Thursday,13 June 2024

Mckinsey’s Bruno and Chaudhuri: “ Fintechs don’t see payments as a means of profitability, they see payments as a source of data”

5 min read

Interviewed By The Asian Banker Live

Mckinsey’s Bruno and Chaudhuri highlighted the emergence of alternative payment instruments in especially in markets of ASEAN & China and how fintechs and telcos had taken the lead in providing real-time payment services.

  • Bruno elaborates on the rapid growth of payments, particularly in China and the rest of Asia
  • He talks about the growth of alternative payments in Asia and China
  • He discusses how banks are responding to the rise of alternative payment methods

Here is the transcript:

Philip: We have seen the highest growth ever in payments last year, at 12% globally. This is the highest growth we’ve ever seen in the 20-something years we’ve been calculating the payments revenues for the industry. A lot of it has to do with the fact that we are seeing synchronous growth in many economies around the world. In Asia, with the growth of China and a number of other countries, India and others, with very high growth rates, it’s driving the growth in payments revenues. So, Asia is the region with the highest revenues of $900 billion out of the $1.9 billion, all coming from Asia and it’s driving all the growth, which within five years will be at $2.9 billion, just a hair shy of $3 trillion by 2022.

Boon Ping: We talked about the outlook. You mentioned the synchronous growth development across all these markets in Asia. China is starting to slow its economy. Obviously, other businesses will continue to grow in India, the rest of Southeast Asia, and various parts of the world. What’s the outlook? This is the outlook going forward in the next 12 months. What are the opportunities? What are some of the challenges?

Philip: So, I think the growth challenge for China’s slowing is relative because it’s still expected to grow at 6.5%, which I think many other economies would love to have even half that. The opportunities I think are a couple-fold. One is on the consumer side with commerce, is really the digital commerce revolution of what’s going on, and Asia is leading the alternative payment method growth.

So we’re seeing non-bank payment instruments dominate the digital payments arena, which is e-commerce, in-app payments, and all of that digital commerce is already in China at 75%. We think in the next five years, it’ll grow another 10%. So 85% of Chinese payments for digital commerce will be on non-traditional payment instruments. India is also quite high as well. So, the region is going to be a leader in alternative payments. It already is and will continue to be a leader going forward.

Then, on the commercial side, because of the growth of world trade and industrial provisioning, everything from small business up to large corporate, we’re going to continue to get growth on cash management revenues for the commercial side.

Boon Ping: This report looks at payments in all its forms, right?

Philip: Yes.

Boon Ping: So, you have digital and you have traditional payments. You talk about digital payments, and digital payments in China, but throughout Asia, you hear throughout this conference about instant payments or fast payments. How is that going to shift the structure of payments?

Philip: The instant payments I think in some ways is the banks’ response to what is happening with alternative payment methods. So, what they are looking to do is create applications that sit on top of national payments infrastructure that was created for faster payments to be able to drive end-user benefits. The end-user benefits will be the consumer because it’s from P2P, it could be for commerce, bill payment, but also for commercial because it is the catalyst for doing electronic invoicing and digitizing the entire commercial payments value chain from the purchase order all the way – for accounts receivable and accounts payable.

Boon Ping: Regarding alternative payments, the business model for traditional payment providers like a bank, how will it be impacted with, one, new infrastructure like instant payment, and, the increasing participation of non-traditional payments like your Alipay or Tencent Pay? There is a lot of disruption and those players don’t necessarily look at payments as a revenue product. They look at it as a means or adjacency to commerce.

Philip: Yes, exactly. When we see these starting around the world, many of the alternative payment mechanisms were started by digital commerce ecosystems and it’s the ecosystem’s desire to control, end-to-end, the customer experience of commerce, and payments is one piece of it. So, the digital firms think about their value chain in terms of ‘search shop by’, which is payments, and then delivery of goods on the back end. So, it’s that entire four-part value chain. Banks only focus on payment, the one sliver. So, the other firms want to own the whole thing. They’re willing to give away payments revenue in order to get the commerce piece.

So, that’s where banks I think have to think more expansively about how they support the entire commerce value chain, not just this act of payment.

Boon Ping: We’re meeting a lot of banks here. What is the first thing they ask you? How do they use this report? What do they look for in this report?

Philip: A few things that they look for in the report, one is how to start to think about payments as a business across the entire bank because there are synergies from the retail side of the bank, the commercial side of the bank, of bringing those together to be able to do new things. Two is how they think about payment strategy and where they want to spend their time. What we’ve been telling banks now is, in this period of good times where we have incredible growth, they should take the extra revenue and profits that they are generating from payments now and put it into transforming the business model from old bank payments into what is now a technology business.


  • Reet highlights the success of fintechs in the payment space, for example, Alipay and Grab, and how they have outperformed banks in that area
  • He explains how fintechs and telcos entered and took the lead in the payment space
  • He touches on the payment landscape in Southeast Asia and the possibility of a common cross-border, real-time payment system


Here is the transcript of the interview with Reet:


Reet: To be honest, I think banks have been a bit slow and I think most of the action is coming from attackers. Obviously, China is a fairly specific example everyone knows about, but if you look at WeChat Pay or Alipay, and how sophisticated they have become, they have completely destroyed the banks to the extent that fairly big banks which were trying to compete with Alipay and WeChat Pay, they actually spent a lot of money trying to build a competing offering, and then they just gave up. And they now have collaborated with WeChat and they have started to use something called WeChat Pay for Corporate. It is far, far superior to anything they could build on their own.

