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The impact of the crisis has not been consistent across sectors or geographies, of course. Travel and entertainment, which had been among the most advanced e-commerce sectors, was hit particularly hard and faces an uncertain path to recovery. Payments providers in regions that have lagged in digitization, meanwhile, in many cases possess greater potential for revenue increases in the new environment. On the other hand, a protracted period of low interest rates, which began before the current crisis, will pressure payments revenues, as will a persistent slowdown in economic activity.

This is the context in which we release our annual report on the global payments industry. As always, these insights are informed by McKinsey’s Global Payments Map and by continuing dialogue with practitioners throughout the payments ecosystem.

Given the impact of the changes and challenges in 2020, however, we are taking a different lens to our analysis, focusing more on the current moment and on the future, than on examining past growth. Our first chapter briefly tells the story of 2019—a solid year with broad-based revenue growth—but focuses primarily on current developments and takes a forward-looking view of the payments landscape. It also details the actions we believe payments providers will need to take to weather the pandemic and position themselves for the “next normal.”

Our “now-cast” analysis of 2020 paints a contrast between the first and second halves of the year— namely, an estimated 22 percent payments revenue decline in the first half will be softened somewhat by stronger performance in the second half. Still, we expect full-year 2020 global payments revenue to be roughly 7 percent lower than it was in 2019—a $140-billion decline roughly equal to recent years’ annual gains, and 11 to 13 percent below our prepandemic projection. Beyond this, in some countries and segments, the likely sustained increase in digital penetration could result in a recovery of revenue pools to levels matching our pre-COVID-19 expectations for 2021.

In following chapters, we explore four areas of payments we consider critical to achieving success in the context of accelerated change. Like many aspects of payments, the merchant-acquiring business was already undergoing significant transformation. Consolidation had driven scale economy imperatives, and non-bank market entrants were gaining inroads with underserved verticals. Our experts detail the need to redefine acquiring offerings to encompass a full suite of value-added services extending well beyond payments settlement—including fraud controls and cart optimization for the fast-growing e-commerce segment. In a separate chapter we look at the specific opportunity for small- and medium-size enterprises, a segment that has historically been expensive to serve for large incumbents, but which has been the focus of many fintech attackers and is well overdue for a closer look.

Supply chain finance has long been considered to be a source of untapped value, but unlike other payments sectors, has struggled to develop enough momentum to address its structural challenges.

Given an expected increased focus on working capital, a step change in digital adoption at scale, and the potential geographic re-shuffling of roughly $4 trillion of cross-border supply chain spending in the next five years—the value embedded in supply chain finance will become even more attractive. The question is whether it will be enough to spur a long anticipated transformation.

Finally, in this overview of global payments, we look at a challenge many established payments providers are facing—the need to transform the operating model to meet the growing imperatives for efficiency, scale, modularity (e.g., Payments-as a-Service), and global interoperability. With many banks likely unwilling to commit the hundreds of millions of investment dollars needed to modernize existing payments infrastructure, we outline various paths worth considering before more focused players can establish an insurmountable advantage.

We hope you find the insights in these pages thought-provoking and valuable as you navigate these uncertain times.

To download the full report, please click here.

Alessio Botta is the Leader of the Europe Payments Practice at McKinsey & Company. 

Philip Bruno is the Co-leader of the North America Payments Practice at McKinsey & Company.

Reet Chaudhuri is the Leader of the Asia Payments Practice at McKinsey & Company.

Marie-Claude Nadeau is the Co-leader of the North America Payments Practice at McKinsey & Company.

Gustavo Tayar is the Leader of the Latin America Payments Practice at McKinsey & Company.

Carlos Trascasa is the Leader of the Global Payments Practice at McKinsey & Company.

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As new global supply chains are being constructed, this time for services, tasks are being divided more finely, opening new entry points for poorer countries’ services exports. Digitally enabled services are stabilizing global production networks, helping offset the reshoring thrust, and rejuvenating traditional exports across agriculture, fisheries, handicrafts, and tourism, including through better matching of sellers and buyers and finance access provision. New trade opportunities are emerging for developing and advanced economies alike.

