Global Payments 2020 Fast Forward into the Future Boston Consulting Group partners with leaders in business and society to tackle their most important challenges and capture their greatest opportunities. BCG was the pioneer in business strategy when it was founded in 1963. Today, we help clients with total transformation—inspiring complex change, enabling organizations to grow, building competitive advantage, and driving bottom- impact.

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SWIFT is a global member owned cooperative and the world’s leading provider of secure financial messaging services. We provide our community with a platform for messaging and standards for communicating, and we offer products and services to facilitate access and integration, identification, analysis and regulatory compliance. Our messaging platform, products and services connect more than 11,000 banking and securities organizations, market infrastructures and corporate customers in more than 200 countries and territories. While SWIFT does not hold funds or manage accounts on behalf of customers, we enable our global community of users to communicate securely, exchanging standardized financial messages in a reliable way, thereby supporting global and local financial flows, as well as trade and commerce all around the world. Headquartered in Belgium, SWIFT’s international governance and oversight reinforces the neutral, global character of its cooperative structure. SWIFT’s global office network ensures an active presence in all the major financial centers. Global Payments 2020 FAST FORWARD INTO THE FUTURE

YANN SÉNANT SUSHIL MALHOTRA

MARKUS AMPENBERGER STANISLAS NOWICKI

ANKIT MATHUR PRATEEK ROONGTA

INDERPREET BATRA MICHAEL STRAUß

JEAN CLAVEL ALEJANDRO TFELI

STEFAN DAB ÁLVARO VACA

ALEXANDER DRUMMOND

October 2020 | Boston Consulting Group CONTENTS

3 INTRODUCTION

4 MARKET OUTLOOK A Shifting Landscape Regional Outlook

11 SECURING FUTURE GROWTH IN RETAIL PAYMENTS How Issuers Can Prepare for a Healthy Recovery How Merchant Acquirers Can Derisk and Reboot How Merchants Can Use Payments to Drive Efficiency and Growth

17 SOLVING PAIN POINTS IN WHOLESALE PAYMENTS A Growing Role for Transaction Banking Solutions Fierce Competition Across the Value Chain Strategies to Drive Differentiation

23 WINNING THE FUTURE Rebalance the Product and Customer Portfolio Pursue Strategic M&A, Partnerships, and Ecosystem Opportunities Become a Data-Driven Organization Reinforce Risk Management Accelerate Digital Transformation

26 APPENDIX: ABOUT OUR METHODOLOGY

28 FOR FURTHER READING

29 NOTE TO THE READER

2 | Fast Forward into the Future INTRODUCTION

ayments players are used to operating in an instant and Preal-time world, but few could have anticipated the crushing speed of the pandemic or its devastating toll. Amid the extraordinary dislocations, the payments industry demonstrated its adaptability, springing quickly to serve as a crisis response copartner for individu- als and businesses, assist in distributing government stimulus pay- ments, and help customers, merchants, and corporate clients transact in contactless ways.

Still, with economic life disrupted by social distancing and lock- downs, most payments businesses will see revenue growth dip in the near term—although the impacts will vary according to the value proposition, portfolio composition, and market position of individual players. Our modeling suggests that from 2019 to 2024 global pay- ments revenues will likely increase by about 1% to 4%, depending on the speed of the economic recovery. Under a quick-rebound scenario, that growth range would be roughly half the rate of the prior five years. Once the recovery is underway, however, prospects in the medium term and beyond remain buoyant. Our forecasts suggest that payments revenues globally could soar to $1.8 trillion by 2024, from $1.5 trillion in 2019, lifted by the continued transition away from cash, sustained strong growth in e-commerce and electronic trans- actions, and greater innovation.

Incumbents will need to work harder to capture this growth, however. The payments space is becoming more crowded, with an expanding array of nontraditional players jostling with and payments ser- vice providers to become the issuer, provider, processor, or partner of choice. Shifts that were already happening before the pandemic will force established institutions to pick up the pace of digitization, gain economies of scale, and manage risk in new ways—all while continu- ing to innovate. The growth winners in the postcrisis period will be those that use this time before the recovery to reset and rebalance.

These are among the findings of BCG’s 18th annual analysis of pay- ments businesses worldwide. Our coverage draws from BCG’s pro- prietary global payments model, using data from SWIFT, a global provider of secure financial messaging services. First, the report out- lines recent developments in the payments market around the world and on a regional basis. The next chapters then explore how retail and wholesale payments providers can best respond to the disrup- tions caused by the pandemic and fast-forward to growth. Finally, in our concluding chapter, we note key challenges impacting the indus- try and five imperatives to win in the future.

Boston Consulting Group X Swift | 3 MARKET OUTLOOK

he COVID-19 crisis has reshaped much Given the uncertainty surrounding the still- Tof daily life, including how consumers unfolding pandemic and questions about and businesses transact. In the short term, subsequent waves of infection, our payments most players in the payments industry are forecast includes three revenue growth likely to see revenue growth contract. But scenarios based on global GDP development. favorable trends such as the shift to contact- (See Exhibit 1.) Under a quick-rebound less payments, the growing adoption of scenario, our outlook suggests that the global digital wallets, and the more widespread use payments revenue pool will expand from of business-to-business (B2B) payments $1.5 trillion in 2019 to $1.8 trillion in 2024, automation will lift the industry’s prospects a compound annual growth rate (CAGR) of longer term. 4.4%. (See “Appendix: About Our Method-

Exhibit 1 | Three Revenue Growth Scenarios from 2024 to 2029

uc reou So recoer eeer ct

Revenue ($B) 2,374 2,127 1,810 1,915 1,670 1,464 1,542 1,031

2014 2019 2024 2029 2024 2029 2024 2029

CAGR 2019–2024 CAGR 2024–2029

Source: Global Payments Model 2020. Note: Please refer to the appendix for GDP growth relative to each scenario. Rounding effects may occur.

4 | Fast Forward into the Future ology” for assumptions and reporting meth- limits for contactless transactions at the point ods.) Although solid, this CAGR is much lower of sale without entering a PIN code. In the than the 7.3% annual growth the industry en- US, digital wallets attained a level of mass joyed from 2014 to 2019. In a slow-recovery adoption during the lockdown period that scenario, the global revenue pool would reach would ordinarily take two to three years to $1.7 trillion by 2024, a CAGR of 2.7%. Under achieve.1 a deeper-impact scenario, the revenue pool would grow to only $1.5 trillion, a moderate CAGR of 1.1%. Consumers have eagerly The second half of the decade, however, looks embraced contactless considerably brighter, driven by economic expansion, advancements in payments infra- payments methods. structure, e-commerce growth, and greater financial inclusion. From 2024 to 2029, pay- ments revenues globally should rise by 4.4% The shift away from cash could prove endur- to 5.6% annually (depending on the scenar- ing. In Asia-Pacific, e-commerce adoption io)—roughly 1.5 times faster than the growth soared after the SARS outbreak, establishing of banking revenues overall. By 2029, the rev- behavioral norms that contributed to subse- enue pool could swell to between $1.9 trillion quent strong growth in digital payments. Ali- and $2.4 trillion, depending on the extent of baba’s Taobao platform, for example, grew by the economic recovery. more than 50% in 2003 during the post-SARS period in China, and E-Mart saw online or- ders rise by 50% to 60% after the 2005 MERS A Shifting Landscape outbreak in South Korea. Governments may BCG’s market data and industry observations also have an interest in accelerating the suggest a few important trends will shape switch to cashless payments—research shows the payments industry globally over the next that electronic payments boost GDP by as five years. much as 3 percentage points annually.

