This Newsletter will cover two different subjects, the first item tells you “Why fashion says “vote” this U.S. election“ by Vogue Business, allowing some insight into the American fashion industry, with examples of the big players.
The second feature entails an executive summary of the latest McKinsey Report on “Accelerating winds of change in Global Payments”. Since all of us – in business and private life do effect payments – you will find interesting details of the changes resulting from the Covid-19 crisis. If you wish to download the full report, you will find the necessary tools at the end of the summary.
We at TextileFuture hope that you stay safe and interested in TextileFuture’s publishing services.
Here starts the first feature:
Why fashion says “vote” this U.S. election
By guest author Christina Binkley from Vogue Business
Responding to the concerns of Gen Z, American fashion brands are engaging with politics. But will this alienate shoppers?
This time round, fashion wants to play its part. The high stakes of a fiercely fought US presidential election, to be held on 3 November, are prompting fashion labels and retailers to cast aside their usual political reticence, responding both to employees and to consumers who expect brands to get involved.
New get-out-the-vote platforms are winning support from apparel companies that run the gamut from luxury to direct-to-consumer. Saks Fifth Avenue is registering voters at its New York flagship and online at Saks.com. Warby Parker and Tory Burch are paying employees to volunteer at polls. Ralph Lauren has declared Election Day a company-wide holiday. Patagonia even sewed a crudely worded voting appeal into the waistbands of shorts.
Only 56 % of the voting age population cast a ballot in the 2016 US presidential election, which is low compared to most nations, according to Pew Research Center. But a vocal and growing cohort of young fashion consumers from Hong Kong to Chicago, who gravitate towards brands that share the same values, expect companies to take ethical stands.
Gen Z, the youngest generation of consumers, is growing in influence, having this year surpassed millennials as the largest generation on earth. These youthful shoppers’ opinions and the factors that drive their spending make them a growing economic force on every continent. And the issues that are of concern to them — including environment and climate change, all-gender parity and racial and LGBTQ+ equity — are driving the US election.
Political engagement brings with it risks for brands. Savvy customers are quick to sniff out inauthentic or pandering messages. But non-engagement, likewise, brings risks too. Fashion business consultant Robert Burke says the shift in attitude is being driven by social media and the direct communications it drives between brands and consumers. “It was not long ago when brands and designers would absolutely not comment on anything about [politics] because they were so afraid of alienating customers,” Burke says. By contrast, brands now fear they may be accused of complacency if they do not speak out. “They run the risk of Diet Prada or someone calling them out if they don’t say something,” Burke adds.
Gap Inc., one of America’s largest retailers with USD 16.4 billion in revenue in 2019 and 129000 employees in February 2020, is directing employees to resources to educate themselves on candidates and issues. The company has dubbed its broad efforts #GapIncVotes and includes all of its brands: Intermix, Athleta, Banana Republic and Old Navy. Plans have been tailored for each brand’s ethos, and include an election day Instagram concert with pop star JoJo. Old Navy will pay store employees who work as poll workers for eight hours. GapKids has formed a “Be the Future” collective with several young climate activists that is billed as a call to action “for youth, led by youth”.
Gap’s more active involvement in elections began during the 2018 midterms in response to employee questions about voting, says Gabrielle Friedman, Gap’s senior manager of government affairs in Washington DC. It has picked up substantially since. “When Gap Inc. started down this journey, we went from, let’s see if they’re interested to, wow, they’re really interested!” Friedman says. “And we felt our customer would expect us to talk about it.” The company has formed an employee “Team Democracy” that earns badges by studying ballots and researching candidates and issues. Store managers receive collateral to help discuss voting with their teams, who are encouraged to talk about it with customers.
Apparel companies are finding that when political action authentically aligns with a brand’s values, it strengthens the relationship with customers and employees alike. “What we have found as a company is that when we do the right thing, we sell more,” says JJ Huggins, a spokesman for Patagonia, which has long championed sustainability. “It improves our brand image.”
Earlier this month, Patagonia produced shorts with a hidden message — an interior label that read “Vote the assholes out”. The USD 79 “regenerative stand-up shorts” went viral and quickly sold out. Huggins says the message is not aimed at any specific individuals but rather at climate-change deniers.
