The new normal of contact-free payments: how new is it?
This year’s pandemic has accelerated digitalization in an unprecedented way — or has it?
In fact, a disease-driven explosion of digital payments has been noted in the world at least once before. As Yuval Ziv pointed out, in 2003, the SARS epidemic fueled the launch of digital payments and e-commerce in China. Compelled by demand, Alibaba launched Taobao, their first consumer-facing e-commerce website. In 2004, Alipay came on the market — now the company enjoys 55% of China’s mobile payments market.
This past experience prepared some firm ground for the industry as a whole. While individual players may have been caught off guard by this year’s events, the global payments community could refer to that earlier case for some reassurance and best practices.
This means that many of the technologies and market behavior patterns we see today didn’t appear from scratch but rather accelerated in 2020.
Digital payments at the start of the pandemic: what became more obvious
Anyone can be a merchant now
The very notion of a merchant has changed in the past years, noted Chris Skinner. Many acquirers used to target primarily large retailers — now their acquiring portfolios may include anyone who accepts payments via mobile, from a mom-and-pop store to a busker in the underground.
Christian Desert gave an example: in these recent months, Latin America has seen the emergence of new small/individual businesses operating from home. What spurred it? Pervasiveness and accessibility of pay-in and pay-out solutions.
Some of those nascent businesses may follow in the footsteps of companies like PayPal and Square. These started as small startups, paving their way aside from the giants, and now they cost more than Bank of America and Goldman Sachs. We could have been struck by such news at first, but we’ve gotten used to it as the new normal.
The pandemic brings glad tidings to those developing e-commerces across the globe. In the US alone, consumers spent more money online in April and May than the last 12 Cyber Mondays combined, announced Yuval Ziv, referring to the Mastercard survey.
Payment is not necessarily about money
Anything can be a payment, continued Chris Skinner, specifically – anything of value that can be exchanged through a network, from data to ideas. Take bitcoin as an example: it has no relation to money, yet it has its recognized value.
New payment technologies are still inaccessible to many
There is a certain imbalance in the way new payment technologies are distributed, pointed out David Birch. For example, now you can order a coffee remotely, but to pay for it, you may still need to enter your card number and CVV code. It could be done easier and faster with a one-click payment, but many shops are not equipped for Apple Pay or other wallets.
With all the buzz around alternative payments, merchants can’t just stop accepting cash — otherwise, they would lose profits. To move to cashlessness, they need a strategy developed and promoted at a high level — like the National Strategy for Cashless Payment Instruments in France.
What drives commerce in 2020
Before we even touch upon the opportunities that e-commerces seized worldwide, let us define the “new” normal with some statistics, presented by MPE Summer Week 2020 participants.
The great shift to online
19% of businesses in the UK only started selling online this year, according to the VISA “Adapt for Recovery” June 2020 survey. Yuval Ziv made an important note on this: some retailers lost their entire business exposure solely due to the fact they were not online.
Both essentials and non-essentials are in demand
Essential goods were the top items to be purchased during the lockdown, to no surprise. But in addition to these categories, Leisure, Sports & Hobby and Gaming increased in average ticket size, according to Daniel Kornitzer. Further, Ivan Glazachev added FoodTech as the category that doubled its average check during lockdown — this includes deliveries of groceries, restaurant meals, and meal kits.
Financial health is trending
These are not only e-tailers to benefit from the changed demand. Fintechs contributing to consumer financial health are meant to come to the fore as customers’ financial well-being is starting to be taken seriously.
Now is the time for investors to take an interest in such fintechs, suggests professor Markos Zachariadis from University of Manchester Business School, cited by David Birch.
How consumer mindset has changed
Generation Z has a different approach to shopping and paying
According to the Paysafe Lost in Transaction report, Gen Z consumers are generally more aware of in-app payments (84%), mobile wallets (83%), prepaid vouchers (61%), and online cash solutions (61%) compared to previous generations. They are also more open to using a whole variety of payment methods regularly. As a result, 53% prefer shopping in stores that accept contactless payments.
Interestingly, Gen Z customers are more likely to use credit cards (41%) than millennials — presumably because they are more educated about credit scores, interest rates, and possible benefits.
Newbies have landed online
There is more than the youngest generation’s behavior to consider. During the lockdown, many customers across the globe had to make their first ever e-commerce purchase.
18% of the surveyed consumers in Western Europe, Canada, and the US made their first online transaction during the first month of the pandemic, reported Daniel Kornitzer. 56% used new-to-them alternative payment methods, such as digital wallets and bank transfers.
