Overview of the U.S. Payments Industry

Transcription

1 0 Overview of the U.S. Payments Industry Southern Financial Exchange Conference May 3, 2017

2 Today s Discussion Trends in payments volume and value Five forces impacting payments 1

3 US PAYMENTS INDUSTRY: OVERVIEW Cash remains the most frequently used payment instrument, while ACH represents the majority of payments flows for US transactions 261 billion 2015 US dollar flows USD 113,942 billion (43%) Cash $2,116 (2%) 37.2 (14%) 33.8 (13%) Sig. Debit Credit Card $1,410 (1%) $3,135 (3%) 27.5 (11%) ACH $66,823 (59%) 19.7 (8%) PIN Debit $778 (1%) 17.3 (7%) Check 1 $26,830 (24%) 12.5 (5%) 0.7 (0%) 0.4 (0%) 0.2 (0%) Prepaid Book Entry Transfers Other 2 Wire Transfer 3 $317 (0%) $89 (0%) $6 (0%) $12,437 (11%) 1 Reflects checks paid, not checks written. Checks converted to ACH are counted in ACH. This convention is used throughout. 2 Includes deferred payment services (e.g. BillMeLater) and cell phone/other bill charges 3 Our model excludes the vast majority of wire transfer dollars in an effort to approximate customer payments activity rather than FI settlement. SOURCE: McKinsey U.S. Payments Map, Release Q

4 US PAYMENTS INDUSTRY: OVERVIEW Electronic instruments continue to replace paper-based transactions U.S. Payment transaction growth Billions Cash Debit Credit ACH Other 1 Check Wire CAGR -1% 4% 4% 5% 7% -3% -1% Other includes prepaid, book entry transfers, and other payments. SOURCE: McKinsey U.S. Payments Map, Release Q

5 US PAYMENTS INDUSTRY: OVERVIEW C2B payments account for the vast majority of transactions, while the B2B space holds the largest share of dollar flows Total 2015 payment volume and value by counterparty Volume in billions, value in USD Trillions % of total payments volume % of total payments value Business / Government B2B 79 B2C Payer 8 volume value 70 4 volume value 14 C2B 220 C2C Consumer 85 volume value 15 3 volume value 1 Business / Government Consumer Payee SOURCE: McKinsey U.S. Payments Map, Release Q

6 US PAYMENTS INDUSTRY: OVERVIEW Cash makes up over half of consumer POS transactions but ~30% of flows; ACH dominates bill-pay; and cash and check still comprise most P2P payments 2015 distribution of C2X transactions and $-flow by instrument Point-of-sale payments 1 Bill payments 2 P2P payments 3 Transactions 100%=194.5B Prepaid Other Credit Debit 53 Cash Transactions 100%=26.0B Debit Check Credit 14 Other ACH Transactions 100%=9.0B Other 11 Check Cash $-Flow 100%=5.8T Prepaid Other Cash $-Flow 100%=11.3T Credit Other Debit 3 2 Check 2 26 $-Flow 100%=1.7T Other 18 Cash 10 Check Credit Debit 68 ACH 72 1 Other includes check, ACH, and book transfer 2 Other includes prepaid, wire, and book transfer 3 Other includes credit, debit, ACH, prepaid, book transfer, and wire SOURCE: McKinsey U.S. Payments Map, Release Q

7 US PAYMENTS INDUSTRY: OVERVIEW Businesses prefer using credit cards at POS; ACH and check dominate B2B bill pay and B2C income payments 2015 distribution of B2X transactions and $-flow by instrument Point-of-sale payments 1 Bill payments 2 Income payments 3 Transactions 100%=7.9B ACH Other Check Cash Debit Credit Transactions 100%=11.8 B ACH Credit Other Wire Check Transactions 100%=11.4B Check 22 Cash Other ACH $-Flow 100%=0.9T ACH Other Check Cash 10 5 Debit $-Flow $-Flow 100%=78.3T 100%=16.0T Credit Other Cash Other Wire 0 Check Check Credit 59 ACH 78 ACH 1 Other includes wire, prepaid and book transfers 2 Other includes cash, debit, prepaid and book transfers 3 Other includes book transfers and wire SOURCE: McKinsey U.S. Payments Map, Release Q

