digitization.
Overall, the trend toward specialists and utilities A more ambitious differentiation will require
in noncustomer areas is set to continue; scale strengthening the bank’s current position
effects in processing and cash, as well as regulation through integrated offers, ecosystem plays, and
(such as PSD2) and security remain important. In partnerships with fintechs and—selectively—big
customer-facing areas (cards and digital payments, technology firms. Regulation such as PSD2 and
for example), the picture is complex. Specialists the proliferation of APIs may support such moves
such as PayPal are focusing heavily on digital but will also put pressure on laggards as third
payments but have not achieved broad market parties can more easily gain access. As advances
leadership. Banks clearly aim to strengthen and in technology and the accelerated growth of digital
defend their customer touchpoints. They have an commerce rapidly reduce the viability of legacy
asset in girocard, a significant stake in credit cards, systems, banks should consider divestment or
and at least a foothold in digital payments with outsourcing of assets where scale or differentiation
paydirekt, giropay, and other methods. Customers cannot be achieved. An example is payments
seem to trust banks with sensitive payments data, processing, where leading European players (such
but so far banks have not significantly benefited as Worldline) generated an estimated €2.2 billion
from this advantage. Card schemes are both their in revenue, compared with €5.7 billion in revenue
allies and competitors; their networks act in direct in Germany for transactions overall. Nonetheless,
competition to girocard and may siphon significant selective insourcing of assets appears possible,
value away from banks. They may, however, still be when they may play into a differentiation strategy.
beneficial to banks, providing them with customer Moreover, for certain players, such as small private-
and data access. banking players, a complete exit from offering
payments services may be advantageous.
What should market participants do? Banks as a group need to acknowledge the
As cash loses relevance, cards and digital threats inherent in industry trends but also grasp
payments expand, regulation fuels competition, and the opportunities, such as where they may want to
consolidation looms, firms need a clear strategy for cooperate to enable superior propositions vis-à-vis
strengthening their value proposition. While German payments specialists and new market entrants. They
banks are struggling to generate returns on equity should give industry utilities serious consideration,
(ROEs) of more than 5 to 10 percent and losing their given successful examples such as TWINT for digital
share in the payments value chain, the valuation payments in Switzerland aiming at the customer
and total shareholder returns (TRS) of payments interface and Geldmaat for ATMs in the Netherlands
specialists have been high. For example, Wirecard’s aiming at cost efficiency.
price-to-earnings ratio is about 43 (as of September
For customers, banks need to accelerate the
6, 2019), with a 21 percent ROE in 2018, and the
development of payments solutions and create
overall payments TRS since 2010 is more than 20
highly convenient, omnichannel offers. With
percent per year. Given that payments-related
girocard, banks have an asset, but compared with
activities are a primary customer touchpoint and a
their peers in other European countries, German
key to cross-selling, payments should be a central
banks’ response to non-cash-related payments
theme for almost everyone.
has been fragmented. Offers focus on separate
Individually, banks should decide on their payments solutions, such as girocard (offline), paydirekt and
strategy and whether they will be a differentiator— giropay (e-commerce), and Kwitt (peer-to-peer).
that is, play for a competitive advantage—or aim Banks could also link their current accounts more
to just keep pace with market developments. directly with the digital world (for example, by
Independent of the strategy, for most banks a making online banking credentials/apps usable for
significant share of their banking revenues will still e-commerce payments).
21 McKinsey on Payments 30, January 2020Banks may want to consider acting on statements tech firms look at payments methods in terms
by European politicians on the development of a of control of the customer interface. Others see
European consumer-to-business/business-to- payments as a value driver from a sales funnel
consumer scheme (potentially involving girocard, management perspective, meaning they favor the
Europe’s largest domestic scheme). They might methods that will increase the number of consumers
even reach into payments issues around mobile-to- who click, buy, and pay while minimizing risk and
mobile payments and the Internet of Things, with complexity. Of course, they may still try to introduce
applications to, for example, machinery, automotive, their own payments methods, which could lead
and insurance. to a marginalization of banks. An example of this
might be an overarching customer interface for
With regard to cost, banks need to collectively
payments where all scheme/interchange as well
improve their structure, ensuring that cash stays
as transaction fees are captured. However, if truly
affordable, through cross-industry consolidation
distinctive, omnichannel offers emerge from banks
and optimization of cash infrastructure and by
or specialists, tech players are likely to integrate
redistributing the true costs of cash between all
them into their platforms.
