THE FUTURE OF PAYMENTS IN ASIA - GLOBAL BANKING PRACTICE NOVEMBER 2020 - MCKINSEY
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Global Banking Practice
The future of
payments in Asia
November 2020Introduction Payments have never been as important to Asia’s financial services ecosystem as they are today. Asia has outpaced all other regions in terms of payments-revenue growth over the past several years. The region is also the largest contributor to global payments revenue, generating over $900 billion in 2019, nearly half the global total. The role of payments in Asia’s overall banking landscape has expanded as well, now representing 44 percent of aggregate banking revenues, compared with a third as recently as 2007. The dollars involved tell only a fraction of the story, however. Payments remain the bedrock of the customer relationship for both consumers and businesses, representing the most natural opportunity for ongoing engagement, keeping the institution’s brand top of mind, and creating a practical reason to keep a healthy level of funds on account. Payments have never been more important for traditional banks, longstanding service providers, and fintech innovators aiming to disrupt the status quo. The global effects of COVID-19 prompted a reset in the payments ecosystem. In most cases, the result was an acceleration of trends—such as increased digitization—that were already underway. Although we forecast a decline of 1 to 8 percent in Asia’s 2020 payments revenue, the industry’s solid foundation is poised to foster a relatively rapid return to mid-to-high single- digit growth rates. Asia’s payments sector remains well positioned to exceed $1 trillion in annual revenue by 2022 or 2023. The first chapter of this report explores these dynamics in greater detail. Our perspectives are informed by ongoing dialogue with industry leaders and McKinsey’s global network of payments experts, and by our work with payments providers in the region. McKinsey’s Global Payments Map also provides a quantitative foundation of longitudinal revenue and volume data. Additionally, our recently launched Asia Payments Practitioner Survey (APPS) polled payments business leaders in 13 Asian markets to document their strategic perspectives and illuminate key themes and areas of consensus. Asia’s future payments landscape will look quite different from the ecosystem currently in place. We have distilled the fundamental themes governing this future vision into a list we call the Five Cs: connected commerce, contactless consumers, a cashless economy, cross-border activity, and consolidation. Our goal is to identify a comprehensive set of trends that will reshape the payments industry, and to initiate a dialogue on how Asia’s payments ecosystem of 2025 will differ from the current state. The second chapter of this report considers the likely scenarios for the Five Cs, based on our analysis of the APPS findings. The third chapter outlines a series of potential actions for various sets of players across the ecosystem: banks, acquirers, card networks/schemes, nonbanks and tech firms focused both on financial services and other areas, and governments and regulatory bodies. Naturally, significant interdependencies exist across these constituencies; notably, there are very few areas in which these groups’ objectives are in direct conflict. We hope you find these perspectives illuminating. As always, we appreciate your comments and welcome the opportunity to engage in further dialogue. Reet Chaudhuri Jacob Dahl Bharath Sattanathan Joydeep Sengupta
Shaken, not stirred:
The next frontier in
Asia payments
Heading into 2020, numerous trends (selectively captured below)
had set a clear path for continued payments growth across Asia.
Chief among these was the rapidly expanding number of connected
and digitally active consumers, with booming e-commerce markets
reinforcing the need for digital solutions. The competitive landscape
was simultaneously heating up, with the entry of formidable
new players—including telecommunications firms, fintechs, “big
techs,” and other conglomerates—spurring incumbents to step
up their own innovation efforts. Meanwhile, regulators sought
to standardize infrastructure while encouraging competition,
fostering the introduction of real-time payments, digital know
your customer (KYC), and various local payment schemes.
COVID-19 has permanently reset support. Players stepped up with educational
payments trajectory resources on managing disruption and public-
COVID-19 then upended expectations with a service activities such as fund-raising support.
generational economic shock affecting both Banks forged partnerships with specialized
supply and demand, resulting in an unprecedented fintech providers to launch new platforms to help
drop in discretionary spending, shifts in spending merchants establish an essential online presence
patterns for remaining outlays, lower trade volumes, (e.g., Shopify’s alliance with OCBC in Singapore)
the loss of foreign-exchange revenues, and a and created incentive programs to foster online
suppressed interest-rate environment. For example, shifts. Governments also played a vital role, waiving
India recorded no car sales in the month of April, or reducing some charges related to electronic
Thailand’s foreign tourism declined by 78 percent payments (e.g., UPI payments in India), increasing
from the prior year in March and fell to zero the digital-transaction limits, and providing funding
next month, and Singapore’s construction industry to small and medium-size enterprises (SMEs) to
contracted by 45 percent in 2Q2020 while its overall support digital commerce.
economy declined by 13.3 percent.
Despite these efforts, we anticipate that in the near
The payments industry was quick to respond to term, COVID-19’s impacts will cause a decline in
these challenges, offering immediate economic 2020 payments revenue of up to 8 percent across
relief in the form of faster settlement times, Asia (Exhibit 1). Excluding Mainland China, which
customer-fee waivers, and short-term funding recovered from the depths of the crisis more rapidly,
2 The future of payments in AsiaExhibit 1
The impact of COVID-19 is expected to lead to a decline in near-term revenues of up to 8%.
Asia payments revenues,1 $ billion
Underlying movements that will
998 contribute to the slowdown2
Decline of 10–15%, Asia GDP growth expected
excluding Mainland China at −4% to −8% in 2020
937
10–30% expected decline in
global trade in 2020
−8% to −1%
860–925
50–70% decline in
Q2 2020 discretionary
consumer spending
10–50 basis-point cuts in
rates across Asia,
depressing liquidity
revenues
2019 payment 2020 expected 2020 payment
revenues revenues revenues after
prior to COVID-19 COVID-19 impact3
1
Asia includes Mainland China, Hong Kong SAR China, India, Indonesia, Japan, South Korea, Malaysia, Singapore, Taiwan, Thailand, Philippines, Vietnam. Revenues include domestic revenues from
credit/charge cards, debit cards, prepaid cards, bank transfers, direct debit, current account, and overdraft, plus cross-border revenues from trade and nontrade, international travel, e-commerce,
remittances, and B2C.