Digitally enabled trade (henceforth “e-commerce”) has become the major global trade growth story. As the digital age takes hold, services (already dominant in most domestic economies) are growing in importance in international trade, both in their own right and as a support to trade in goods. Digitalization renders an ever-increasing range of services tradable across borders via digital networks1; roughly 50% of traded services are digitally enabled compared with 15% of traded goods.

Trade in digitally enabled services, in turn, depends crucially on cross-border data flows, which are growing exponentially and now contribute more to global GDP growth than trade in goods and services. The development of international rules on cross-border data flows and Internet-based activities is becoming critical to firm-level competitiveness, including for small and medium-sized enterprises (SMEs). These developments raise major new challenges for digital-age trade, investment, innovation, and industry policy settings. Harnessing the gains from digital technology in the realm of trade, especially in services, requires multilateral governance and regulatory frameworks geared for the 21st century.

The Group of Twenty (G20) must address these challenges and ensure the potential growth in international trade flows, so that consequent global gains in economic growth and development are facilitated rather than stymied.

As highlighted in the Appendix, the COVID-19 pandemic has impacted domestic economic activity and global value chains in both goods and services industries. Its most important short-run effect has been an intensive push toward digitalization. The adverse effects of widespread social distancing measures have been mitigated through a range of digital technologies and cross-border services (from online education to e-signatures and new modes of communication); many activities that would otherwise have been shut down have stayed afloat. While recent reliance on online interactions exposes new privacy threats that need to be addressed, the benefits of digitally enabled services, which rely on unimpeded cross-border data flows, for ensuring business continuity and agility, have been clearly proved. A push for international standards and disciplines regarding cross-border data flows would lock these benefits in and provide the ground for ongoing growth of digitized services.

Managing this transition to digital trade and fully realizing its benefits in a mutually beneficial way requires policy decisions that allow trade to flourish while achieving domestic public policy objectives. G20 members should assume leadership by implementing a best-practice policy and establishing interoperable regulatory settings so that every economy can reap the digital age’s productivity gains.

The following section presents our policy recommendations, which address challenges in the transition to digital trade and propose concerted action by the G20 on eight fronts.

Jane Drake-Brockman is an Industry Professor at the University of Adelaide and is an expert on international trade and regional integration and widely recognized as Australia’s foremost industry expert on services competitiveness and trade in services.

Ingo Borchert is a Senior Lecturer at the University of Sussex and a Fellow of the UK Trade Policy Observatory.

Nigel Cory is an associate director covering trade policy at the Information Technology and Innovation Foundation.

Ziyang Fan is the Head of Digital Trade at the World Economic Forum LLC.

Christopher Findlay is the Commissioner at South Australian Productivity Commission, and an Emeritus Professor at the University of Adelaide.

Fukunari Kimura is the Chief Economist at the Economic Research Institute for ASEAN and East Asia.

Hildegunn Kyvik Nordås is a Research Professor at NUPI where she works on trade and trade policy issues, focusing on the interaction between trade policy, trade, technology and labour market adjustments.

Magnus Lodefalk is an associate professor at Örebro University, Sweden, and affiliated to the Ratio research institute and the Global Labor Organization.

Shin-yi Peng is a Professor of Law at National Tsing Hua University in Taiwan.

Dr. Hein Roelfsema is an Associate Professor International Entrepreneurship, the Coordinator Master International Management, and the Coordinator Master Science and Business Management (Business Economics) at Utrecht University.

Yose Rizal Damuri is the Head of the Department of Economics at the Center for Strategic and International Studies in Indonesia.

Sherry Stephenson is a Senior Fellow at the World Economic Forum, and Member of the Services Network of the Pacific Economic Cooperation Council (PECC).