COVID-19 Will Accelerate the COVID-19 Will Boost E-Commerce Cash-to-Noncash Conversion Growth in Select Categories Although areas like the Nordics are already The pandemic drove more retail purchasing nearly cashless, with more than 300 electron- activity online as a cooped-up populace ic payment transactions per capita annually, sought to meet its everyday needs. BCG’s con- several mature-market countries have been sumer pulse survey found that 48% more US slower to make the shift. The COVID-19 crisis consumers used digital channels to shop could change that. A BCG survey revealed during the first months of the crisis than be- that from May to June 2020, many formerly fore, with younger generations especially like- cash-loyal countries, such as Germany, Japan, ly to embrace e-commerce sales. Small and and Italy, saw cash use fall by 30% or more. midsize enterprises (SMEs) that had previous- Other countries, like , Canada, and ly relied heavily on in-store transactions were the UK, made an even sharper move away quick to help meet this rising interest, with from cash. many moving briskly to add online-shopping capabilities. Changing mindsets, greater accessibility, and higher contactless transaction limits helped From 2020 to 2023, eMarketer estimates that drive this transition. Globally, more mer- retail e-commerce will jump from $4.2 trillion chants began to accept contactless payments to $6.5 trillion, a CAGR of 16%. But that during the crisis, even for low-value trans- growth will come from different sources than actions. Consumers proved eager to embrace in the past. The crisis has created a structural these payments methods, even in previously shift in consumption, with sectors like travel tough-to-crack markets. Card schemes and entertainment that depend on mobility supported the development by increasing and density seeing a drop and others such as

Boston Consulting Group X Swift | 5 fresh food, pet supplies, and in-home That push could spark further consolidation entertainment likely to see above-average after the crisis since small and midsize play- growth. That shift will alter the mix of pay- ers might band together to defend their mar- ments methods used, reducing the traditional ket position. dominance of cards in some instances. Pro- viders need to be alert to these changes and Megadeal fever also reached Europe, with align payments options to fit the context of Worldline’s $8.6 billion bid for Ingenico in different sector-based purchasing patterns. February 2020 serving as the latest example. Those that do stand to capture a significant While the largest deals have created a limited share of the burgeoning e-commerce market number of players with pan-European reach, globally. some companies are looking to increase share domestically, such as Nexi’s strategic partner- Industry Consolidation Will Continue ship with Intesa Sanpaolo in Italy. Across the to Shape the Competitive Environment region, private equity engagement continues The quest for scale, the desire to serve more to be a catalyst for deal activity. The collapse points along the value chain, and the need to of Wirecard in June 2020, driven by multiyear move money faster have fueled M&A activity accounting fraud, will also create acquisition in payments. To date, the deal flow has been opportunities. concentrated primarily in payments process- ing and acquiring, but we expect it will bleed In Asia-Pacific, Latin America, and the Middle into other parts of the value chain. East and , payments markets are still relatively young. In these regions, M&A activ- ity is likely to be driven by private equity as Both the US and Europe well as by ecosystem players and local giants that are looking to build regional scale. have seen a recent flurry of megadeals. Regional Outlook Despite near-term disruption, the five-year forecast for most regions remains largely For example, while the issuer space has been positive. (See Exhibit 2.) This section outlines relatively quiet, subscale players that don’t the major developments. partner may find it increasingly challenging to remain competitive. Networks have been Europe active in pursuing adjacencies. They may Payments revenues across Europe are on look to strengthen their position in value- track to grow modestly, although at a lower added services (VAS) and diversify to ac- rate than over the past five years. From 2019 count-to-account (A2A) rails. Finally, mature to 2024, growth could range from 2.3% un- fintechs may become attractive targets for der a quick-rebound scenario to –0.9% in a partnerships and acquisitions. Taken togeth- deeper-impact scenario. er, the changing competitive and regulatory landscape, as well as the difference in valua- Eastern Europe, which captures 30% of the tions between payments activities and retail region’s revenue pool, will continue to notch banking, is likely to drive more corporate the highest growth rates, with Russia remain- alliances, joint ventures, and sales of - ing a strong driver of growth in the region. owned payments businesses to reinforce From 2019 to 2024, payments revenues could banks’ capital base. increase by a high of 4.7% annually in a quick rebound. Western Europe, which accounts for Payments-related M&A activity varies by re- 64% of regional payments revenues, will see a gion. In North America, the 2019 megadeals CAGR of 1.1% in a quick rebound down to a between Fiserv and First Data, FIS and low of –1.6% in the deeper-impact scenario, Worldpay, and Global Payments and TSYS while the Nordics, which make up 6% of the put the industry’s largest players in a league revenue pool, should see revenue growth of their own in terms of scale and reach. hover at 0.1% to 2.9%.

6 | Fast Forward into the Future Exhibit 2 | APAC and LatAm Are the Growth Hotspots

2024 REVENUE OUTLOOK

uc reou So recoer eeer ct 2014 2019 R R R R uroe

Nort erc

Asia-Pacific

t erc

e t rc

Source: Global Payments Model 2020. Note: Please refer to the appendix for GDP growth relative to each scenario. Rounding effects may occur.

Although banks across Europe have imple- become the default payments method in Eu- mented the Payments Services Directive 2 rope. Both the European and (PSD2), open-banking innovations have not the European Commission have welcomed yet had a meaningful market impact. Recent this undertaking, which comes on top of oth- M&A activity (such as PayPal’s investments er infrastructure-related initiatives such as in the open-banking platform Tink, Master- the TARGET Instant Payments Settlement card’s acquisition of Finicity, and Visa’s ac- System (TIPS). quisition of API leader, Plaid) could change this, however, and usher in new use cases The European Digital Payments Industry Alli- and greater standardization of APIs. Bank- ance (EDPIA), an advocacy group formed by fintech collaboration is also on the rise. For four independent European payments proces- example, TransferWise has created APIs that sors, is another effort to improve coordina- enable the company to push its products tion. The alliance seeks to accelerate a digital through traditional banking channels and single market and monetize A2A payments allow banks, in turn, to provide customers capabilities. with richer features. North America Open banking aside, European banks and Our projections show that payments revenues regulators are increasingly concerned that in North America will grow by a moderate without better regional coordination, foreign CAGR of 2.0% from 2019 to 2024 under a card schemes, wallets, and tech giants could quick-rebound scenario and would turn challenge Europe’s monetary autonomy and slightly negative if the region experiences a displace the region’s fragmented payments more protracted recovery. infrastructure. To address this risk, 16 Euro- pean banks have banded together as found- Debit cards still account for the largest ing members of the European Payments proportion of transactions (44%) in North Initiative (EPI) with hopes of creating a card America, followed by credit cards (28%) and scheme, , and person-to-person checks (8%). If past patterns hold, debit use (P2P) instant payments system that will could spike in the near term. Following the

Boston Consulting Group X Swift | 7 2008–2009 financial crisis, for example, US Across the payments space, fintechs continue consumers shifted significantly more of their to erode incumbent market share. In addition spending to debit cards in order to keep to an active domestic scene, several foreign household debt in check. By 2011, however, fintechs have entered the region over the past credit expenditures had returned to precrisis few years, including Afterpay, Klarna, Monzo, levels, and they grew quickly in the years and N26. that followed. Asia-Pacific From a product perspective, buy now, pay From 2014 to 2019, payments revenues in later (BNPL) providers are gaining traction Asia-Pacific grew at an average annual rate as a result of the challenging economic of 9.3%, far higher than the global average. environment and the shift in spending Over the next five years, revenues will con- toward e-commerce channels. Afterpay, for tinue to rise but at a slower rate. Under our example, saw a 40% rise in its active user quick-rebound scenario, industry revenues base in 2020. Partnerships are also growing are likely to rise by a CAGR of 7.3% from in this area. Examples include QuadPay and 2019 to 2024. Stripe, Klarna and H&M, and Shopify and Affirm. Given the region’s diversity, we see markets falling into three broad clusters (see Exhibit 3): In A2A payments, peer-to-peer schemes have seen growing adoption and more diverse •• Almost-Cashless Societies. These uses, from paying rent to splitting the cost markets, which include South Korea, Hong of meals. App downloads for Square, Zelle, Kong, and , should see payments , and PayPal all rose by more than 50% revenues grow at a CAGR of less than 5% in April and May 2020, compared with the over the next five years. year before. Many players benefited from crisis-related interventions that allowed •• Societies Transitioning to Cashless. government stimulus funds to be deposited and mainland China should see directly into these apps, a move that helped payments revenue growth rates of 5% to position these schemes as the primary trans- 10% over the next five years, with main- acting account for many consumers. land China especially well positioned.

