Few would have missed the introduction of the new £10 polymer note this month, which has come after the new £5 note and £1 coin. Whether discussion was about who would feature on its design – in this case Jane Austen, now the only woman apart from the Queen to feature on an English bank note – or about who got hold of the new note first; the discourse about cash is more than monetary value. Cash can have huge symbolic value, just take a look at the importance of the Royal mint throughout history, Roman emperors proudly displaying their rule on coins and even the £100 million note that sits in the Bank of England, which is there largely for accounting purposes.
It’s no surprise, therefore, that the move away from cash is so slow. Only this year did under 50 per cent of retail purchases happen using cash and, although in value card transactions have long been higher, it begs the question whether for small value purchases another method will ever be favoured over cash? Falling under the 50 per cent threshold is significant, however, and with new payment methods that facilitate the transaction of smaller values – such as contactless – we could be looking at a market on the edge of change.
Card payments are showing no sign of slowing, with an additional £7.6 billion transacted in 2016 than in 2015. In terms of the proportion of sales this represents – 75 per cent – the value was consistent, but it amounted to an additional five per cent of individual transactions. The total number of card transactions topped 10.3 billion in 2016. This shows that card payments are happening more often, largely due to technology such as contactless, which has encouraged smaller value payments using card. By looking at the average transaction value (ATV) this is supported in the numbers, with the ATV in 2013 being £30.53, compared to £25.40 in 2016; interestingly just below the threshold for contactless payments.
According to the UK Cards Association, a third of all card transactions are now contactless; a staggering amount given the payment method is in its relative infancy. This has been encouraged not only by the transaction limit for contactless rising from £20 in 2015 to £30 in 2016, but also by the huge increase in merchants able to accept this type of payment method. 68 per cent of manned terminals now have the capability to accept contactless cards, which is up from 47 per cent in 2015, according to the British Retail Consortium.
With such momentum seen in the number of card payments thanks to contactless, retailers are investing in software and hardware to accept other new payment applications. The likes of ApplePay, AndroidPay and SamsungPay are all likely to transform the payment market even further. The additional benefit with these types of payment methods is that they are not capped by the £30 contactless limit; which means we will likely see not only a jump in the number of card payments next year but potentially also in value.
Non-card payments are a small but growing proportion of UK payments. In 2016, these accounted for £8 billion of retail spending, which is £2 billion more than the previous year. These figures are largely driven by PayPal, but also include payments via cheques and coupons issued by third parties; they’re often used as part payment for goods and services.
There is also variation across Europe. In Romania, for example, average card holding resides at 0.75, compared to 3.77 in Luxemburg. The number of card transactions per capita can also have an impact and vary significantly; from 11.1 in Bulgaria, 13.3 in Greece, to a staggering 382.4 in Iceland and 373.6 in Norway. Not to mention the fact that digital payments not only vary in popularity but also by company in different countries; Paylib in French banks and Sofort in Poland, for example.
Cryptocurrency is another innovation merchants need to have an eye on. With the likes of bitcoin gaining in popularity, adoption of alternative payment methods like this will likely be driven by consumer adoption. If larger institutions, such as the Bank of England, also issue digital currency – as they’re currently investigating and discussing – cryptocurrencies could be the next game changer for the industry with a whole new infrastructure and need for new governing laws.
Market change vs legacy systems
The future is not only about additional ways to pay. The upcoming PSD2 legislation, which opens up access to customer banking data, means that more companies will be able to offer banking and payment services than ever before. Indeed, consumer choice is set to explode with options and the ways they pay will be intricately involved with this.
One of the most significant impacts this will have is the integration needed within the payment ecosystem. With many more companies needing to securely connect to each other and share data, there is likely to be some significant shifts in market leaders if integration isn’t properly considered ahead of time.
The fact of the matter is that much of the existing banking network is run on legacy infrastructure and outdated systems. With a handful of banks dominating the market for years, arguably little has been done to innovate on the back-end, even if new and shiny contactless cards have made it into our wallets.
Indeed, to keep up with consumer demand for numerous payment options, many banks have facilitated a variety of payment methods on the front-end, without enough thought as to how this will be supported by the back-end. If this is not rectified, merchants will grow tired of the inadequate ‘plumbing’ behind the scenes, as it is only a matter of time before this compromises consumer experience and hits the merchant’s bottom line. What’s more, as innovative new fintech start-ups and challenger banks – for which the PSD2 legislation will be a catalyst to business success – enter the market, competition will be steeper than ever.
In a nutshell, payments and consumer preference is evolving. Just how the high-street banks have begun to disappear and we no longer have much use for 1 pence and 2 pence coins, change is afoot again and the financial services industry needs to be prepared. Integration with other vendors will be paramount to facilitate the future of payments and the careful processing of data and handling of those payments, is likely to secure a company’s reputation and future success.
Laurent Dhaeyer, MD, Secure Trading
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