BCG: 2023 Global Payments Report – Investor Scrutiny Provokes a Moment of Truth

Report Link: Global Payments Report 2023 | BCG
Size of Report: 40 pages

Compared to many, the BCG report looks at the industry through a different lens making it a standout read, plus the quality of the infographics is excellent. The BCG narrative was one not previously explained before, which is – what is driving bank executives on their investment themes & directions to meet shareholder returns.

For example, whilst 2023 has seen acquirer shareholder returns plummet 40%, the mid-term expectation is that the Issuing Business will face greater slowdown owing to macroeconomic trends and the growth of new payment types, especially a/c to a/c rails and the growth in payment innovation (VAS) especially aimed at SMEs.

• Regionally, North America will face the greatest CAGR challenge, whilst APAC (excluding China) will face the greatest growth, with Africa & MENA, LatAm, Europe remaining steady.
• Four areas to top the payments leadership agenda:
  • operational resilience,
  • GenAI,
  • risk management + compliance, and
  • mergers and acquisitions.

The key points that stood out to us were:

1. Many similar endorsing points to McKinsey on trends, especially:
   • Embedded Finance,
   • GenAi in Product Development (see page 8),
   • Simplify Operations,
   • Advanced Analytics/Loyalty &
   • Add Pace to Legacy Modernisation
2. Acquiring view: From Page 12 to 17 – Revenue to rise by 6.9% annually over the next five years (see breakdown by segment Page 13) & the payments process is riddled with pain points to be addressed. For example, a well-conceived front-to-back redesign can boost acquirer revenues by 2% to 3%, cut onboarding costs by 5% to 20% and lift net promotor scores by 15 to 30 points.
3. Issuing View: from Page 18 – 22. Growth wave that issuers have long been riding is breaking & rougher next five years lies ahead. We expect issuer revenues globally to grow by a CAGR of just 5.5% from now through 2027. Regulatory action on late fees could compress margins even further. As the tech stack opens up, infrastructure specialists are emerging with capabilities that can help traditional issuers gain market advantage and manage parts of their business more cost effectively. This new wave of service providers includes issuing processors, loyalty experts, debt collection enablers and other niche players.   As Loyalty is up for grabs, Issuers must become tech & data led, offering multichannel orchestration, embedded finance, and data-as-a-service, for example, by supporting cross-channel journey orchestration and permitting simple, ongoing reporting. Done right, these improvements can help issuers speed up cycle times by 60% to 80% and improve conversion rates of product offerings by 20% to 30%.
4. Modern Payments Architecture (page 28) comprises of six core elements.
5. Payments Infrastructure Revolution: from Page 29. From rails to regulation to currencies, nearly every global payment ecosystem element is undergoing a rebuild.  Five trends reshaping infrastructure:
   • Infrastructure at a tipping point with RTP/Instant Payments to lead.
   • New Payment Rails have momentum – Cards to remain dominant BUT APMs will grow twice as fast as person-to-merchant payments from 2022 to 2027 (Poland Blik & Brazil PIX examples).
   • CBDCs still several years away but the most exciting use cases are programmable payments, ability to integrate CBDCs into smart contracts and other forms of decentralised finance.
   • Open Banking could finally deliver on promise – Infrastructure providers can support banks with solutions that make compliance with regulatory mandates easier to review and allow banks to leverage open banking innovations for commercial applications.
   • Regulators raising the bar (again). The European Commission has published draft proposals for PSD 3, Payment Service Regulation, and Regulation for Financial Data Access to reduce fraud levels, improve consumer rights and create a more level playing field between banks and non-banks. In addition, local rails, scheme issuance and co-badging could cut into revenue growth for card companies and impose new requirements for data security and operations.
6. Infrastructure providers must lead the revolution or get left behind – four recommendations:
   • Pick a strategic focal point (examples in report).
   • Be a modernisation facilitator – enable solutions as a service & supply particular expertise in use case develop­ment. Leaders can tailor the data needed for open banking, CBDC and other types of exploration to specific audiences.
   • Partner with policymakers.
   • Diversify value streams – infrastructure providers should lean into orchestration-layer propositions and enable at-scale VAS.
7. Summary map Exhibit 13 worth reading.

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