2
COVID-19 impact assessed using macroeconomic scenarios and econometric regressions, incorporating government actions, sector-specifics, and views from local and global experts.
Source: McKinsey Global Payments Map; World Trade Organization
the contraction is projected to be as steep as 14 both before and after the pandemic, payments
percent. The extent of the contraction is projected to players seeking to engineer a sustained accelerated
be the worst in 40 years—exceeding the severity of response to COVID-19’s irreversible shifts and
the 1998 Asian financial crisis and the 2008 global position the ecosystem to realize its considerable
financial crisis. potential must overcome several barriers facing
Asia’s payments industry:
Paradoxically, we anticipate that COVID-19’s impacts
will ultimately serve to accelerate several established — Limited digitization. Despite meaningful
payments trends. For instance, at the height of the progress in moving transactions to card and
crisis, the proportion of consumer items purchased digital forms, cash remains quite popular in
online nearly doubled, representing a 30 to 40 most Asian markets. Cash utilization has fallen
percent growth rate in online spending, compared from 97 percent of transactions in 2010 to 71
with a 22 percent pre-COVID-19 projection. Across percent in 2019. Habit, security concerns, and
emerging Asia, a 60 percent increase in contactless- perceived complexity remain roadblocks to
payments usage during the crisis was double the speedier consumer migration. Meanwhile, many
expected levels, and paperless B2B payment flows small merchants remain dependent on paper-
grew eightfold. Although it’s reasonable to expect based systems and wary of the fees and tax
some reversion to past practices as the most severe implications that accompany digital transactions.
measures are lifted, the in-process digital shift has
— Fragmentation. In many markets, consumers
clearly received a permanent forward jolt.
face a preponderance of choices at the expense
of an integrated solution. Competition is
Persistent structural changes require certainly desirable, but in an ecosystem that
concerted actions requires universal access for efficient operation,
Our intent for this report is not to detail COVID-19’s an excessive number of below-scale alternatives
impacts, however. The past several months’ events can create consumer indecision and impede
have exposed structural challenges impeding a convergence toward a market standard.
truly transformative end state. Despite progress
3 The future of payments in Asia— Unsettled industry economics. Not surprisingly, the gains that occurred during the height of COVID’s
the rapid transition away from an all-cash impact expected to remain for the long term (Exhibit
economy over the past decade has prompted 2). We address the impact of these trends in greater
some turmoil. Merchants, many of which do not detail in the next chapter.
recognize the hidden costs of cash handling,
Digital wallets and QR codes will become the
have resisted the more visible acceptance
next normal
fees that accompany card-based and digital
Despite recent migration to digital payment
transactions. SMEs, lacking the scale benefits
methods, Asia remains the world’s most cash-
of larger enterprises, tend to face the highest
reliant region, with cash representing 71 percent
fees as a share of revenue. At the same time,
of transactions in 2019. The recent momentum
incumbent financial-services firms and new
achieved by e-wallet providers and QR-enabled
entrants alike are in the investment stage
solutions is likely to accelerate moves away from
of establishing next-generation payments
cash, particularly in emerging markets, with
infrastructure and must support these business
contactless cards serving as a driver in developed
cases in an increasingly turbulent environment.
Asia. Account-to-account transfers also are
— Uneven regulatory interventions. Countries have expected to play an increasing role. In the future, it
chosen differing and not always compatible is likely that current payment methods (e.g., credit
paths to fostering and/or governing emerging cards) will be reformatted to optimize their utility
utilities such as real-time payments and national within digital-wallet front ends.
payment schemes. Given the importance
The battle between banks and platforms will
of cross-border activity in the region (Asia
intensify
accounts for over a third of global trade in
Banks, leveraging their incumbent position and
goods, up from less than a quarter circa 2000),
established customer-trust advantage, are seen
any barriers to efficient funds flow, whether
as the most logical payment providers in emerging
intentional or incidental, can be problematic.
markets. As real-time payments become the norm,
— Varied levels of innovation across markets. A banks will have an added advantage over nonbank
reasonable degree of interoperability between providers. In developed markets, experts view
country payment schemes is essential to digital ecosystems (e.g., Kakao in South Korea)
efficient operations. While one would not expect and big tech players (e.g. Google, Facebook) as
all markets to progress at the same pace, better positioned to prevail, given the superior user
marked disparities—particularly if paired with experience and ubiquitous reach of “super apps”
restrictions on outside players—could impede (which address the full array of consumers’ digital
regional growth overall. needs) offered by these players and increasingly
connected to funding sources like bank accounts
The megatrends accelerating Asia’s and credit cards.
payments revolution Current-account relationships will unbundle
In May, McKinsey launched its proprietary Asia Historically, Asian customers have maintained
Payments Practitioner Survey (APPS), aggregating sufficient current-account liquidity to enable timely
the views of 56 payments-business executives transactions. This has led to many banks investing
spanning 13 Asian markets, to gather informed in payments despite pressures from declining
perspectives on the key shifts expected to affect fee revenues. A majority of bank respondents (57
Asia’s payments landscape over the coming five percent) anticipate a decoupling of current accounts
years. The resulting feedback revealed a fascinating and payments. As real-time payments and digital
mix of consensus and sharply divergent views, wallets reduce friction and time to transfer, account
the latter often segmented by one’s role in the holders may embrace a wallet for payments while
ecosystem or operation in a developed or emerging cherry-picking a bank for current accounts. This will
country. force banks in the region to rethink current-account
propositions else risk hurting current account/
We see several key trends shaping Asia’s future
savings account ratios. For example, banks in other
payments landscape, with COVID-19 having fueled
regions have already begun the rebundling process,
an 80/20 rise in digital payments: a 20 percent
augmenting current accounts with value-added
increase in the digital user base, with 80 percent of
4 The future of payments in AsiaExhibit 2
Our research highlights seven emerging payments trends across emerging and developed Asia.
