"Globally, payments revenues reached $1.8 trillion at the end of 2023. We expect these revenues to rise at a compound annual rate of 5% through 2028 to create a revenue pool worth $2.3 trillion. This rate of growth is significantly lower than the nearly 9% growth that the industry experienced over the period from 2018 to 2023." (The revenue projection from BCG’s Global Payments Model includes transaction-related fees (such as processing fees and interchange fees), nontransaction-related fees (such as monthly or annual fees for current accounts or debit/credit cards), and net interest income from deposits on thecurrent account.)
This data is slightly different from McKinsey which reports $2.4 trillion as global payments revenue in 2023. (Difference - Perhaps cross border? Also, number of countries?)
"1) Structurally, the shift from cash to digital payments is reaching its peak. In large markets such as the US, the UK, and the Nordics, less than 10% of consumer transactions by value are made in cash. In Germany, traditionally a cashloyal country, the share of cash has decreased by more than 50% in the 2010s, to approximately 25% in 2023.
2) Macroeconomically, the initial boost that the industry received from rising interest rates and inflation is reversing.
3) Depressed credit card revenues will continue as lenders maintain tight underwriting standards in response to rising charge-offs and difficult funding conditions. Interchange fees will remain flat or decline in response to continued global regulatory actions.4) Operationally, payments companies also face intensifying cost pressures. Regulatory costs are higher, and many infrastructure initiatives—such as faster payments, central bank digital currencies, and open banking frameworks— require significant investment"
Further, the BCG report talks about Regional Trends:
North America will see revenues impacted by lower inflation rates and by the ceiling in noncash conversions.
Western Europe will feel the pinch from a combination of account-toaccount (A2A) payments growth, declining interest rates, heightened fee pressure, and lower cash-to-card displacement.
Eastern Europe, however, still has potential for further card penetration, and double-digit revenue growth.
In Latin America, digital payments adoption and resultant debit and credit card use will underpin revenue growth in the near term, although instant payment solutions (such as PIX and SPI in Brazil) may supersede card payments longer term.
In the Middle East and Africa, card adoption and government investment in payment acceptance underlie most of the region’s expected revenue growth.
And in Asia-Pacific, instant payments and non-card solutions such as Unified Payments Interface (UPI) continue to gain traction, although there is still considerable room for cards growth across the region, given the growth of the middle class.
A look at different segments from the report:
Networks
Networks have been the strongest and most stable performers in the payments industry—a trend that we expect will continue. Beyond their advantages of scale, many network players have successfully diversified, and value-added services now account for roughly 40% of revenues for Visa and Mastercard. Acquisitions have played a key role in this diversification. Visa acquired Tink to strengthen its open banking capabilities and Pismo to advance into banking, while Mastercard acquired Finicity for open banking and Nets and VocaLink to penetrate the A2A and faster-payments infrastructure markets. Looking ahead, geographic expansion can continue to drive value, albeit at lower growth rates and margins. This situation reflects the peaking of cash-to-card conversion, which had previously been responsible for more than 30% of network transaction value growth in organization for Economic Cooperation and Development (OECD) countries. BCG’s most recent fintech report warns networks to brace for heightened competition in consumer-to-business flows as digital payments infrastructure solutions such as UPI, Pix, and PromptPay gain traction.
Acquirers
Acquirers were once shareholder favorites, posting annual TSR gains of 29% from 2014 to 2021 on the strength of geographic expansion, value-chain growth, and increased business e-commerce adoption. Their direct access to merchants provided a ready market. But since 2021, acquirers’ TSR has declined at an average rate of 16% per year as software companies that enjoy a stronger primary relationship with merchants have disintermediated them. Growth in the segment is expected to stabilize at a compound annual growth rate (CAGR) of around 6% through 2028. Even so, vertical solutions providers such as integrated software vendors (ISVs) and payment facilitators (payfacs) will lead in volume growth and maintain pricing leverage. Incumbent acquirers must choose now between maximizing volume as a flexible backend or securing pricing premiums through industry-specific vertical differentiation.
Issuers
Issuers have trailed the broader payments industry over the past decade, with annual TSR growth of just 5% compared to the overall payments market’s 12%. This underperformance is largely due to macroeconomic sensitivities and regulatory pressures. After solid revenue growth of 8% to 9% from 2018 to 2023, growth is projected to slow to around 6% through 2028, driven by higher interest rates, regulatory fee caps, and the rising costs of funding loyalty programs. To enhance valuation growth, many leaders are turning to connected commerce solutions that link merchants with consumers and diversify revenue streams through affiliated marketing or referral fees. Larger issuers, especially in the US, should continue leveraging their merchant and cardholder bases to create value and diversify revenue through more targeted customer offers and experiences. Smaller issuers can compete through emerging third-party solutions.
