The 2023 McKinsey Global Payments Report

On the cusp
of the next payments era:
Future opportunities
for banks
September 2023
 2023 McKinsey Global Payments Report

On the cusp of the next

payments era: Future
opportunities for banks

This report is a collaborative effort by Luca Bionducci, Alessio Botta, Philip Bruno, Olivier
Denecker, Carolyne Gathinji, Reema Jain, Marie-Claude Nadeau, and Bharath Sattanathan,
representing views from McKinsey’s Global Banking Practice.

2
Table of contents
Introduction 4

State of the industry 5

Entering a new payments era 14

Emerging opportunities for banks 18

 Introduction
The 2023 McKinsey Global Payments Report shines a light on a changing industry and explains how banks and
others can capitalize on new dynamics. The analysis is based on McKinsey’s Global Payments Map, covering more
than 25 payment products in 47 countries, accounting for 90 percent of global GDP.

We begin by assessing the state of the industry. A close look at the industry’s revenues highlights emerging
changes in geographies and products, as well as developments in instant payments and digital wallets. Next, we
look at valuations and find that payments players have re-gained a degree of investment confidence. Among this
year’s findings are the following:

— Global payments revenue grew by double digits for the second year in a row.

— Sustained growth in India, fueled by cash displacement, moved it into the top five countries for payments
revenues.

— For the first time in several years, interest-based revenue contributed nearly half of revenue growth.

— Cash usage declined by nearly four percentage points globally in 2022. Over the past five years, the growth
rate for electronic transactions has been nearly triple the overall growth in payments revenue.

A historical view provides a picture of the progress the industry has made. From its early days to the present, the
payments sector has already been through three distinct eras. The evidence suggests the industry may be on the
verge of a fourth era, which we interpret as an era of “de-coupling.”

The industry’s transition from the Account Era to the Decoupled Era presents concrete opportunities for banks
and other payments players to differentiate. In our final section, we offer perspectives on two distinct paths
that banks and payments players more broadly can follow to solidify their competitive position in the payments
industry: finding new opportunities to scale business impact and doubling down on improvements to productivity
and risk management.

4 On the cusp of the next payments era: Future opportunities for banks
State of the
industry

5
 State of the industry
The payments industry’s 2022 performance, in terms of revenues and valuations, shows ongoing change with
opportunities for growth and margin improvement across geographies and products. A close look at revenues
uncovers some structural changes, including new developments in instant payments and digital wallets. Also,
recent public company returns suggest investors may be regaining confidence following the volatility of 2020–22.

Revenue results highlight the industry’s resilience and future direction

Globally, payments revenues proved remarkably resilient, overcoming a variety of regional headwinds to grow at
rates well above the established long-term trend. Payments revenues grew at 11 percent in 2022—a double-digit
rate for the second consecutive year—reaching more than $2.2 trillion, an all-time high (Exhibit 1).

Revenues by geography: Broad-based gains

Revenue growth was broadly distributed geographically, with three of the four regions posting their strongest
increases in a decade. North America; Latin America; and Europe, the Middle East, and Africa (EMEA) all grew at
double-digit rates.

The exception to this trend is Asia–Pacific. In recent years, this region, which accounts for 47 percent of global
payments revenues, has served as the primary growth vector. But in 2022, regional revenues rose just 4 percent,

Exhibit 1
Global payments revenues grew by 11 percent in 2022.

Global payments revenues, 2017–27F, $ trillion

Asia–Pacific North America Europe, Middle East, and Africa¹ Latin America CAGR, %
2017–22 2022–27F

+7% 3.2 6 7
0.3 14 11
+11%
0.5 7 6
+5% 2.2
2.0 0.2
1.7 1.8
0.1 0.1 0.4 0.8 5 6
0.1
0.3 0.3
0.3
0.5 0.6
0.5 0.5
1.5 5 8
0.8 0.9 1.0 1.0

2017 2020 2021 2022 2027

Share of forecast
banking
revenues,² % 37 35 36 36 38

Note: Figures may not sum to totals, because of rounding.

1
Russia revenues kept flat after 2021.
2
Total banking revenues excludes capital markets and investment banking (CMIB) revenues.
Source: McKinsey Global Payments Map

McKinsey & Company

6
as a result of a 3 percent decline in payment revenues in China. Excluding China, however, the Asia–Pacific region
grew at 25 percent—faster than in 2022.

Broadly speaking, the economies with the largest payments revenue pools delivered growth at or above the mean,
contributing to 2022’s strong result. This list, which includes Brazil, India, Japan, and the United States, posted
solid results in both interest and fee-driven revenues.

A key factor in China’s results was the 5 percent decline in transactional fee revenue. It fell to $255 billion as a
result of smaller ticket sizes on card transactions and fee concessions implemented by payments providers to spur
small and medium-size enterprise (SME) activity and counteract the COVID-19 macroeconomic shock.

By category, interest outpaced fees, and commercial maintained a lead over retail
In many markets, about half of 2022’s revenue growth came from rising interest rates, interrupting a long-standing
trend in which fees were the main source of growth. The shifting interest rate environment had the greatest impact
on the EMEA region, where net interest margins jumped markedly, reversing a trend of the past decade. EMEA’s
transaction-based revenue continued to grow at a steady pace (5 percent in 2022), while net interest income’s
(NII) share of total revenues rose from 33 percent to 45 percent in a single year, bringing it closer in line with other
regions.

Another way to understand payments revenues is by customer segment (commercial and consumers) and the
products that the industry delivers to each (Exhibit 2). The mix has been subtly but persistently tilting toward
commercial across all regions for some time. Overall, commercial now accounts for 53 percent of revenues and
consumer 47 percent. This proportion varies from region to region. Commercial revenues have long predominated
in Asia–Pacific and EMEA. Consumers still generate the majority in North America (63%) and Latin America
(54%), where markets remain mostly card driven.

Cross-border payment dynamics were particularly robust. Flows reached about $150 trillion in 2022, a 13 percent
increase in a single year. This money movement generated an even greater increase in cross-border revenues,
which rose 17 percent to $240 billion. Revenues from cross-border consumer payments—both C2B and C2C—
increased at double-digit rates, accelerating from high single digits in 2021. Conversely, both forms of commercial
payments (B2B and B2C) grew by 10 percent, somewhat slower than 2021’s postpandemic surge.