Rise of wallets Horns locked: Unbundling Shift toward Shrinking Bilateral driving Consolidation of
and QR-enabled banks vs current accounts acquiring physical presence cross-border value chain
payments platforms real-time payment
E-wallets and QR Banks have a Decoupling New sectors and Rationalization of Bilateral 64% of survey
codes to ramp up “boon”: Banks and between current last-mile branch and ATM arrangements top respondents
in emerging Asia bank wallets to accounts and merchants to networks (>20% driver for expect
win emerging Asia payments digitize in some cases) cross-border consolidation
Contactless credit
capabilities real-time along value chain,
cards in Platforms excel at Lower merchant While digital
payments eg, ecosystems
developed Asia customer Imperative for discount rates and currencies not
purchasing issuers
experience: banks to rethink faster settlements expected to Regional
Deeper and payments
Ecosystem current-account to onboard small become ecosystem player
penetration of gateways
players tied with propositions merchants; tax mainstream, Libra could deliver a
phones and
banks in concerns and CBDC may solution with 44% expect
wallets likely to
developed Asia, overstated gain traction regulatory consolidation
boost financial
given superior approvals (seen as within value chain,
inclusion Acquiring to
user experience more likely by eg, acquirers or
outpace issuing,
and captive use bank respondents) e-wallets
with >50% of
cases consolidating by
acquirer revenues
buying smaller
to be
players
nonprocessing
Unprecedented rise of digital
payments: 20% increase in user base
with 80% retention post-COVID-19
Tech enablers:
Biometrics, AI, and blockchain
Source: McKinsey analysis
features not necessarily associated with financial through everyday banking services like deposits and
services (e.g., football-score updates and video lending, the specialists have expertise in building
highlights). out what is increasingly becoming a software
business.
Acquiring will see a resurgence, with new
business models Reliance on physical infrastructure will shrink
Merchant acquiring is expected to undergo a Just as the current environment gives Asia an
significant shift as new lifestyles and business unprecedented opportunity to reduce its reliance
models emerge. Acquirers will need to contend on cash, increased digitization will also spur a
with a decline in merchant discount rates (MDRs), shakeout in physical infrastructure, with expected
especially in offline settings; 87 percent of our reductions of more than 20 percent in branch
respondents estimate MDR declines of 20 percent and ATM networks. As demand for cash declines,
or more. This will induce a scale-up from mere banks can consider a utility model, outsourcing or
payments processing to monetize adjacent value- sharing ATMs. In parallel, banks could play a service-
added services, such as reconciliation, loyalty, provider role for digital currencies by providing local
lending, and deposits. Such adjacent services could clearing and settlements.
account for over 50 percent of acquirer revenues.
Bilateral cross-border partnerships will
Lower MDRs and faster settlements will drive
accelerate
adoption by smaller merchants, while competition
Cross-border payments in Asia have been plagued
between global specialist acquirers and local legacy
by the twin challenges of long settlement times
champions will likely intensify at medium and large
and high costs. While over 70 percent of experts
enterprises as well as in online acquiring. Although
believe a regional infrastructure like the single euro
banks possess the core processing related product
payments area (SEPA) would be beneficial in the
set and often the large merchant relationships
Association of Southeast Asian Nations (ASEAN),
5 The future of payments in Asiathey are skeptical of execution. The more likely even for countries in developed as opposed to
scenario is a series of bilateral agreements (e.g., emerging Asia. For instance, whereas cash and
NETS with NPCI). In addition, regional ecosystem prepaid-card usage is likely to decline across the
players could disrupt this space by providing board, traditional offline commerce will continue
comprehensive cross-border services. For instance, to grow in emerging Asia even as it is displaced in
we could soon see a Singapore-issued wallet used developed Asia.
to scan and pay for a meal in Jakarta or Bangkok.
We believe this paradigm shift will alter usage
Consolidation could drive value-chain patterns for several payment instruments (Exhibit
“horizontalization” 3). As would be expected, given digitization trends,
Rationalization among a fragmented payments cash and (already quite limited) check usage
market is likely. Nearly two-thirds of experts expect is poised to decline, while account-to-account
further consolidation, whether across the value transfers and stored-value wallet activity will
chain (e.g., networks combining with merchant accelerate. Other patterns are more complex. For
acquirers) or within a specific category (e.g., instance, we foresee debit-card usage declining
e-wallets). Given reductions in venture-capital sharply in developed Asia yet continuing to grow
funding of fintech players, we expect to see larger in emerging markets, given continued banking
banks and tech firms make acquisitions to build out penetration in markets such as Indonesia, the
their product portfolios. Philippines, and Vietnam. Likewise, traditional
swipe-based card payment volumes are poised
Payments products will look quite to contract somewhat in developed Asia while still
different within a decade expanding in emerging Asia.
Taken together, these trends carry numerous As the industry addresses these challenges and
implications across constituencies (consumers, responds to these trends, we foresee a significant
merchants, and businesses), payment instruments and permanent reshaping of Asia’s payments
(e.g., cash and debit, credit, or prepaid cards) and industry, built around “five Cs”: the contactless
Exhibit 3
Payments in Asia are likely to go through a paradigm shift in the medium to long term.
Current usage and outlook for payment products, by customer segment
Developed Asia1 Emerging Asia2
Consumers Merchants
Cash Cheques A2A3/pass- Stored-value Offline Offline
through wallet4 traditional contactless
Credit cards Debit cards Prepaid Online/digital
cards5 platforms
Cash usage ranges from 40–95% by transaction volume across markets E-commerce accounts for
up to 20% of retail sales in
Checque usage isExhibit 4
Given the trends, we expect a gradual recovery in Asia payments revenues.
