The chessboard rearranged: Rethinking the next moves in global payments

The global payments industry demonstrated its resilience again in 2021, more than recouping the revenue erosion experienced in 2020, which was the sector’s first decline since the 2008–09 financial crisis. Our five-year revenue outlook now exceeds prepandemic expectations, topping $3 trillion by 2026. The factors fueling this expected growth have shifted in unexpected ways.

Payments industry revenues rebounded strongly in 2021, growing at an 11 percent rate—more robust than we forecast last year and reaching a new high of $2.1 trillion globally. Growth was strong across all regions, with both Asia–Pacific (APAC) and Europe, the Middle East, and Africa (EMEA) registering double-digit gains. Fee-based revenue continues to increase at a faster rate than net interest income and comprises more than half of the total (although this trend may soon reverse, as we will discuss).

Looking forward, a confluence of events is reshaping the payments landscape. After more than a decade of low inflation and interest rates, many central banks—particularly in Europe and North America—have shifted their policies, leading to rapidly rising interest rates. Geopolitical factors, capital market resets, commerce expectations, technology advancements, and societal responsibilities are creating more pronounced sector and regional dynamics as well. This rapidly evolving landscape will create new opportunities for incumbents and disruptors alike to win customers, develop new solutions, and claim market share, reshaping the competitive chessboard.1. Macroeconomic environment

In many regions of the world, inflation is at its highest level in decades, potentially calling for changes in the business models of payments providers and other financial services firms alike. In this context, a central bank response to inflation may serve to expand interest margins, generating more income from this side of the payments equation, primarily for deposit-holding parties such as banks. The combination of inflation and interest margins, in turn, will require changes in the cash management strategies of businesses and consumers. At the same time, factors like the global energy and commodities environment create economic-growth uncertainties and increase the likelihood of recession, differing by region. This, in turn, will have impact on the liquidity and investment strategies of many companies and households, altering payments economics on both the demand and supply sides.

1. Geopolitical environment

Geopolitical disruptions are altering the long-standing trend toward globalization, prompting moves to greater payments regionalization and localization. Instances of regional and domestic networks with local control over key infrastructure are proliferating, challenging the standardization of solutions across geographies. An increasing number of countries are looking to ensure local instances of payment services and key infrastructures, likely leading to increased complexity in local regulations and requirements.

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2. Capital markets reset

While “attacker” payments companies significantly outperformed both the broader market and “incumbent” payments players over the last few years in the capital markets, 2022 saw a significant reset in valuations. In the 12 months ending August 2022, these same attackers delivered a negative 70 percent return to shareholders, compared to negative 26 percent for incumbents. This valuation reset creates opportunities across the landscape as incumbent companies consider acquisitions and attackers focus on sustainable growth and a path to profitability.

3. Commerce expectations

A main driver of the past high valuations of fintechs and attackers was the expectation of revenue growth through expanding customer relationships. This opportunity persists as payments increasingly serve an integrated, value-added commerce role rather than merely executing a stand-alone financial or money movement transaction. The most common current embodiment of this trend is commerce facilitation, extending beyond checkout and payment to enhance the commerce journey. The most promising for the future is embedded finance, or integrating finance products into nonfinance ecosystems. Players that can monetize services and data are poised to capture a larger share of revenue pools.

4. Technology modernization

After a long period of mostly incremental upgrades to networks, and to bank and business payment systems, companies are now making more structural as well as de novo infrastructure improvements. For instance, banks are aggressively modernizing their core systems to real-time, third-generation cores and updating their payments infrastructures, largely in response to the continued rise of instant payments, open-banking requirements, and cloud technology. We forecast that several regions will enter the next S-curve on instant-payment transaction growth. In addition, with the continued growth of embedded finance, digital natives’ expectations for how those services are delivered will continue to exert pressure on providers to modernize their payments infrastructure.

5. Social responsibility

The overall momentum for social responsibility in business—often characterized under the environmental, social, and governance (ESG) banner—also is changing the context for payments. Governance covers the need for banks to act as gatekeepers against money laundering, fraud, and other unauthorized access to payment systems, and it is a major driver of investment and operational change across the industry. Inclusion and customer protection also are increasingly central to the missions of payments players.

In the following exploration of these six forces, we will assess their projected impact on payments revenue and offer ideas of how players across the ecosystem can adjust to and thrive in the new landscape.

by Sukriti Bansal