What’s this all about?
With the COVID-19 crisis spurring a speedy switch to digital, thoughts in financial services turn to the future of payments. Is the end of cash nigh? And is it all digital from here on out? In the following article, Aoife Loy looks at findings from two reports published over the summer to assess what could be ahead for the future of payments.
Read on if you:
- Are interested to hear what the future of payments might hold
- Want to know what leading thinkers expect
- Don’t want your business to be left behind
There can be little doubt that 2020 will be picked out in future history books, retrospectively referenced as the year COVID-19 sent many countries into lockdown and was a catalyst for change.
With general sentiment reluctant towards handling cash and as more people get accustomed to using online services, there has been a rapid switch to digital as well as a huge increase in contactless spend and e-commerce. Discourse in the financial services sector considers what the dramatic move from physical to digital means for the future of payments.
Over the summer, leading industry experts released reports exploring the current trends. One by Chris Skinner, titled: Payments in a Post-Pandemic Europe, presents findings from interviews with 12 leading authorities in payments, fintech and finance, also incorporating wider views on Europe and banking.
A second by Finextra, in association with FIS, converses with card industry experts to examine the Shift to the New Normal in Card and Digital Payments. This report reflects on the changing landscape wrought by several drivers of innovation in recent years which have been sped up by the crisis.
So what can these reports tell us about how the pandemic might affect the future of payments?
Accelerating the inevitable
Both reports view the upswing in online behaviours as a hastening of trends that were already underway. They forecast that mobile and digital adoption will accelerate beyond pre-pandemic projections while cash will increasingly decline but it will not immediately disappear.
The Finextra/FIS report highlights research from before the pandemic which shows that digital and mobile wallets accounted for 42 per cent of global e-commerce in 2019 with online shoppers predicted to use digital wallets more than all other payment methods combined by 2023.
During the crisis, card issuers have seen an increased urgency to adapt their business models to ensure cards stay front and centre for all types of payment transactions. Indeed, they are ramping things up, rolling out features such as connected cards.
Skinner’s participants reason that while no one can prove what will happen, it’s logical to expect that if people have behaved in a certain way for a prolonged period, they’re likely to continue.
His report further emphasises that not all of Europe is the same, noting the predominantly cash base in southern countries and card, mobile and digital base in northern countries. In certain markets, there’s a specific view that favours cash in order to avoid government tracking and tracing.
Even so, more and more Europeans are embracing digital payments, he says. In Italy, which has one of the lowest rates of card payments, the government plans to offer financial bonuses to those who use cards or other electronic payments systems and also offers a tax incentive to use cards with a 2 per cent cashback on each transaction.
Gijs Boudewijn, Deputy General Manager at the Dutch Payments Association and Chair of the Payment Systems Committee of the European Banking Federation, gives some figures around how in the Netherlands, he anticipates cash use to decline sooner than expected: “We are already seeing payments where 67 per cent is cards and 33 per cent cash in 2019. I ask my people, apart from the crisis, if we just follow the trend, where will we be in five years’ time? From the discussions we are having about the future of cash, the trend says we would have arrived at 15-17 per cent without any crisis effect. The crisis will probably accelerate this to be 10-15 per cent sooner.”
Far from curtains for cards
Of course, a pivotal question is: does this mean that it’s all digital from here on out?
Both reports disagree with the view that the physical card will completely fall out of use. From the Finextra/FIS report: “Much has been said around the demise of the physical card but behind the scenes of many examples of a digital payment ‘usurping’ a card transaction, the cards rails still play host.”
Jason Maude, Chief Technology Advocate at Starling Bank, says: “There’s definitely going to be a market for more online purchases but nothing that will dislodge cards specifically. If anything, cards will be used more due to the decline of cash, the rise of electronic payments and digital banking but nothing that’s going to tip things the other way.”
Virtual cards – many of which have been deployed to meet the sudden demand for unexpected purchases during the pandemic – are expected to come very much to the fore in the coming years. These one-time cards have a temporary number released for one use and are managed through APIs. On the commercial side of things, a key value they offer is that clients can be equipped with a card to pay their suppliers quickly and without disrupting their cash flow.