Growth rates ~400 bps below pre-COVID-19 levels, due to margin and current-account net interest margin
compression
Asia payments revenue,1 $ billion
5–7% Historical
per year Projected
1,150–1,220
12% per
year
937
860–925
664
2016 2019 2020 2025
1
Includes Mainland China, Hong Kong SAR China, India, Indonesia, Japan, Korea, Malaysia, Philippines, Singapore, Taiwan, Thailand, Vietnam. Assumptions for post-COVID-19 impact for Mainland China,
Japan, Singapore, Indonesia, Malaysia: bottom-up projections on liquidity and transaction revenue impact post-COVID were used; figures for remaining markets (India, Hong Kong SAR China, South Korea,
Taiwan, Thailand, Philippines, and Vietnam) based on expected GDP growth rate post-COVID and projected multiplier of payments revenue to GDP.
Source: McKinsey Global Payments Map; World Trade Organization
consumer, connected commerce, cross-border of electronic payments across both consumer
linkages, consolidation of the industry, and an and business flows. Various ecosystem players,
increasingly cashless economy. The Asian payments spanning traditional banks and fintech start-ups,
industry—with an estimated compound annual have already adapted operating models and product
growth rate (CAGR) of 10 percent (excluding portfolios to address the increased digital demand
Mainland China) and nearly $300 billion of additional and other disruptions brought on by the crisis. And
revenue at stake by 2025—deserves strategic focus just as the impact of COVID-19 spurred greater
for players of all stripes, including banks, nonbank contraction in payments revenues outside Mainland
financial institutions, and regulatory authorities. China, the broader Asian landscape is expected to
Although these themes have existed at a high level return to its established healthy growth curve in the
for the better part of the past decade, a new set of pandemic’s aftermath.
underlying dynamics will greatly accelerate the pace
COVID-19 has further fueled profound changes
of change.
already under way in Asia payments. However, it
At the pan-Asian level, economists expect a gradual has brightened the long-term outlook and could
payments-sector recovery over the next few years propel growth in Asia payments via increased cash
(Exhibit 4). Although hard to predict with certainty, displacement and digitization. Winning in the new
this assumes a gradual pickup in travel towards normal will require players to reimagine their value
the second half of 2021—leading to a rebound propositions with a digital-first business model,
in cross-border spending and foreign-exchange potentially mirroring the traits commonly associated
opportunities—as well as government actions to with technology companies.
curb some excess liquidity and reverse a portion
of 2020’s decline in interest rates. The longer-
term outlook remains quite robust, particularly
given the accelerated shift away from cash in favor
7 The future of payments in AsiaThe five Cs shaping
the future of Asia’s
payment sector
Asia’s future payments landscape will look quite different from the
ecosystem currently in place. We have distilled the fundamental
themes governing this future vision into a list of five Cs (Exhibit
5). It’s worth noting that these trends are not new; what is evolving,
however, is the extent to which the forces are playing out at a
tactical level across Asia’s ecosystem. COVID-19’s impact over recent
months has further reinforced several of these trajectories. The
next decade will see the gradual mainstreaming of these trends.
Our perspectives are informed by ongoing has existed for some time, hygiene concerns have
dialogue with a wide array of industry leaders, prompted customers to actively seek out touchless
including McKinsey’s global network of payments alternatives in a variety of daily activities, and
experts and a vast array of client work. McKinsey’s payments are no exception. Even as payments
proprietary Global Payments Map also provides a volumes declined overall during COVID-prompted
solid quantitative foundation of longitudinal revenue quarantines, the contactless user base grew by as
and volume data. We recently launched our Asia much as 20 percentage points for select payment
Payments Practitioner Survey (APPS), for which providers in the region. Moreover, we expect 70 to
we polled payments business leaders in 13 Asian 80 percent of new adopters to continue long-term
markets to document their strategic perspectives use of these new forms.
and illuminate key themes and areas of consensus.
E-wallets to lead; account-to-account transfers
In this chapter, we will explore the likely scenarios make great strides
for the five Cs, drawing from our own expert Excluding Mainland China, where the use of mobile
assessment and APPS findings, regarding important payments is already well established, McKinsey
developments, including emerging business expects the number of mobile-payments users to
models, digitization, the monetization of payments more than double by 2025, exceeding two billion.
data, cross-border cooperation, and industry Our APPS reveals interesting nuances regarding
consolidation. industry leaders’ views in this area. Industry leaders
share our assessment of digital wallets becoming
Contactless consumer the preferred form of payment by 2025, with credit
cards ranking a close second. Looking a level
From a payments perspective, arguably the greatest
deeper, however, bank-affiliated experts continue
and most lasting impact of COVID-19 will be in the
to see credit cards as the instrument of choice,
contactless arena. Although the wallet medium
8 The future of payments in AsiaExhibit 5
The five Cs reshaping Asia payments.
Consolidation and industry- Contactless consumers
structure shifts Rise of ecosystems vs. bank wallets
Integration across value chains Horns locked: Banks have trust; ecosystems have CX¹
Rise of payments specialists QR preferred mode for emerging markets
Global/local partnerships Rise of transaction credit (POS lending)
CON
TION TA Unbundling of CASA² and payments
IDA CT
OL L
NS
ES
CO
S
Cross-border links Connected commerce
C R O S S-B
ERCE
Accelerating bilateral real-time payments Revenue opportunity beyond payments
arrangements Digitizing long tail of merchants
MM
Rise of digital money-transfer operators Lower merchant discount rates, faster
OR
CO
B2B options proliferate settlements
DE
R
Revenue shift from issuers to acquirers
CASHLESS
Cashless economy
Diminishing role for ATMs
Digital currencies—a speck
on the horizon
1
Customer experience.
2
Cash account savings account.
Source: McKinsey analysis
whereas nonbank professionals give e-wallets the anticipate that within five years, 30 to 40 percent of
nod. retail transfers will be executed over real-time rails.