Despite efforts to remain non-partisan, there is always the potential of blowback. Department store retailer Nordstrom this autumn promoted National Black Voter day on September 18, 2020, and has launched a get-out-the-vote campaign, called Make Your Voice Heard, that involves an alliance with nonprofits National Urban League and When We All Vote. However some social media commenters criticised the Seattle-based retailer, requesting that a retailer should stay mum — “Stop being political! You’re a retail store. Get out of politics! Geez!!” posted one commenter.
Nordstrom defends its stance. “For us, this is a non-partisan initiative. Our hope is to inspire more people of all backgrounds to participate in the process, regardless of who they choose to vote for,” says Pamela Lopez, a Nordstrom spokeswoman.
Patagonia is behind a broad corporate consortium called Time To Vote. It began as a company initiative in 2016, when the retailer chose to close its stores, offices and distribution centres on the November election day, giving all employees a paid day off so they would have plenty of time to vote.
“Shopping could wait a day,” says Huggins, who was a store manager in Santa Monica at the time. Buoyed by the positive response, in 2018 Patagonia co-founded the voter awareness initiative, working with Levi Strauss and PayPal. They asked company executives to pledge to support their employees in voting. “We thought we might get a couple of dozen companies. We got 411,” Huggins says.
None of the companies Vogue Business spoke with found the expenses of their get-out-the-vote initiatives to be worrisome — or even worth tracking. “There certainly is a cost. We would say it’s worth it,” says Gap’s Friedman.
The push to support employees with voting shows signs of being a long-term shift in the US even outside of fashion. There is increasing support for bills introduced in Congress to make election day a national holiday — as it was for much of the 19th century when US voter participation peaked at 80 per cent or more.
After deciding to make the day a paid holiday and close its corporate offices, Ralph Lauren last week opted in addition to close its Greensboro, NC distribution centres on election day. Any employees who must work will receive holiday pay as well as time off to vote.
Spokeswoman Katie Ioanilli says there has been no push-back. “We believe civic engagement matters and want to ensure our team members have the time off and the resources they need to vote — especially when Covid adds complexity to exercising this right,” she says.
Meanwhile, Patagonia spokesman JJ Huggins has found himself an additional task, working on the communications team for Time To Vote. Like many of his fellow employees, he’s very happy to take it on. “It’s not election day, it’s election season,” he says.
Pledges to the consortium snowballed after the killing of George Floyd in May 2020 as people began to connect the dots between racial justice and voting. Companies have been joining at a rate of more than 10 per day, with roughly 1,300 members who thus far have taken a pledge to give employees time they need to cast ballots. The many fashion members include Tiffany & Co., L’Oréal USA, Loro Piana, Diane von Furstenberg and Nike, but they also span industries from finance to tech and sports, including Morgan Stanley, Sonos and Major League Baseball.
Time to Vote doesn’t dictate an approach. Many members offer a few hours of paid time off while others are shutting down operations for the day and offering forms of voter assistance such as research resources.
The second item starts here:
Accelerating winds of change in global payments
By guest authors Philip Bruno, Olivier Denecker, and Marc Niederkorn.Philip Bruno is a partner in McKinsey’s New York office, Olivier Denecker is a partner in the Brussels office, and Marc Niederkorn is a partner in the Luxembourg office.
The COVID-19 crisis is having a significant and widespread effect on global payments across sectors. The most striking and potentially lasting impact is an accelerating pace of change in the industry.
For the global payments sector, the events of 2020 have reset expectations and significantly accelerated several existing trends. The COVID-19 public- health crisis and its many repercussions—among them, government measures to protect citizens and rapid changes in consumer behavior—changed the operating environment for businesses, large and small, around the world. For the payments sector, global revenues declined by an estimated 22 % in the first six months of the year compared with the same period in 2019. We expect revenues to recover (only to a degree) in the second half of 2020, ending 7 % lower than full-year 2019. Over the past several years, payments revenues had grown by roughly 7 % annually, which means this crisis leaves revenues 11 to 13 % below our prepandemic revenue projection for 2020.
