Disruption is big business. McKinsey & Company released their annual Global Payments report last month, and with it came some figures that brought home the true scale of the ongoing evolution in the financial services industry.
Homing in on how nonbank digital entrants are poised to further transform the payments landscape, McKinsey says global investment in financial services-related start-ups “soared from $3 billion in 2013 to $12 billion in 2014, a growth rate three times the rate of overall venture capital investment.” Even more impressively, the trend looks set to continue in 2015, with Time Magazine claiming 2014’s figures had been surpassed by the half-way point in 2015.
The report also highlights the fact that payments innovations are the chief focus for the majority of start-ups—with around 35% of FinTech firms “active in the payments area.”
Such stats highlight just why there is so much buzz around the possibility of a global revolution in how consumers and businesses pay one another, but McKinsey also touches on the perception that FinTech is a bubble waiting to burst; “…history suggests most start-ups will never gain solid footing. During the dot.com boom of 1997 to 2000, fewer than 10 of more than 450 payments start-ups survived…”
Addressing that historical omen, however, McKinsey offers up three reasons why they expect things to be different this time around. These include the fact that major players entering the payments sphere—such as Apple and Google—already have large and loyal customer-bases; the proliferation of smart phones; and changing customer expectations.
Summarizing the potential impact of new entrants into the payment picture, the report asserts; “To the extent these nonbank players use payments to gain control of the customer interface ‘front door,’ they will then own the customer relationship and the ability to influence consumer behavior, reshape industry economics, and potentially penetrate higher-margin financial services.”
In portraying such a potentially rosy outlook for FinTech players, McKinsey’s report is also naturally replete with warnings for banks.
“The long-term disruptive threat,” says the paper, “is that direct, front-end consumer relationships are disintermediated and banks run the risk of being relegated to the ‘pipes’ that other players use to move money, a much less profitable business model than today.”
The threat to banks outlined in the report is certainly not a new revelation, and McKinsey does acknowledge the efforts of some leading financial institutions to innovate, often through partnerships with and investment in FinTech start-ups.
For banks, concludes the report, the best possible future is one in which they embrace the fact that “digital technologies can do much more than simply automate processes,” because, “Rapid advances in technology and communications will continue to drive change in the way people and companies do business—change that is already making legacy systems inadequate.”
Overall, McKinsey predicts global payments revenues will increase from $1.7 trillion in 2014 to over $2 trillion by 2020. But even though they are confident of this continuing upward trend, the exact nature of how the pie will be carved up between banks and new players seems to be the most fascinating and uncertain aspect of the payments landscape in the years ahead.
For more analysis of McKinsey & Company’s Global Payments report, check out our previous blog on the changing face of cross-border payments.