Incorporating loyalty programs and a wide array of
Account-to-account transfers also are seen
payment options (including points redemption for
as gaining in prominence, particularly across
a portion of the amount due) also could serve as
developed Asia, where they are forecast to become
powerful wallet differentiators.
the third-most-favored instrument, particularly for
small-ticket items. The advent of real-time payments Payments are increasingly unbundled from
will help fuel this transition, and lead to a gradual current accounts
erosion of stored-value wallet usage, as funds can The twin forces of e-wallets and open banking also
be pulled directly from a bank account at the time of increase the likelihood of the further decoupling
need—an added boon for banks. of checking and savings account (CASA) balances
from payment capabilities. Fifty-seven percent of
Banks and nonbanks wage a battle for wallet
APPS respondents see such decoupling as likely
supremacy
over the coming five years, with the majority of those
A similar dichotomy exists in perceptions of likely
deeming it “very likely.” Not surprisingly, nonbank
winners on the retail-payments battleground. Banks
experts are most bullish on this view. This dynamic
and digital ecosystem players rise to the top of
reinforces the imperative for banks to rethink their
the list; however, bank experts are more bullish on
CASA value proposition, potentially rebundling
their sector’s solution, pointing to consumer-trust
current accounts with nonbanking features
and incumbency factors. Nonbank participants,
such as football-score updates to drive ongoing
meanwhile, are evenly split between these options,
engagement, as discussed in Chapter 1. It also
citing the ubiquitous reach and sleek design of
serves as a call to action to solidify banks’ digital
“super apps” as key advantages.
experience, as the liquidity from retained balances
We believe execution and first-mover advantage will is an important component of payment revenue
be keys to determining the winners in each market. streams.
Further evolution of real-time payment capabilities
Notably, business leaders differ by geography in
can foster a more seamless customer experience,
their expectations for cash. Twenty-one percent of
particularly for cross-border commerce, and may
experts in emerging Asia say they expect cash to
give bank wallets an added differentiator. We
remain the preferred consumer-payment vehicle,
9 The future of payments in Asiacompared with single-digit response rates in business, with merchants in prominent categories
developed Asia. Few experts expect cash to be fully such as healthcare facing an unexpected immediate
retired; it likely has a long tail, even in developed need for remote payments acceptance and small
Asia. offline merchants suddenly seeking solutions
beyond cash (Exhibit 6) Fundamental business-
The wallet space remains quite active, with various
model changes will be necessary to meet these
constituencies—banks, telecommunications
requirements, extending beyond the traditional role
providers, big tech, and digital ecosystems—seeking
of the merchant discount rate (MDR) in defining
entry points, leveraging supporting capabilities as
the economic proposition for both providers and
a means of monetization. This dynamic could leave
merchants.
pure-play e-wallets vulnerable: the APPS revealed
little to no expectation of stand-alone players Merchant expectations of payment service
or telcos prevailing in this space. This is likely a providers are growing beyond traditional payments
reflection of monetization challenges. The discrete functions to encompass tools for helping them
payment event remains unprofitable, and regulation manage and grow their businesses (Exhibit 7). In
typically precludes such players from adjacent response, acquirers are evolving into technology
revenue streams such as lending. The market is and software companies delivering “one-stop
already crowded, with over 150 wallet licenses being shop” experiences that harmonize channels and
issued in Southeast Asia. We expect the number are personalized to merchants’ needs and sizes.
of wallets to decline by two-thirds via industry This value proposition includes more seamlessly
consolidation, even as new players attempt to gain a embedding payments into the commerce flow and
foothold. extending offerings to address merchants’ financing
and growth needs as well.
QR codes drive emerging Asia traction
Emerging markets will be more inclined to adopt The most important factors driving merchants’
solutions based on QR codes, which are viewed digital adoption over the next five years will be
as easier and more cost-effective to implement lower MDRs, faster funds settlement, and ease of
and better suited to mass-market consumers. onboarding. We will also see innovations in hardware
Developed markets, by contrast, will favor “tap and solutions, such as lower-cost point-of-sale devices.
go” (which is considered faster and more closely Offerings like static QR stickers, dynamic QR codes,
aligned with global standards), account-to-account and low-cost scanners make it increasingly feasible
transfers, and card-linked mobile solutions, such for acquirers to service even small merchants with
as Apple Pay. Banks completing a robust digital limited payments volumes.
transformation will be particularly well positioned
Shift in dynamics from issuers to acquirers
to lead in consumer digital payments, leveraging
Since card issuers have historically realized the
institutional trust and an established infrastructure.
majority of MDR revenue, such pricing pressure
As always, government’s role in market evolution is likely to be borne disproportionately by issuers.
will be pivotal. Regulators must strike a delicate Compressed revenue margins of as much as 20
balance across multiple factors: ensuring safety percent will be borne largely by issuers. Value-
and ubiquity, fostering innovation, and maintaining added offerings will become an increasingly
an environment conducive to healthy competition. essential component of merchant acquirers’ product
These are essential ingredients of initiatives suites, as unit revenues from payments alone
such as real-time payment networks and e-KYC will become insufficient to support an attractive
enablement. In addition to these endeavors, APPS business model. As a result, acquiring will grow to
respondents voiced strong support for greater comprise a third of transaction-based payments
adoption of cashless transactions to and from revenue, up from 23 percent in 2019, with the
government entities and for granting necessary majority of growth derived from value-added
regulatory approvals to advance open-banking services (particularly for small merchants) beyond
protocols, thereby fostering greater competition. core payments processing.
The revenue opportunity stemming from further
Connected commerce merchant digitization over the next five years could
The dramatic surge in demand for digital capabilities grow by over $5 billion annually, based on McKinsey
has driven unprecedented shifts in the acquiring analysis. Although cash displacement is a natural
10 The future of payments in AsiaExhibit 6
Digital acceptance in some sectors has increased since the emergence of COVID-19, leading to
new frontiers for digital payments.
Healthcare
Telecom
High
Logistics
E-commerce
Mobility
Advertising Entertainment
Medium
Sector size 1
Social media
Music and radio
Online gaming
Online travel
Online education
Digital print
Low
Limited Significant Major
Impact of COVID-19 on digital acceptance
!