The United States–Latin America corridor remains the largest for C2C remittances, representing 11 percent of
the total value of such flows. Central America has been an increasingly relevant destination for remittances and
humanitarian aid from the United States.¹

While B2B remains the primary driver of cross-border revenue (69 percent of the total), the consumer categories
carry higher margins and are projected to grow more rapidly over the next five years. Much of the growth is
expected to be in C2B, related to increased travel and e-commerce spending. We discuss this opportunity further
in the last section.

Future revenue growth: Instant payments and digital wallets on the rise
Our analysis suggests that future revenue growth will likely be stimulated by instant-payments innovations and
the rise in digital wallets in certain geographies. The increase in electronic payments transaction volumes has
consistently outpaced payments revenue growth (17 percent versus 6 percent) over the past five years. This is
indicative of the continuing evolution in payments preferences, a general migration toward lower-fee instruments,
and the gradually declining margins that accompany scale.

1
“Fact sheet: Update on the US strategy for addressing the root causes of migration in South America,” The White House, February 2023.

On the cusp of the next payments era: Future opportunities for banks 7
 Exhibit 2

Liquidity revenues in 2022 accounted for $750 billion globally, largely driven
by Asia–Pacific.

Global payments revenues, by type and location, 2022

Latin
Asia–Pacific North America EMEA America
6 6 Commercial (53% of total)
8
16 Cross-border¹
11 Account-related liquidity²
16
Domestic transactions³
9 Credit cards
28
17
20
11

3
Global
8 22 5
payments
22 2
revenues, Consumer (47% of total)
2022, %
13 Cross-border⁴
16 2
4 Account-related liquidity²
4
2 Domestic transactions³
9 Credit cards
15
16

5 37
16 30

15
8

$1.0 $0.6 $0.4 $0.2

Global payments revenues, 2022, $ trillion

Note: Figures may not sum to 100%, because of rounding.

1
Cross-border payment services (B2B, B2C).
2
Net interest income on current accounts and overdrafts.
³Fee revenues on domestic payment transactions and account maintenance (excluding credit cards).
⁴Remittance services and C2B cross-border payment services.
Source: McKinsey Global Payments Map

McKinsey & Company

These dynamics are also evident in cash displacement. Cash usage declined by nearly four percentage points
globally in 2022. Worldwide, the decline in cash usage during the pandemic shows no evidence of being reversed,
led downward by the cash-reliant economies of India and Brazil, where the share of cash transactions fell by seven
to ten percentage points. Brazil’s cash declines are concurrent with the rapid uptake of the country’s Pix instant-
payments network.

8 On the cusp of the next payments era: Future opportunities for banks
A similar transformation is taking place on a smaller scale in Nigeria, where instant-payments capabilities are
being built into point-of-sale devices to facilitate merchant enablement. Nigeria’s share of cash transactions fell
from 95 percent in 2019 to 80 percent in 2022. Over the same period, instant payments’ share quadrupled to
8 percent.

Instant payments are playing a key role in this transition out of cash. In Brazil, almost half of the transactional
revenue growth through 2027 is expected to come from instant payments. Yet in other places, revenue growth
from instant payments could be meager. Instant payments in India are expected to contribute less than 10
percent of future revenue growth because no fees are currently charged for the Unified Payments Interface (UPI).
Conversely, in several European countries such as Germany, instant payments are perceived as a premium option,
resulting in relatively strong potential for revenue growth.

By 2027, cash-heavy developing economies to make further significant shifts toward instant payments, bringing
these transactions’ share to roughly half of overall payment transactions—nearly two-and-a-half to three times
greater than in 2022. By contrast, our analysis indicates that near-term impact in mature markets such as the
United States and United Kingdom will be nominal. Instant payments remain in a nascent stage in the United
States, where 2022’s cash decline was more muted following 2021’s pandemic lockdown-related reduction. July
2023’s launch of the Federal Reserve’s FedNow real-time payment rails may prove to be an inflection point, but
the effect will be gradual.

Our sidebar on the Indian market (“India’s embrace of digital payments”) offers a valuable case study of payments
evolution and its role in a strongly growing economy, with particular lessons for cash displacement and instant
payments adoption.

India’s embrace of digital payments

The volume of India’s digital payments has grown Although UPI generates minimal transaction
tenfold over the past five years and is projected fees, these revenues still represent an uplift
to grow at roughly 35 percent per year over the from no-fee cash events, and the paperless
next five. The vast majority of these new digital process eliminates the hidden costs of
transactions are the result of cash displacement managing cash transactions. Additionally, the
and, in recent years, have migrated directly associated change in consumer behavior has
to instant payments on the Unified Payments enhanced security and increased access to
Interface (UPI) network. UPI’s share of digital digital commerce channels. Arguably, the shift
transactions has risen from 8 percent in 2017 to to a digital-payment mindset with credit-led
nearly 75 percent in 2022. Notably, credit cards benefits may help explain increases in India’s
also contributed to the growth of digital payments, credit card usage as well.
registering double-digit growth.

On the cusp of the next payments era: Future opportunities for banks 9
 India payments revenues have risen by an percent in 2022 to 34 percent in 2027. The solid
average of 12 percent over the past five years, majority of these will migrate to UPI’s instant-
reaching $64 billion in 2022, when they grew payment rails, which—assuming a continuation
by 38 percent. India has pulled even with Japan of current government policy—will drive minimal
as the fourth-largest payments-revenue- direct revenue uplift. However, continued gains
generating country—behind only China, the in credit card penetration and usage, as well
United States, and Brazil, and ahead of mature as even stronger growth in digital commerce,
economies including the United Kingdom, offer significant untapped pockets of revenue,
Germany, Canada, and Italy. particularly given the volumes involved.

Looking forward, the Indian payments We see India’s ongoing payments revenue
ecosystem faces headwinds similar to those growth, which exceeds global averages,
in other markets. Regulatory mandates may concentrated in a handful of cash-rich, high-
result in increased costs, and fintech players are friction pockets (exhibit). The majority of these
opening new competitive battlefronts through are consumer initiated to businesses (where
adjacent payment propositions such as credit point-of-sale transactions show healthy growth
offers at the point of sale. along with digital) as well as to other consumers.
The sheer volume and digitization opportunity
Despite all this, India has a unique opportunity in the B2B space is too large to overlook. There
among large payments economies to continue is ample room for banks to pursue various
digitizing a significant cash base. The share of use cases depending on their specific core
cash transactions is projected to fall from 82 competencies and strategic priorities.

