Top Payments Trends to Look Out for in 2023

Top Payments Trends to Look Out for in 2023

by January 18, 2023

The outlook for the global payments market in the years to come is expected to be rather favorable, with a projected average annual revenue growth of 9% between 2021 and 2026 and total revenue set to reach US$3.3 trillion by then, according to McKinsey’s 2022 Global Payments Report.

These gains will be created by several trends and forces reshaping the landscape, including embedded finance and technological modernization efforts from banks and other industry players, the report says.

The 2022 McKinsey Global Payments Report, released in October 2022, provides a detailed analysis of the 2021 results and the insights they reveal, delving into top trends arising in the sector such as embedded finance, central bank digital currencies (CBDCs) and sustainability.

According to the report, 2021 was a fruitful year for the global payments industry, which manifested resilience despite market turbulence. In 2021, payments revenues rebounded strongly, growing 11% to reach a new high of US$2.1 trillion and exceeding expectations.

Global payments revenues, 2012-26F, Source: 2022 McKinsey Global Payments Report, Oct 2022

Global payments revenues, 2012-26F, Source: 2022 McKinsey Global Payments Report, Oct 2022

Within the next four years, global payments revenues are expected to continue growing steadily, facilitated by modernization efforts in the industry and new opportunities brought about fundamental changes in commerce, merchant and consumer behavior, as well as technology.

Embedded finance, a trend that has risen sharply over the past few years, will play a key role in the growth of global payments, the report says, owing to rising adoption of these solutions by both consumers and businesses.

Already, a number of non-banks and technology players are using embedded finance, leveraging these solutions to enhance their role in the commerce experience, increase their engagement with end users, and gather additional customer data. They view embedded finance as a tool to gain a competitive edge and as a way to provide their customers with the integrated experiences they request, the report notes.

At the other end of the spectrum, traditional financial services are being provided with new opportunities to address this demand by delivering the infrastructure needed to enable embedded finance, it says.

Embedded finance reached US$20 billion in revenues in the US in 2021, according to McKinsey. The consulting firm estimates that the market could double in size within the next three to five years.

Another trend outlined in the report is the push for payments modernization among banks and payments firms.

Payments infrastructures are currently undergoing full redesigns, and banks are making fundamental adjustments to their core payment systems largely in response to the continued rise of real-time payments, open banking requirements and cloud technology, the report says.

Global instant payments have grown tremendously over the past years. In India, Spain and Thailand, real-time payments usage nearly double each year, while in Australia and Singapore, it’s increasing by roughly 50% annually, the report says. In China and the UK, where real-time payments have already achieved broad adoption, growth continues at double-digit rates.

McKinsey expects global growth of instant payments to continue at double-digit rates and rise faster than the 10% growth rates for cards observed over the past two years.

Open banking, meanwhile, continues to see increased adoption, especially in Europe. In the UK, the combined adoption of account information services and payment initiation services stood at 15% of online adult in 2022, according to market research company Forrester. That proportion is projected to soar to 44% by 2027, growing at an annual rate of 23%.

Open banking payments are also expected to increase rapidly over the next five years, rising from 71 million transactions in the UK in 2022 to 1.6 billion by 2027.

The report also highlights the rise of digital payments, especially in emerging markets where innovations are proliferating.

Globally, the number of non-cash retail payment transactions increased at an annual growth rate of 13% between 2018 and 2021, according to McKinsey. That figure is the highest in emerging markets where annual growth stood at 25% during the period.

In markets with less developed payments infrastructure and where telecom companies and other providers face fewer regulatory barriers, non-bank wallets are outperforming traditional banks in digital payments usage.

In the Philippines and Vietnam, wallets are the leading e-commerce payment method, accounting for 31% and 25% of transaction value, respectively. In Thailand, wallets are the second most used e-commerce payment method after bank transfers.

Dominant digital payments players by market characteristics, Source: 2022 McKinsey Global Payments Report, Oct 2022

Dominant digital payments players by market characteristics, Source: 2022 McKinsey Global Payments Report, Oct 2022

Other trends highlighted in the McKinsey report include sustainability and the rise to relevancy of environmental, social and governance (ESG) principles, the macroeconomic environment that’s marked by higher interest rates and inflation, geopolitical disruptions that are prompting moves to greater payments regionalization and localization, as well as the big capital market reset that has seen the valuation of “attacker” payments companies plummet and which is creating opportunities for incumbents to consider acquisitions.

 

Featured image credit: Edited from Freepik

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