Given the impact of the COVID-19 crisis on the operating environment, we are diverging from our usual approach of delivering perspectives on the current year’s global payments landscape relative to the prior year. Instead, we focus primarily on the state of the payments ecosystem in 2020 and explore the actions payments providers need to take to compete effectively in the “next normal.”
The insights provided in the full report are informed by McKinsey’s proprietary Global Payments Map, which has provided a granular, data-based view of the industry landscape for more than 20 years.
A half decade of change in a few months
For global payments, 2020 stands in dramatic contrast to the year before, which was a relatively stable year. Global revenues grew at nearly 5 % in 2019, bringing total global payments revenue to just under USD 2 trillion (Exhibit 1). Payments also continued to grow faster than overall banking revenues, increasing its share to just under 40 %, compared with roughly one-third only five years earlier.
Any stability was quickly disrupted in early 2020 by changing geopolitics coupled with reactions to the COVID-19 pandemic, both public (physical-distancing measures and limits on business activity) and private (anticipatory and causal shifts in consumer and commercial behaviors). As a result of the public-health crisis, payments revenues in the first six months of 2020 contracted by an estimated 22 % (roughly USD 220 billion) relative to the first six months of 2019. We expect full-year 2020 global payments revenue to be roughly USD 140 billion lower than in 2019—a decline of about 7 % from 2019—a change equal in size to prior years’ annual gains, which leaves revenues 11 to 13 % below our prepandemic revenue projection for 2020.
What we already know
Once the classification of COVID-19 moved from a local outbreak to a global pandemic, many governments moved to protect their citizens, leading to lockdowns with various degrees of limitation. The immediate consequence was, of course, a steep reduction in discretionary spending and a severe demand-side shock, along with reductions in cash usage. Discretionary spending initially sank by 40 % globally. The impact was especially great in the travel and entertainment category, which was off 80 to 90 %. While some categories of spending rebounded, consumers’ well-documented shift from the point of sale (POS) to digital commerce accounts for the reduced use of cash.
Overall, in retail, the impact was not a decline but a shift in buying behavior. In the first six months of the year, consumers spent $347 billion online with US retailers, up 30 % from the same period in 2019—corresponding to six times the annualized 2019 growth rate of online retail. 1 Amazon’s second-quarter 2020 numbers recorded 40 % year-over-year growth, boosted in particular by the tripling of grocery sales. In Europe, differences in shopping behavior among geographies were strongly reduced and differences among age groups eroded as many consumers (in particular, older shoppers) turned to online shopping for the first time.
Consequently, all forms of electronic peer-to-peer and consumer-to-business payments have been boosted. In many regions, this has mostly benefited debit cards, which typically align with lower-value transactions and are a logical cash substitute for contact-averse consumers. Switzerland reported an increase in share of debit-card spending to 72 %, from 65 %, between January and May 2020, 2 mostly at the expense of cash. Higher limits for contactless payments also triggered rising adoption rates across the globe, making inroads beyond debit’s typical domain of smaller-value transactions. For credit cards, the picture is more nuanced; consumers in certain geographies seem to be paying off credit-card balances in preparation for challenging times ahead. In Australia, for example, credit-card share among total card spending fell by five %age points between February and June 2020, in favor of debit cards. 3 In Asia, however, alternative payments, such as instant and mobile payments, grew, while credit cards retained their strong incumbent position supporting e-commerce and POS transactions.
Logically, given the steep reduction of in-person purchases, cash transactions and ATM usage declined—the latter after an initial wave of withdrawals by anxious consumers. Germany and the United States each saw spikes in cash withdrawals in the days leading up to lockdowns. The fear of contracting COVID-19 through high-traffic ATMs and, in some cases, the refusal of merchants to accept cash (often despite legal obligations) nudged consumers toward electronic payment options to complete purchases. ATM usage fell by 47 % in April 2020 in India, while the United Kingdom experienced 46 % declines in ATM usage per month on average from March to July 2020. By the end of 2020, we expect a shift of four to five %age points in the share of global payment transactions executed via cash—down from 69 % in 2019—propelled by evolving behavior in both mature and emerging markets (Exhibit 2). This is equivalent to four to five times the annual decrease in cash usage observed over the past few years. The reduced use of cash benefits banks overall: the cost of cash handling exceeds cash-related revenue inflows, and electronic payments generate incremental revenue.