Exhibit

India’s payments market has several cash-rich pockets.

Number of payment transactions, 2022 and 2027F, billions

Digital transactions <25% 25–75% >75% Significant projected jump in digitization

2022 actual 2027 forecast

Destination Destination
Initiation Consumer Business Government Consumer Business Government
30% 15% 30% 70% 60% 60%
Consumer
145 360 <1 190 415 <1
45% 10% 95% 50% 80% 98%
Business
5 100 <1 6 140 <1
85% 99% 100% 97% 99% 100%
Government
5 <1 <1 6 <1 5

Total 20% 65%

~620 ~765

Source: McKinsey Global Payments Map

McKinsey & Company

10 On the cusp of the next payments era: Future opportunities for banks
The story varies from country to country, but the developments in Europe are worth a second glance. Today,
instant payments currently constitute 12 percent of the credit transfer volume in the Single Euro Payments Area
(SEPA) (Exhibit 3). Absent regulatory intervention, this share could double by 2027; however, if regulators proceed
with anticipated actions to encourage adoption, this share could rise to 45 percent of SEPA’s 23 billion annual
transactions and a far higher share of account-to-account (A2A) payments, including transfers done through
automated clearing house (ACH), real-time gross settlement (RTGS), and instant payments.

Digital wallets, the source and destination of much of the flow in instant payments, are similarly booming. Several
business models are taking shape in different parts of the world. In several African countries (Kenya, Ghana, and
Tanzania, for instance), mobile-wallet infrastructure is ubiquitous and interoperable. Nigeria’s Central Bank spurred
uptake by pushing a “cashless economy” during a note-change process in early 2023. Demand for digital payment
solutions has spiked among Nigerian merchants of all sizes. One acquirer reports that 70 percent of the new
merchant customers haven’t previously accepted digital payments—a clear indicator of expanding network effects.

Exhibit 3

If new favourable regulations are issued, as anticipated, instant payments

volumes could double the current forecast for 2027.

Number of instant payments transactions, Scenario 1: No new regulation Scenario 2: New regulation
Eurozone,¹ 2022 and 2027F, billions

Share of A2A in
total payments

24% 26%
21–23

+140%

8–11

3.3 3.3

2022 2027F
Instant transfers/
total payments,² % 1.50 1.50 3.30 7.87

1
Estimate for selected countries: Austria, Belgium, Finland, France, Germany, Greece, Italy, Netherlands, Portugal, Slovakia, Slovenia, and Spain.
2
Total payments includes transactions made through cash, checks, cards, and A2A in the Eurozone.
Source: McKinsey Global Payments Map; McKinsey estimates

McKinsey & Company

On the cusp of the next payments era: Future opportunities for banks 11
 Valuations: Signs of stabilization, with differentiated performance by sector
Following strong performances in 2020 and the first half of 2021, during which time payments companies delivered
more than 50 percent total shareholder returns, and the “capital market reset” spanning the second half of 2021
and first half of 2022, when the same companies delivered a 60 percent negative TSR,² recent market valuations
suggest that payments players have regained a degree of investor confidence.

Publicly traded payments companies overall delivered 13 percent TSR from September 2022 to August 2023, in
line with the overall market and above the broader banking industry’s 6 percent,³ despite the shifting interest rate
environment, which primarily benefits banks.

Our analysis of 33 listed payments companies globally is divided into incumbents (20 companies) and newer
“attacker”⁴ firms (13 companies). Attackers’ valuations took the larger hit in 2022 (–62 percent TSR for the year) but
performed on par with incumbents for the 12 months through August 2023. Notably, the attacker group’s recovery
had exceeded 20 percent until mid-August when adverse market news reversed some of those gains.

Recent market valuations suggest

that payments players have regained
a degree of investor confidence.
Despite the rebound, payments companies’ share prices remain well off the highs established in 2021. Investors
may be expecting both groups to continue refocusing on fundamentals in order to align with the changed
macroeconomic environment. While investors’ revenue growth expectations for payments companies moderated to
10 percent for 2022–24 (versus 17 percent for 2020–22), EBITDA margin expectations increased from 35 percent
in 2022 to 41 percent in 2024, reflecting the greater focus on profitability. Meanwhile, the average EBITDA multiple
of 18 times is the same as measured in August 2022.

Incumbents’ performance has varied by segment over the past 12 months. Payment scheme providers fared best of
the four segments tracked, producing TSR of 25 percent. B2B payments specialists (companies specializing in fuel
cards, accounts-receivable financing, and similar offerings) also delivered positive returns (9 percent TSR), driven by
double-digit revenue growth expectations and margins anticipated to significantly improve to 47 percent in 2024.
By contrast, infrastructure providers (such as processors and merchant acquirers) produced the lowest returns (–17
percent), driven by a reduction in revenue growth expectations. Traditional cross-border specialists (essentially
money-transfer operators) were also in negative territory (–9 percent TSR), reflecting shrinking revenues and low
margins.⁵

2
Please refer to the 2022 Global Payments Report for a deep dive on the capital markets performance by payments companies between 2020 and the first
half of 2022.
3
“Overall market” includes the top 5,000 companies globally by market capitalization. “Broader banking industry” includes banks within this overall market.
4
Attacker payments players defined as businesses established less than 15 years ago and with a business and operating model characterized by “disruptive”
attributes either in terms of products (for example, e-commerce acquiring only, issuing of non-physical cards, payments as a service), distribution channels
(for instance, partnerships with e-commerce/tech players), or technological infrastructure (for example, cloud-based data centers). Thirteen companies
included in sample.
5
Data in this paragraph is based on analyst consensus figures taken from McKinsey Corporate Performance Analytics.