Wholesale Payments
Although the wholesale payments segment plays a crucial role for banks—driving commercial relationships and fee income—investors often undervalue this business. Accounting for 33% of total payments industry revenues, the segment has grown at around 8% CAGR since 2018, with expected growth of around 4% annually through 2028. But TSR is difficult to isolate because wholesale payments and transaction banking is usually embedded as a business unit within larger banking organizations. Large banks retain an edge with their multinational payments networks and complex treasury management products, but nonbanks have made significant inroads by digitizing the user experience, integrating application programming interfaces, and offering white-glove service to small and medium-size corporates. For example, Wise, Convera, and Corpay have created cross-border payments solutions that target the small to medium-size segment. Large enterprise resource planning providers have developed treasury management solutions as add-on modules. And Kyriba or Serrala have introduced solutions that enable multibank aggregation, payment execution, and liquidity and risk management. Software providers such as Bill.com, Coupa, and Blackline pose a competitive challenge as well. Their offerings automate and digitize accounts payable and accounts receivable processes and include integrated payments solutions for CFOs and corporate treasurers. Whether these offerings can challenge banks’ value proposition in a sustainable way, however, remains uncertain, especially as banks strive to close the digitization gap.
A look at key trends:
DPI
The Global Proliferation of DPI. Digital public infrastructure has accelerated the adoption of real-time payments in countries including India (whose DPI is Unified Payments Interfaces, or UPI) and Brazil (Pix). (See Spotlight #2.) This three-tiered infrastructure—a national digital identity system, a payments layer, and a data exchange—creates a fertile context for fintech development. Many countries, particularly emergingmarkets, are looking to emulate the success of UPI and Pix. However, while the success of the India and Brazil DPIs is unequivocal, it is by no means certain that other countries—including developed markets—will be able to replicate it. Much depends upon the current market context and the maturity of the various layers.
The embedding of financial workflows into nonfinancial journeys continues to expand and will only increase as more and more customer activities become digitized across both B2C and B2B.
For now, the primary use cases continue to be payments, lending, and insurance, in both the B2B and B2C contexts. The API-zation and integration of financial ecosystems has boosted growth. In payments, two of the leading firms in embedded finance, Stripe and Adyen, crossed the trillion-dollar mark in overall payments volume in 2023. These players, and others, continue to expand use cases, including pay by bank, acceptance of cryptocurrency payments, and use of digital assets. (See Spotlight #3.) While not as mature as other segments of the fintech market, embedded lending, including buy now pay later (BNPL) players, saw robust increases in transactional volume, with Klarna accounting for $90 billion and Affirm for $20 billion. Correspondingly, embedded insurance has a strong growth outlook; adoption in Europe is already strong, with roughly $8 billion in premiums in 2023.
Incumbent banks are custodians of some of the most insightful data about their customers. This has long been understood as an advantage, but it is one that has not yet been fully realized. However, if there is a killer app for converting this proprietary data into a revenue generator, it is connected commerce. With the increasing value of first-party data, given cookie depreciation and app-tracking transparency, connected commerce is emerging as a triple play for banks—it creates a new revenue stream, increases customer loyalty, and enables banks to offer a marketing channel to their SMB and enterprise customers.Connected commerce thrives in an environment in which customers have a high degree of digital engagement— either on websites or on mobile apps. Using granular customer data, banks can strengthen customer loyalty by surfacing ads hypertailored to the individual. Merchants then pay the bank based on either attributable sales or traffic—creating a win-win-win scenario where the customer is rewarded, merchants generate more sales, and banks earn revenue. As core payments revenue streams, like interchange and late fees, continue to come under pressure, and as deposits risk becoming commoditized in a higheryield environment, connected commerce hints at a future model for banks. Major financial institutions with sufficient scale are investing in the approach: see JPMorgan’s Chase Media Solutions, Capital One Shopping, and Citi Shop. Select fintechs such as Klarna have also invested in connected commerce, and both Revolut and PayPal recently announced the launch of advertising businesses.
Open Banking
We believe that open banking will continue to be a relevant but not game-changing factor in consumer and SMB financial services and fintech. Revenue pools in the connectivity layer, retrieving and managing data that banks are mandated to provide, will remain modest, with value accruing to the ultimate use-case providers leveraging open banking infrastructure. These use case providers will, however, often use proprietary APIs, with higher data granularity and breadth, supplemented by access provided by open banking, and will not rely on screen-scraping or alternate methods used to gather the same data today.
Digital Currencies
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Given the changes and development in sector, it is not surprising that amongst the different industries, banks spend the most on IT!
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Back to Visa and Mastercard:
To truly understand the power of Visa and Mastercard's business models, it's important to note their revenue sources and how the value chain works regarding payment processing. They do not issue cards themselves or set interest rates; instead, they provide networks for electronic payments involving merchants, banks, and consumers. Their revenues stem from transaction processing fees and services offered to financial institutions.
The best way to describe payment processing is as a digital counterpart to railroads. Just as goods cannot be transported by train without railroads, giving railroad owners significant control over transportation, so too do payment processors control digital transactions. If a new entity were to start building railroads, the costs would be prohibitive. Initial investments would yield little return, as a single railroad in, for example, Texas, would offer limited value if not connected to a broader network across America. The same applies to payment processing.
