The payments industry is changing. The way customers shop, increasing technological innovation, fierce competition from new 'non-bank' entrants, new regulation and burgeoning investor interest from venture capitalists and other financiers are just some of the factors changing the sector. And at a pace perhaps never seen before.
This, coupled with consumers’ growing willingness to embrace new technology, presents a challenge to the payments industry, retailers and other vendors, all of which need to integrate the latest innovations across the payments value chain.
Recent analysis by The Times newspaper, based on data from The Payments Council, suggests that banknotes and coins will be less popular than digital money by March 2015, as cashless payments overtake cash transactions for the first time.
While cash is - and will inevitably remain - an important way to pay for things, the increasing popularity of cards for everyday transactions is reflected in The UK Cards Association’s data. In 2014, total payment card spending amounted to £567 billion from 12 billion transactions. In December 2014 alone, total spending on debit cards was £34.5 billion and on credit cards was £14.6 billion.
Alternative ways to pay are becoming more common. For example, we’re reaching a tipping point in the evolution of contactless payments. In October 2014, The UK Card Association said that almost 34 million debit cards with contactless functionality were in circulation, which accounts for 35% of all debit cards in issue. The Association estimates a record £2.32bn was spent last year by consumers using contactless technology – a 255% increase on the previous year’s figure of £653m.
And with the confirmation that the limit for contactless payments in the UK will increase from £20 to £30 later this year, the appeal of 'tapping and going' in stores and at train stations is likely to increase.
The shift to electronic payments is in part because technology has permeated every part of our day to day lives. Smartphones and ubiquitous internet connectivity at home, on the move, in the high street and even in our workplaces are perhaps the most visible driver of this change.
Many consumers now regularly shop online. According to Capgemini, a total of £91 billion was spent online in 2013, a 16% increase over 12 months. Much of this success can be attributed to the growing influence of m-commerce, with sales via mobile devices increasing by 138% on 2012.
Last year's launch of Apple Pay has the potential to push mobile payments into a completely new arena. Their mobile wallet uses near field communication (NFC) to allow customers to pay using their iPhone. The same NFC technology is already used in contactless cards and so Apple Pay will work on retailers’ existing contactless card readers. Apple also plans to launch a smartwatch incorporating technology for the user to make a payment by holding the watch against a payment reader.
The popularity and availability of “a wearable” technology, such as prepaid or contactless wristbands, are growing. Wearable technology is particularly useful at music festivals and other outdoor events, cutting retailers’ security risk as they hold less cash in their tills. At the same time it reduces queuing, keeping customers happy and tills ringing. The potential for wearable payment technology being incorporated in everyday items such as clothing is only really just starting to be explored.
As the payments industry grows and becomes even more systemically important, regulators are introducing new rules. These are designed to combat fraud and make payments more secure, limit the costs of card payments through restrictions on interchange fees, and facilitate easier cross-border transactions by harmonising payments across the Eurozone.
Furthermore, and closer to home, the impending launch of The Payment Systems Regulator - an independent body and a subsidiary of the Financial Conduct Authority - in April 2015 is likely to drive further advancement and innovation in the UK's payments industry.
With all of this change going on, and innovation very much at the fore, the opportunity for investors is evident too. There are thousands of payments start-ups in existence, providing a steady stream of ideas and innovation to the industry. While only a relatively small number of these enterprises will survive, the more established players are paying close attention to see who the likely winners might be, and investing in those with the most potential.
The payments industry is at a point of fundamental change, with the pace of adoption of electronic methods and cash alternatives set to increase significantly over the coming years. The importance of the network infrastructure underpinning the performance and security of the payments value chain cannot be overlooked.
With more players involved than ever before, more ways of paying, growing volumes, increasing customer expectations and ever-present cyber threats, the case is being made for a seamless and secure global payments network.
It’s clear there will be opportunities for everyone involved in the industry. But alongside this there will be a degree of uncertainty as to how this change will play out in the future.
By Fabrice de Windt, VP Europe and global business development, global banking & financial markets, BT Global Services and bobsguide contributing Editor