So, at least in China, very clearly we are seeing that banks have almost given up the battle on the payments side. One of the things, you will see in the report, we have said that non-conventional, or alternative forms of payment, today have a share in China of about 70%. We are actually projecting a 10% gain in share over the next five years for these modes of payment. So, that’s actually in China. In the rest of the markets, the banks are still somewhat ahead and most of the players are sort of trying to catch up. There are a number of fintechs in most markets.

Now, the biggest challenges I see which are very, very well-funded are obviously GrabPay and GO-JEK with GoPay. They have a proprietary use case. They have built up a fairly large base of customers. In fact, I recently read that Grab has now crossed a billion dollars of revenue which actually makes them bigger than a lot of the banks in the region. They are now investing heavily in growing their payments business. The interesting thing is they have a very different mindset for payments. So, they don’t see payments as a means of profitability. They see payments as a source of data.

They then use that data to underwrite personal loans which is really where the source of money is. In fact, payments for none of these players is actually profitable. So, even Ant Financial which is the biggest player in the world in that space, don’t make money on the pure payments business. They just about barely break even. This is after they have exploited every possible source including selling customer data to third-parties. Even then, they’re not paying money on payments. They are only making money on the related financial services cross-set- so that’s I think one.

The second is, if you look around Asia, you will find there’s not really a single example of a market where the leading alternative mobile wallet is run by a bank. DBS is trying in Singapore with PayLah. In Bangladesh, you have an example which is bKash. I think Bangladesh is virtually the only example where the leading wallet is actually run by a bank. That is obviously also being funded by Alipay. But in most other markets, you will see it’s an independent player.

In Vietnam, the leading wallet is someone called Momo. It’s totally independent. Then, if you look at Indonesia, there’s a mix of TCASH, Telkomsel, Go-Pay, and GrabPay. Then, Thailand is basically TrueMoney and so on. So, the telcos seem to be doing a bit more and they are also getting into this game quite – GCash in the Philippines of course. So, the banks are really struggling to get a toehold here. I think a lot of them are thinking ‘what do we do better?’ So, they all do have a mobile money offering of some sort, but they are not able to scale it up and the reason they are not able to scale it up is because of internal silos. A lot of people don’t understand this product and they see it as potentially cannibalizing their credit card business or their other businesses. I think they need to wake up and realize that these legacy businesses are increasingly coming under threat and they really need to move to these new products.

Boon Ping: A lot of this traditional business are big revenue generators.

Reet: Yes, but they are facing some pressures. You are seeing a bit of margin compression that’s happening. What’s actually happening is the market as a whole is growing because traditionally these new forms are focusing on the small ticket space. Singapore, if you look at it, GrabPay is tied up with all of the hawker centers. So, this was a space that was entirely cash-based. Now, these hawker centers are taking e-money of some sort. So, they’re really going after a new part of the market. It’s not really going after the traditional market. I think the displacement has mainly happened in China.

China, if you look at it today, if you walk around Beijing or Shanghai, you will not need your card for anything at all, just your phone.

 Boon Ping: You don’t need a wallet.

Reet: You literally don’t, just your phone that takes care of everything. So, at least in other markets, that displacement has not yet started. I think it is going to start – we can see a similar trend to China happening in the next two or three years. A lot of the telcos as well, they are getting majorly squeezed on their core business and many of them actually are starting to see the payments and potentially even lending could be an alternative to the core telco business because their revenues are falling. Voice revenues are falling big time. Data is slightly going up, but data, historically, they have been giving away cheap.

 So, the core telco business is under pressure, so this has now become a new engine of growth. Many of them are investing in credit scoring capabilities and they are selling that to banks. They will soon realize that ‘hey, wait a minute, we could make a lot more money if we start extending some credit ourselves or getting into a JV with the banks where we cream away a bigger portion of the lending income.’

Boon Ping: They will subject themselves to regulations as well, right?

Reet: Yes, that is true. You do need to get the regulatory approval to do some of that, yes. So, today a telco can’t directly lend without a specific kind of approval. Yeah, that’s right.

 Boon Ping: So, how do you see the payment landscape? Will there be a common cross-border, real-time payment in Southeast Asia? What needs to happen for real-time payments from domestic markets to become regional or cross-border?

Reet: I think that is going to take a bit of time. I know there are already some attempts. Singapore and Thailand have managed something, which Singtel has sort of managed. I think if you take all of ASEAN, it is going to take a lot of time. You might have select country corridors where it will work. I think Singapore is very, very proactive. They are going to push this in a number of markets. It really depends on how open the regulator on the other side is to something like this. But if you take the broader ASEAN experience, and we keep talking about ASEAN integration, but it’s not really materialized.

I think it is a while away because many countries still do have the protectionist mindset. If you take a country like Indonesia, why would they care if a Singaporean can directly make a prompt pay to Indonesia or not? Either way, most of the Indonesian money is outside Singapore anyway, so they won’t really have an incentive to encourage something like this.

Categories: Financial Technology, Payments, Transaction Banking
Keywords: Sibos 2018, Technology, Digital Wallet, Telcos, E-Commerce
Institutions: McKinsey
Region: Asia Pacific
People : Philip E. Bruno, Reet Chaudhuri
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