12 On the cusp of the next payments era: Future opportunities for banks
Positioned for growth
Overall, the payments industry’s 2022 revenue and valuation growth are consistent with optimism about the
future. Our analysis indicates that the five-year outlook is strong, with likely revenue growth of 6 to 8 percent. The
opportunities will likely be widespread: all four regions are projected to expand at an annual average of 6 percent
or higher. Fee-based revenue growth is forecast to return to slightly exceed interest-based contributions, and
global electronic transaction volumes may continue to grow (15 percent in this case) at rates exceeding revenue.
Although these interest rate effects may moderate in the coming years, the market remains on pace to exceed
$3 trillion in payments revenue by 2027.

v v v

Last year was a good one for the payments industry worldwide, and the five-year outlook is strong, with
significant opportunities in all four regions. However, while growth expectations remain positive, investors are still
reassessing their view of the sector in the capital markets, following the ups and downs of 2020–22. To withstand
the scrutiny, companies will benefit from keeping up with the technological transformation sweeping payments, as
described in the next section, to enhance the profitable nature of the projected revenue growth.

The market remains on pace to exceed

$3 trillion
in payments revenue by 2027.

On the cusp of the next payments era: Future opportunities for banks 13
 Entering a new
payments era

14 On the cusp of the next payments era: Future opportunities for banks
Entering a new payments era
During the past few decades, the payments industry has rapidly embraced new technologies, in the process
opening new avenues to serve customers. The industry has already been through three distinct eras dominated, in
turn, by paper, plastic, and account transactions. Signs point to a fourth era starting in the present decade: we call
it the Decoupled Era.

How we got here

The $3.2 trillion in revenue that McKinsey Global Payments Map projects for 2027 is aligned with the projection
we made in last year’s edition of this report⁶ ($3.0 trillion in 2026). However, the mix of revenue sources is evolving.
Cash usage has been declining rapidly, losing 20 percentage points in the share of global payments over the past
five years. Net interest margin is driving a greater share of growth, and companies are moving into less penetrated
areas of the payments value chain—for instance, low-value cross-border payments, business payments, and
instant domestic transfers.

All of this suggests the industry may be on the cusp of a new payments era⁷—and not for the first time (Exhibit 4).
People have seemingly always needed technologies to make payments. For the longest time—arguably since bills

6
The 2022 McKinsey Global Payments Report, McKinsey, October 2022
7
For more, see “On the cusp of a new era?,” McKinsey Global Institute, October 20, 2022.

Exhibit 4

Changes in the payments ecosystem have ushered in four eras of payments

business models.

Timeline
1960 1970 1980 1990 2000 2010 2020

Paper Era: Plastic Era: Account Era: Decoupled Era:

Pre-1960s 1960s–90s 1990s–2020s 2020s

Transactions Cash, checks, and Cash, checks, Instant transfers, Interoperable and
wire transfers wire transfers, A2A, and virtual cards open, platform,
and physical cards and decentralized

Sources of Balances and Transaction fees Relationships and Convenience, security,

economic deposits transfer fees and low fraud incidence
differentiation

Distribution Physical Physical and ATMs Physical, ATMs, Physical, ATMs, online,
channels (eg, branches) online, mobile, and mobile, embedded,
digital wallets and metaverse

Technology Telegram Automated clearing Applications and Platform as a service

house (ACH) instant payments (PaaS), tokenization,
generative AI, and
open/API banking

Source: McKinsey analysis

McKinsey & Company

On the cusp of the next payments era: Future opportunities for banks 15
 of trade were used in the Middle Ages or even earlier, when Chinese emperors introduced notes—transactions
were made on paper.

Modern payments began roughly in 1950 with a cardboard Diners Club card accepted by 28 restaurants in New
York City and two hotels. Card issuers soon ditched the cardboard; the Plastic Era took off in earnest starting in
the 1960s. Cards spawned new payments opportunities and new sources of revenue from transaction fees, such
as ATM and guarantee cards.

The Plastic Era then gave way to the Account Era, where we find ourselves today, when plastic is no longer
required to access funds or transfer money between accounts. We peg the start of the Account Era to the
emergence of the online world at the end of the last century. Internet and mobile technologies made it possible for
users to direct funds from their accounts, repurposing infrastructure such as automated clearing houses.

Another notable shift in the account era has been the emergence of new players in the form of fintechs and telcos
(as wallet providers), which provide easier, cheaper, and instant transfers, driving transaction volumes in both
consumer and commercial segments. However, fintechs recently have had to adjust to lower valuations and an
equity market less willing to fund growth at the expense of margins, leading traditional banks to reassert their role
in the payments ecosystem. Bank response strategies have ranged from payments carve-outs, as when banks
have established merchant payments businesses, to the building of defensible propositions from within.

As the world has moved from paper to plastic to accounts, a few observations warrant highlighting. For one, older
payment mechanisms don’t disappear but simply decline in usage. For another, each successive era has leaned
harder into technology, requiring established institutions to undertake extensive retooling and creating openings
for disruptive competition. Third, payments have become more embedded into customer shopping journeys
and business activities, which makes payments increasingly important to users as they search for convenience
and utility. Finally, each era has seen more companies entering the market, including banks, infrastructure and
payment schemes, and today’s specialists and fintechs.

The Decoupled Era

Today, the industry may be on the verge of a new era. We call it the Decoupled Era because payments may be
increasingly disconnected from accounts and other fixed repositories of value. Users will have an even greater
voice than in the Account Era as they seek convenience, affordability, and security. The Decoupled Era is also
shaping up to be even more reliant on technology—but with the winning technologies yet to be determined.
Contenders include models that will transition to platform as a service (PaaS), serving smaller providers unable
to build across the value chain and providing a seamless transition across products and services for clients;
generative AI, which will further personalize client experiences, streamline payments processes, and protect
against fraud; and decentralized and highly interoperable technologies such as tokenization, further reducing the
need for a central agent.

Some new players may emerge in the Decoupled Era, and archetypes of existing players will morph as well.
Fintechs, having pivoted their business models toward sustainability, will likely either move further into traditional
financial services or aggressively pursue partnerships to fulfill client needs. Banks in turn will likely seek more
independence and control across the value chain, which may take the form of partnerships or M&A activities.
Payments infrastructure players could take a proactive approach to portfolio strategy to secure positions in the
higher-value businesses, and telco players could diversify from traditional mobile money offerings to become
broader platform-based digital finance enablers. As a result, competition for client deposits and balances will
likely intensify in the Decoupled Era in tandem with heightened pursuit of client relationships. Returns may accrue
to players able to seamlessly integrate payments into client lifestyles and behaviors. Embedded finance will
become the standard.