The pandemic has accelerated the move from physical to virtual banking. Banks in multiple geographies are closing branches (or in some cases, will not reopen branches they closed as a result of the pandemic), as well as ATMs. In Australia, the top four banks have removed 2,150 ATM terminals and closed 175 bank branches since June. 4
These accelerated behaviour changes in response to the COVID-19 crisis caused a fundamental shift in adoption of technologies, such as real-time account-to-account payment infrastructures, that had been developed over recent years. Investments in instant payments have begun to reap greater benefits, both in POS and e-commerce usage of instant solutions. The trend comes in response to customer expectations for speed, price differences, and greater adoption of customer-facing applications, such as specialist GrabPay in Singapore or bank solution MobilePay in Denmark. In the United Kingdom, as payment speed becomes more important, consumers and businesses have increasingly opted to settle bills online. For example, the average daily value of transactions processed by the Faster Payments service rose by more than 10 % from the fourth quarter of 2019 to the end of March 2020. In India, banks stepped up their digital propositions, integrating bill payment, e-commerce links, and Unified Payments Interface (UPI)—the nation’s local real-time payment system—into mobile banking apps to present three digital options in a single customer interface. UPI spending increased by roughly 70 % over the first seven months of 2020.
At the same time, governments have tried to protect the economy as a whole and the well-being of companies as well as citizens. Additional easing of monetary policies led to lower interest rates, further deteriorating interest margins. Monetary authorities reduced benchmark rates in Europe and the United States and then in emerging markets, including Brazil, India, and South Africa, to limit the impact of pandemic-related recession, making net-interest-margin (NIM) compression a global phenomenon. Large and small markets alike are experiencing rate cuts of 100 to 300 basis points. Overall, we expect global interest margins to contract by approximately one-quarter %, on average, in 2020, compared with a six-basis-point reduction in 2019, shrinking payments revenues globally by approximately USD 82 billion. Digitization benefits must first fill this gap before generating growth.
Cross-border payments flows also have been severely affected by the pandemic, as well as by geopolitical dynamics. In 2019, cross-border payments totaled USD 130 trillion, generating payments revenues of USD 224 billion (up 4 % from the previous year). In the first half of 2020, many cross-border fundamentals radically changed:
- International travel all but ground to a halt, with more than 90 % of countries imposing restrictions. Transaction-fee margins on remaining volume also declined, because of waivers offered to stimulate demand to offset the impact of a reduction in leisure and business travel flows, which fell by more than 70 %.
- During the pandemic, interregional trade saw greater impact than intraregional. Drops in interregional flows for Asia (−13 %), Europe (−20 %), and the United States (−23 %) directly cut into cross-border payments volumes, while the prices of oil and other commodities fell sharply.
- Business-to-consumer payouts (often salary disbursements) and remittance payments slowed, because of restrictions on the movement of cross-country workers and growing unemployment.
- Cross-border e-commerce volumes provided a notable exception to the gloomy news: the second quarter of 2020 brought double-digit growth as initial logistic challenges were resolved. UPS and PayPal, for example, reported double-digit growth on cross-border shipment volumes and the value of merchandise sold.
- Increased volatility and uncertainty have enabled growth in foreign-exchange-related revenues and pushed up treasury-related transactions as companies scramble to mobilise surplus cash.
In addition to the impacts of the COVID-19 crisis, certain geopolitical forces that began to materialize in 2019 have grown stronger since. Many companies are realizing the strategic weaknesses in their existing global supply chains, given trade frictions and potentially recurring public-health disruptions, leading to the exploration of nearshoring and other rebalancing. McKinsey analysis reveals potential shifts of as much as USD 4.6 trillion of global trade flows over the next five years. The value-chain shifts that began before the crisis have yet to take full effect—because of the complexity of moving such supply chains and the challenge of building new ones—so this is a longer-term trend.
