The payments industry will change after the pandemic

The shutdown of most economies due to the pandemic is being reflected in changes occurring in the volume and structure of global payments and is accelerating their digitization. Financial market companies will undergo strategy changes, and payments will become invisible.
The payments industry will change after the pandemic

According to recent forecasts, revenues of global payments companies were supposed to grow by 6 per cent this year, but now McKinsey predicts a decline of 8-10 per cent, which translates into a drop in revenues reaching USD210bn, similar as in the wake of the global financial crisis. This hurts banks, as the processing of payments accounts for over 35 per cent of their revenues. The falling revenues are also reflected in a significant decline in the shares of global operators — the shares of Mastercard and Visa have lost 30 per cent of their value, while the shares of PayPal have recorded a slightly smaller decrease.

The declines are impacting many segments of the payments industry. Cross-border payments account for a quarter of the decline in revenues, with B2C settlements being the most heavily affected.

More cashless transactions

The biggest shock is being experienced by the retail sector, where payment volumes at classic points of sale (POS) could decrease by up to 40 per cent, which is a result of the shutdown of the hospitality, recreation, and tourism industries. These sectors previously accounted for 30 per cent of household spending in the European Union.

The payment flows of the fintech sector, associated with entities operating in the area of the sharing economy (Uber, Grab, Airbnb) is also shrinking. Meanwhile, there is a growth in the volume of eCommerce transactions, which last year amounted to USD3.53 trillion. Online purchases are being increasingly settled using digital wallets.

Last year’s forecast presented by WorldPay indicated that digital payments would achieve a 50 per cent share in eCommerce sales by 2023. This could ultimately prove correct, because the pandemic is accelerating the move from traditional forms of payment to the electronic ones. However, this growth could be slowed down by the expected decrease in the consumers’ purchasing power due to rising unemployment.

Another segment of the payments industry with growth potential is the food delivery market due to the shutdown of eateries and restaurants in most countries. The food industry will likely be affected by the restrictions for the longest time, alongside tourism.

In many countries, cash turnover decreased sharply despite the attempts to sterilise banknotes. For example, in the United Kingdom the use of cash fell by a half.

Contactless payments are soaring. In 2018, they accounted for nearly 50 per cent of the transaction value in Europe (according to Mastercard data), but in countries such as Hungary, Poland, Georgia, and the Czech Republic their share in points of sale was much higher.

In many countries the limits for contactless transactions were raised. Even in Germany, which is known for its preference for cash, the share of contactless payments increased from 35 to 50 per cent during the pandemic, according to reports from the German Savings Banks Association.

Meanwhile, the most popular method of payment used in online purchases — which account for 14 per cent of retail sales globally and 6 per cent of retail sales in Central and Southeast Europe (CSE) — are debit and credit cards. They are used in 43 per cent of online transactions (but in only 11 per cent of such transactions in Germany). Meanwhile, digital wallets account for 21 per cent of online shopping transactions, while bank transfers and cash account for 30 per cent. The European Union’s PSD2 directive and the experience of living during the pandemic will likely lead to the standardization and digitization of payments in the European market.

It’s worth noting that the technological infrastructure supporting digital payments has proved to be resilient and reliable during the pandemic, which will increase customer confidence in this form of financial settlements.

More non-bank operators

In the long term, the popularity of digital payments will be increasing in all markets, promoted by changes in consumer behavior, technology, regulations, the degree of financial inclusion and innovation.

We can also see a gradual blurring of the boundaries between the individual types of payment operations. The company Oliver Wyman calculated that about a quarter of all debit and credit card payments are now made digitally. We are also observing a growing role of non-bank operators and a resulting intensification of the consolidation trends in that industry. It is difficult to expect full unification, however, as many countries have their own long-standing traditions and divergent individual potentials.

The most consolidated digital payments market exists in China. The digital wallets of the two major operators, Alipay and WeChat Pay, account for over 70 per cent of all eCommerce transactions and for nearly half of all transactions at stationary points of sale. Meanwhile, about 80 per cent of all Chinese consumers use mobile payments.

The share of eCommerce in the retail market in China is the highest in the world and reaches 36 per cent. One peculiar local phenomenon are the so-called super apps (that is, applications within applications, also referred to as mini-programs) which combine multiple services — starting from messaging, through ride hailing, booking medical appointments, food deliveries, as well as payments and money transfers. They can also be used to make payments in public transit, in stores and in street vending machines offering drinks and snacks.

In many places it is also possible to make payments using facial scans, which are authenticated by the two previously mentioned major financial companies. Last year, about 120 million Chinese people were registered in this system. They are able to make face scan payments in the subway and the municipal railway system, in fast food chains, and in the global convenience store chain Seven Eleven. Ironically, people even use the face scan technology to withdraw cash from ATMs.

