BCG: Global Payments Growth to Slow as Fintechs Gain Ground

The global payments industry is set for a significant slowdown in growth over the next five years, according to Boston Consulting Group's latest Global Payments Report. 

The report projects that revenue compound annual growth rate (CAGR) will decline from 9% to 5% by 2028, taking total industry revenues from US$1.8tn to US$2.3tn.

Despite the deceleration, transaction-related revenues are expected to continue seeing healthy growth, especially in Latin America, the Middle East and Africa. The report attributes this to the continued adoption of digital payments in these regions.

Europe and North America are forecast to see the most significant slowdowns, with revenue growth in these regions projected to slow to a tepid 3%. Asia-Pacific is the only region likely to see payments revenues expand at a rate exceeding the prior five-year average.

Fintechs outpacing traditional banks

BCG’s report highlights that fintechs are rapidly gaining market share from traditional banks in the payments space. This is forcing banks to pivot their strategies to remain competitive.

Companies like Stripe and Adyen, which provide payment processing services for online businesses, now rival the largest bank-owned merchant acquirers in transaction volume. 

Other fintechs have gained prominence by focusing on areas where banks have underinvested, such as cross-border payments.

Klarna, the buy-now-pay-later (BNPL) provider, has leveraged generative artificial intelligence to handle two-thirds of customer service chats autonomously - equivalent to the work of 700 employees. The company expects this to deliver US$40m in bottom-line improvements in 2024 alone.

BCG suggests that to stay competitive, banks must aim to achieve at least 50% of their new growth in payments from offerings outside their core business.

“The days of easy growth are over,” says Inderpreet Batra, Managing Director and Senior Partner at BCG. “Payments companies face a major challenge in balancing short-term earnings pressure with the need for decisive action to enhance long-term shareholder value.”

Shift in investor expectations

The report notes a significant shift in the investor base for payments companies. Value-focused investors now comprise 33% of the industry's investor base, up from 26% in 2021. This has led to heightened expectations for returns and profitability.

Buybacks and dividends are now driving more than one-third of total shareholder return growth, as cash returns become a critical focus for investors.

To remain profitable, BCG argues that payments companies must upgrade outdated systems. A modular, scalable, cloud-ready architecture is deemed essential for improved unit economics and efficient adaptation to evolving requirements.

The consultancies’ report also emphasises the growing importance of instant payments capabilities. With instant payments systems now live in over 60 countries, payments companies are urged to adapt their operating models to support deeper customer engagement beyond just transaction processing.

Digital currencies on the horizon

Elsewhere, BCG highlights the increasing relevance of digital currencies in the payments landscape. More than 90% of central banks are developing central bank digital currencies (CBDCs), with some already live and others in pilot stages.

CBDCs could usher in a new era of innovation in programmable payments, offering benefits such as lower transaction costs, better traceability and near-real-time settlement. 

However, the report notes that widespread adoption will require improved architecture, use cases, and regulation to unlock their innovation potential.

Yet, as new technologies emerge, risk and compliance becomes all the more important. Regulatory authorities are introducing new regulations for payments companies and imposing severe penalties for risk and compliance failures.

To safeguard value, companies must strengthen their risk and compliance operating models. 

As such, BCG suggests adopting a holistic approach to risk and compliance, with the right operating model and infrastructure to satisfy regulatory requirements, avoid operational risk and more effectively seize new product and business opportunities.

Generative AI opportunities

The report identifies generative artificial intelligence (AI) as a key area of opportunity for payments companies. 

Early adopters are deploying generative AI in key areas across their business – from customer service to software development and coding – and seeing improved customer and business performance.

In some instances, companies have reduced cost-to-serve by up to 70% through the implementation of generative AI technologies.

Yann Sénant, Managing Director and Senior Partner at BCG concludes: “We believe that the payments industry has significant growth potential. Leaders who act decisively now can create significant long-term value for their customers, shareholders and society.”

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