The rest of 2020 and beyond
The second half of 2020 presents a quite different outlook. Broadly, we see some pressures from the first half continuing but with pronounced geographic variations.
Our forecast uses McKinsey’s nine macroeconomic scenarios for the impact of the COVID-19 crisis. According to a survey of more than 2,000 executives around the world, the most likely outcome is the muted-recovery scenario (A1), a combination of virus recurrence and a muted economic recovery, with regional differences.
A regional overview of the year in payments
The relative contributions to global revenues of Asia–Pacific; Eastern Europe, the Middle East, and Africa (EMEA); Latin America; and North America remained consistent in 2019. Each region posted solid mid-single-digit growth in payments, led by Latin America at 6 %. Asia–Pacific continued to lead both in growth and in its contribution to global revenue—45 % of the total, with China generating the lion’s share. The rate of Asia–Pacific payments growth continued to moderate from its double-digit rates of a few years ago, given margin compression on current-account balances across the region and China’s GDP expansion receding to a more sustainable rate.
At slightly over a quarter of the overall pool, North America remains the second-largest contributor to global revenues and grew at par with global trends. Growth in EMEA slightly exceeded the global average, mainly because of acceleration in the emerging markets of Africa and Eastern Europe (10 % growth in revenues). Western Europe grew at just 1 %, although it had already largely absorbed the effects of interest-margin compression that had affected the region in earlier years.
The number of electronic-payment transactions continued to grow at healthy rates in 2019, just shy of 20 % annually (at 10 % in value conveyed). Disproportionately high contributions came from China (56 % growth), India (48 %), and Russia (19 %). Despite a reduction in fee margins per transaction globally (to USD 0.89 per transaction, from an average of USD 0.97, for electronic payments), these additional volumes propelled overall fee-based revenues from electronic payments to new highs (a 9.75 % increase in fee income for all products except cash and checks).
Alternative payment methods (APMs), such as e-wallets and instant-payment-based solutions, continue to play a key role in accelerating cash substitution, particularly in developing countries. APMs have particularly gained traction in China, where they generated about $43 billion in 2019 revenues, far exceeding the approximately USD 22 billion for the rest of the world collectively (exhibit).
Applying the A1 scenario to global payments, we forecast that most categories of payment transactions are poised for sharp and rapid rebounds as lockdowns are lifted and behavioral shifts from cash to electronic payments are largely sustained. On the downside, interest-dependent revenue components are likely to remain suppressed for an extended period, mostly affecting banks that provide payment services. For specialists and fee-based revenues, much will depend on differences in spend patterns (for both businesses and consumers) before and after the crisis. For instance, dining, travel, and entertainment expenditures, which often carry higher transaction fees, are unlikely to rebound in the near term.
As we indicated, not all players, countries, and products will arrive at the same end state (see sidebar “A regional overview of the year in payments”). At a regional level, the following differences are notable:
- Asia–Pacific (excluding China) could suffer larger declines, as its revenue model is more affected by NIM contraction, faces increasing government pressures on mass-market transaction fees, and has greater exposure to long-term affected industries, such as travel, tourism, and international remittance payments.
- Europe may be poised for a swifter rebound, for two reasons. First, NIMs were already so compressed before the COVID-19 crisis that there was little room for further squeezing. Second, volume growth is being fueled by the acceleration of digital migration in Southern and Eastern Europe, and by government stimulus measures.
- In North America, the revenue benefit from an accelerated shift to digital channels has been more than offset by credit-card economics—outstanding balances are down roughly 29 percent from 2019 levels, and increased delinquencies are a possibility. Considering credit cards are the largest source of the region’s payments revenue, at roughly 44 percent, the decline in outstanding balances alone will outweigh the benefits of increased use of digital channels.
- In Latin America, which is characterized by a significant unbanked population, cash usage will likely remain resilient. Among the banked, Visa-supported mobile wallets such as PLIN and Yape have gained more than a million users since December 2019, with the pandemic accelerating this trend.