16 On the cusp of the next payments era: Future opportunities for banks
 As the Decoupled Era begins, the business models, solutions, and firms of the Account Era remain relevant,
but new opportunities are emerging for actors willing to explore fresh areas of growth. As we saw earlier,
equity markets are treating banks and nonbanks more evenly than in recent years, affording banks a renewed
opportunity to invest in growth. We expect the shift from a “grow at all costs” to a “resilience” mindset to continue
for the near to medium term. Emerging trends point to an acceleration of M&A activities, especially of smaller
rivals or of carved-out operations of incumbents, as well as strategic partnerships and expansions to take place.
In particular, payments infrastructure operators may be willing to adopt a proactive corporate portfolio strategy in
order to maximize scale in high-value businesses (such as merchant acquiring) while shedding underperforming or
value-diluting activities.

v v v

In the Decoupled Era, banks will no longer be able to rely solely on the account ownership paradigm. They will need
to build new businesses to keep clients within their service ecosystem. The transformation will require technology
changes in the form of core modernization and the application of generative AI. Furthermore, because the
independent actors in decentralized systems pull toward their advantage, banks and nonbanks will experience a
heightened need for security as avenues for fraud and financial crimes increase. We explore some of these issues
in our next section.

In the Decoupled Era, banks will no

longer be able to rely solely on the
account ownership paradigm. They will
need to build new businesses to keep
customers within their service ecosystem.

On the cusp of the next payments era: Future opportunities for banks 17
 Emerging
opportunities
for banks

18 On the cusp of the next payments era: Future opportunities for banks
Emerging opportunities for banks
The transition from the Account Era presents concrete opportunities for banks to differentiate. These fall
into two distinct categories in which banks can solidify their competitive position in the payments industry.
The first involves finding new opportunities to scale business impact, including new digital businesses and
the opportunity in deposits. The second concerns ways that banks can double down on productivity through
generative AI, the modernization of technology, and the ongoing battle to prevent financial crime.

Building new digital businesses

Given that payments has become a technology business, building new digital businesses is a logical path to
growth for incumbents and new entrants alike. Opportunities are especially appealing in B2B markets because
retail markets are already relatively well served by digital payments platforms. In the past, building new B2B
digital payments platforms hasn’t been easy (corporate and commercial clients have been reluctant to pay for
such services in the past), but banks have offered them as a vital lifeline to these valuable customers. Today,
macroeconomic changes might offer new hope for digital B2B payments platforms that can stand on their own
two feet.

For those seeking new business opportunities, three areas stand out for their growth potential: cross-border
payments, financial supply chain alternatives for SMEs, and embedded finance. As leaders consider their
options, a pragmatic approach is to stay close to the customer and to focus on existing strengths,⁸ rather than
acting like a start-up.

Cross-border payments
Traditional cross-border specialists (specifically money-transfer operators) performed well below the market
average between 2017 and 2022. Yet, while their business model is under stress, opportunities exist in key
segments. B2B trade continues to fuel two-thirds of cross-border payments revenues and has grown at a healthy
clip, but the C2B category ($35 billion revenue) is growing most rapidly (by 70 percent in 2022) and offering
several promising use cases.

Another clear trend includes B2B: growing lower-value cross-border payments, which are generating new
revenue dynamics. SWIFT reports that for its SWIFT gpi solution, transactions with ticket sizes less than $1,000
have been increasing at a rate of nearly 300 percent since the platform’s 2017 inception,⁹ at least double that of
other value categories. Even among the typically higher-value B2B payments flowing over SWIFT, 80 percent of
those transactions are less than $100,000.

This makes low-value payments—those with ticket sizes less than $100,000 in consumer and SME segments—a
significant opportunity for banks and nonbanks. Although low-value payments comprise 8 percent of cross-
border payment flows, they account for roughly one-third of revenue because of extensive retail networks and
higher margins. The majority of the low-value payments involve either B2B (still the lion’s share via SME trade and
one-off corporate payments), C2B use cases (travel; verticals such as healthcare, real estate, and education; and
general e-commerce spending), or B2C (marketplace payouts, salaries, and social benefits) (Exhibit 5).

While banks are incumbent leaders in this space, a growing number of attacker fintechs are steadily progressing
their positions. Additionally, banks and fintechs have formed partnerships to serve this market. With emergent

8
Tomas Beerthuis, Ralf Dreischmeier, Tomas Laboutka, and Nimal Manuel, “A practical guide to new-business building for incumbents,” McKinsey, June
21, 2023.
9
Swift GPI: Driving a payments revolution, Swift, October 7, 2020.

On the cusp of the next payments era: Future opportunities for banks 19
 Exhibit 5

Low-value payments use cases collectively account for about $12 trillion in
global cross-border payment outflows.

2022 global low-value payments use cases, $ trillion High >10%

Medium 5–10%
Low <5%
Counter- Average ticket CAGR, 2022–27F,
party Use case size, 2022, $ Principal, 2022, $ trillion low–high

B2B SME trade 5,000–10,000 ~6

SME nontrade payments 15,000–50,000 ~2
All B2B 7,000–12,000 ~8
B2C Dividends and interest payments¹ 500 ~0.6
Marketplace payouts 1,500 ~0.3
Payroll 1,000–2,000 ~0.2
Claims and 1-time disbursements 250 <0.1
Refunds 200 <0.1
Social benefits 350 <0.1
High-touch vertical payouts² 300 <0.1
All B2C 500–1,000 ~1.3
C2B Travel ~100 ~0.8
E-commerce ~100 ~0.5
Education 5,000–10,000 ~0.2
Healthcare ~5,000 ~0.1
Bill payments³ 100 <0.1
Loan repayments⁴ 500 <0.1
All C2B ~1,000 ~1.6
C2C Remittances 300–1,000 ~0.8

1
Including only low-value payouts to individuals.
2
Eg, legal, NGO.
3
Eg, utilities, telco.
4
Excluding real estate and including microloans via platforms.
Source: McKinsey analysis

McKinsey & Company

action across full-stack players like Visa, Mastercard, and cloud- and API-based and clearing providers, as well as
alternatives leveraging existing rails, the chessboards are sure to be rearranged over the coming years.

