Cross-border payments are a part of your daily life. Banks and non-bank payments institutions want to help you to make those payments. So, what does the USD231bn cross-border payments services market look like?
Payments are a very big business. According to consultant McKinsey, total revenues earned by banks and non-bank payments services providers from handling payments rose by 6% in 2018 to USD1.9 trillion.
The vast majority of payments involve parties, be they businesses, consumers or governments, that are in the same country or currency area. About 12% of the revenues - or USD231bn - came from cross-border payments.
This revenue was generated on payments flows of USD136 trillion, of which USD133 trillion involved B2B transactions. These transactions generated revenues of USD149bn for the payments institutions involved.
What really matters is that, for the payments institutions involved with cross-border B2B transactions, the overall margins are very low - at just 0.1% or so. Margins are much higher when cross-border payments involve consumers. For consumer-to-consumer (C2C) payments, the margins are about 5.4%. For consumer-to-business (C2B) and business-to-consumer (B2C) cross-border payments, the corresponding numbers are 2.5% and 1.5%.
Collectively, businesses that are involved with international trade are in a powerful position relative to the payment institutions that they work with. Cross-border B2B payments is a market where the volumes are enormous and the prices are very low.
McKinsey calculated that cross-border B2B payments revenues rose by 4% in 2018. Meanwhile, revenues from payments involving small and medium-sized enterprises (SMEs) grew by two-to-three times as fast as revenues from large corporates. SMEs, and particularly those in emerging markets, are growing rapidly through cross-border trade.
It will be a few months before the final figures are available for the payments market in calendar 2019. However, some predictions can be made with confidence.
One is that there will continue to be a lot of hype about cross-border payments involving consumers (and not just credit card payments) given that these are very profitable for the payments services providers.
In the much larger cross-border B2B payments market, prices and margins have already fallen to levels where they are unlikely to change much more.
This means that banks and other payments services providers will have to compete increasingly on service and brand rather than price.
If you’re making cross-border payments on a regular basis, your experience as a customer will become a lot more important.