Exhibit 3 | Three Clusters of Payments Revenue Growth and Cashless-Payments Adoption in APAC

otce ocete Mainland China: high growth expectations owing to its quick in the next five years recovery from COVID-19 o ocete

five years

R R Socete trto to ce Japan: an outlier with conservative GDP growth and the next five years high cash usage

ecte et reeue rot reeue ecte et

ectrocet oto uer o ce trcto er ct

Source: Global Payments Model 2020. Note: Rounding effects may occur. 1Assuming a V-shaped recovery scenario post-COVID-19.

8 | Fast Forward into the Future •• Cash-Loyal Societies. India, , the country’s most widely used payments , and some other emerging service, with transaction values growing at markets in Asia should see the fastest a dizzying rate of 469% annually, compared payments revenue growth over the next with just 39% for mobile payments and 23% five years as their payments infrastructure for credit cards. The UPI’s interoperability matures and financial inclusion increases, has allowed both foreign tech giants and with a CAGR of more than 10% likely in local e-commerce players to enter the market some markets. and build intuitive payment apps targeted at merchants and consumers. The Asia-Pacific region Latin America From 2019 to 2024, payments revenues in remains a hotbed of Latin America could grow by as much as 4.9% annually, a rate that is second only to Asia- payments activity. Pacific—albeit from a much smaller revenue pool. Drivers include e-commerce innovation and efforts across the region to promote Overall, however, Asia-Pacific remains a greater financial inclusion. hotbed of payments activity. Large merchants have become major digital Digital wallets are becoming a sizable force payments players in their own right, more so as top players consolidate their pan–Latin than in other regions. Examples include American presence. Mercado Pago, for exam- Alibaba in China and PhonePe (owned by ple, hopes to expand its eight-country foot- Flipkart) and Amazon in India. Taking a page hold in the region with campaigns to enter from these giants, ambitious entrepreneurs new markets such as Chile. are applying a “land and expand” strategy, anchoring the business in a key niche and To date, these merchant-led digital wallets then building rapidly into adjacent services. have focused on a core set of applications Grab, for instance, began as a ride-hailing such as food delivery and e-commerce. But app in Malaysia and followed that up with an regional banking initiatives like the instant- expansion into mobile payments, cards, and payments system PIX developed by Brazil’s financing. The company is now competing central bank and a new electronic-payments to acquire a banking license in Singapore platform called Modo from a consortium of and Malaysia. South Korea’s Kakao followed Argentinian banks could open up new oppor- a similar path, beginning as an instant- tunities. Incumbents are also investing in in- messaging and gaming provider, then moving novation. For example, Itaú in Brazil is scal- into mobile wallets and payments before ing up its own wallet, Iti, and digital giants becoming the country’s first internet-only such as WhatsApp are becoming more active bank in 2017. in the region.

Some countries are also emerging as local In the merchant-acquiring space, the region is payments champions. Indonesia, for example, seeing a shift away from the single-brand is fast becoming a major innovation hub, model. This began in Brazil in 2010, spread to especially when it comes to addressing the Argentina and Chile, and is expected to ex- needs of Southeast Asia’s large unbanked tend to Peru and Colombia. The region is populations. The country has launched five now moving toward a multibrand competi- unicorns in the past several years: , Ovo, tive market paradigm, opening competition , Traveloka, and Bukalapak. for third-party players and integrated soft- ware vendors (ISVs), including Naranja X and In other countries, regulators have fueled in- Todo Pago in Argentina, Izipay and Vende- novation. The introduction of the United Pay- Más in Peru, and CompreAquí in Chile. A ments Interface (UPI), for example, revolu- more competitive market could challenge the tionized the payments infrastructure in India. dominance of some incumbents and lead to Since its launch in 2016, the UPI has become greater M&A activity.

Boston Consulting Group X Swift | 9 Middle East and Africa But this is changing. As with the Middle East, From 2019 to 2024, payments revenue growth government, bank, and nonbank payments across the region is likely to peak at a CAGR players are promoting the use of digital pay- of 2.2% under a quick-rebound recovery. ments through consumer education, reduced transaction fees, and product innovations. In the Middle East, crisis-related headwinds such as falling oil prices, a slowdown in tour- Roughly 60% of the African mobile payments ism, and a spike in expatriate migration have market is captured by telco-led solutions. slowed economic growth and led to more cau- Over the past decade, for example, ’s tious consumer spending. Although payments M-Pesa has come to dominate the mobile revenue growth will remain somewhat muted payments space in that country and has be- as a consequence, electronic transactions come the most prominent telco-led mobile have seen a surge in interest. A survey com- money solution across Africa. In Ghana, MTN missioned by the government in Dubai found has achieved strong market penetration with that 71% of consumers in the United Arab its innovative customer-to-customer offerings. Emirates increased their use of digital pay- Orange Money has done the same in the ments for in-store shopping since the start of . Telcos have also developed at- the pandemic and 49% shop more online, tractive business services, including a leading with 61% of them using cards and digital wal- cross-border remittance solution between lets. More SMEs are also accepting contactless Ivory Coast, , and . payments. Other countries in the region have seen e-commerce adoption accelerate as well. Although banks and non-telco-led payments solutions are not common in Africa currently, Governments, banks, and payments service the opportunity is huge. The estimated providers are helping to propel digital pay- potential market for banks in sub-Saharan ments adoption further—for example, by in- Africa is $500 billion, nearly all of it in the creasing access and lowering transaction fees. form of P2P payments. Transactions using To support economic growth, both Saudi Ara- mobile payments total roughly $300 billion bia and the UAE plan to launch real-time annually across the continent and are ex- payments infrastructures sometime in 2021 pected to more than quadruple, reaching or early 2022. In addition, countries like the $1.3 to $1.9 trillion in 2025. UAE are allowing more international pay- ments players to enter the market. These shifts will push revenue growth higher in the medium to long term. Note Africa has its own market characteristics. His- 1. Based on the adoption levels observed for major digital wallets (, , , torically, cultural norms and the fact that 65% Walmart Pay) in the US during the first few years after of the population is unbanked contributed to launch. a heavy reliance on cash across the continent.

10 | Fast Forward into the Future SECURING FUTURE GROWTH IN RETAIL PAYMENTS

etail payments revenue growth Merchants face their own challenges. Wooing Rwill slow down from 2019 to 2024 as customers back into physical stores, finding consumers, merchants, and the global the best ways to reach them online, and economy recover from the COVID-19 crisis. discerning what promotions are likely to (See Exhibit 4.) In a quick-rebound scenario, appeal most will require soul-searching and payments revenues would grow by 4.9% over experimentation. the next five years, well below the 8.0% CAGR achieved from 2014 to 2019. Much of the revenue shortfall will come from lower How Issuers Can Prepare for a deposit volumes and interest rates. Healthy Recovery Understanding what revenues are at risk, Credit cards will account for roughly 50% of which segments are most exposed, and how retail payments revenues, but debit cards and to enter the postcrisis period on a strong foot- credit transfers will see the highest rates of ing will require different types of analysis growth. and a willingness to experiment. These ac- tions can help issuers reduce their exposure Revenue growth will vary by region. (See Ex- and protect their revenue streams. hibit 5.) The global revenue pool will see a rebalancing, with Asia-Pacific likely to ac- Manage Customers as They Come Out count for around 40% of total retail payments of Forbearance revenues by 2024 under most scenarios. Latin In the early months of the COVID-19 crisis, America is also poised to see solid growth, short-term debt deferral and extensions with revenues across the region expected to held total delinquencies at bay. As deferral rise at a CAGR of 1.4% to 5.1% under the terms expire, however, issuers could face new three scenarios. By 2024, revenues in the re- exposures. They can significantly reduce gion could total $144 billion, putting Latin those risks by taking proactive measures. America’s retail payments pool within range of more established markets such as Europe. Adapt segmentation to account for COVID- 19-related risks. Instead of the broad risk In the near term, issuers and merchant categories (such as low, medium, and high) acquirers in most markets face a greater traditionally used, issuers should incorporate likelihood of delinquencies and second-order factors such as deferral-program as customers and businesses struggle with status, the regularity of payments during the financial fallout from the pandemic. forbearance, and customer responsiveness to