Financial supply chain alternatives

Pressure to digitize extends throughout the enterprise. With an uncertain economic environment and companies
keeping less excess cash in operating accounts to maximize interest yield, leaders need better visibility into real-time
account positions and access to efficient financing. Many of these needs reside in the office of the CFO. Banks have
an opportunity to extend valuable automation and digitization services, embedding new functionality into their suite of
financial offerings.

20 On the cusp of the next payments era: Future opportunities for banks
Start with the basics. Invoice standardization is a prerequisite to payables and receivables automation. The Factur X
e-invoice initiative championed by France and Germany is one development. The steady growth occurring in the volume
and complexity of invoices merely adds to the imperative. Cloud computing and the increasing acceptance of software-
as-a-service (SaaS) alternatives are creating a path forward.

Banks, factoring specialists, and SME financing fintechs should assess their options. Some banks may consider
partnering with others that can provide credit expertise; banks can bring their balance sheet to the table. Others can
build their own solutions—for example, by using their merchant networks and current underwriting capabilities.

New moves in embedded finance

Embedded finance10 is taking off, fueled by technology, especially by the possibility of exposing APIs that simplify the
integration of payments products into any type of consumer journey. Nonfinancial firms with a history of creating strong
digital experiences are becoming gateways to financial services for millions of consumers and businesses, while their
bank partners enjoy expanded, low-cost distribution for their financial products.

How can banks break into the business? And how can those already in the game improve their position? We see four
basic postures. Global and international banks might seek to build a bank-owned embedded-finance business,
replicating and trying to outcompete challenger models to win business in segments where the legacy approach
falls short or cannibalization seems a threat. Examples include installment repayment plans for standard credit card
purchases such as American Express’s Pay It, Plan It and Citi’s Flex Loans.

Big banks can go another way and become strategic partners to retailers and other distributors. Banks choosing this
stance typically have strengths in risk and regulatory management that distributors lack. They can contribute these skills
and a fit-for-purpose embedded financial structure; distribution partners can focus on the digital experiences at which
they excel.

Banks can also tap an area of expertise and become specialists in a given product, such as loans. Their vast
experience in certain credit products and serving specific industry verticals can help them partner with distribution
companies that have neither the licensing nor infrastructure to address these needs at scale.

Some smaller banks might choose a fourth path: becoming providers of balance sheet and risk services. Such banks
might use banking-as-a-service (BaaS) platforms like Treasury Prime, Unit, and Bond to provide distribution partners
with deposit and lending products. In this way, banks can gain access to new revenue streams while BaaS platforms
expand their networks’ deposit and lending capacity.

Deposits: A changed environment calls for new strategies

Deposits represent one of the most critical resources of any bank and one of the most important revenue streams for
corporate transaction banks around the globe. However, several financial institutions have experienced significant
deposit withdrawals and increasing market volatility in response to rising interest rates, credit restrictions, and liquidity
gaps. As the banks attempt to capture and maintain their deposit base, investors are closely monitoring their resilience.

For several years, businesses and consumers have faced very little opportunity cost for retaining excess funds in current
accounts. This changed rapidly as interest rates began to increase in late 2022 and further accelerated in 2023. North
America saw money market rate increases of more than 2 percent, and balances migrated out of current accounts.
Across other markets (for example, Singapore), consumers shifted idle money into savings accounts as central banks
increased rates, causing declines in current-account deposits. In economies such as India and Indonesia, however,
money market rates rose less dramatically, and current-account balances moderated but did not decline.

10
Andy Dresner, Albion Murati, Brian Pike, and Jonathan Zell, “Embedded finance: Who will lead the next payments revolution?,” October 13, 2022.

On the cusp of the next payments era: Future opportunities for banks 21
 Deposits represent one of the most critical
resources of any bank and one of the most
important revenue streams for corporate
transaction banks around the globe.
Corporate deposits generate 40 to 45 percent ($500 billion to $550 billion) of transactional bank revenues
globally. Recent market events (with bank deposits falling by over $700 billion during the latter half of 202211) and
continuous pressure on banks to reduce fees have made deposits a primary area of competition for many banks.
The shakeup of the financial market in March 2023, when Fed data shows that almost $100 billion in deposits
were withdrawn during the week up to March 15,12 has reignited the debate on how banks can maximize one of
their most valuable resources.

In today’s uncertain environment, where deposit growth has slowed and interest rates have risen significantly,
achieving deposit growth requires challenging many of the traditional approaches. A current McKinsey analysis
outlines how to achieve such growth:

— Increasing client visibility into their liquidity position using data lakes, dashboards, and key performance
indicators

— Establishing a Deposit Command Center to coordinate, execute, and monitor the deposit growth effort

— Mobilizing a specific deposit growth sales approach, including resetting the focus of relationship managers
and training staff to address evolving market realities

— Enhancing value propositions for ‘cash rich’ client sectors, identifying and pursuing pockets of excess
liquidity

— Leveraging advanced analytics given the wealth of available records, both internal and external

— Reinvigorating payments and liquidity management products directly tied to operating accounts

— Designing optimal pricing strategies based on segments data and rapidly evolving analytic tools

Additionally, retail deposits continue to comprise 43 percent of current account balances and are therefore
another important source of both liquidity and revenue—although the funds are, of course, spread across many
more accounts and it is therefore difficult to apply the same granular approach. Both retail and corporate deposit
balances grew nominally during 2022 in all regions but North America, and are projected to continue to do so over
the near to midterm, even as net-interest margins drive the greater share of liquidity revenue growth. It does not
follow, however, that all institutions will be affected equally. There will undoubtedly be banks registering deposit
share gains and others enduring absolute deposit losses. Strategies taken today will help determine those who
gain and those who don’t gain.

11
Damian J. Troise, “Bank failures highlight declining deposits,” Associated Press, March 30, 2023.
12
Jeff Cox, “Nearly $100 billion in deposits pulled from banks; officials call system ‘sound and resilient’,” CNBC, March 26, 2023.

22 On the cusp of the next payments era: Future opportunities for banks
Three avenues toward better productivity
Banks can double down on productivity with strategic use of technology. Three measures relevant to the current
state of technology are: identifying valuable applications of generative artificial intelligence, modernizing the bank’s
technology, and applying technology to the ongoing battle against fraud and crime.

