Worldwide electronic payment transaction volumes rose 17% over the past five years, according to an annual payments report from the global consulting firm McKinsey.  

But as payment choices evolve, users are migrating to lower-fee instruments, pushing revenue and margins down as scale increases, the report showed. So, the volume increase was much higher than a 6% increase in payments revenue growth over the same period, according to the report, released in September.  

Instant payments are growing the fastest in places where there is not just payments infrastructure, but also allow multiple applications, including person-to-person and bill-pay tools, coupled with a digital identity. 

“When all of those things came together, (it) actually drove such rapid adoption,” McKinsey Partner Philip Bruno, one of the report’s authors, said in an interview. 

In the U.S., the Federal Reserve this year launched an instant payments system, called FedNow, that will now compete with the private RTP Network started by large U.S. banks in 2017. With FedNow seeking to engage more financial institutions in real-time payments, the use of instant payments is expected to increase in the U.S. 

Instant payments adoption abroad

The McKinsey report pointed to India’s real-time payments system as instrumental in the expansion of its electronic payments use. Digital payments volume there grew tenfold in the past five years, and is projected to climb roughly 35% annually over the next five years, facilitated by the country’s Unified Payments Interface network. Although the network generates minimal transaction fees, it still creates more revenue than cash use does. 

India’s adoption of instant payments is “a positive poster child for how to do a payments scheme,” said Peter Tapling, managing director at his Chicago-based consulting firm PTap Advisory.

Brazil is another example of that phenomenon, he said. The McKinsey report forecasts that by 2027, instant payments will represent almost half of the transactional revenue growth in that country.

Instant payments won’t drive revenue growth everywhere in the short-term, the report states, as these payments remain nascent in the U.S. If countries enact favorable regulations for instant payments, volumes could double in areas such as the Eurozone, McKinsey’s report predicts. 

“The whole instant drive around the world has been about taking stodgy old bank pay and enabling bank products that operate the way people have begun to think, which is instant gratification,” Tapling said in an interview.  

When it comes to payments digitization, consumer payments is just one part of the equation, Bruno noted. There is “massive growth” potential in commercial digital payments, which are about a decade behind consumer payments in some respects, he said. 

There is major growth taking place in the digitization of accounts receivable and accounts payable, Bruno said.

Global cash usage declined by about four percentage points in 2022, continuing a pandemic-era trend as instant payments gained ground in certain geographies, according to McKinsey. The most cash displacement happened in the cash-reliant economies of India and Brazil, where the share of cash transactions dropped by seven to 10 percentage points.

The drop in cash usage fueled India’s move to the top five countries for payments revenue as well, the report states. Meanwhile, the quick acceptance of Brazil’s Pix instant payments network is pushing aside cash there. 

Broad-based revenue growth in 2022

The gain in electronic payments comes as payments revenue hit an all-time high in 2022, jumping 11% globally to $2.2 trillion, McKinsey reported. That was the second consecutive year for a double-digit gain.  

Most regions of the world experienced double-digit payments revenue growth last year, the report said, with the exception of the Asia-Pacific region. In that geographic area, revenue grew only 4%, dragged by a 3% decline in Chinese payment revenue. Excluding China, the Asia-Pacific region grew at a faster 25% clip. 

As interest rates crept up worldwide last year, interest-based revenue contributed more to overall payments revenue growth than did fee-based revenue, the report said. “For the first time in several years, interest-based revenue contributed nearly half of revenue growth on the back of rising global interest rates,” the report said. Nonetheless, fee-based revenue is projected to overtake interest-based revenue again at some unspecified time in the future, according to the report.

Account-related liquidity revenue accounted for $750 billion of the $2.2 trillion in worldwide revenue, McKinsey’s report said, referring to net interest income on current accounts and overdrafts.

Banks are making more money on interest as the Federal Reserve pays interest on master accounts and on variable lines of credit, among other ways, Tapling said. 

Higher interest rates don’t affect steady-state payments, but digital wallets hold billions of dollars of “stagnant money” which can earn interest for the financial institutions, Tapling said. 

“Any of the stagnant money in the wallet can earn interest for the financial institution that the financial institution does not have to pay off to the customer,” he added. 

Overall, the industry remains on track for global payments revenue to surpass $3 trillion by 2027, according to the McKinsey report.


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