The analysis of payments data provides the basis for offering other financial products. Each client is subjected to a pre-scoring process and based on that an offer is generated. Within three minutes of the customer accepting the offer, the amount of the loan is made available on their account. Customers who are in arrears with the repayment of their obligations are blocked from using the payment function. As a result, the ratio of overdue loans does not exceed one per cent of the total value of the loan portfolio.

More apps

This trend of increasing popularization of digital payments is also observed in other countries of the Asia-Pacific region where digital wallets account for 58 per cent of eCommerce sales and 36 per cent of traditional in-store sales. Hong Kong and South Korea are the only countries of the region where credit cards remain the leading payment method. In recent years, the highest rate of growth in mobile payments — reaching 50 per cent — was recorded in India.

Meanwhile, in the United States and Canada credit cards are still the most popular payment method. They account for 42 and 51 per cent of in-store sales as well as 40 per cent and 60 per cent of eCommerce sales in the two countries, respectively. It’s worth noting, however, that more than 50 per cent of Americans still use cheques.

The main operators of mobile payments are technology companies, with PayPal being the market leader (used by 44 per cent of American consumers), followed by Apple Pay (9 per cent); Venmo, which is controlled by PayPal; Zelle, which was created by leading American banks; and GooglePay. Still before the outbreak of the pandemic it was predicted that the value of digital payments in the US would surpass that of traditional card transactions by 2021.

In contrast, the payments market in Latin America has been the odd one thus far. The share of customers using cash to pay for their purchases at retail outlets is 58 per cent, which is much higher than the global average (30 per cent).

Only 113 million of the 625 million people living in that region have a credit card — mainly in Colombia, Mexico, and Brazil. This is due to the high share of unbanked people in the general population (approximately 50 per cent), high costs of banking services, and the lack of points of sale accepting electronic payments.

However, a growing percentage of the population in Latin America now has access to smartphones — 67 per cent — which is creating opportunities for new market entrants. Payments based on QR codes are becoming increasingly popular. By the middle of last year, they had been used by 13 per cent of internet users.

Popular payment tools of this type include the Argentinian app Mercado Pago and Rappipay, which was created by a Colombian start-up that has achieved the status of a unicorn (i.e. market valuation exceedingUSD1bn). Cashless payments are also being popularized by fully digital banks, and especially the Brazilian Nubank, which is the largest digital bank in the world. It has gained 15 million users and has now also extended its operations to Argentina and Mexico.

The Brazilian central bank has announced that later this year it would launch the PIX instant payments platform, which is intended to provide 24/7 access to digital payments to all residents of the country. As a result of these changes and the pandemic, which is also affecting the continent, Latin America will undoubtedly undergo a rapid digitization of payments.

More digitization

Digital payments are the least developed in Africa, where about half of the population could be considered financially excluded. Some 21 per cent of Africa’s inhabitants (i.e. 200 million people) use smartphones to make payments and to execute cash transfers, but eCommerce only accounts for 4 per cent of the total value of the local retail market.

The biggest payment operators include Kilimall from Kenya, the Nigerian company Jumia, and Takealot from South Africa. Credit cards are the most popular payment method used for online purchases (44 per cent), even though they are only held by 12 per cent of the adult population. Meanwhile, slightly more than half of all adults in Africa have access to the internet.

The situation in the payments industry is the most favorable in Kenya, thanks to the M-Pesa system which has been in operation for 13 years. In 2018, this system enabled 40 million people to carry out transactions for a total amount of over USD38bn. Mobile payments in Africa are set to grow rapidly thanks to the very young local population — 60 per cent of inhabitants are under the age of 25.

Most of them have never encountered money in the physical form. The additional factors driving the development of digital payments in Africa include the rapid pace of urbanization and the broad access to smartphones, which is supposed to reach almost 100 per cent by the end of 2021, according to a forecast by the company Ericsson.

McKinsey claims that the field of payments and the companies from this sector are likely to play an important role in the global recovery from the crisis associated with COVID-19. Financial companies can support governments and non-governmental organizations in providing assistance funds through diverse distribution channels and can also make it easier for customers to take advantage of the offer available in the digital channels.

Mobile wallets can be equipped with services such as identity verification, monitoring of transactions, easy access to health care applications as well as shopping applications (various kinds of discount alerts), and digital payments, unless they already include them.

Banks and ATM network operators could extend their functionalities to also enable users to open accounts, make bank transfers and verify their identity, which would provide access to many documents, including for the public administration. In the longer term, the crisis will force companies to increase the efficiency of payment services through their increased automation, basing them on cloud computing infrastructure, and the development of “payments-as-a-service” solutions (e.g. payments being processed by external operators and banks creating shared services centers to deal with payments).

In the case of retail customers, the payments system will ultimately move towards so-called “invisible payments”, as has already happened in the case of Uber or AmazonGo stores. In the latter the account is charged automatically after the customer leaves the store. However, that will require the implementation of a universal and safe digital identity technology. This doesn’t necessarily have to take the form of facial scans that the world outside Asia does not yet seem to be ready for.

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