Boston Consulting Group X Swift | 11 Exhibit 4 | Three Growth Scenarios for Retail Payments

uc reou So recoer eeer ct

Revenue ($B) 1,785

1,568 1,356 1,409 1,229 1,127 1,066 727

2014 2019 2024 2029 2024 2029 2024 2029

Current accounts Others Credit cards CAGR 2019–2024 CAGR 2024–2029 Credit transfers (electronic, paper) Debit cards

Source: Global Payments Model 2020. Note: Please refer to the appendix for GDP growth relative to each scenario. “Others” include direct debit and checks. “Credit cards” includes charge cards, and “” includes prepaid cards. Rounding effects may occur.

company communications (especially digital potential segments at risk, and preparing outreach). These insights can help businesses sample outreach can improve speed to mar- better understand customer-level risk and can ket for new strategies. influence the outreach strategy for exiting customers. For issuers with large deferred Rehabilitate Modeling to Reenter populations, treating that group as its own Lending Safely specific risk segment with a particular stra- In May 2020, US originations tegy may be even more helpful. dropped by more than half from what they were in 2019, according to the credit bureau Take a personal approach to outreach and Equifax, with some issuers ceasing to give communications. Proactive and personalized out new cards altogether. Rather than cutting communications can lead to improved pay- off lending, however, issuers can build back ments capture from exiting customers. Lend- the lending book by reinforcing their early- ers should track their customers’ preferred warning systems. Updating analytics to channels and should tailor messaging to include credit bureau alerts on trade line their specific situations, with the tone and events like mass closures, internal data such content reflecting an individual’s affinity and as deviations in normal checking-account engagement. behavior, and new data assets on variables like employment levels can help issuers iden- Enable quick changes to the collections tify distressed customers. strategy. Given the volatile economic environ- ment, lenders need to adapt more rapidly. Issuers should then prepare a suite of credit They should use this time to create processes actions: for example, issuers can extend cred- that allow them to accelerate offer develop- it and deepen relationships through cross- ment. Streamlining approvals, anticipating product targeting and at the same time build

12 | Fast Forward into the Future Exhibit 5 | APAC and LatAm Will See the Fastest Retail Payments Revenue Growth

2024 REVENUE OUTLOOK

uc reou So recoer eeer ct 2014 2019 R R R R uroe

Nort erc

Asia-Pacific

t erc

e t rc

Source: Global Payments Model 2020. Note: Please refer to the appendix for GDP growth relative to each scenario. Rounding effects may occur. appropriate risk mitigations such as lower operations, marketing, and technology. ZBB credit lines and stronger authentication rules. provides a framework for business leaders Recalibrating lending models and policies to to separate pet projects from strategic the new postcrisis reality can help issuers initiatives and create dual accountabilities make informed decisions and maintain between the cost owner and demand appropriate oversight. generator. COVID-19 can be a catalyst for this type of examination, giving leaders Accelerate Cost Transformation an opportunity to reconsider their site Winning in the postcrisis period will come strategies, revisit contracts with marketing down to scale and dexterity. Gaining both will agencies, and reinforce the shift to paperless require issuers to become leaner. But banks processes. need to be careful to trim fat, not bone, lest they hamper their ability to ramp up service Prioritize Simplicity and Value when the economy recovers. To capture the expected growth in contactless and e-commerce payments, issuers need to take measures to make sure that their cards Winning in the postcrisis are the top-of-wallet choice. period will come down to Enable contactless integration. Issuers need to ensure that their cards can be added to a scale and dexterity. customer’s digital wallet in a no-hassle way by seamlessly integrating with merchant mobile payments journeys. Awareness- By taking a zero-based budgeting (ZBB) building efforts that educate customers about approach, banks can reallocate funds to the value of contactless payments are also enhance productivity while protecting important. For example, an issuer ran a initiatives that are key to unlocking long- campaign for its high-spending segments by term growth. Cross-functional collaboration encouraging them to provision their card in is essential because many costs flow across the wallet.

Boston Consulting Group X Swift | 13 Tailor value to the new reality. Some issuers •• Fraud risk due to a surge in e-commerce in the US have shifted from promoting business, where fraud is more prevalent. travel-related rewards to providing points for grocery shopping. Others have extended Merchant acquirers need to approach risk in eligibility windows, such as for travel-related a more incisive way and reposition their busi- cobranded cards, to maintain current rewards ness for the rebound. Here’s how they can tiers. But issuers should seize the opportunity meet that challenge. to go further and rethink their rewards programs. Creating unique and tailored Deaverage, Triage, and React experiences—for example, using points for a Acquirer portfolio composition can vary wide- celebrity-hosted book club or a virtual ly. Those with a heavy concentration of cus- cooking class with a high-end chef—can tomers in sectors hard hit by the crisis face a inject new value and gain fresh interest from significantly higher risk of chargebacks from key customers. businesses that cannot meet their customer refund obligations. Merchant acquirers should take several measures to understand Merchant acquirers need where and how they are most exposed. to approach risk in a more Construct a 360-degree customer view. Although acquirers typically manage credit incisive way. risk through portfolio diversification and by maintaining appropriate collateral, these efforts won’t be sufficient to protect them in Innovate the offer. Traditional incentives such the current crisis. Instead, acquirers need to as a low introductory interest rate have their gain a granular understanding of their place, but banks that capitalize on their rich customers’ inflows, outflows, liquidity, and data repositories can further differentiate collateral. their products. For example, banks looking to expand into installment can use custom- They can do this by mining more types of er data to get a fuller picture of a customer’s data including pooled insights from industry cash flow and trade lines in order to extend experts on the expected speed of recovery the most appropriate offer. Longer term, per industry vertical and by analyzing cus- issuers will need to build on these steps in an tomers on an individual and segment basis. effort to stave off the growing fintech threat. For example, regular reporting on the top 100 merchants on metrics such as free cash flow expectations, debt service capacity, and de- How Merchant Acquirers Can fault risk can allow management to keep an Derisk and Reboot eye on the most valuable customers. Like- For merchant acquirers globally, COVID-19 wise, acquirers should assess what percentage was a black swan event that resulted in an of their SME base is at risk (since this seg- abrupt drop in payment volumes and record- ment can account for 40% to 50% of total rev- high chargebacks across multiple industries. enues for some acquirers). For bank-owned Suddenly, acquirers found themselves facing acquirers, data from the business’s checking significant exposure. Vulnerabilities included: account is a rich source of inflows and out- flows and should be used accordingly. •• Business risk due to reduced payment volumes in some industry verticals. Monitor continually. Given how quickly economic parameters can change in a crisis, •• Credit and liquidity risk due to high acquirers need to establish regular reporting rates of canceled trips and orders in the and review processes. In some cases, merchant travel and tourism sector that resulted in acquirers may need to refresh initial short- above-average volumes of refunds, putting term crisis measures and increase collateral substantial pressure on the liquidity of and rolling reserves on an individual-merchant these businesses. basis. They also need to keep an eye on a