Based on total global 2019 revenue: low = $1 trillion.
1
Source: McKinsey analysis
Exhibit 7
Merchant increasingly want payments service providers to help them manage and grow their
business.
Hygiene factors Distinctive value
Make it easy “Anything that can make the A 1-stop shop “I have 1 to 2 person days per
customer journey better, month to do reconciliation
Provide a natural, Provide a single source
increase service speed, and and balancing. My staff
convenient way to serve of truth uniting
turnaround.” extract reports from
customers and run the payments with
payments gateways and
business. accounting, operations,
bank to identify
and marketing.
discrepancies.”
Delight my customers “Promotions drive footfall. A growth partner “We are exploring
We need synergies with automation and self
Help us deliver value to Help us grow and stand
partners to get customers to payment kiosks to reduce
customers, because if out in a competitive,
come in and shop with us.” cash handling and risk. Let’s
we do, they stick with us. crowded marketplace.
discuss initiatives beyond
periodic agreements.”
Deliver superior “We need the service level to Provide value from “Its hard for SMEs. I have
reliability be high; lapses will damage data been looking for analytics
[banks’] reputation as solutions to know my
Be a responsive partner
custodians. Merchants are customer better, for
who keeps pace with my
fearful of putting all eggs in targeting, staffing, and
needs as I run my
one basket.” productivity positioning.”
business.
Source: Merchant interviews
11 The future of payments in Asiacontributor to this expansion, the key drivers are multiple POS terminals, a significant merchant
spending growth and, more importantly, value- pain point. The players best suited to enable the
added opportunities that go beyond transaction merchants in this process, according to the APPS,
fees to leverage data analysis and other related are fintech specialists and e-commerce and
financial or merchant services. ecosystem players; banks are not seen as playing a
leading role on this front.
Accelerated digitization of the long tail of small
merchants An example of how ecosystems are enabling end-
The digitization of small and midsize merchants to-end digitization of retail supply chains, removing
represents a major opportunity, both in building out cash from the journey, can be found in JioMart’s
a suite of additional payments-adjacent services initiative to create online grocery shopping/delivery
and in fostering financial inclusion. The process capabilities for a network of mom-and-pop “kirana”
of digitization has been rapidly accelerated by shops, connecting them with larger hubs and
COVID-19; we project that digital acceptance across enabling broader services like access to credit for
Asia will approach 90 to 95 percent of merchants consumers and volume purchasing discounts for
within five years, driven by both simplified KYC shop owners.
processes and low-cost acceptance methods (e.g.,
smartphones). As a greater share of commerce Cashless economy
inevitably moves online, it becomes increasingly
To be clear, cash is not expected to disappear;
important for all populations to have access to
however, its use will continue to decline across
noncash instruments. SME enablement is a step in
Asia. Over the past decade, cash usage in mature
this direction.
Western economies has fallen by roughly 30
Acquirer growth driven by leveraging adjacent percentage points from beginning levels of
revenue streams approximately 55 percent of transactions. The
The lasting consumer behavior shifts prompted target level of payments electronification will differ
by COVID-19 illuminate several business sectors across Asia, given starting points that vary from less
in which digitization opportunities exceed what than 3 percent of transactions in Indonesia to as
was widely perceived just a few months earlier. much as 60 percent in Singapore.
E-commerce has long been seen as the natural
Cash will decline more rapidly but not vanish
target, with sales volumes expected to nearly
Countries in both developed Asia and emerging
double by 2025 to $2 trillion, but the sudden
Asia remain in the relatively early stages of cash
surge in downloads and time spent on streaming
displacement. Cash usage, as measured by
platforms moves entertainment into a higher-
percent of transactions, remains higher than in the
priority category as well. Likewise, the remarkable
European Union and United States. Furthermore,
growth of telehealth and popularity of wellness
with the exception of Mainland China, the roughly
and fitness apps elevate the healthcare focus for
20-percentage-point rate of decline in usage
payments providers. Supply-side requirements
over the past decade—even in developed Asian
for faster and seamless delivery of food and other
countries—has lagged reductions in developed
online purchases are upping the ante for optimized
Western countries.
logistics processes.
Based on learnings gleaned from other countries’
Given the daily working-capital needs of small
experience, any expectation of overnight
merchants, more rapid settlement and access
transformation is unrealistic. Prior attempts at doing
to funds—including same-day availability at a
away with cash completely, such as Singapore’s
minimum—will be critical to the achievement of
efforts to eliminate cash from the public transit
universal access. Market forces will play a leading
system, have met with backlash. An extended
role in the evolution of both of these factors,
period of coexistence between cash and electronic
although a role for regulatory authorities cannot be
instruments is a near certainty. Even as digitization
discounted. Another key to adoption will be ease
delivers added convenience and new revenue
of use and onboarding, including the advent of
opportunities, existing cash processes will not be
low-cost point-of-sale solutions and dramatically
fully retired in the foreseeable future. Therefore,
reduced merchant onboarding costs. Thin terminals
more efficient models must be implemented to
with “soft switches” will supplant the need for
address these ongoing needs.