Dr. TU Xinquan is a Senior Fellow at the Center for China and Globalization. He is also a Professor and Dean of China Institute for WTO Studies, University of International Business and Economics.

Erik van der Marel is a Senior Economist at ECIPE.

Mustafa Yagci is a researcher for the Islamic Development Bank.

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Global Financial Integrity (GFI) has produced a comprehensive report, estimating the magnitude of trade misinvoicing since 2012 with a particular focus on the crucially important crude oil and gold sectors, given that these two commodities accounted for nearly half (47 percent) of Sudan’s exports by value in 2017. GFI also completed a regulatory and legal analysis of Sudan’s oil and gold sectors and has provided policy recommendations for all three areas of research.

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U.S. foreign policy has not come up often in the 2020 presidential campaign. But when it has, candidates on both sides of the aisle frequently have stressed that U.S. foreign policy should not only keep the American people safe but also deliver more tangible economic benefits for the country’s middle class. The debate among the presidential contenders is not if that should happen but how to make it happen.

All too often, this debate takes place within relatively small circles within Washington, DC, without the benefit of input from state and local officials, small business owners, community leaders, local labor representatives, and others on the front lines of addressing the challenges facing middle-class households. That is why the Carnegie Endowment for International Peace convened a bipartisan task force in late 2017 to lift up such voices and inject them into the ongoing debate. The task force partnered with university researchers to study the perceived and measurable economic effects of U.S. foreign policy on three politically and economically different states in the nation’s heartland—Colorado, Nebraska, and Ohio. The first two reports on Ohio and Colorado were published in December 2018 and November 2019, respectively. This third report on Nebraska has been prepared in partnership with a team of researchers at the University of Nebraska–Lincoln (UNL).

To gauge perceptions of how Nebraska’s middle class is faring and the ways in which U.S. foreign policy might fit in, the Carnegie and UNL research teams reviewed household surveys and conducted individual interviews and focus groups, between July and August 2019, with over 130 Nebraskans in Columbus, Scottsbluff/Gering, Kearney, Lincoln, North Platte, and Omaha.

While those interviewed expressed many different opinions on a broad range of topics, several opinions were repeated often in rural and urban areas alike, in strikingly similar terms.

Prior to the outbreak of COVID-19, the disease caused by the new coronavirus, there was widespread confidence about the state of the U.S. and Nebraska economies but also deep anxiety about how hard it is for working families to sustain a middle-class lifestyle. Virtually everyone interviewed for this study welcomed the low rate of unemployment. They stressed that help wanted signs could be seen throughout the state and that anyone who wanted a job likely could find one. However, like people across Colorado and Ohio, Nebraskans also regularly report mounting financial anxieties about the rising costs of healthcare, education, and housing, in addition to other local concerns more specific to Nebraska: high property taxes, the rampant rate at which retail stores are closing, extreme flooding, and farm consolidation.

There is a lack of information about the U.S. role in the world. As in Colorado and Ohio, working families in Nebraska often find it difficult to determine how their economic interests are affected by most U.S. foreign policies, especially if they are not working in an area that is heavily dependent on what happens overseas. They are focused on their day jobs and meeting their daily expenses. And even when they do pay more attention to the country’s foreign policy, it is difficult to know what to believe amid such politically biased and divisive commentary from media outlets.

There is an erosion of trust in foreign policy professionals (and in the federal government generally). Also similar to Colorado and Ohio, doubts abound in Nebraska that foreign policy professionals in Washington, DC, truly understand the economic realities confronting middle-income households or that they prioritize these realities in the development of U.S. foreign policies.

International trade policy is viewed as the most important aspect of U.S. foreign policy for Nebraska’s middle class, particularly due to its impact on the agricultural production complex. The message was remarkably consistent: the more international trade the better. Nebraskans’ interests on trade seem to be largely aligned, in contrast to Ohio, where past trade policies and globalization have produced winners and losers within the state in far greater numbers, particularly for the large manufacturing workforce. While many Nebraskans expressed strong support for President Donald Trump and his administration’s decision to play hardball with China, and even conveyed a willingness to incur some near-term pain to that end, their views diverged on how much pain they could absorb and whether it would be worth it.