In Latin America, more than 50% of interviewees either made their first online purchase ever or started buying more during the pandemic, stated Christian Desert.
Ivan Glazachev noted a similar trend in Russia: in absolute numbers, 10 million consumers started shopping online for the first time during the pandemic.
Even though these new customers are late adopters, online shopping will become their new habit, pointed out Ted Hettich. They may start purchasing at larger retailers like Amazon, but they will definitely go to other, smaller merchants also.
Data-enriched communication is preferred
There is a crucial difference between what traditional banks and innovative financial institutions have to offer in terms of communication. Chris Skinner gave an example. When a typical bank informs you of a transaction on your account, you will get a message like: “[ID number] sent you [money amount]”. Then you will be left guessing who it was and what this payment relates to.
In contrast, when you use your TransferWise card, you may receive a notification: “You’ve just spent [this sum of money] in [exactly this place]”, and if you want to know more, you can follow to see the place on Google Maps.
Data makes a difference in the customer experience. As David Birch predicted, people will get used to data-enriched transaction environments and will demand them. Such data richness has a big part to play in pushing along the transition to open banking.
Customers are concerned about the potential recession
While e-commerce is currently on the rise, the International Monetary Fund expects global GDP to decrease by 4.9% in 2020.
Merchants may stop generating high profits because of a potential decrease in consumer activity. Tim Buckingham pointed out that people are worried about a possible global downturn that may be a byproduct of employees not going back to work and then not spending. Those that keep their jobs may reduce their expenses too, so businesses will start to fail.
Before that happens, they need to adapt.
How merchants approach the shift to digital payments
Small businesses harness their flexibility — but it may be not enough
Michel Yvon admitted one great advantage of small businesses over larger merchants (like his own employer Decathlon): they are flexible. Their readiness to change and offer any payment options to their customers should be exemplary for many enterprises. When consumers get used to the diversity of payment methods like digital wallets in smaller shops and don’t find the same in larger stores, this will harm the retailers’ brand reputation.
However, small businesses need to be flexible beyond payments. Wilco Slabbekoorn provided an example: the work-from-home reality turned out to be unfavorable for stores and coffee shops in business areas. Those will have to reinvent their distribution and communication to stay afloat.
Large enterprises and retail chains are wary of costs
Transition to omnichannel could be a solution for large-scale retailers, suggested David Birch, as it opens more opportunities for alternative payments. Imagine how much it would cost Carrefour to change all their POS terminals and train their staff to accept a new payment method. However, if alternative methods are available, a customer can pay independently online. The most complicated part of the payment falls on the back end, and it takes the burden off Carrefour.
At the same time, Michel Yvon noted that the online ecosystem can be much more expensive than offline payment activities. Merchants want to maintain their margin — and while they switch their activities to online, they need to pay commission fees to every service provider in the payment process. Even though these could be 1–2% per transaction, this percentage would still decrease the margin.
Lowered commission fees on special terms could be an attractive solution for merchants — and ultimately, for acquirers too.
E-commerces adapted their offerings to the changed demand
Adding the needed payment options is only half of the story — 39% of businesses had to introduce whole new product categories and services to keep trading, revealed Yuval Ziv. Think of the home decor stores, for example, that started selling masks and basic necessities during the pandemic.
Furthermore, retailers had to make sure that they delivered e-ordered goods with no delay — now as ever, shipping time has become a deal breaker. Costco’s experience in China shows that partnering can go a long way. Lacking delivery in Chinese cities, the company connected with Meituan-Dianping and Ele.me which have significant urban reach. This way, Costco ensured their customers’ needs could be met.
New brands are welcome to the market
Surprisingly, now could be a good time for all kinds of novelties. Christian Desert reported some curious findings in the Latin American market: 81% of the surveyed customers tried new brands during lockdown, and 98% of the respondents said they had learned to compare product prices.
These stats imply that the pandemic could be a profitable time for newcomers to benefit from the Latin American e-commerce growth and to install their brand, especially if they are willing to offer advantageous prices.
Global expansion goes according to plan (almost)
Expanding the reach means going digital and going global — both are hard to achieve in a short time, emphasized Yuval Ziv. Spotify’s experience of launching in 13 new countries, including Russia, shows that a lot of groundwork has to be done in advance. Nevertheless, even they experienced a delay in the delivery of their music-streaming service to the market.
The role of physical stores is changing
Certain countries have noted an increase of click-and-collect (208% surge in the US in April, compared to a year ago, for example). A larger transformation is to come: according to Wilco Slabbekoorn, physical stores will be used for brand experience, while most global retailers will be spending more on their mobile presence.