12 The future of payments in AsiaThe role of ATMs will diminish Utilities will rise in significance
Among consumers, COVID-19’s acceleration of Specific use cases and counterparties warrant
digital-banking trends has similarly reduced the special attention. Consumer payments to
dependency on branches for routine transactions, businesses and/or governments account for more
such as those involving cash. Despite Asia having than half of transaction volumes, making them a
lower ATM penetration than other regions, significant electronification opportunity. Similarly,
reductions in cash reliance will lead to a likely the business-to-business (B2B) payments last-mile
decline in ATM prevalence (Exhibit 8). Even as cash challenge accounts for a large share of potential
use declined over the past decade, ATM machines value generation and is ripe for innovation. The
in use grew by 16 percent across Asia, thanks to payments infrastructure between small merchants
onboarding of the formerly unbanked population and the wholesalers or distributors serving them
combined with banks’ desire to establish brand can be extended (as noted in the earlier JioMart
identity in many regional markets. example), and retail ecosystem providers can bring
integrated ordering, invoicing, and payments to
An increasing number of machines are failing to
market.
generate sufficient activity to attain breakeven
status, however. McKinsey projects that the In an effort to buffer their economies from COVID-
number of ATMs will stagnate and eventually 19’s severe impacts, most governments have added
decline slightly by 2025. Two paths are possible in significantly to their national deficits. In due time,
this area. We expect many banks to begin viewing this will result in quests for additional tax revenues,
these machines as standard utilities, looking to which can be achieved in part by plugging leakages
outsource their operations and/or pool resources via payments electronification, particularly in the
across institutions. An alternative approach may be B2B space. This includes e-invoicing, which delivers
to invest in differentiated ATM offerings to sharpen the added benefit of lower costs for payables and
branches’ focus on value-added activities oriented receivables processing. A McKinsey study across
to customer experience. a broad sample of enterprises estimates such
Exhibit 8
ATM networks are expected to shrink as transactions move online.
ATM usage in Asia is already declining as … leading to a likely decline in number of ATMs over
consumers switch to digital channels… the next 5 years
Annual ATM withdrawals per customer, Asia1 Expected decline in ATMs over next 5 years1
% of expert respondents,² n = 56
16
No experts from developed
Asia foresee ATMs remaining
flat or growing 36
15
25
21
18
14
13
Remain flat Decline by Decline by Decline by
2015 2016 2017 2018 2019 or grow 0–10% 10–20% > 20%
1
Based on data collected from a sample of 39 banks across Mainland China, Hong Kong SAR China, India, Indonesia, Japan, Malaysia, Singapore, Taiwan, Thailand, Vietnam.
2
Q: In the next 5 years in your market, what will be the change in the number of ATMs?
Source: Finalta; McKinsey Global Payments Map
13 The future of payments in Asiacosts at 1 to 2 percent of the total base, with a in other Asian markets. Per the APPS, most experts
savings opportunity of one-half to three-quarters if (87 percent) say that such e-commerce platforms
e-invoicing is fully implemented through digitizing are best positioned to migrate SMEs online.
payables and receivables.
Emergence of bilateral real-time payments
Digital currencies remain a long play arrangements
While the potential of distributed ledger technology The heterogeneity of payments systems’ maturity
remains on financial institutions’ R&D road maps, the and design across countries in the region—
current prominence of cryptocurrencies owes more including the lack of a common currency—presents
to their role as investment vehicles than their use hurdles to functional interoperability. Although
as mainstream payment methods. Various central initial conversations regarding build-out of regional
banks have begun experimenting with central- infrastructure have begun and 70 percent of APPS
bank-issued digital currencies (CBDCs), which respondents find a SEPA-like structure desirable,
would leverage a distributed ledger backbone while most experts assign a horizon beyond five years to
addressing KYC and stability concerns. If launched, such an endeavor, given the challenges of aligning
however, these vehicles will likely strengthen rather multiple jurisdictions. In the meantime, a series
than replace the usability of existing digital wallets. of bilateral real-time payments arrangements are
being formed.
Two-thirds of industry experts responding to the
APPS do not expect material adoption of digital Rise of digital money-transmittal operators
currencies over the coming five years. Nonetheless, (MTOs)
the latest iteration of Libra v2.2 and the People’s With regard to retail cross-border remittances,
Bank of China’s blockchain-based digital RMB digital money-transfer operators (MTOs) have
currency called DCEP (digital-currency electronic proven adept at capturing market share by offering
payment) have the best potential for traction. Libra— a better user experience at lower cost. Traditional
assuming it can resolve KYC and AML concerns MTOs have responded by launching online versions
posed by US and EU regulators—has the benefit of with similar functionality, while some banks have
a large, highly engaged user base from consortium invested in or partnered with these players. Most
partner Facebook and an array of digital-commerce small, purely local banks will likely opt to partner with
partners likely to build apps leveraging the currency, a provider like TransferWise or Instarem, generating
once established. DCEP has the early advantage revenue through a fee-sharing arrangement. Digital
of government and regulatory backing, as well remittances should reach 40 percent market share
as a target market already accustomed to digital across Asia by 2025, up from 17 percent today.
payments. Additional scale and international
Choices on B2B servicing
acceptance could result from a proposed East
The B2B arena, a significant driver of Asia’s
Asia digital currency, serving as a counter to the
payments revenues, also faces intensified
dominance of the US dollar. Such a move could lay
competition. Incumbents are upgrading the
the groundwork for a compelling proposition.
correspondent-banking model through initiatives
such as SWIFT gpi, while fintech disruptors have
Cross-border linkages altered the value chain by creating alternative
Cross-border revenues have been a key contributor payment methods circumventing banks in some
to Asia’s ongoing payments growth, increasing by country corridors.
an average of 6 percent annually between 2011 and
On the corporate payments side, banks will face
2019. As the economy emerges from COVID-19’s
a trade-off. One option is to maintain a traditional
near-term shock, consumer-related cross-border
correspondent-banking network spread across
payments will again become the largest opportunity
many markets—a model that is proving increasingly
for additional penetration and innovation.
risky and cost-inefficient. An alternative is to limit
Another major opportunity exists in enabling the the longstanding nostro/vostro route to a few
region’s disproportionate SME population for large corridors and rely on solutions like Visa B2B
international e-commerce. COVID-19 has helped Connect or Ripple to service the long tail of markets
to propel the already impressive growth of regional with limited flows. This option adds operational
players like Lazada and Shopee. One can anticipate complexity, however, given the need to plug into
adoption trends achieved in China to be replicated alternative payment rails. Players with established
14 The future of payments in Asiaglobal scale and the willingness to fund ongoing markedly by country, is notable for its high degree of
innovation are best positioned for success with fragmentation. For example, more than 150 e-wallet
this option. While technology breakthroughs like licenses have been issued in Southeast Asia alone.
