The Covid crisis has changed the payments industry irrevocably. A shift towards digital banking methods was already happening before the pandemic, but this accelerated in 2020 as the fear of viral transmission through the handling of cash prompted more consumers to use contactless payments. The number of transactions that used coins and notes fell by 35% in the UK last year, while contactless methods accounted for more than a quarter of all payments, according to research by UK Finance.
“Cash has all but vanished. Instant, contactless payments have become the baseline for in-person transactions,” says Josh Guthrie, UK country manager at payment service provider Mollie.
Over the past 18 months there has also been a significant increase in the number of consumers using apps and other digital services offering them more control over their finances. Almost 90% of European banking executives surveyed by Marqeta in August 2020 reported that their companies had been overwhelmed by the growth in demand for online and mobile banking. Three-quarters admitted that they hadn’t been prepared for the speed of the changes in consumer behaviour triggered by the lockdowns in their countries.
About the same proportion of respondents said that their banks had been forced to change their strategies to remain fit for purpose in the Covid era. Indeed, there have been several recent innovations in areas such as embedded finance, instant payments and open banking.
The latest offerings have been designed to provide a high-quality customer experience, especially in terms of functionality and user-friendliness. This is because digital services have become a key part of our lives, so we expect a lot more from them than we did. Consumers will no longer stand for poor performance and inconvenience in the shape of slow, clunky payment systems.
Embedded payments are nothing new – well-established digital platforms such as Uber and the Starbucks app have been using them for years. But the technology is becoming ubiquitous, partly because of the convenience it offers consumers.
As Guthrie notes: “The double-click ease offered by embedded payments, with methods such as Apple Pay, is setting the new baseline.”
Online fashion retailer Snag Tights says that more than three-quarters of its customers check out using an embedded payment method such as PayPal, rather than using a credit or debit card, which would require them to submit more information on the site.
“Embedded payment methods often come with higher charges for the merchant, but it’s important to balance this factor against the customer’s preference for the simplest checkout experience,” says Snag’s chief revenue officer, Tom Martin. “If we were to refuse to adopt a new payment method because of higher fees, that would only cause fewer customers to shop with us.”
Iana Dimitrova is CEO of OpenPayd, a provider of software that enables retailers to embed financial services within their products. She says that what was once a service exclusively provided by banks and card issuers, and divorced from the shopping process, is now becoming an invisible but inseparable part of the customer experience offered by brands.
Dimitrova points to research by her firm, which indicates that 95% of UK brands expect to offer embedded payments in the next five years.
“By adopting such a strategy – adding convenience, tailoring the user experience and using data to offer customised financing solutions – retailers can maximise brand loyalty and benefit from crucial new revenue streams in return,” she says. “But make no mistake: it’s brand considerations, rather than financial ones, that are driving the uptake of embedded payments for most merchants in this country.”
Frasers Group, which owns the department-store chain House of Fraser and trades mainly under the Sports Direct brand, has seen a huge growth in mobile payments.
Rolling out instant payments would boost this growth further, says its head of IT, Tony Westwater. “This is especially important with younger consumers, particularly those aged 25 to 34. They want to try new payment methods and aren’t as attached as older customers are to debit and credit cards. Instant payments offer them something new to try from their mobile device, which is now becoming their primary payment vehicle.”
Westwater adds that the transparency provided by instant payments can benefit shoppers who find it hard to keep track of their outgoings. “With their money being taken immediately, customers can more easily manage their spending and avoid experiencing bill shock at the end of the month,” he says.
One of the main advantages for businesses of adopting instant payment is that it aids cash flow. Even before the pandemic, this was a big concern among retailers. Nearly all (96%) of those responding to a survey by the Confederation of British Industry in April 2020 reported that they were experiencing cash flow problems.
With the direct transfer of funds from a customer’s account into the retailer’s account that’s enabled under an instant payment system, the money is made available immediately, rather than in the three working days it could take for the funds to clear. This would alleviate much of the pressure of cash flow management, says David Maisey, CEO of MultiPay Global Solutions.
He adds: “If the government is serious about helping businesses to recover from the pandemic, then actions that offer long-term benefits and a solid foundation for growth – for instance, enabling instant payments – need to be looked at as a priority.”
The number of people in the UK choosing to share their data through open banking has tripled since the start of the pandemic, according to research published by Experian in May 2021. More than half (54%) now regularly apps powered by open-banking technology.
Marie Walker, co-founder of the Open Future World forum, expects to see fast growth in the use of open-banking applications over the coming years.
“They’re easy for consumers to use and very cost-effective for merchants,” she says. “Open banking can be used to make life easier in other ways – for example, with apps that let people easily split the bill at a restaurant, say.”
There are other benefits on the horizon, Walker says. The task of chasing payments is a huge burden for small businesses, for instance, but open banking will enable them to “automatically request payments when they issue invoices, and both invoices and payments can be automatically linked to the company’s accounting system”.
She continues: “Moving beyond payments, open banking and the broader world of open finance is very exciting. The technology will provide benefits ranging from helping individuals and businesses manage their finances better to making it easier for people to see what impact their spending is having on the planet.”
Barriers to adoption
Much of the success of technologies such as open banking hinges on the process of user authentication, which can affect the customer experience. Those providers that can streamline payment authorisation are likely to gain a crucial competitive edge over their rivals.
But some experts believe that regulatory constraints may affect developments in this field. One example is the second EU payment services directive (PSD2), which is both an enabler of competition and a restrictor of innovation.
“Put simply, PSD2 doesn’t allow open banking and embedded finance to be as innovative as they could be,” says Daniel Homoki-Farkas, MD of digital innovation agency Supercharge UK. “Don’t get me wrong: PSD2 is a great initiative that deserves everyone’s support. But it’s too convoluted in its current form. The effort involved versus the potential returns doesn’t make it worthwhile for many players to think about launching a product or service.”
He cites the requirements for re-authentication every 60 to 90 days as a case in point. These are “well intentioned as a protection against fraud. But it’s a tedious, frustrating process that disrupts the user experience and turns off customers.”
The challenge for banks and other financial service providers is to strike a balance and come up with innovative products that don’t compromise on security.
“PSD2 needs updating again to enable more effective and exciting use cases than we’ve seen so far,” Homoki-Farkas says. “We need cases that properly add value to customers’ experience of personal finance products and services.”
While customer experience has long been a battleground among brands, the demand for secure, user-friendly payment services is inspiring a new generation of innovative solutions.
For example, with consumers already getting used to one-click payments, we’re now entering a world of no-click payment. Amazon Fresh grocery stores are using a system known as Just Walk Out to allow customers to buy goods using their Amazon accounts simply by taking them from the shelves.
Elsewhere, look out for the arrival of one-tap direct payments via a bank-to-bank transfer that allows funds to move straight from the customer to the merchant, circumventing a payment processor such as Visa or Mastercard.
There is still room for improvement, though. There will be increasing pressure for banks to make better use of PSD2 and open banking to optimise payment processes for their customers. The pandemic has accelerated innovation in payments – and these promise to meet ever-increasing customer expectations long after the lockdown restrictions are lifted.