BrazilHow the region's payments market could fare in the next decade
The speed of economic recovery in the next few years will be crucial for the payments market in GCC and around the world, marking the difference between expansion or contraction by 2024. A new Boston Consulting Group report presents the numbers.
Strong economic fundamentals have taken payments from strength to strength in recent years – after all, most people around the world make payments at least periodically if not several times a day. Also in the pros list is that payments have kept pace with a changing economic landscape, in a show of agility and rapid digitalisation.
When Covid-19 hit, it was this tech foundation that kept payments afloat, as several other sectors crumbled under the pressure. Booming ecommerce and remote working made digital payments a much needed lifeline. At the same time, BCG reports the sudden dip in economic activity that ensued has dampened growth the payments arena as well, with a spending crunch putting a squeeze on the number of transactions. The firm expects this to persist for the medium term at the very least.
Between 2014 and 2019, payments around the world grew at a compound annual growth rate (CAGR) of over 7% – reflected closely in the Middle East & Africa (MEA) markets. In the lead up to 2024, this figure will level at 4% for the whole world and 2% for the MEA region, in the very best case scenario. BCG’s analysis is based on data from the global payments market, sourced primarily from SWIFT – a global provider of secure financial messages.
No doubt, few can predict how the economy will pan out over the next few years, with second and third waves emerging across economies countered by the imminent arrival of a vaccine. Accounting for this uncertainty, the researchers broke their analysis down into three scenarios, progressively negative: quick rebound, slow recovery and deeper impact.
Quick rebound describes a scenario where infection rates are brought under control across major economies, keeping the economic downturn “moderate” – bringing consumer confidence and unemployment back to pre-crisis levels. And healthy spending means a healthy payments market.
Middle East landscape
As mentioned, growth will resume in this best-case scenario, although MEA rates will lag behind the global average. “In the Middle East, crisis-related headwinds such as falling oil prices, a slowdown in tourism, and a spike in expatriate migration have slowed economic growth and led to more cautious consumer spending,” said BCG Middle East Managing Director & Partner Godfrey Sullivan, explaining the gap.
“Although payments revenue growth will remain somewhat muted as a consequence, electronic transactions have seen a surge in interest,” he added. Growth in MEA will likely be driven by revenue from retail payments – touching just under 2.5%. Wholesale payment revenues in MEA will hover around 1.5% growth even in a quick rebound scenario.
This is the best case. The heavy impact of Covid-19 across sectors leaves open the possibility of a slow recovery scenario – where unemployment lingers and trade remains subdued, keeping consumer confidence at a low. For global payments, this will drag the CAGR till 2024 down below the 3% mark.
Payments in MEA will slow to 1% here, but will still manage to outperform payments markets in Europe and North America where growth will dip below 1% in a slow recovery scenario. The sheer momentum in the Middle East financial technology (FinTech) market will keep it afloat in this scenario, driven by involvement from a variety of stakeholders.
“Governments, banks, and payments service providers are helping to propel digital payments adoption further – for example, by in- creasing access and lowering transaction fees,” Sullivan pointed out. Interestingly, wholesale payments will take the driver’s seat in a slow recovery scenario, clocking 1.3% compared with 1% for retail payments.
Then there is the much-dreaded worst-case scenario, which BCG labels the deeper impact outcome. In this case Covid-19 comes back in several waves, borders remain shut and economic growth contracts globally. It is hard to imagine free spending in such a setting, and payments will likely suffer. Even global payments will drop to a 1% CAGR in this case.
MEA’s payments landscape will actually shrink in this setting, dipping into a negative CAGR. Both retail and wholesale payment revenues will drop, with the latter actually contracting by nearly 1%. Similar contractions could unfold across the world in a deeper impact scenario.
This is the lead up to 2024. The good news, per BCG’s analysis, is that the second half of this decade will see a recovery for payments irrespective of how things pan out over the next few years. Also a given is the changing face of payments across the world, with a boom in competitiveness. Smaller FinTechs are already grabbing more of the payments market share, forcing incumbent banks to come up with innovative and agile solutions for customers. This give and take will only intensify over this decade according to BCG.
In the Middle East, the economic fundamentals point to a strong performance over the next decade. “To support economic growth, both Saudi Arabia and the UAE plan to launch real-time payments infrastructures sometime in 2021 or early 2022. In addition, countries like the UAE are allowing more international payments players to enter the market. These shifts will push revenue growth higher in the medium to long term,” concluded Sullivan.