14 | Fast Forward into the Future potential wave of business defaults once ple, SMEs tend to have significant unmet short-term government aid programs expire. needs and are often less price-sensitive than larger merchants. Expected structural im- Professionalize the risk management operat- provements such as payments infrastructure ing model. Acquirers must ensure that their upgrades could open other opportunities in risk management function is staffed with the certain regions and industry sectors, such as right number of individuals, with the right payments acceptance for governments and skill sets and expertise to manage their public institutions. exposures. In addition, they should formalize their risk management operating model to Strengthen e-commerce positioning. Retail improve efficiency and risk reporting. Estab- e-commerce volumes are expected to rise by lishing industry-specific risk policies is also a CAGR of 16% until 2023—about three to important. These can include setting risk- four times faster than physical point-of-sale adjusted collateral requirements and pricing growth. Acquirers that make their product for specific companies and sectors as well as easy and convenient to use will capture the risk policies that prohibit the acquirer from lion’s share of that growth. For example, doing business with industries whose risk- offering “plug and play” omnichannel pay- return profile is above a specified threshold. ments solutions would give SMEs a simpler Such practices can help merchant acquirers and more appealing way to integrate pay- continue to serve a broad client base while ments functionalities into their web shops. securing their own financial health. Prepare for tighter risk management and Winning—and holding compliance regulations. Finally, acquirers should be alert to the prospect of increased onto—key customers regulatory scrutiny, both as a result of the pandemic and from the massive Wirecard requires having the right accounting fraud, an incident that took many sales organization in place. auditors and regulators by surprise. Authori- ties are likely to pay much closer attention to acquirer compliance with industry regula- Provide value-added services. With fees in tions and standards going forward. the payments acceptance and transaction business under pressure, acquirers can drive Price according to risk. Traditionally, most down costs and improve the customer experi- acquirers have not priced for the risk posed ence by expanding their use of high-margin by individual merchants, but they need to VAS offerings. The possibilities are vast, start doing so now. We recommend that including industry-agnostic solutions (such as acquirers create a framework to quantify dynamic currency conversion, real-time risk-return tradeoffs and use that analysis to merchant reporting, and fraud prevention), set pricing levels. industry-specific solutions (including partial- refund options in the apparel e-commerce Prepare for the Rebound sector), and white-label offerings (consumer Engaging proactively in several important ar- finance, for example). eas can help merchant acquirers reboot faster and capitalize on green shoots of growth. Realign sales capabilities. Winning—and holding onto—key customers requires having Rebalance the merchant portfolio. Merchant the right sales organization in place. For acquirers should examine their portfolio example, shifting from a branch-based sales from an industry, merchant size, and geo- approach to a telesales model backed by graphic lens to assess where they might be advanced analytics would allow highly skilled overindexed. Likewise, acquirers should sales personnel to focus their time on serving assess which segments, markets, and regions the more complex needs of large merchants could become new growth hotspots on the while enabling greater self-service for smaller basis of customer characteristics. For exam- customers. Acquirers should also consider

Boston Consulting Group X Swift | 15 sales partnerships, such as collaborating with an ongoing and manageable way. While a banks that lack their own merchant-acquiring reimagination of the purchasing journey business as well as with ISVs. The result could may take time to complete, several tactical help acquirers deliver a richer customer changes can be implemented relatively experience in a time- and cost-efficient way. quickly. For example, minimizing signa- ture requirements, introducing contactless checkouts, and offering multiple payments How Merchants Can Use options (such as BNPL) can help mer- Payments to Drive Efficiency and chants improve conversion rates—and Growth address customer concerns about conta- During the initial whiplash period of the cri- gion risk. Similarly, merchants operating sis, merchants did what they could to expand in Europe that devise a seamless way to their omnichannel capabilities, developing support the two-factor authentication new processes on the fly with admirable required by PSD2 can earn significant speed. Still, many encountered hiccups. With competitive differentiation. the first heady months behind them, now is a good time for merchants to reassess their pay- •• Strengthen offerings. ments priorities and make two key changes: Providing financial services is an un- tapped opportunity for many merchants. •• Integrate payments into the purchasing Players like Alibaba and Tencent have journey. Merchants that create a friction- shown the strategic potential of doing so, less experience for their customers can winning customers and value by offering a gain significant advantages. Given techno- variety of financial products over their logical advances, for example, it’s not platforms. Large merchants that operate farfetched to imagine a model in which in favorable market conditions can do the customers would receive a prompt over same. For instance, better use of data can their mobile phone letting them know allow merchants to go beyond standard, that a favored takeout restaurant was no-frills on big-ticket purchases running a special family meal promotion. and tailor products according to the The app could enable a one-click order individual’s intended use, past experience using a preauthorized card at the mer- with similar products, or the average chant’s website and set the delivery time product shelf-life. More broadly, assessing according to a customer’s location. customers by total lifetime value can help merchants determine the most relevant Experimentation is key. Creating room for type of payment or VAS to issue (such as sandbox initiatives can allow merchants a cobrand card or installment loan). to refresh their purchasing experience in

16 | Fast Forward into the Future SOLVING PAIN POINTS IN WHOLESALE PAYMENTS

he COVID-19 crisis is likely to acceler- revenues will rise by a CAGR of 2.7% in a Tate the digitization of wholesale trans- quick-rebound recovery. This compares with action banking—a set of services that 5.5% from 2014 to 2019. (See Exhibit 6.) includes domestic and cross-border pay- ments, cash management, trade finance, Some product categories, regions, and sec- and working-capital solutions. The mission- tors could see above-average growth. For critical nature of these activities for corpora- example, about one-third of wholesale tions and the expertise required to support payments revenues over the next five years them will drive revenue growth in most will be primary revenues from processing major markets. Our outlook suggests that, transactions. Secondary revenues, fees, and from 2019 to 2024, wholesale payments interest rate revenues from account and

Exhibit 6 | Three Growth Scenarios for Wholesale Payments

uick rebound Slow recovery Deeper impact

Revenue ($B) 2 21 9 09 0

589 559 2 506 455 441 12 10 415 397 9 9 303 9 2 29 2 00 9 29 1 1 01 222

2014 2019 2024 2029 2024 2029 2024 2029

Primary cross-border Primary domestic Secondary CAGR, 2019-2024 CAGR, 2024-2029

Source: Global Payments Model 2020. Note: Please refer to the appendix for GDP growth relative to each scenario. “Primary” relates to transaction-based revenues, and “secondary” relates to checking-account and credit card–related fee and interest revenues. Rounding effects may occur.

Boston Consulting Group X Swift | 17 credit cards will also be significant, as will revenues higher and leading to less vari- cash pooling from across legal entities, ance in the growth outlook between these currencies, and jurisdictions. scenarios.

The primary-revenue outlook varies consid- erably across regions. (See Exhibit 7.) A Growing Role for Transaction Asia-Pacific and Latin America, with their Banking Solutions many rapidly emerging countries, will Most wholesale payments providers will face account for the highest share of growth in revenue challenges in 2020 and 2021 as a re- wholesale payments. Europe will see modest sult of pandemic-related reductions in trade growth, as will the Middle East and Africa, volumes, business spending, and interest in- albeit off a smaller revenue pool. North come. At the same time, CFOs and corporate America, however, will face the toughest treasurers will be looking for wholesale pay- challenges over the next five years. The ments providers to give them up-to-the- economic consequences from the greater minute visibility into their account balances scale of the COVID-19 outbreak in the US and credit lines and help them gain more are likely to drive down payments revenues, accurate cash flow projections. with limited growth—or even a decline—un- der the three recovery scenarios from 2019 These needs will heighten the demand for to 2024. transaction banking solutions. In addition, elevated uncertainties around international In some regions, interest revenues would trade are likely to generate increased interest actually grow at a faster rate under a slow- in documentary trade finance instruments in recovery scenario than in a quick rebound. order to mitigate risks. The need for working This would occur because companies would capital and supply chain finance will also rise hold onto more cash owing to the ongoing as businesses pursue ways to shore up their economic uncertainty driving deposit-related cash position and stabilize their supply chains.