Network effects describe a phenomenon where a product or service becomes more valuable as its user base grows. This concept is essential in understanding the dynamics of many businesses and technologies, especially in the digital age, and is particularly relevant to the Visa-Mastercard duopoly. Essentially, as Visa or Mastercard adds another bank to its payment network, its value to merchants increases, and the same is true in reverse. This creates a virtuous cycle, making Visa and Mastercard increasingly difficult to compete with as they expand.
Moreover, the power of payment processing from a competitive perspective is significantly enhanced by its distribution. Beyond relying on size (network) and first-mover advantages, Visa and Mastercard have gained immense benefits by having major banks serve as distributors of their cards – a relationship that persists to this day. This means that the banks, which initially controlled Visa and Mastercard, ensured that these networks became the exclusive options available to merchants.
Additionally, payment processing is remarkably scalable: more transactions over their networks result in increased revenue without a proportional increase in costs. This scalability, combined with network effects and distribution advantages, arguably constitutes the three most crucial aspects of creating this duopoly, which is among the largest globally.
Apart from Consumers, Merchants, Issuing Bank, Acquiring Banks and Card networks that have been traditional participants of the Payments Value chain, following about the new participants: Digital Wallets, Gateways, Merchant Acquirers and Payment Processors:
Acquirer Processors: Acquirer processors provide the technical link between merchants, card networks, and acquirers. They handle payment processing from merchants through acquirers to card networks or alternative payment methods (APMs) like PayPal, ensuring transactions are authorized and settled. While distinct from acquirers, acquirer processors often work closely with them, handling technical aspects of transactions, including fraud and chargeback minimization, and creating payment databases.
Payment Service Providers (PSPs): PSPs, such as PayPal, connect merchants to the financial system, enabling them to accept various payment methods, including credit and debit cards. They manage the entire payment transaction from authorization to settlement and act on behalf of merchants. PSPs differ in their service offerings, with some providing basic services and others offering comprehensive support, including security, fraud protection, and regulatory compliance.
Payment Gateways: These collect payment credentials from the merchant’s clients and forward them securely to PSPs or acquirers. They also act as intermediaries in electronic financial transactions, supporting both in-person and online businesses. They handle encryption of payment data, connection with payment processors, transaction authorization, data collection, and fraud detection. Gateways ensure secure, efficient, and accurate processing of various payment methods, including credit and debit cards and digital wallets.
Independent Sales Organizations (ISOs): ISOs act as intermediaries between acquirers and merchants, offering a range of payment services and products. Their primary function is merchant acquisition, and they may also conduct preliminary underwriting for merchant applications. ISOs provide ongoing training and support to merchants and operate within regulatory frameworks established by card networks like Visa and Mastercard.
Security Providers: With the rise of e-commerce, security providers play a critical role in reducing risk and securing transactions from fraud. They often employ advanced technologies such as artificial intelligence and big data analytics to enhance payment security.
Digital Wallets: Digital wallets allow consumers to digitally store and spend funds, including real money linked to payment cards, loyalty points, or discount coupons. They offer the convenience of cardless payments and store various items like boarding passes, movie tickets, and loyalty vouchers. Key players in this sector include Apple, Samsung, Google, Alibaba, Walmart, PayPal, Venmo, and Block’s Cash App. These wallets use technologies like open APIs and smart ledgers (blockchain) for better integration and management of digital payments.
Terminal Manufacturers and Vendors: Terminal Manufacturers and Vendors develop and distribute Point of Sale (POS) terminals for various sectors like retail, hospitality, and financial services. Their core function is designing and producing hardware that enables electronic payment processing. These companies offer a range of products including traditional card readers, mobile POS systems, and advanced smart terminals. They often provide software and API support to enhance the functionality of their devices. Additionally, they offer technical support and maintenance services to ensure the smooth operation of their terminals. These vendors must comply with industry standards and security protocols to ensure safe and reliable transactions.
Unlike American Express and Discover, which issue their own cards and consolidate functions typically provided by merchant banks, card issuers, and card networks, Visa and Mastercard work with multiple independent entities on both the acquiring and issuing sides.
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There are 1.3 billion Visa credit cards in circulation worldwide and 1.1 billion Mastercard credit cards.Visa accounts for 37% of all credit cards in circulation, while Mastercard makes up 32% of all credit cards.Discover and American Express lag behind. There are 141 million American Express cards and 71.5 million Discover credit cards in circulation around the world. American Express comprises 4% of all credit cards in use, while Discover makes up 2%.Among American brands, Visa leads in market share measured by global purchase volume, according to the Nilson Report. Here's how global purchase volume by credit card brand broke down in 2023:UnionPay credit: $6.9 trillion, 35%Visa credit: $6.3 trillion, 32%Mastercard credit: $4 trillion, 21%American Express credit: $1.7 trillion, 9%JCB credit: $320 billion, 2%Discover credit: $256 billion, 1%Note: This data includes all consumer, small business, and commercial credit cards.
Looking at just the United States, the big four brands, Visa, Mastercard, American Express, and Discover, accounted for $5.8 trillion in purchase volume. Here's a breakdown of those brands purchase volume in the United States:
Visa: $3 trillion, 52%
Mastercard: $1.4 trillion, 24%
American Express: $1.1 trillion, 19%
Discover: 0.3$ trillion, 5%
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