This year, super-large retailers have closed globally more than a thousand stores per group, and they have invested billions in their online presence. The trend will continue to develop, so that the number of e-commerce channels will be greater than the number of physical stores in a few years’ time.
What is restraining the growth of digital payments?
Increase in fraud
With massive numbers of people new to online shopping, more fraud is inevitable, admitted David Birch. According to Ted Hittich, the share of fraud has increased from 1.2% to 1.7% of the transaction volume his company monitored. Smishing accounts for part of the fraud, and it has seen a boost since the COVID-19 outbreak, as Rahav Shalom-Revivo reported.
The statistics look quite disturbing, especially since 72% of consumers who experience fraud during purchase are likely to stop using the merchant or payment platform where the fraud occured. This is what Spencer McLain announced, referring to a recent survey that Ekata held for the US and Europe.
Apart from the criminal fraud increase, the industry has faced the so-called friendly fraud growth. This happens when a customer successfully receives their online order and still applies for a chargeback. Such cases now account for 50% of declined transactions. The stats, provided by Monica Eaton-Cardone, showed the volume of friendly fraud transactions growing from $57 billion in 2012 to $300 billion in 2020.
The reason is, Tim Buckingham had to admit, the chargeback system is fundamentally flawed. At the moment, neither the issuer, nor the acquirer is protected when a merchant transaction is challenged.
Fraud prevention must become priority now, concluded David Birch. However, it shouldn’t be about providers exploiting user data — any fraud protection initiative should be developed in a way that benefits customers.
Lack of efficient digital identity infrastructure
Payments with digital devices had already started to emerge before COVID-19, and the pandemic widened the desired scope of e-wallet features.
David Birch suggested that wallet operators should add digital IDs, transaction monitoring and reporting, and health-related functionality. For customers, this would be a way to stay informed of when it is too crowded to go shopping or when their goods are ready to pick up. For merchants, such solutions could help to manage customer workflows, providing a means of contactless payment in-store and, for example, enabling checkouts only for the elderly at certain times.
What features will drive the development of digital payments?
Contactless and contact-free will be in demand
56% of consumers are now more comfortable using contactless cards than a year before, declared Daniel Kornitzer. Other speakers confirmed the trend — moreover, Yuval Ziv stated that globally, almost 7 in 10 consumers expect the shift to digital payments to be permanent. To be more specific, 74% of consumers in the UK and 31% of customers in the US think they will continue to prefer online shopping even when there are no lockdown restrictions. Cashless payments will continue to grow in the long term, stated Christian Desert, speaking of the Latin American region.
With the growing easiness of the shopping experience, it is little wonder consumers are ready to go touchless with their payments. Think of Amazon Go stores as an example. There are no cashiers and no checkouts; customers just scan their app at the entrance, pick whatever products they like, and leave. All the chosen items are automatically added to their virtual card, and the price is charged from the customer’s account.
Still, in-store contactless payments can be a competitive advantage
To quote Yuval Ziv, 31% of businesses surveyed by VISA in June 2020 still didn’t have an online shop. This means companies that provide viable options for integrated and contactless in-store payments to both customers and merchants will have a distinctive edge over competitors.
Companies now see that trackable digital payments contribute to customer loyalty. Merging of the physical and digital experiences (online payments made within brick-and-mortar premises), mentioned by Daniel Kornitzer, is already taking place. 5G proliferation is still being discussed, as too much controversy surrounds the technology. Nevertheless, businesses might seize this new opportunity in the future.
PSD2 SCA has a future for those who take it strategically
The main idea behind PSD2 SCA, the strong customer authentication requirement within the revised payments regulation in Europe, was to make consumers more confident about online shopping.
Currently, 80% of the acquirers and PSPs surveyed by Ekata consider SCA as a strategic tool in their portfolio, but only 47% treat it as a differentiator that can boost their leadership position.
In practice, a company needs some proven experience and dedicated investment to successfully implement SCA. Specifically, Spencer McLain mentioned that the acquirers and PSPs aimed at gaining a bigger market share should promote their thought leadership and hold educational campaigns. Those will be especially relevant for smaller merchants who don’t have technical or regulatory expertise to implement the SCA strategies correctly.
When implementing PSD2 SCA, it’s worth minimizing authentication through the use of biometrics and whitelisting. Sharing more data about transaction context during authorization looks promising too. With the proper transaction risk analysis solutions in place, some processors and PSPs can even consider offering full liability shift as a service — but this deserves another discussion.
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