8 US PAYMENTS INDUSTRY: OVERVIEW Payment revenues are expected to grow at 5% annually over the next five years NII Fees 2015 revenues Billions growth Percent 2020E revenues Billions, Estimate growth Percent US Payment Industry Cons. Credit Card Issuing % % Cons. DDA Bus/Gov DDA Bus./Gov Credit Card Issuing 34 29% % 7 Merchant Acquiring Money Services Other Money Services includes prepaid cards, electronic money transfer (EMT), non-bank check cashing and money orders. 2 Other includes armored transport, check verification/guarantee, travelers checks, and ISO ATM fees. SOURCE: McKinsey U.S. Payments Map, Release Q

9 US PAYMENTS INDUSTRY: CONSUMER CREDIT CARD Revolving balances continue to recover after bottoming out in mid-2011 Consumer revolving credit (SA) $billion 1,200 1,150 1,100 Balances have gotten back ~40% of what was lost during the great recession 1,050 1, Over half of the rebound has come in past 16 months Jan 2002 Jul 2008 Apr 2011 Mar 2014 Jul 2015 Jan 2018 Jul 2020 SOURCE: FRB G19 8

10 US PAYMENTS INDUSTRY: CONSUMER DDA Consumer balance levels are likely to decrease over the next five years; yet higher NIM will help drive income Consumer DDA net interest income 1 $Billions % p.a E 17E 18E 19E 2020E Consumer deposit balances $Billions 1, ,258 1,259 1,258 1,228 1,187 1,200 1,152 1, , NIM Deposit Balances Deposit net interest margin Percent Excludes OD line of credit NII SOURCE: McKinsey U.S. Payments Map, Release Q

11 US PAYMENTS INDUSTRY: COMMERCIAL DDA Rising NIM drives increased commercial DDA income over the next few years Commercial DDA net interest income $Billions 1,500 1, ,031 1,082 1,118 1,131 1,181 +3% p.a. 1,205 1,255 1, E 17E 18E 19E 2020E NIM Deposit Balances Commerical deposit balances $Billions Deposit net interest margin Percent 1,400 1,200 1, ,031 1,082 1,118 1,131 1,181 1,205 1,255 1, SOURCE: McKinsey U.S. Payments Map, Release Q

12 US PAYMENTS INDUSTRY: COMMERCIAL CREDIT CARD Commercial card spending took off post-recession; purchasing card continues to lead the charge, followed closely by small business credit cards Industry general purpose commercial card purchase volume $Billions CAGR Percent T&E P-Card SMB CC $1,300 $1,200 $1,100 $1,000 $900 $800 $700 $600 $500 $400 $300 $200 $ % p.a E 17E 18E 19E 2020E SOURCE: McKinsey U.S. Payments Map, Release Q

13 Today s Discussion Trends in payments volume and value Five forces impacting payments 12

14 Five forces influence the payments landscape 1 Economy Moderate economic recovery Rising interest rates Lower unemployment 5 Regulation Basel III/LCR/NSFR Reg Q repeal EMV liability shift Upending of Visa/MC Payments 2 Technology Big Data analytics Machine Learning Artificial Intelligence 4 Customer behavior 3 Need for faster, secure reliable payments Potential return of the revolvers Competition Tech giants and Fintechs Partnerships SOURCE: McKinsey Payments Practice 13

15 ECONOMY 1 Economic recovery and returning interest rates bode well for the overall payments landscape Annual change in US real GDP Inflation Percent Percent Unemployment Fed Funds Rate Percent Percent E 17E 18E 19E 2020E E 17E 18E 19E 2020E SOURCE: Moody s Analytics, Feb 2017 forecasts based on Slower near term recovery scenario 14