users (banks, consumers, and merchants). This
means banks will almost certainly need to develop Merchants should take a more holistic view of the
new value propositions without cash. Indeed, cashless trend and focus on the effects of payments
withdrawals may even become free for customers of complexity on buying behavior, data generation,
all banks, as they are in many other EU markets, to and costs. The growth of digital payments opens
compete against payments specialists. possibilities for creating transparency on revenues
and actively using payments data to manage
Specialists should be cognizant of what leads
sales funnels. These advantages are also more
to success: mainly convenience and scale.
and more accessible for smaller retailers. Larger
Further consolidation might be a smart strategy.
merchants may also opt to actively push selective
Acquisitions—often of payments assets divested
payments methods.
by banks—can deliver cost synergies or extend
a provider’s services to less penetrated markets. In conclusion, all players, and banks in particular,
Specialists should continuously evaluate technology need to decide whether payments is a differentiator;
architecture and options for integrating systems they can play for a competitive advantage or just
as part of any deal. This consideration should keep pace with market developments. Playing for
also encompass evaluation of the strategic focus, competitive advantage requires a flexible approach
whether to partner up or compete with other that can deliver superior value propositions to
specialists in the market. Specialists may also customers. Here technology is important but not
extend their payments offers to leverage into decisive, whereas keeping pace with changing
cash management, corporate accounts, and even customer needs, as well as a sharp focus on creating
other areas such as leasing and factoring for large scale at selected points along the value chain is
merchants. Some specialists (e.g., Adyen) have always essential. On the other hand, a fast-follower
already obtained a banking license and are offering strategy will rely on third-party providers and may
services such as cash management and foreign be more cost-efficient. In each case, customers
exchange. Similarly, credit card schemes may want can continue to expect more convenient payments
to focus on enriching their omnichannel offers to offers and more tailored solutions.
solidify and expand their business in both the offline
(particularly in debit) and digital channels.
So far, big technology firms have not treated Dr. Franca Germann is an associate partner in the
German payments as a core target and have Frankfurt office, Reinhard Höll is a partner in the
generally been agnostic toward payments methods Dusseldorf office, and Marc Niederkorn is a partner
used on their platforms. Most digital wallets, in the Luxembourg office.
for example, have been open to what payments
methods they consider to work with. Some big
McKinsey on Payments 30, January 2020 22Are convenience and
rewards leading to a
digital flashpoint?
The long-awaited inflection point in US digital wallet adoption
may finally be upon us. This finding is among the key takeaways
of McKinsey’s most recent Digital Payments Consumer Survey,
an annual study of US consumers conducted since 2015.
Lindsay Anan Other survey insights challenge the A top-of-wallet paradigm shift
conventional wisdom surrounding digital
Deepa Mahajan One significant surprise is that consumers
payments behavior, and point to unexpected
are beginning to treat digital wallets more like
Marie-Claude Nadeau shifts in segmentation that financial services
their legacy analogs. The inception of these
providers—both traditional and non-
digital credential containers was thought to
traditional—are already acting upon. In this
exacerbate the “top of wallet” paradigm that
article we share some of the key insights as
long governed payments card preference.
well as the implications for financial services
Major issuers have engaged in a “land rush,”
providers of all stripes.
striving to establish their card credentials as
McKinsey’s research reveals that over three- the default payments option in a variety of
quarters of US consumers made a mobile apps—witness American Express offering
payment of some type (whether online, in $200 in annual Uber credits to its Platinum
store, or in-app) in the twelve months ending cardholders, and Citibank and others touting
August 2019 (Exhibit 1, next page). The most statement credits for users using their card
meaningful increase is in the use of digital to settle recurring charges with iTunes,
wallets, which are defined here as an app Netflix, and others.
or solution that can be used to store card or
The prevailing wisdom has been that most
bank information to make purchases, pay for
consumers would take a “set it and forget it”
services, or make online payments to family
approach, making top-of-wallet status in the
or friends—that is, peer-to-peer (P2P). Close
digital world far stickier and more lucrative
to half of consumers are now using in-app
than in the physical setting. This tide has
digital wallets, a 7 percent uptick from one year
shifted, however; a majority of in-store and
earlier. In-store usage remains lighter, however
in-app wallet users now report switching
(around one-fifth of respondents).
to a non-default card at least every couple
Another critical takeaway from the survey of weeks (Exhibit 2, next page). This may
is that digital behavior is not confined to the be attributable to added functionality from
Millennial cohort most commonly associated segment leaders like Amazon and ride-sharing
with digital transactions. Although Millennials companies simplifying the process of toggling
do lead the way, all groups show significant between cards.
uptake—including 64 percent of Baby Boomers
participating in mobile payments in some form.
23 McKinsey on Payments 30, January 2020You can also read