Exhibit 7 | APAC and LatAm Will Outpace Other Regions in Wholesale Revenues

2024 REVENUE OUTLOOK

uick rebound Slow recovery Deeper impact Revenue B 2014 2019 CAGR CAGR CAGR CAGR 2012019 2019202 2019202 2019202

Europe 64 63 0 68 1 65 0 59 1

135 139 138 130 North America 87 9 0 0 02

187 153 195 176 Asia-Pacific 116 0 1 2

Latin America 18 23 9 28 0 26 2 23 02

Middle East and Africa 18 23 1 24 1 24 1 23 0

Source: Global Payments Model 2020. Note: Please refer to the appendix for GDP growth relative to each scenario. Rounding effects may occur.

18 | Fast Forward into the Future These shifts could open important opportuni- tions for the SME segment, and the Falcon ties for wholesale banks, allowing them to Group has created new inventory manage- play a deeper role—not just as a purveyor of ment and finance solutions. products but as a thought partner, trusted ad- visor, and provider of transaction banking In other areas, OnDeck, Kabbage, and Fund- solutions. But incumbent banks will have to ing have introduced advanced-lending work harder to retain and expand high-value and working-capital finance solutions for cor- B2B relationships in a field that has become porate clients. Fintechs are also attacking oth- far more crowded. er wholesale banking strongholds such as cross-border payments and foreign-exchange risk management. (See the sidebar, “It’s Time Fierce Competition Across the for Banks to Revamp Their Cross-Border Value Chain Business.”) In addition, several big-tech plat- Not only has competition among banks forms such as PayPal, Amazon, and Alibaba intensified—for example, with Goldman have begun offering working-capital finance Sachs entering the transaction banking busi- and lending products targeted at the SME ness—but the number of nonbanks compet- segment. ing in the wholesale market continues to grow. This diverse group includes enterprise But banks still command many advantages, resource planning (ERP) and treasury man- including their longstanding customer rela- agement system (TMS) providers as well as tionships, balance sheet strength, and ability card networks, like Visa or Mastercard, that to offer a full range of services. Moreover, have extended their offerings in B2B pay- BCG’s corporate treasury survey continues to ments and open banking. show that CFOs and treasurers view banks as their most trusted partners. To continue to earn that trust, however, wholesale banks The number of nonbanks need to update their strategic playbook, en- hance the customer experience, and adapt competing in the wholesale more quickly to changing events. market continues to grow. Strategies to Drive Differentiation To hold onto and expand valuable relation- A key factor in the expanding playing field is ships during the crisis and in the postpan- integration. More companies from inside and demic environment, banks and new entrants outside traditional banking spheres are em- alike need to go beyond their current level of bedding payments capabilities into their of- service. SMEs, for example, generally lack the ferings and ecosystems. Coupa’s acquisition sophisticated treasury capabilities of large of Bellin in 2020, for example, allowed Cou- corporations. These businesses are looking pa to add cloud-based treasury management for wholesale payments providers to lighten and payments capabilities to its enterprise- the administrative load, enable straight- spending management platform. through processing, and offer transparency on their overall cash flow picture. Some of these newer entrants have devel- oped sophisticated capabilities that target Likewise, large corporations want wholesale underserved segments and provide corporate payments providers to deliver a fully auto- customers with more favorable price struc- mated, secure transaction experience that tures. In the trade and supply chain finance plugs neatly into their corporate ERP and space, for instance, Greensill Capital and accounting systems and want them to offer Demica each created a digital originate-to- complete transactions digitally in real time. distribute business model that gives medium At the same time, CFOs and corporate trea- to large corporates expanded access to supply surers want to engage with experienced chain finance offerings. BlueVine and C2FO human relationship managers when needs have developed invoicing and factoring solu- arise, whether on technical issues, payments

Boston Consulting Group X Swift | 19 IT’S TIME FOR BANKS TO REVAMP THEIR CROSS-BORDER BUSINESS

Card networks, fintechs, and infrastructure To support these changes, banks need to providers such as Ripple and Earthport lower their cost base. Increasing operation- have entered the cross-border payments al efficiency, especially in core transaction space in recent years. These challengers processes, and modernizing IT infrastruc- often outperform banks in speed, pricing, ture are vital. Banks may also wish to API integration, and the overall customer explore fintech partnerships in order to experience. To stay competitive, banks will serve more exotic trade and payments need to change their approach. corridors effectively. In addition, as part of their correspondent banking realignment, Innovation is one requirement. Many banks wholesale banks should consider rationaliz- have introduced SWIFT gpi to improve the ing the number of correspondent banks in speed and tracking of international high-risk jurisdictions in order to minimize payments. But with challengers providing the compliance risks and costs. They convenient solutions like “request to pay” should also consider applying global that facilitate remittance and reconcilia- standards for know your customer (KYC), tion, banks need to continue refreshing sanctions screening, and transaction their own offerings. monitoring to identify money-laundering and terrorism-financing attempts. Structural changes are also needed. Banks should align their correspondent banking These steps can help wholesale banks network along core trade and payments defend their cross-border business and corridors to ensure that they can provide deepen high-value customer relationships. customers with support in the regions where they trade. Offering competitive pricing is another must.

investigations, or questions that require ex- pooling solutions to improve liquidity pert guidance. In addition, many customers optimization. Working-capital and supply are looking for enhanced digital reporting chain finance offerings will also become and tracking tools as well as advisory capabil- increasingly important to address corpo- ities that can help optimize their currency rate liquidity needs. These are priorities hedging or working-capital finance strategy. for large and small companies in nearly every market. By focusing on a few near-term actions, banks and wholesale payments providers have an •• Collaborate for speed and scale. Given opportunity to become part of the overall the time-sensitive cash and liquidity needs crisis solution, establishing relationships that of many customers, payments providers can pay long-term dividends: have a critical window in which to demon- strate value to them. Forging strategic •• Become a go-to partner in crisis man- partnerships and B2B ecosystems compris- agement. Just as banks and payments ing banks, ERP and TMS providers, service providers played a vital role in fintechs, and other players (such as big- helping to dispense government stimulus tech companies or procure-to-pay plat- payments, they can also reduce pandemic- forms) could allow wholesale payments related stressors for customers in other providers to do more, faster, such as ways. Account aggregation (within the accelerate the development of digital primary banking relationship and across platforms in order to facilitate supply multiple banking relationships) should top chain and trade finance, access white-label the list along with cash management and products, and gain critical capabilities.

20 | Fast Forward into the Future •• Provide solutions rather than prod- processes. Such automation would be ucts. Instead of thinking in terms of particularly helpful for businesses whose discrete products, banks need to look procurement and invoicing (and payments across the whole customer relationship processes in some cases) remain manual. and offer solutions that address key pain Over time, banks and new entrants can points and provide an enhanced experi- build on these advances. They can auto- ence, such as facilitating domestic and mate customer journeys from end to end cross-border payments and cash manage- using intelligent processing and machine- ment, in addition to maintaining the learning tools. They can also embrace primary banking relationship. Success will autonomous operations to minimize require banks to make expertise more manual intervention and reduce costs as accessible to corporate customers and well as error rates. offer tailored solutions that meet specific customer challenges at competitive prices. Instead of thinking in terms •• Improve risk management capabilities. of discrete products, banks Wholesale payments providers must ensure that their organizations are well need to offer solutions. placed to withstand the seesaw of eco- nomic volatility during the crisis and the period that follows. Default risk is likely to •• Apply advanced analytics to improve rise, particularly in the SME segment. To processes and customer centricity. reduce their exposure, wholesale pay- Wholesale providers have access to a rich ments providers must refine risk manage- set of data from processing transactions, ment processes and controls, especially including supplementary-messaging since current credit-rating systems may information, consolidation of daily-cash not adequately capture supply chain and positions, and contextual information other risk drivers related to the COVID-19 from trade and supply chain finance. They outbreak. can use this data to track cross-border pay- ments, reconcile failed payments, auto- In parallel with these efforts, wholesale pay- mate credit decisions, and gain a more ments providers should consider additional detailed understanding of customer needs. improvements that are independent of the Industry-specific benchmarking on pandemic, especially given that some of these spending patterns, sophisticated cash flow larger-scale changes could take a year or projections, and advanced working-capital more to complete. These capabilities will be analytics tools can then help banks especially crucial to banks over the medium innovate more effectively and provide term and longer: customer-centric transaction banking solutions that are tailored to the needs of •• Digitize customer journeys from end to specific segments. end. Banks can improve their connectivity with customers by providing corporate •• Master technological change. Trans- portals that enable customer self-service action banking is a technology-intensive and multichannel access and developing business, and the landscape is changing APIs that can be embedded directly into quickly. Although leaders may be tempted corporate systems. These moves would to defer experimentation given other speed customer onboarding and improve crisis priorities, banks and all other digital-product information sharing and players in the global transaction banking use. ERP systems providers such as SAP or ecosystem need to pay attention to some Oracle and procure-to-pay platforms such important technology shifts and deter- as Coupa may be able to go further and mine which to pursue and how best to help customers fully automate their engage (such as whether to make, buy, or accounts-receivable and accounts-payable partner in order to develop the needed