“For fraud, control and reconciliation reasons, this is undoubtedly the future of cards,” says Steve Robson, EMEA Head of Commercial Cards at Citi.
Participants in Chris Skinner’s research, on the other hand, foresee a move to predominantly card payments because:
- There is no major alternative.
- It supports the business interests of card companies which, argues one participant, have not been progressive in the use of their systems.
Although, Skinner says this might be changing due to schemes such as the European Payments Initiative to create a pan-European card scheme as well as the development of Open Banking.
He also highlights Visa Europe data which shows that 77 per cent of Europeans are using mobile banking and/or mobile payments. But, he notes, surprisingly, mobile wallets, in general, have not taken off.
Richard Turrin, author of Innovation Lab Excellence, says: “The critical failure in the EU and US is basing mobile payment on what brand of phone you buy: Apple, Samsung or Android. The need for an independent third-party payment platform is made clear to me whenever I pick up my iPhone and try to use it to send money to someone with an Android phone. The opportunity to span this gap is massive and as of yet untapped.”
CBDCs expected to Launch Sooner than later
Several participants in Skinner’s report believe that due to the crisis, central banks are evaluating and escalating their activities in the area of Central Bank Digital Currencies (CBDCs) which they expect will launch sooner rather than later.
The most progressive, according to one interviewee, has been the Bank of England which has published and actively looked at CBDCs. The earliest we could see them emerge is predicted to be from around 2030 and is pegged to a Real-Time Gross Settlement (RTGS) upgrade.
Skinner also points out that CBDCs are often associated with cryptocurrencies, blockchain and Distributed Ledger Technology (DLT) – the effects of which Simon Taylor, Co-Founder and Blockchain Lead at 11:FS, believes are underway: “DLT has already had an impact, as Central Banks are now looking at issuing their own currencies directly to the population digitally. So, it’s not will it make a difference. It already has. China has taken a massive lead on that, and you will see similar initiatives across Europe.”
Private cryptocurrencies or those generated by technology firms are not expected to take off. Nonetheless, this finding has the potential to completely change payments and perhaps undermine the need for Payment Service Providers (PSPs) in the future.
Challenges and opportunities
Both reports see opportunities and challenges ahead for financial services.
The Finextra/FIS report includes the new value and flexibility brought about by bespoke rewards programmes, the added control and visibility introduced by delayed payments and statements of repeat payments as components of a rich, proliferated customer offering that will compete with innovative new payment service providers who don’t have the same scale or breadth as incumbent issuers. Additionally, they expect card payments integration into online platforms to be a key differentiator. Strategic partnerships, meanwhile, will be key for achieving results rapidly.
Participants in Skinner’s research reflect on technological hurdles: “Several interviewees underscored that there is a core infrastructural and logistics challenge in Europe that means the idea of moving to a rapid cycle of mobile payments and digital delivery will take a long time.”
Additionally, he highlights another factor as to why people carry and use cash, card or mobile payments: when their bank’s system goes down. In those situations, cash is of critical importance.
In light of the failure of mobile wallets to take off, a pan-European mobile payments wallet platform is identified as a huge opportunity.
Overall, Skinner’s findings stress that there will be a big drive to be more digital after the crisis. In particular, banks will be forced to digitise faster and create payments systems that are internet and mobile-first, not cash and card first. Cards continue to be important and mobile and digital payments services are predicted to increase.
The use of cash is on the decline even in southern European countries and the COVID-19 crisis has advanced non-cash payments by three to five years.
The Finextra/FIS report, meanwhile, concludes that as well as virtual cards or tokens, personalised features and functionality in a real-time context form the basis for the future of cards programmes alongside the physical card. Ultimately, however, change and digital progression are not guaranteed. Instead, it falls to technology companies, regulators and consumers to imagine better and financial institutions to innovate. We at LEVERIS, cannot but concur.