A surge in payments trends: FIs forced to pivot quickly during pandemic

The pandemic has reinforced the need for industry to be agile and adaptable

By Aoife Morgan | 22 April 2021

The increased demand for contactless payments during the pandemic meant financial institutions had to pivot quickly to asses market structures and what features and products to prioritise, according to Sajni Shah, co-head of product at Starling Bank.

The first quarter of 2020 saw a larger shift towards digital payments in 10 weeks than in the proceeding five years, according to Mastercard. That trend has continued.

“The past 12 months has seen a rapid rate of change in the way we pay for things, get paid, and move money,” said Mark Nelsen, senior vice president of products and solutions at Europe Visa. “The payments industry has had to adapt quicker than ever to meet this revolution in consumer behaviour.”

In response to the World Health Organisation (WHO) advice that physical cash would increase the risk of disease transmission in March last year, 29 countries across Europe raised their contactless limits with some choosing to make the temporary reliefs permanent.

“Nobody wanted to touch anything so payment methods that didn’t require touching a point of sale took off,” says Jodie Kelley, CEO of the Electronic Transactions Association. “Contactless payments, which had been growing slowly, suddenly grew much more quickly and similarly we saw a huge acceleration of growth of mobile payments for the same reason.”

This month, Visa announced it had processed one billion touch-free payments in Europe since contactless limits were increased. Out of those, 400 million took place in the UK.

Over 80 percent of in-store Visa payments are now contactless. Contactless transactions in France and Germany increased by two-thirds and almost half year-on-year. Similarly, Mastercard notes at least 75 percent of all transactions in Europe are now contactless.

As consumers gravitated towards contactless transactions, cash usage continued to decline.

The share of cash as a portion of sales declined 2.5 percent per year, according to Mastercard. As countries around the world were placed into lockdown, this figure jumped by an additional 2.5 percent beyond the trend.

The change among corporates has also been noteworthy – with the instance of cashless businesses having risen more than four times, according to a report by Square. Almost half of businesses (46 percent) are now cashless compared to one in 10 before the pandemic.

Mobile-based payments

The convenience factor of card on file scenarios has partly accelerated the adoption of mobile wallets during the pandemic, according to Phillip Bruno, partner at McKinsey.

A survey by Samsung found that 46 percent of people are more willing to pay digitally since the first lockdown. On top of that, 31 percent of people are turning to their phone to make payments.

“When looking for an alternative, it’s only natural that consumers will turn to their trusted and safe mobile phone to be able to transact the business,” says Craig Ramsey, global head of real time payments at ACI Worldwide.

Global mobile wallet adoption rose to 46 percent in 2020, up from 40.6 percent in 2019 and 18.9 percent in 2018, according to research by ACI Worldwide. Countries like Italy, Brazil, Mexico and Malaysia were some of the fastest adopters of mobile wallets.

“While the most popular way of paying using contactless technology is with a debit or credit card, many other popular ways include using mobile phones and devices such as a Garmins and Fitbits are set to grow,” says Scott Abrahams, senior vice president, business development at Mastercard UK and Ireland.

In south east Asia and Africa, QR code enabled payments have grown in popularity.

“QR codes have made a resurgence and will be here to stay as the world gets used to a new way of operating,” said Thibaut Genevrier, head of merchant acquiring at Revolut. “Merchants aren’t always able to carry or operate a payments terminal, so QR codes offer customers a useful way of accepting payments whilst remaining socially distanced.”

“Consumers in Europe and North America have become accustomed to contactless cards and more recently mobile wallets, which, in essence, do the same thing as a QR code without the added effort of downloading bespoke apps,” said Nabil Ibenbrahim, deputy managing director at HPS.

“These regions already have an existing payments infrastructure which consumers and businesses can rely on and there hasn’t yet been much incentive until the pandemic came along to change that,” he said in an email.

Buy now pay later takes off

Consumers spent nearly $900bn with online retailers in 2020, according to Mastercard.

The rise in ecommerce exposed people to other payment methods including buy now pay later, says Damian Kassabgi, public policy chief at Clearpay. “Our core base has been millennial and Gen Z but we do think older demographics are now being forced to think about the online space.”

Since the start of the pandemic 70 percent of consumers have used a new shopping or payment method for the first time, according to Visa.

In the first quarter of its 2021 financial year, Clearpay saw sales across all regions jump by 115 percent to £2.3bn compared to £1.03bn recorded in the same period last year.

The growing popularity of buy now pay later is reflective of the decline of credit cards, according to Clearpay's Kassabgi.

Credit card usage has been in a steady decline in recent years, according to UK Finance figures. In January 2021, there were 196m credit card transactions, 31.1 percent fewer than in January 2020. The total spend of £10.7bn was 37.9 percent less than January 2020.

“The people who use buy now, pay later products have worked out that it is better to flexibly schedule payments with no interest or late fees, than use a credit card,” says a spokesperson at Klarna.

An opportunity for innovation

The pandemic poses unique challenges for the payments industry, says Visa’s Nelsen.

“It also presents an opportunity to implement better, faster, more convenient and more secure payments solutions both now and in the long-term.”

“Traditionally, new payments solutions and infrastructure take time to scale-up and evolve,” he said in an email. “However, the pandemic has accelerated the rate of change in the payments sector and reinforced the need for the industry to be agile and adapt quickly to changing consumer demands.”

For in-house product teams at banks, it was a rare opportunity to react to the quickly evolving landscape.

During the pandemic, customers were more willing to manage their purchases and business expenses from an app, according to Revolut’s Genevrier. This meant new products were designed around mobiles and contact-free services.

Similarly, the uncertainty and financial instability caused by the pandemic meant that many customers were managing their day-to-day finances more closely highlighting the need for money management features, said Starling's Shah.

Creating an experience

The challenges of the pandemic catapulted the need for contactless payments and other no-contact solutions including mobile banking, according to Mastercard’s Abrahams.

“This is just the beginning as we look to deliver cutting edge solutions to bring even more people into the digital economy.”

One solution the pandemic has helped to fast-track is payments that take place in the background, according to McKinsey’s Bruno.

Pay with one click and the likes of Amazon Go stores -where consumers are able to walk in and out of the shop, with the payment made automatically- are encouraging seamless payment experiences where consumers don’t need to think about reaching for their wallet.

“It isn’t really about paying anymore, it’s about the checkout such as ordering ahead, ordering in-app and curbside delivery. The act of paying is getting absorbed into the purchase journey. It becomes more about the experience of shopping or checkout and of how integrated paying is with the journeys.”
 

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