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A 'once in a generation' opportunity for Asia payments

Jacob Dahl, Bharath Sattanathan and Reet Chaudhuri
Jacob Dahl, Bharath Sattanathan and Reet Chaudhuri • 5 min read
A 'once in a generation' opportunity for Asia payments
Covid-19 has accelerated several ongoing trends in Asia payments, most notably driving an unprecedented rise in contactless payments, with the digital user base growing by up to 20% in select Asian markets over the last three months.
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(July 17): Asia generated over US$900 billion ($1.252 trillion) in payments revenues in 2019, nearly half of the worldwide total. Asia’s payments revenues also outpaced other regions, averaging over 9% annually over the past decade. The importance of payments to banking in Asia has increased as well, representing 44% of aggregate banking revenues in the region.

Covid-19 has accelerated several ongoing trends in Asia payments, most notably driving an unprecedented rise in contactless payments, with the digital user base growing by up to 20% in select Asian markets over the last three months and with 50% to 80% of new adopters expected to continue usage.

However, it has also resulted in reduced discretionary spending, lower trade volumes and declining interest rates. Consequently, Asia payments are likely to witness a revenue decline of approximately 10% in 2020.

As a response to the state of flux in which the industry finds itself, McKinsey launched its proprietary Asia Payments Practitioner Survey, covering 56 leading payments leaders from 13 Asian markets to seek perspectives on the key shifts expected in Asia payments over the coming five years. With the help of this input, we have identified seven trends likely to shape Asia payments going forward.

Digital wallets and QR are the next normal: Despite recent migration to digital payment methods, Asia remains the world’s most cash-reliant region (about 65% of transactions in 2019). The recent momentum achieved by e-wallet providers and QR-enabled solutions is likely to accelerate moves away from cash, particularly in developing markets, with contactless cards serving as a driver in developed Asia.

The battle between banks and platforms will intensify: Banks, leveraging their incumbent positions and established customer trust advantage, are seen as the most logical payment providers in emerging markets. As realtime payments become the norm, banks will have an advantage over non-bank providers. In developed markets, experts view digital ecosystems and Big Tech players (eg, Google and Facebook) as better positioned to win, given the superior user experience and ubiquitous reach of “super apps” offered by these players and increasingly connected to funding sources like bank accounts or credit cards.

Current account relationships will unbundle: Historically, Asian customers have maintained sufficient current account liquidity to enable timely transactions. This has led to many banks investing in payments despite declining fee revenues. A majority of respondents (57%) anticipate a decoupling of current accounts and payments. As real-time payments and digital wallets reduce friction and time to transfer, account holders may embrace a wallet for payments while cherry-picking a bank for current accounts. This will force banks in the region to rethink current account propositions.

Acquiring will see a resurgence, with new business models: Acquiring is expected to undergo a significant shift, given rapid growth in e-commerce and a likely decline in merchant discount rates (87% of our respondents estimate MDR declines of 20% or more). This will induce a scale-up from mere payments processing to monetise adjacent value-added services (such as reconciliation, loyalty, lending and deposits). These adjacent services could account for over 50% of acquirer revenues by 2025. Lower MDR and faster settlements will drive smaller merchant adoption. Competition between global specialist acquirers and local legacy champions will likely heat up as the specialists seek new growth markets in Asia and have proven expertise in building out what is increasingly becoming a “software” business.

A shrinking reliance on physical infrastructure: The current environment gives Asia an unprecedented opportunity to reduce reliance on cash. Increased digitisation will also spur a shakeout in physical infrastructure, with reductions of more than 20% in branch and ATM networks expected. Select digital currencies such as Libra and the China CBDC could gain traction in select markets. As demand for cash declines, banks can consider a utility model, outsourcing or sharing ATMs. In parallel, banks could play a service provider role to digital currencies by providing local clearing and settlements.

Bilateral cross-border partnerships will accelerate: Cross-border payments in Asia have been plagued by the twin challenges of long settlement times and high costs. While over 70% of experts believe a pan-European regional infrastructure like SEPA (Single Euro Payments Area) would be beneficial in Asean, they are sceptical of the execution. The more likely scenario is a series of bilateral agreements (eg, Nets with NPCI). In addition, regional ecosystem players could disrupt this space
by providing comprehensive cross-border services. For instance, we could soon see a Singapore-issued wallet used to scan and pay for a meal in Jakarta or Bangkok.

Consolidation could drive ‘horizontalisation’: Rationalisation in a fragmented payments market is likely. Nearly two-thirds of experts expect further consolidation — whether across the value chain (eg, networks combining with merchant acquirers) or within a specific category (eg, e-wallets). Given reductions in venture capital funding to FinTech players, we expect to see larger banks and tech firms make acquisitions to build out their product portfolios.

Covid-19 has further fuelled profound changes already underway in Asia payments. However, it has brightened the long-term outlook and could propel future growth in Asia payments via increased cash displacement and digitisation. Winning in the new normal will require players to reimagine their value proposition with a digital-first business model, potentially mirroring traits of a technology company.

Jacob Dahl is a Senior Partner and leads McKinsey’s Financial Services Practice in Asia and emerging markets. Bharath Sattanathan is a Partner and Leader in Asia Banking and Payments Practice. Reet Chaudhuri is a Junior Partner and leads McKinsey’s Payments Practice in Asia.

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