16 TECHNOLOGY 2 Significant advances in data sources and advanced analytics continue to fuel new technology Big Data sources Transactions: Trillions of data points from enterprise systems (e.g., DDA Systems, payments systems, loan account systems, billing systems), inter-company activities (e.g., clearinghouses), and consumer activity (e.g., POS) Mobile: 5bn phones worldwide; growing share of smartphones Sensors: Embedded M2M sensors growing 30% annually, installed in everything from cars, roads, buildings, appliances, to medical devices Social: Over 1500mn active users of facebook; over 350mn tweets a day Scientific / engineering: Satellite images, geophysical data, and genetic data Audio / video: With increasing ability to automatically scan and extract information (e.g., facial recognition, speech analytics) Analytics methods Predictive modeling Example uses: estimate customer churn; develop the next best offer for up-sell / cross-sell; estimating risk Neural networks Example uses: fraud detection; medical diagnostics Social network mapping Example uses: identify key purchase influencers; quantifying shifts in sentiment Visualization tools Example uses: visualizing risk; understanding correlations SOURCE: McKinsey Global Institute, Hilbert and López, The world s technological capacity to store, communicate, and compute information, Science,

17 Must-haves Differentiators COMPETITION 3 Few new payments methods have offered step-function improvement over incumbent options Hierarchy of needs Value Convenience Ubiquity Security Reliability In-person payment options Mag-stripe (incumbent) EMV (soon to be incumbent) Mobile Pay wallets In-app payments Remote payment options Online e-wallet Manually entered (incumbent) Unmet Key takeaways Met Value at the top of the needs hierarchy, but has most room for improvement EMV has potential to help Pay wallet ubiquity (infrastructure) and convenience (i.e., tap is better than dip) In-app payments do best job of stepfunction improvements however closed-loop systems cap ubiquity Success of online e- wallets driven by significant improvement in convenience, also helps shopping cart abandonment Merchant and user education go a long way to making EMV/ mobile wallets more reliable and convenient SOURCE: McKinsey Payments Practice 16

18 CUSTOMER BEHAVIOR 4 On the consumer side, Real-Time Payments is a response to digital attackers driving customer acquisition and engagement through P2P payments Venmo payments volume growth USD billions Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q Digital P2P payments app with social features where users can see the payments made by friends that has gotten meaningful traction with Millennials Free, ACH and debit-card based, with a seamless text messaging -like interface Does not generate revenue on its own was acquired by PayPal in 2013 and serves as a customer acquisition engine for a new demographic Pay by Venmo recently announced enabling payment of merchants from Venmo SOURCE: Press search 17

19 REGULATION 5 Regulations redefine the characteristics of revenue growth Consumer Credit Card 100% = $132.7bn Pre-recession peak Tx After the CARD Act Post-recession Tx 100% = $172.3bn Contributors to growth Steady growth Heavy growth Stable Shrinking NII Pen / Maint. NII Pen / Maint. Consumer DDA 100% = $74.2bn NII Tx After Durbin and CFPB mandates NII Tx 100% = $88.4bn Pen / Maint. Pen / Maint. Tx Tx Commercial DDA 100% = $35.95bn NII After Reg Q repeal and LCR / Basel III NII 100% = $49.6bn Pen / Maint. Pen / Maint. SOURCE: McKinsey US Payments Map, Q

20 Who is GCI? GCI is an Atlanta-based office of McKinsey that provides data-driven payments expertise to clients in commercial banking, retail banking and operations & technology. Our services include Benchmarking Data-driven studies that reveal opportunities from front-line sales to portfolio performance Marketing Research Syndicated and custom primary research insights for consumer and commercial banking. Profit Pools An objective fact base and unrivaled expertise to inform payments strategy. Consulting Trusted experts, data-driven insights. Forums Member-driven discussions on the future of cash management and payments Learn more: GCI is a wholly-owned subsidiary of McKinsey & Company 19