Deploying generative AI in payments

Generative AI is taking the world by storm, and banks and other financial service providers can benefit significantly,
as several emerging gen AI use cases seem particularly fitting. For instance, banking is stringently regulated, with
thousands of pages of rules and documentation to sort through annually. Also, the industry has a huge number
of customer-facing workers who must answer questions and generate ideas. Finally, the industry is already well
embarked on digitization and could significantly benefit from gen AI’s impact on software development. McKinsey
Global Institute estimates that generative AI could further increase productivity in banking by 2.8 to 4.7 percent,
equivalent to $200 billion to $340 billion in annual revenues.13

As regards the payments industry, we see four applications with the greatest potential:

— Automating client operations. Payments processes involve significant middle-office activity, much of which
are quite complex in nature as they require some form of client interaction. Gen AI applications in this field span
multiple areas of the payments business. For instance, it can draft technical documents such as account plans,
commercial contracts, and requests for proposal that are key in the enterprise payments sales cycle. Gen AI can
further automate recurrent activities in payments workflows, such as conducting regulatory checks for cross-
border payments, analyzing terms in trade-finance contracts, and matching invoices to purchase orders. It can
also be deployed in more sophisticated workflows, such as streamlining merchant onboarding by automating
analysis of application documents and flagging merchants for human review where necessary. Massive
deployment of gen AI applications is also expected on the retail payments front, as banks and PSPs can use the
technology in post-sale customer care for card and digital wallet businesses. Gen AI also has a major potential
role in combating fraud as we discuss below. For instance, it can optimize fraud-detection rules, identify high-
priority incidents, and improve human analysts’ efficiency by highlighting relevant information and recommending
next best actions for case handlers.

— Accelerating code development. Despite efforts to modernize their technology in response to the ecommerce
boom, many traditional payments companies still heavily rely on legacy systems written in COBOL. The 1960s–
70s programming language remains the foundation for many bank systems yet is difficult to update for much-
needed advancements such as migration to cloud. GenAI-based “code assistants” can facilitate bug detection,
repair as well as user acceptance testing. They can also interpret legacy code, documenting the results and
even rewriting it to make it more readable and testable. Indeed, gen AI is proving to be particularly effective in
improving software engineering across the board and could represent a once-in-a-lifetime opportunity for banks
payments companies to fill the technology gap against digital players.

— Generating content. Gen AI can improve marketing and promotional effectiveness by drafting and personalizing
outbound customer communications—for example, in credit card marketing. It can also be useful in multimedia
content generation, including prospect profiling, where the new tools can use public and internal information to
identify and prioritize customers and targets for outreach.

— Providing virtual expertise. An always-on support bot can augment employee performance by supporting
technical work and customer service. One leading player has built a virtual assistant based on GPT-4 which
takes natural language queries from developers, reads detailed documentation, and provides answers based on
relevant documents.

13
“Industry impacts,” The economic potential of generative AI: The next productivity frontier, McKinsey, June 14, 2023.

On the cusp of the next payments era: Future opportunities for banks 23
 Companies’ success will depend on a coherent strategy, documented in a value-based “road map” to use cases,
and careful implementation. Differentiation will come from proprietary data and the ability to execute. Gen AI can
be the catalyst to a larger transformation in AI and machine learning, but to do that successfully and capture the
potential value, payments companies will need a multi-disciplinary digital transformation approach grounded in
capability building, change management, and risk management. Given the potential of gen AI to alter the scope of
jobs in key functions such as research, quality assurance, and engineering, new capabilities and talent will likely
be required.

As we discuss next, deploying gen AI will require modernization of many pieces of the tech stack (including
cloud platforms, model hubs, and apps), work that to this point may have seemed optional. In addition, a hybrid
approach to infrastructure will be required given many actors in the space. Further, gen AI requires proactive risk
management and organizations should be focused on how risks evolve. Gen AI is accelerating risk discussions
around data privacy, IP protection, data security, bias, and so on. The ability to roll out gen AI at scale, while
avoiding the trap of “pilot purgatory,” cannot be overemphasized.

Technology modernization
Generative AI is one example of how, as the new era unfolds, companies’ reliance on technology will only
deepen. Incumbent payments players, who for decades faced little external pressure to evolve, now universally
acknowledge the need to modernize tech stacks to keep up with the rapid pace of innovation and ecosystem
disruption driven by cloud-based fintechs.

Payments tech modernization can reduce operating costs by 20 to 30 percent and halve time to market for new
products. According to McKinsey’s Operating Model Index, compiled from research across 150 leading financial
institutions, those scoring higher on operating-model maturity tend to be faster growing (20 percent faster
revenue growth) and more profitable (69 percent higher TSR) than the others.

Payments tech modernization can reduce

operating costs by 20 to 30 percent and
halve time to market for new products.
To achieve these gains, incumbents should strongly consider re-architecting complex, monolithic technology
stacks to microservices-based, cloud-native platforms that are flexible, consumable, and scalable. Payments
attackers use such platforms to achieve low cost-to-income ratios. For instance, ClearBank would be unable to
pursue its modular BaaS strategy without cloud technology.

Modernizing complex payments tech stacks is no small undertaking. As the technology gap to fintechs and
native digital players continues to widen, incumbents can no longer afford to wait three to five years to transform.
Instead, companies will need to take an agile approach, focusing modernization investments on strategic, high-
development-intensity products where paying down technical debt and modularizing legacy code into micro-
services will deliver the most benefit. Companies should also consider partnerships to integrate innovative
products and services that may be too lengthy or costly to develop in-house.

24 On the cusp of the next payments era: Future opportunities for banks
As companies rebuild their platforms, they can look to best-in-class tech companies for inspiration on structure and
working practices for modern product delivery. Payments companies will also need to attract, retain, and upskill future-
ready tech talent well versed in modern technologies and skill sets, such as cloud, generative AI, and user interface and
user experience (UI/UX).