Boston Consulting Group X Swift | 21 use cases and applications). These key On the back end, strategic partnerships tech changes include: could help to allocate resources more effectively. For example, some regional ǟǟ The expansion of real-time payments European transaction banks (including infrastructures Commerzbank and UniCredit) have recently outsourced their payments ǟǟ The growth of blockchain-enabled infrastructure to specialized processing cross-border payments and trade providers (Worldline, for example) in finance order to channel investment funds into higher-value activities, such as improving ǟǟ The introduction of ISO 20022 to the customer interface. Also, in areas that upgrade messaging involve significant investment, including blockchain-enabled cross-border pay- ǟǟ The increasing relevance of cryptocur- ments and trade finance ecosystems (such rencies as We.Trade, Voltron, and Marco Polo), banking consortiums can aid in spreading ǟǟ The emergence of machine-to-machine the development costs. payments (such as Internet of Things networks)

22 | Fast Forward into the Future WINNING THE FUTURE

he payments landscape is a vibrant and behaviors and offer issuing-as-a- Tspace populated by diverse institutions. service to merchants, subscale banks, and From big tech to fintechs, issuers to proces- neobanks. sors, full-service providers to niche players, all competitors in this fast-evolving ecosystem •• Wholesale Banks. Solve customers’ most face their own challenges. (See Exhibit 8.) Yet acute near-term challenges, prioritizing five overarching imperatives unite them. The cash flow projections, cash management, winners in the postcrisis world will be the working capital, and supply chain finance companies that lead the field in addressing solutions. these priorities now. •• Schemes. Evolve the product mix to go beyond card rails in order to diversify Rebalance the Product and revenue sources, increase the footprint Customer Portfolio into B2B payments, and offer data- Given the widespread dislocations created by based VAS. the COVID-19 crisis, payments leaders should revisit their product and customer portfolio mix and identify where they might be over- or Pursue Strategic M&A, underexposed. The most effective rebalancing Partnerships, and Ecosystem techniques will involve a combination of plays Opportunities over different time horizons. Here is a repre- Instead of go-it-alone strategies, winners will sentative set of examples: seek strategic partnerships and ecosystem plays to spread risk, boost scale, and unlock •• Merchant Acquirers. Shift the business growth. With payments becoming more inte- mix from offline to online (with omni- grated, propositions will course across the channel and e-commerce solutions, for value chain and cover multiple rails and example), the customer mix to increase channels. Capturing synergies and building SME penetration, and the service mix to scale will take strong execution across every add high-margin VAS offerings (such as deal stage, from target assessment to post- white-label consumer finance, BNPL merger integration. Leaders need to screen solutions). the market on an ongoing basis and free needed investment resources for M&A or •• Issuers. Realign cobrand partner strate- partnerships by reinforcing their productivity gies to reflect changing customer needs and profitability.

Boston Consulting Group X Swift | 23 Exhibit 8 | Key Challenges for the Payments Ecosystem

Merchants Changing consumer buying and payments behaviors related to COVID-19 Growing relevance of the omnichannel and cross-border customer experience Adapting the payments experience to new post-COVID-19 norms (e.g., contactless payments) Integration of frictionless payments into the value chain to maximize conversion Growing number of payments methods (e.g., ) and rails

Merchant acuirers Greater risk exposure from COVID-19 Fintechs (business, credit and liquidity, and fraud) Pressure on valuations during funding rounds due Pressure on core acquiring fees to COVID-19 (commoditization) Scaling of business and operating models to Intensifying demands from merchants for compete with traditional players omnichannel solutions Identifying and forging the right partnerships Greater relevance of scale across geographies More competition for historically underserved Wholesale banks SME segment Customer demands for fully digital, real-time, Heightened attention from regulators personalized customer journeys (Wirecard accounting fraud) High cost to maintain and upgrade payments Increasing disintermediation of SME acquiring infrastructure by partners (e.g., ISV) Strong regulatory and compliance requirements Rebalancing the mix of sales channels (e.g., Partnership opportunities and competitive fewer branch based, more digital) challenges from fintechs and big techs Banking-as-a-service providers lowering barriers of Payments processors entry for nontraditional players Changing customer needs (e.g., neobanks vs. Data analytics increasingly becoming traditional issuers) “right to play” Rising prevalence of nontraditional payments methods Issuers Increasing relevance of scale Rising delinquencies and limited visibility on the true riskiness of portfolio Platform consolidation after a sequence of M&A Rising competitive pressure from noncard rails (e.g., real-time processing [RTP], QR codes, wallets) Adjusting the value proposition to shifts in consumer spending (e.g., reduced Schemes time and expense) Issuers and acquirers increasingly demanding VAS As-a-service offerings that enable new players to enter the market New competition from noncard rails (e.g., RTP) Rebalancing card portfolios to sectors with a positive economic outlook Competitive pressure from domestic schemes Heightened regulatory scrutiny on issuing fees in some regions Growing scrutiny on scheme fees

Sources: Expert interviews; BCG analysis.

Become a Data-Driven intelligence and machine learning), as Organization well as APIs and data exchange, to enable While many incumbents have begun to rich use of transaction and payments data. employ data analytics to strengthen their core services and processes, they need to •• Fast-track open-banking ecosystem plays. move beyond this base quickly. To avoid being left behind in an increasingly digitized •• Focus on an initial set of data analytics payments landscape, institutions should take pilots, then scale over time. several essential actions leveraging internal and external data: Reinforce Risk Management •• Identify high-value product and service With nearly every business and sector thrust use cases, considering time and effort for into upheaval by the pandemic, payments implementation and giving particular players must refresh their risk management emphasis to those involving data processes. Traditional methods for surfacing monetization. and evaluating credit and related exposures often fail to take critical interdependencies •• Build advanced data analytics and data into account. Understanding which cus- architecture capabilities (such as artificial tomers and segments to support and where

24 | Fast Forward into the Future to pull back will require leaders to update Front-end improvements are not enough. To their risk management operating models. ensure continuity of service and optimal cost Payments players that strengthen their risk- performance, leaders must take an end-to- rating and modeling techniques, collections end view. practices, and risk governance policies can better protect their business and their customers. rises often force companies to revisit Chow they do business. COVID-19 is no dif- ferent. Payments leaders have greater permis- Accelerate Digital Transformation sion (and urgency) to make bold moves that While most payments players had digital can secure their business’s long-term prosper- transformation on their agendas prior to the ity. But what’s unusual about COVID-19 is its pandemic, the crisis has accelerated the time- speed. By accelerating changes that tradition- line significantly because the brick-and-mor- ally take a decade to materialize in the pay- tar channels that players relied on for new ments industry, the pandemic and its after- business have become ineffective. No-regret math have created a window for the most moves such as promoting digital self-service, talented companies to leapfrog the competi- greater automation, and seamless integration tion, gain scale, and deliver customer impact. of payments into customer and corporate That ticking clock means that payments play- journeys can help incumbents address severe ers that act decisively now will have a clear pain points quickly while generating savings advantage over the rest of the field. to fund their longer transformation journeys.

