The payments industry's soaring revenue growth of the last five years is decelerating, poised to fall from an overall average of 8% annual growth to only 6% from now through 2027, according to a new global payments report from Boston Consulting Group.
The slowing economy — along with the maturation of a broad payments-digitization cycle and market fallout from a long string of M&A deals — is forcing banks, payments processors, merchant acquirers and fintechs to work harder for transaction revenue growth, a team of 14 BCG analysts asserted in a 40-page report published this month.
A growth wave that began in 2017 created more than 5,000 payments-focused fintechs, attracting equity funding averaging $5 billion to $8 billion per quarter during 2021 through the middle of last year. But payments fintech funding shrank to $1.4 billion by the second quarter of this year and it's unlikely to rebound in the immediate future, BCG contends.
Other factors pressuring future payments revenue growth are the rise of faster payments and open banking technology, which are expected to usher in lower-cost account-to-account transactions, along with downward pressure on card interchange and fees.
Simultaneously, boundaries are blurring between different payment sectors, with new software and payments-as-a-service offerings absorbing incremental growth from industry incumbents; embedded finance startups are also encroaching on banks' turf, said Inderpreet Batra, managing director and senior partner in BCG's New York office.
"The era of the megadeal ended, and now we're in a period of strategic competition where banks and payment processors must figure out how to successfully leverage their customer base by expanding their capabilities with the right technology and partnerships," he said.
To stay competitive, banks and other traditional payments players must adopt cloud infrastructure and modular, scalable payments platforms that can better integrate with third-party software systems, and the payments industry as a whole must master new global data standards and seek opportunities created by new central bank digital currencies, Batra said.
Pressure on card issuers
Even though fintechs' valuations and funding inflows have declined, their role remains critical for the survival of card issuers, payment processors and merchant acquirers, according to Batra. Global payments-focused fintechs currently account for about $100 billion in total industry revenue, and by 2030, fintechs could command a revenue pool worth more than $500 billion, BCG's report said.
Meanwhile, card issuers' revenue growth is expected to decline to 5.5% through 2027 from about 8%, with higher interest rates and economic pressures depressing credit demand, while pending U.S. regulatory action on late fees is likely to compress revenue further in coming years, according to the report.
"We expect lower-cost account-to-account transactions to grow faster than card transactions over the next several years, resulting in lower revenues on the same dollar volume of transactions," Batra said, adding that higher expenses to support card loyalty and rewards will also cramp issuers' revenue-growth.
Banks can seek a successful path forward through the artful use of technology and data, and partnering with fintechs to provide corporate and consumer customers with faster payments and diversified digital financing options, customized access to working capital and payment-orchestration to route transactions for optimal timing, speed and cost, according to Batra.
Product personalization and loyalty have huge potential for card issuers to enrich customer relationships, but only about 15% of issuers are currently maximizing their capabilities in these areas, BCG's research suggests.
Generative artificial intelligence could be a boon for banks developing new products, cutting production time by at least 20%, Batra said.
"Banks and fintechs are likely to find that GenAI can not just speed up product development, but produce richer products, with better outcomes customized to institutions and audiences," Batra said.
Business-to-business payments represent another area with untapped potential for banks to expand their range of services and increase transaction volume by serving companies in fast-growing digital-payment arenas like travel, streaming, gaming, sports betting, online gambling and managing digital assets, the report said.
The merchant-acquiring industry's growth rate will remain near 8% over the next five years, but many banks and traditional payment processors that provide merchants with online and in-store card acceptance are vulnerable to market-share loss from digital-first acquirers like
To offset these risks, incumbent merchant acquirers should make merchant onboarding self-service-driven, expand payment acceptance across a diversified range of channels and devices, and use data analytics to create quick solutions and lower costs for businesses, the report said.
More than half of small businesses now use integrated payments software in their day-to-day operations, and banks must find ways to collaborate with providers of these platforms to optimize their customers' outcomes, the report said.
Many large corporations now rely on five or more payment service providers, and as a result, they need payments-orchestration services to route various payments efficiently and securely among multiple rails.
"You now have software companies that are taking on more and more of what acquirers used to do, and they're nibbling away at incumbents' profit margins," said Batra, who advises banks and payments providers to work with fintechs to support consumers, merchants, and corporations with tailored services to regain control of revenue growth.
Fintechs' perspective
BCG's conclusions resonate with payments industry fintech executives who see opportunities amid a more challenging environment.
Although major payments M&A activity has slowed, declining valuations mean banks and fintechs could more easily make strategic acquisitions to enhance their offerings, said Ralph Dangelmaier, CEO at Waltham, Massachusetts-based fintech
"Next-generation payment orchestration means supporting business-to-consumer, business-to-business, marketplaces, subscriptions, invoicing, accounts receivables and embedded payments, while having the flexibility to accommodate new use cases," Dangelmaier said.
The deflation in fintech valuations was overdue, said Yaacov Martin, CEO of
"Many fintechs were overvalued based on metrics like consumer acceptance, rather than on profitability and revenue," Martin said.
The biggest growth opportunities Martin sees lie in the B2B arena, where producers, suppliers and distributors in specialized industries are starved for tailored financial services and products.
"Once you delve into specific industry segments and sub-industries, it's an unsaturated market," Martin said.
"There will be significant growth in emerging payment options like account-to-account transfers, real-time and variable recurring payments and embedded payments, and banks who start planning for that future will be in the winning camp," he said.