Payments companies must also look to improve speed to market and reduce engineering toil by deploying modern
software engineering practices. We have found that typical software development organizations (in payments and other
industries) spend more time on outer-loop activities14—tasks such as security, compliance, configuration, and integration
testing that are not directly related to building new features and shipping product (the inner loop). Automation—including
generative AI—and modern practices in agile and DevSecOps15 can enable firms to redeploy people and resources to the
inner loop, lifting productivity by 15 percent or more (Exhibit 6) and improving speed to market by more than two times.
Generative AI is proving to be a powerful speed and efficiency lever as well, with especially promising results in code
generation, legacy code refactoring, and test automation.

14
“Yes, you can measure software developer productivity,” McKinsey, August 17, 2023.
15
Santiago Comella-Dorda, James Kaplan, Ling Lau, and Nick McNamara, “Agile, reliable, secure, compliant IT: Fulfilling the promise of DevSecOps,” McKinsey,
May 21, 2020.

Exhibit 6

Improving time utilization in inner-loop processes has potential to increase

developer productivity by roughly 15 percent.

Allocation of time to inner- and outer-loop activities (illustrative), %

Inner loop Outer loop

Other
Infrastructure configuration
Integration testing 30
Security and compliance 45
57 50
Development tools

Tech/infrastructure
modernization
Technology debt Opportunity to
increase efficiency 70
Maintenance
by ~15% by increasing 55
inner-loop time 50
43

Building new features

Client’s Potential Industry Aspirational tech

current state¹ future state benchmark benchmark¹

1
Example assumes a high-tech company with mature application of elevated automation tools.
Source: McKinsey analysis

McKinsey & Company

On the cusp of the next payments era: Future opportunities for banks 25
 Incumbents’ technology gap with fintechs and native digital players continues to widen; for some, modernizing
technology won’t be enough. These firms may want to consider partnerships with others and more generally
think through the areas where paying down technical debt16 will deliver the most benefit. Some tech work can be
outsourced; looking ahead, industry utilities could simplify internal operations for many firms in one go.

Staying ahead of financial crime

A final way to lower costs is by updating how the organization limits risks and costs related to fraud. The face
of financial fraud has changed. Today’s financial criminals are sophisticated, coordinating borderless attacks
simultaneously and globally by using low-cost tools that exploit recent technological advancements. Although
unauthorized card-not-present (CNP) fraud is declining in SEPA (2.8 basis points of transacted card value in
2021, compared with 3.66 basis points in 2020), the introduction of faster payments has opened new fronts for
authorized push payment (APP) scams. In APP scams, fraudsters trick victims, often through social engineering,
into initiating payments to an account posing as a genuine payee. In the United Kingdom, APP scams accounted for
44 percent of the £583 million lost to financial fraud in 2021.17 Of the $6.9 billion lost to internet scams in the United
States in 2021, 98 percent began with social engineering, according to the FBI Internet Crime Center.18

Worse may be in store. It’s easy to envision how generative AI could aid fraudsters in producing fake videos
or spoofing voices, exploiting vulnerabilities of common identity recognition routines, say, through synthetic
identities. But generative AI and other new technologies also offer new avenues for those defending against fraud.
Early examples indicate that generative AI could boost productivity by 30 to 50 percent in fraud detection by
automating some currently manual activities and accelerating others. Its proven ability to process unstructured
data could optimize detection rules, identify high-priority incidents, and foster improved efficiencies for human
analysts by displaying relevant information and checklists for case handlers and recommending next best actions
during investigations. It could also pre-compile suspicious-activity reports for vetting and regulatory submission.

To get the most out of the new technologies, payments companies will likely need to upgrade their fraud operations
from back-office functions to an actively managed competence center. Companies can incorporate what has
worked for them and their own advanced technology skills to design strategies that both counter financial crime
and enhance the customer experience.

v v v

The transition from the Account Era to the Decoupled Era presents opportunities for banks and other payments
players to capitalize on the resulting tailwinds. Many of these are driven by technology advancements, generative
AI being the clearest example. The need to modernize tech stacks has been recognized for some time; market
dynamics give the imperative added urgency while cloud-native platforms and refined API connections offer a
new path forward. Technology empowers both sides of the financial crime battle, making it both an offensive and
defensive maneuver. The shifting interest rate environment has reset deposit dynamics to a state many current
leaders have no experience navigating, with the added twist of technology enabling faster balance movement than
in past cycles.

The outlook for the payments sector remains strong, with five-year growth projected at or above the long-term
average. The vectors of growth are evolving, however, and banks must take steps to optimize the profitability of
such growth. This requires a detailed evaluation of their business, making clear and difficult investment decisions in
building an efficient payments operating core that delivers a share of that growth to both the top and bottom lines.

16
Aamer Baig, Sven Blumberg, Arun Gundurao, and Basel Kayyali, “Breaking technical debt’s vicious cycle to modernize your business,” McKinsey, April
25, 2023.
17
“Over £1.2 billion stolen through fraud in 2022, with nearly 80 per cent of app fraud cases starting online,” UK Finance press release, May 11, 2023.
18
FBI internet crime report 2021, US Department of Justice/Federal Bureau of Investigation, March 2022.

26 On the cusp of the next payments era: Future opportunities for banks
 Luca Bionducci is an associate partner in McKinsey’s Rome office, Alessio Botta is a senior partner in the Milan office;
Philip Bruno is a partner in the New York office; Olivier Denecker is a partner in the Brussels office; Carolyne Gathinji
is an associate partner in the Nairobi office; Reema Jain is an associate partner in the Gurgaon office; Marie-Claude
Nadeau is a senior partner in the San Francisco office; and Bharath Sattanathan is a partner in the Singapore office.

The authors wish to thank Diksha Arora, Hamza Arshad, Sukriti Bansal, Debopriyo Bhattacharyya, Szilard Buksa,
Tommaso Canzian, Neha Dar, Nunzio Digiacomo, Fuad Faridi, Alberto Farroni, Amit Gandhi, Hemant Gaur, Yannis
Harizopoulos, Reinhard Höll, Sumi Hur, Keerthi Iyengar, Larry Lerner, Baanee Luthra, Pavan Kumar Masanam, Kate
McCarthy, Prakhar Porwal, Priyanka Ralhan, Glen Sarvady, Nikki Shah, Julia Simchuk, Shwaitang Singh, Vasiliki
Stergiou, Christabel Sunmugam, Aparna Tekriwal, and Adolfo Tunon for their contributions to this report.

Copyright © 2023 McKinsey & Company. All rights reserved.

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