Payment services providers need to move faster on AI
The rapid rise in global payment transactions has excited investors for years but, according to the latest Boston Consulting Group (BCG) Global Payments Report, this growth is expected to slow down, especially in North America and Europe.
In 2023, financial companies worldwide generated 1.8 trillion dollars from payment transactions, fees, and interest on checking accounts and credit cards, up from 1.6 trillion dollars the previous year. This 12.5% increase, according to BCG, surpassed the average annual growth of 9% recorded by the industry from 2018 to 2023.
A key reason for this development is the plateauing of cash versus digital payments in many countries. In Scandinavia, the UK, and the US, less than 10% of the value of all consumer transactions are now made in cash. Even in Germany, the share has halved to 25% over the past 15 years, according to a Bundesbank study cited by BCG.
Nonetheless, revenue growth from payment transactions is likely to slow because of shrinking margins, with the tailwind from rising interest rates and inflation reversing, and pressure from increasingly strict regulation.
Market players perform differently
However, the outlook for different players in the payments industry varies. Large credit card providers such as Visa and Mastercard have performed best, with a total shareholder return (TSR) of 15% annually since 2014. BCG believes this trend will likely continue during the phase of slower growth, at least until real-time account solutions – already in use in some major emerging markets – become more widespread globally.
The outlook is less rosy for acquiring (merchant acceptance). High TSR growth of 30% has recently shrunk to 16% due to fierce competition with software companies. BCG forecasts that annual earnings growth in this field will fall to 6% by 2028.
Instant payments dominate the industry
Real-time payments have become the dominant topic in the payments industry, according to BCG. These transactions are now possible in over 60 countries. In the Eurozone, banks face significant pressure to enable cross-border instant payments.
India, Thailand, and Brazil already stand out with a very high share of real-time payments in the consumer market. Behind this success are simple digital systems like Pix in Brazil, strong government support in India, and systems offering low or no fees for merchants in Thailand.
In a market transformed by real-time payments, financial service providers can differentiate themselves through added services, according to BCG. Outstanding risk management, fraud prevention, and complaint handling services could become key differentiators, requiring an upgrade in back-office systems.
„Real-time payments will impact liquidity management as well as fraud and sanctions checks“, says Mireia Granzer, co-author of the study. Systems must be able to respond instantly, 24/7.
Shortcomings in AI adoption
It’s clear that AI-based applications could help. Nevertheless, the consultants believe that most payment companies still have considerable shortcomings in this regard, even though generative AI offers tremendous potential for revenue and profit.
85% of companies agree that AI will have a disruptive or at least transformative effect on the industry. Yet only 18% of companies have a clear AI strategy, and just 7% have development teams working on it.
The study identifies uncertain short-term revenue prospects from AI adoption as a key reason for this implementation gap. Many payment service providers still lack the data quality needed to implement AI applications across the board. BCG therefore recommends focusing generative AI on high-value areas, such as customer service or software development.
To succeed in the future, companies need a modular, cloud-based, and scalable payment architecture. Gradually reducing legacy systems, lowering operational costs, and bringing new products to market faster can help along the way. „The companies that boldly pursue product innovation and technological modernization today will not only shape the future of the industry but also create lasting value for their customers and shareholders“, says BCG consultant Markus Ampenberger.