blockchain could still change the game, local Asia’s lengthy economic expansion afforded an
regulatory hurdles remain an impediment for unusual amount of runway to a variety of subscale
regional and global ecosystem schemes. players, thanks to liberal capital availability, and it
limited the need to stress-test business models
Another divergence of opinion between banks and
under challenging circumstances. While such an
nonbanks emerges among APPS experts regarding
environment benefits early-stage innovation, it can
the cross-border outlook. Nonbank experts most
impair the market’s ability to coalesce around a
often view the building of bilateral arrangements
limited number of solutions when scale and ubiquity
between countries for real-time settlement—like
are required.
the approach taken by NETS and Paynet—as the
most important driver of real-time cross-border With venture capital becoming even more difficult to
transactions over the next five years (the option attract during the COVID-19 pandemic, stand-alone
selected by 35 percent of nonbank respondents). firms with negative cash flow face a daunting climb.
However, a similar share of bank experts see Deep-pocketed companies, both banks and big
regional ecosystem players such as Grab and Ant tech, should have opportunities to integrate across
Financial offering cross-border solutions as a likely the value chain and bolt on particularly innovative
outcome, subject to regulatory approvals. solutions at valuations that would have seemed
unlikely mere months ago.
Consolidation of disparate players This shakeout could provide the added benefit
Asia’s payments value chain, whose players vary of rationalizing excess market capacity—for
Exhibit 9
Potential investment ideas in Asia payments
Observations regarding COVID-19’s impact on payments
Potential investment What you would need
ideas to believe
Positive impact Neutral impact Negative impact
Merchant services Merchants will continue
+ Tailwinds – Headwinds such as onboarding and transitioning online and will
managing subscriptions value digital-specific
E-commerce/ Closing of Economic slowdown functionality that helps with
card not physical locations hitting key spending migration as a differentiating
present and increased categories; margin feature
demand for compression
convenience generally seen as Integration platforms New ecosystems are sticky
fueling ~50% volume growth in to connect merchants even after crisis and will be a
growth in online POS/card present to multiple ecosystems differentiating feature to the
sales (CP) (eg, Instacart, merchant
Doordash)
POS/ Reopening of the Closed locations
Payout solutions for Online marketplace volume
card present economy should shrinking volumes
online marketplaces will continue to increase as
bring rebound ~30–40% in short
SMEs transition online
term
Consumer payment Analytics will play an
C2C and B2B Consumer: B2C CNP: Volumes enhancers that layer increasing role in payments,
cross-border Volumes up for in travel and on top of card and value-added services
P2P remittances entertainment are payments can penetrate existing user
and B2C card not down base
present (CNP) B2B: Volumes
B2B: Long-term down, timing
trend of differences for
increased recovery, reopening
globalization
Source: McKinsey analysis
15 The future of payments in Asiainstance, in the e-wallet space. If Europe is any should explore payment-enhancement solutions to
guide, payment specialists are poised to absorb layer on top of card payments. If online marketplace
meaningful portions of the value chain, such as volume is considered a key growth lever as SMEs
acquiring, that have long been served by banks. transition online, payout solutions supporting these
Such specialists have emerged in the United States marketplaces become a wise play.
(e.g., Stripe) and Europe (Adyen, Worldpay). No such
An increasing role for partnerships
specialist has yet to separate from the pack in Asia.
In addition to outright acquisitions, global players will
likely capitalize on the same conditions, navigating
Integration across the value chain regional ownership constraints by striking
We expect players to make moves within and partnerships with key players (e.g., Facebook and
across the payments-industry value chain to bolster PayPal’s stakes in Indonesian ride-hailing firm
their pan-Asian positions. Several archetypes Gojek). Asian bank incumbents can also pursue
could govern these consolidation scenarios. partnerships with fintechs built around another
Banks seeking innovation, talent, and return could valuable commodity at their disposal—customer
bolster their solution sets via fintechs or buy online referrals—in pursuit of new value propositions and
merchant acquirers to address revenue pool shifts. adjacent markets.
E-wallets can address the existing need to build
The rise of payment specialists
critical mass, consolidating stand-alone offers and
The net effect of these dynamics will be a blurring
creating linkages across countries. Acquirers can
of the lines between global and local acquirers.
expand through acquisition into fast-growing Asian
Local specialists will contribute licenses, access,
markets and/or integrate with fintechs to diversify
market knowledge, and bandwidth to complement
from a pure-processing revenue model. Meanwhile,
global players’ scale, technology, and domain
ecosystems players can pursue adjacencies on both
expertise. The evolving landscape also raises the
the acquiring and issuing sides to acquire stronger
provocative question of whether national payments
fintech offerings, and big tech can strategically
players across Asia could explore combining to form
expand into new markets while making payments
a regional powerhouse akin to NETS in Europe.
inroads by advancing diversification from existing
Approaching the opportunity from another lens,
advertising revenue streams.
regional banks could investigate the potential
Asian incumbents have an uncommon opportunity to unlock greater value from their payments
to acquire payments capabilities and talent, businesses by spinning them out as separate
extending an existing pattern of strategic global entities, at which point several may be combined to
deals, potentially at quite different scale and price generate scale.
points (Exhibit 9). COVID-19’s aftermath has created
a new set of headwinds and tailwinds that should
be considered, depending on the use case being Each of these five Cs will ultimately increase market
considered. For instance, those who believe newer complexity, forcing payments players from all
ecosystems will remain sticky after the crisis and corners to rethink their strategic objectives and
provide differentiating features for merchants could monetization strategies. In Chapter 3, we explore a
consider investing in platforms (such as Instacart series of imperatives that each constituency should
and DoorDash) connecting merchants to multiple consider as ways to harness these forces to their
ecosystems. Those who see analytics playing an advantage.
increasing role in payments, with value-added
services as a key to deeper merchant relationships,
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