- Overall, the greatest recovery opportunities reside in countries with low electronic penetration (such as Brazil, India, Indonesia, and Thailand), as the next normal provides impetus for electronification. However, countries starting from a high level of digitization (such as France, Germany, and the United Kingdom) are also seeing pandemic-induced behaviour push cash usage to the minimum—fueling payments-revenue growth.
Overall, while the global health crisis leaves banks and specialists with meaningful revenue concerns, the real challenge—as well as the real opportunity—lies in embracing the acceleration of change. If that issue is addressed properly, the global impact on payments could be significantly more positive than the outlook for GDP.
The relationship between GDP and payments revenue
Over the past decade, payments revenues have grown substantially faster than GDP (exhibit). Between 2010 and 2019, nominal GDP has grown at roughly 5.0 percent in the geographies covered by McKinsey’s Global Payments Map, while payments revenues have grown at 7.4 %, or 1.5 times the GDP growth rate. This multiple has, however, been decreasing, largely as a result of an increasingly global contraction of net interest margins (NIMs), as well as ongoing regulatory pressures, which mostly affected card fees. In 2019, payments revenues grew at 5 %, roughly one time the GDP growth rate, mainly resulting from contraction in NIMs.
Looking forward: New rules for engagement
Long-term forecasting is unusually difficult in the current global environment, given the looming uncertainty on multiple fronts: economic recovery, interest rates, global trade, and a murky time frame for public-health breakthroughs. One thing seems clear, however. The imperative to accelerate transformations to digital-first and more agile organizations has never been greater, and it exists globally.
Still, the current global context removes many of the long-standing impediments to embracing transformation. As financial institutions enter this period of change, we propose five major themes to which payments and bank executives should be particularly attentive:
- Choose where you play wisely. The composition of your customer portfolio matters more than ever, as restructuring of consumer and commercial commerce reshapes where value is captured in payments. Growth is notably accelerating in the small and medium-size enterprise segment, B2B–to consumer (B2B2C) business models, and new customer arenas, such as cross-border e-commerce. The role of platforms is also growing fast, with ecosystems as a new growth segment. The shift to digital makes it possible for providers to create far more tailored solutions, and customers have shown a willingness to pay for these if sellers demonstrate value.
- Services and solutions, not financial products. Commercial customers expect bank and payments partners to enable greater sales by improving end-customer experience and the adoption of new business models—for instance, marketplace onboarding, B2B2C credit, and loyalty services—that do more than move money and manage cash flow. For consumers, the payment step is moving into the background of the shopping journey, and they expect support with conducting commerce and avoiding negative consequences, not merely a means to pay.
- Sales excellence. Transaction banking and acquiring are nearly a decade behind the technology and telecom sectors in sales and customer-management practices. These other industries have an entirely different skill set and language for sales and service—for example, sales motions, agile sales, inside sales, and customer success—all made possible by data and algorithms delivering the best adapted solutions for the market. Closing this decade-wide gap over the next two years will deliver significant value.
- Transaction-banking client experience. New challenges in supply chains and growing trade pressures are accelerating what has been a slow disruption in international payments and trade. Delivering the long-promised step-change improvement to corporate clients will require fundamental organisational change, particularly for siloed banks.
- Change in focus from the time value of money to the money value of time. Becoming digital by default requires significantly redefining the institution’s operations through the lens of customer journeys. To plan that digital transformation, most players have built road maps spanning the next five to six years. But given the modified revenue context, continued investment requirements, and market expectations spurred by the new environment, winners will find a way to deliver on this transformation within 18 to 24 months.
The events and trends of 2020 have undeniably created a changed global context for payments. What is most significant about this change is not so much the importance of the payments business or the kinds of trends transforming the market, but the speed at which the change is occurring. Change in 2020 takes place four or five times faster than before. This puts all actors on the payments landscape under pressure to transform and adapt in order to preserve their positions and results.
To download the full report or individual chapters, use the links below:
Chapter 1: The accelerating winds of change in global payments
Chapter 2: Merchant acquiring: The rise of merchant services
Chapter 3: Supply-chain finance: A case of convergent evolution?
Chapter 4: A burning platform: Revamping bank operating models for payments
Chapter 5: Closing the gap: Matching attackers on B2B sales for SMEs