Immigration came up almost as often as trade as a “foreign policy” issue that mattered most to Nebraska’s economy and middle class. Those interviewed sounded a common refrain: the United States needs a streamlined, pragmatic approach to permitting more foreigners willing to work in Nebraska’s unfilled jobs. While Coloradans discussed immigration in similar terms, they did not bring it up nearly as frequently or as forcefully as Nebraskans did. Population decline in rural Nebraska makes the area more dependent on international in-migration to offset workforce shortages. Those interviewed also expressed pride that Lincoln and Omaha hosted high rates of refugees per capita relative to most other U.S. metropolitan areas. That said, they made a distinction between legal and illegal immigration, voiced opposition to the concept of open borders, and spoke openly about cultural challenges that arise with growing immigrant and refugee populations.

Those interviewed generally expressed strong support for peacetime defense spending that keeps the U.S. military strong, even if they evinced no enthusiasm for the United States getting into another major war. The need for a strong national defense overrode economic considerations for them. While Offutt Air Force Base contributes significantly to the economy of the greater Omaha area, defense spending in Nebraska does not benefit the state’s economy nearly as much as it does in Colorado or anchor a regional economy as it does in Dayton, Ohio.

When asked about climate change, those interviewed focused on the near-term impacts of regulatory changes on jobs associated with ethanol production, farming, ranching, and rail transport of coal. Unlike in Colorado, only a minority of interviewees argued that the international fight against climate change should be a top U.S. foreign policy priority.

When interviews were conducted, U.S. foreign aid did not come up that frequently in connection with the economic interests of Nebraska’s middle class. But those interviews were conducted in 2019, long before the outbreak of COVID-19, which originated overseas and rapidly spread around the world and across all fifty U.S. states. The spread has resulted in the worst public health crisis that most Americans have experienced in their lifetimes. In addition to threatening individuals’ lives and physical well-being, the measures required to contain the virus’s spread have totally upended Americans’ social interactions and way of life. And the economic consequences have been devastating, especially for middle-income households contending with business closures and lost wages, higher healthcare and childcare costs, and precipitous declines in their retirement savings. One can assume that, in the wake of this crisis, more Americans, including Nebraskans, will see a connection between the economic interests of America’s middle class and U.S. efforts to strengthen global health security systems to prevent the outbreak and spread of pandemic diseases. At the same time, Americans’ anxieties about globalization and economic relations with China may also be exacerbated by this crisis.

Upon reflecting on the findings across these three different states, it becomes clear that foreign policy professionals need to reexamine how they are defining the national economic interests intended to be advanced through U.S. foreign policy. These case studies reveal that rates of economic growth and unemployment are important but incomplete measures of the economic well-being of the country’s middle class. One must also examine the effects of foreign policy on middle-class jobs, standards of living, and the economic viability of local communities. There must be a greater acknowledgment of how these effects diverge in different places. In their upcoming final report, Carnegie’s task force members will evaluate how national economic interests are being defined in the context of what has been learned, as well as propose national-level recommendations.

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Institutions:

Carnegie Endowment for International Peace, University of Nebraska Public Policy Center, University of Nebraska Bureau of Business Research, and the Clayton Yeutter Institute of International Trade and Finance.

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The UK’s financial services and insurance trade balance also increased from £61bn to £63bn in 2018. And these figures also show that financial services is a major driver of the UK economy – this is by far the largest trade surplus of any other UK service industry.

The success of UK financial services and insurance firms in exporting across the globe plays a vital role in balancing the UK’s trade deficit and helps to support jobs around the country. 

The UK’s success as an international financial centre depends on remaining open to trade and investment from around the world. 

Through sharing and developing our financial services expertise, the UK can continue to build and strengthen trade and investment links across the world.

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