Boston Consulting Group X Swift | 25 APPENDIX ABOUT OUR METHODOLOGY

The ultimate impact of COVID-19 on pay- Quick Rebound. A moderate downturn that ments will depend on the scale and duration restores the global economy to its precrisis of the pandemic and on the various govern- growth path. This will occur only if COVID-19 ment and policy interventions intended to has been brought under control in most mitigate the economic crisis. Although pre- major economies and unemployment as well dicting the precise economic impact of the as consumer confidence return to precrisis pandemic is difficult, we believe that three levels. scenarios for economic output are plausible, each with different implications for payments Slow Recovery. A deeper downturn with a players. (See the exhibit.) recovery approaching a U-shape. A higher

Projections Differ by the Duration and Depth of Impact

uick rebound Slow recovery Deeper impact

GDP level GDP level GDP level Levels A return to the Growth resumes Growth resumes preshock level… at a lower level… at a lower level… 2019 GDP 2019 GDP 2019 GDP level level level …and growth rate …but at a preshock …and at a lower after a brief rebound growth rate growth rate

GDP growth GDP growth GDP growth Growth Pre- Pre- Pre- COVID-19 COVID-19 COVID-19 growth growth growth

Source: Global Payments Model 2020.

26 | Fast Forward into the Future level of unemployment persists and global that leaves economic growth at a lower rate trade is slow to gain momentum. Conse- over the long run as geopolitical tensions quently, consumer confidence is slower to inhibit trade recovery and consumer confi- recover as well. dence stays low. This scenario becomes possible if COVID-19 cannot be brought Deeper Impact. A widespread shock lasting under control and several waves of lock- more than a year with an L-shaped recovery downs occur.

Boston Consulting Group X Swift | 27 FOR FURTHER READING

Boston Consulting Group has Unlocking the Small Business Global Asset Management 2020: published other reports and articles Opportunity in Financial Services Protect, Adapt, and Innovate that may be of interest to senior A white paper by Boston Consulting A report by Boston Consulting Group, financial executives. Recent Group, September 2020 May 2020 examples include those listed here. Five Strategies for Mobile- A New Outlook on Pricing and Payment Banking in Africa Revenue Management for Banks A Focus by Boston Consulting Group, An article by Boston Consulting Group, August 2020 May 2020

How Supply Chain Finance Unlock Value in Banking with Can Help Companies Beat the E2E Process Transformation COVID-19 Downturn An article by Boston Consulting Group, A white paper by Boston Consulting May 2020 Group, July 2020 Global Risk 2020: It’s Time for Unsecured Debt Deferral: The Banks to Self-Disrupt Next Set of Challenges A report by Boston Consulting Group, A white paper by Boston Consulting April 2020 Group, June 2020

ICC Trade Register Report Reinventing Corporate and Reveals Potential Impact of Investment Banks COVID-19 on Trade A Focus by Boston Consulting Group, March 2020 A report written by Boston Consulting Group and published by the International Chamber of Commerce, Alfa-Bank’s Michael Tuch on June 2020 Transforming Customer Journeys An interview by Boston Consulting Global Wealth 2020: The Future Group, February 2020 of Wealth Management—A CEO Agenda For Banks, a Long Way to A report by Boston Consulting Group, Excellence in Digital Sales June 2020 An article by Boston Consulting Group, February 2020 Get Ready for the Future of Money An article by Boston Consulting Group, May 2020

28 | Fast Forward into the Future NOTE TO THE READER

About the Authors Acknowledgments For Further Contact Yann Sénant is a managing direc- The authors thank their BCG col- Yann Sénant tor and partner in the Paris office of leagues for their valuable contribu- Managing Director and Partner Boston Consulting Group and the tions to the development of this BCG Paris global leader of the payments and report—in particular, Matthew +33 1 40 17 10 10 transaction banking segment. Barton, Zakaria Bouazzaoui, [email protected] Markus Ampenberger is a partner Frédéric Boutet, Keith Bussey, and associate director in the firm’s Tijsbert Creemers, Jean Dobbeni, Markus Ampenberger Munich office, focusing on pay- Prateek Gupta, Ravi Hanspal, Toshi Partner and Associate Director ments and transaction banking. Hirano, Mohammad Khan, Brian BCG Munich Ankit Mathur is a knowledge ex- O’Malley, Sukand Ramachandran, +49 89 231 740 pert in BCG’s New York office work- Benjamin Schedl, Sebastian Serges, [email protected] ing in the payments and trans- Ricardo Tiezzi, Kanchanat U-Chu- action banking segment of the kanokkun, and Enrique Velasco- Ankit Mathur Financial Institutions practice. Castillo. Knowledge Expert Inderpreet Batra is a managing BCG New York director and partner in the firm’s In addition, the authors are ex- +1 212 446 2800 New York office. Jean Clavel is a tremely grateful to core members [email protected] managing director and partner in of the BCG Global Payments Model BCG’s Paris office. Stefan Dab is a team: Stephanie Resch, Akshay Inderpreet Batra managing director and senior part- Agarwal, Nikhil Dangayach, Anuj Managing Director and Partner ner in the firm’s Brussels office. Goel, Jeewan Goula, and Johannes BCG New York Alexander Drummond is a man- Martens. Also, Petra Demski, Jens +1 212 446 2800 aging director and partner in BCG’s Mündler, and Amit Sukhija provided [email protected] New York office. Sushil Malhotra is helpful support, as did numerous a managing director and partner in local analysts from the Financial Jean Clavel the firm’s New York office and the Institutions Knowledge Team and Managing Director and Partner leader of the payments and trans- Data & Research Services. BCG Paris action banking segment of the +33 1 40 17 10 10 Financial Institutions practice in The authors are also deeply thank- [email protected] North America. Stanislas Nowicki ful to Luc Meurant, Pedro Mullor, is a managing director and partner Harry Newman, Wim Raymaekers, Stefan Dab in BCG’s Paris office. Prateek and Anne-Sophie Walravens of Managing Director and Senior Partner Roongta is a managing director SWIFT. BCG Brussels and partner in the firm’s Mumbai +32 2 289 02 02 office and leads the payments and Finally, the authors are grateful to [email protected] transaction banking segment in Marie Glenn for writing assistance Asia-Pacific. Michael Strauß is a and Philip Crawford for marketing Alexander Drummond managing director and partner in support. They thank Katherine Managing Director and Partner BCG’s Cologne office and leads the Andrews, Siobhan Donovan, Kim BCG New York payments and transaction banking Friedman, Abby Garland, and +1 212 446 2800 segment in Central Europe and the Shannon Nardi for their editorial, [email protected] Middle East. Alejandro Tfeli is a design, and production support. managing director and partner Sushil Malhotra in the firm’s Buenos Aires office. Managing Director and Partner Álvaro Vaca is a managing director BCG New York and partner in BCG’s Madrid office +1 212 446 2800 and leads the payments and trans- [email protected] action banking segment in Western Europe, Africa, and South America.

Boston Consulting Group X Swift | 29 Stanislas Nowicki Michael Strauß Álvaro Vaca Managing Director and Partner Managing Director and Partner Managing Director and Partner BCG Paris BCG Cologne BCG Madrid +33 1 40 17 10 10 +49 221 55 00 50 +541143175900 [email protected] [email protected] [email protected]

Prateek Roongta Alejandro Tfeli Managing Director and Partner Managing Director and Partner BCG Mumbai BCG Buenos Aires +91 22 6749 7000 +54 11 4317 5900 [email protected] [email protected]

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