Payments: The $100 Trillion Revolution

In the past decade, people have transitioned from using cash or in-store payments to online or contactless processes. More recently, these trends are speeding up as consumers spend more time shopping on their computers and phones than actually going into stores. This pandemic could be a reckoning for the payments industry. Transformation and convergence in payments on a global scale is changing the finance and technology landscapes. Integration between the two encourages an innovative space and increases competition. According to Paypal’s CEO, Dan Schulman, the digital payments industry could reach $100 trillion after only being valued at $979 billion in 2019. This is an extravagant prediction, but where is Schulman seeing this? 

Let’s start with online payment providers and mobile wallets. According to BNYMellon, there is a trend of telecommunications companies and mobile providers turning into payment providers. With market leaders like Apple Wallet and Google Checkout, mobile providers are capitalizing on the integration of our phones and wallets. ACI Worldwide, an electronic banking and payment solutions firm, believes that the biggest risk to telecommunications companies is customer lifetime value (CLV)-- the revenue that an average customer will generate over their entire relationship with the operator (Curd, 2017). They also believe digital payments can help save it. Here’s their reasoning: digital payments can help optimize customer convenience and trust with frictionless payment methods, a personalized interface and advanced security and loyalty programs. There is room for opportunity in the digital marketplace as ACI assumes a basic level of 1.5% merchant commission delivering a 49% increase in CLV (Curd, 2017). So, there is real upside to integrating digital payments and telecommunications companies. 

Virtual marketplaces are another way digital payments are transforming, especially in retail where payment processes are rapidly changing. One main source of revenue for banks are the cross-border fees they charge to credit card holders, which reached $230 billion in global revenue in 2018. Now we are seeing cross-border retail volumes increasing, but margins have fallen due to the increased competition in e-commerce. However, automation of refunding and price-monitoring processes, as well as increasing partnerships with fast growing e-commerce merchants, is advancing the digital payments landscape. According to McKinsey, digital commerce in Europe is expected to grow from 19 to 26 percent of total Consumer to Business transaction processes by 2022. Main proponents of payments are through credit cards (47%) and mobile wallets (27%), according to J.P. Morgan. In the US, merchants were reportedly willing to adapt to the digital wallet landscape with about 55% polled saying they would consider adding this payment process within the year in 2019. Retail has been another source of growth for the payments industry, and experts from top companies like McKinsey and J.P. Morgan are expecting to see more of the same.

At its core, the payments industry is driven by electronic invoicing and documentation. Global transaction banking (GTB) plays a huge role and is set for faster advances in the technological landscape. For reference, GTB is a business that big banks offer to their institutional clients in which they offer technologically advanced payment products and services that can serve their clients domestically or internationally. New payment solutions to cross-border transactions will lead to convergence in regulatory aspects across major jurisdictions (Broom, p.22, 2014). 

Increasingly multinational corporations mean more complex systems for cross-border payments, which leads to higher demand for integrated solutions within the GTB landscape. Once companies tap into different markets, they must go through with similar payment processes as they do across familiar borders. There are challenges such as new tax codes and bank transaction fees, payment tracking issues, and even a greater risk of fraudulent payment activities. Multinational corporations must be wary of these obstacles, so top tier advisory is highly recommended. 

A key component of the payment industry’s infrastructure is GTB and it is run by large interbank payment systems. Even more, GTB is quintessential when considering large scale growth potential of digital payments. Electronic invoicing and documentation allows GTB to integrate with online banking, which we have seen a lot more of in the past decade. Large-value online credit transactions driven by corporations yield significantly more value than automated clearing houses (ACH) (Bruno et al. 2019). These transactions are executed via wire transfers, which is the difference between allowing the transaction to complete before the end of one business day versus the typical 2-3 business days an ACH takes. Regardless, interbank payment systems have higher fees for completing a transaction, but the minimized friction with payments lead to faster and more efficient business, despite the higher costs (Bruno et al. 2019). This supports the upward, long-run trend in the industry. 

Another component of GTB is cross-border transactions, which plays a huge role in this conversation because of different regulatory regimes and the attractiveness of global integration. There are many requirements for payment propositions to be transparent between the payment provider and the customers, most specifically “Know Your Customer” requirements that guards against money laundering and terrorism finance (Broom, p.5, 2014). The opportunity here is to link data and analytics to the flow of payments in order to satisfy these customer requirements across payment regimes. We are seeing more strategic alliances in banks, specifically, translating regulatory requirements into a competitive advantage. For example, banks aligning with fintechs expand their customer bases and bring attention to their new digital payment orientations, yielding a common benefit (Klus et al. 2019). It was found that systemization of banks and fintechs in this case is still at early stages of development, meaning we should look ahead for “rapid innovation” and “business model evolution” (Klus et al. 2019). This is exciting as we see the payments industry having so much potential. 

Transformation and convergence of digital payments has brought players like telecommunications and e-commerce to this innovative technology landscape. Financial institutions continue to expand this space by integrating digital payments across global transaction banking. Online banking and cross-border transactions are at the forefront of this revolution. Consumers and businesses alike, everyone prefers a seamless transaction. It makes business more efficient. That being said,  growth and opportunity is here and ready for headlines such as Dan Schulman’s, so expect to see more speculative bets like his. 

Works Cited:

Broom, Dominic. “Global Payments 2020: Transformation and Convergence.” BNY Mellon, 2014, www.bnymellon.com/_global-assets/pdf/business-insights/global-payments-2020-transformation-and-convergence.pdf.

Bruno , Phil, et al. Global Payments Report 2019: Amid Sustained Growth, Accelerating Challenges Demand Bold Actions. McKinsey & Company, 2019, www.mckinsey.com/~/media/mckinsey/industries/financial%20services/our%20insights/tracking%20the%20sources%20of%20robust%20payments%20growth%20mckinsey%20global%20payments%20map/global-payments-report-2019-amid-sustained-growth-vf.ashx.

Curd, Chris. TURN THE CUSTOMER JOURNEY INTO A JOYRIDE: The Mobile Payments Opportunity for Telcos. ACI Worldwide, 2017, www.aciworldwide.com/-/media/files/collateral/trends/turn-the-customer-journey-into-a-joyride.pdf.

Klus, Milan, et al. Strategic Alliances between Banks and Fintechs for Digital Innovation: Motives to Collaborate and Types of Interaction. The Journal of Entrepreneurial Finance, 2019, digitalcommons.pepperdine.edu/cgi/viewcontent.cgi?article=1346&context=jef.