The payments industry has arguably never had better incentives to find more convenient ways for consumers to pay for goods and services, writes Miya Knights
Although the payments landscape is still dominated by cash and cards, payment service providers are looking for ways to respond to changing consumer demands, help merchants speed transaction throughput and add value in terms of providing extra consumer information.
Despite this, evidence suggests that more traditional payment methods still dominate. But perceptible shifts in the popularity of the likes of cash, and credit and debit cards strongly suggest consumers are open to new and improved methods of payment.
The Payments Council, which guides strategy among payment institutions in the UK, found although cash still makes up the largest proportion of daily one-off transactions – three in fivepurchases – they are very small in value. Only ten years ago, UK consumers used cash to pay for 75 per cent of store purchases. That proportion has now dropped to just over half.
In that time, debit cards have taken over in terms of the way consumers now prefer to pay for small value transactions – enabled by the Faster Payments scheme – as a speedy alternative. In fact, last year the Payments Council predicted debit card spending in the UK could almost doubleover the next decade, totalling £664 billion from 14 billion transactions. This compares with credit card spending projections of £204 billion from 3.1 billion transactions.
Chris Dunne, payment services director for VocaLink, which manages the UK payments infrastructure including the LINK cash-machine network, says consumers have embraced debit card payments because they are easier to track and show up on consumer bank accounts almost immediately. Despite this, he says, there is still much room for improvement.
“Card payments require a five-point ecosystem, involving the consumer, merchant and acquiring banks, so that even if it may look like payments are moving faster out of the customer’s account to the merchant’s, they’re not,” he says. “Payments still take time to get to the merchant.”
Recent research carried out by VocaLink among UK consumers found they were more open to digital payment methods that eliminated the need to carry multiple cards, just as they have been keen to abandon coins and notes. They want the same immediacy of a payment showing up on real-time account balances that comes with debit cards, and can help with monitoring and budgeting.
But they also want to use one single system for all purchases that also eliminates the need to share bank details with merchants. You only need think back to the most recent Target data breach in the United States, which saw an estimated 98 million citizens’ card details compromised, to understand this consumer caution.
In response, VocaLink has launched Zapp, a mobile payment scheme that relies on passing a token between between the merchant and consumer in order to authorise payment without having to exchange any bank details. “Although the [payments] process is nowadays electronic, the industry is still reliant on legacy systems that are largely 20 or 30 years old,” adds Mr Dunne.
Like VocaLink, most payment innovators are focusing on mobile devices and their ability to offer multiple layers of pass-code and even biometric security to provide the single system consumers have been asking for to both initiate transactions and track their spending. In fact, the payments infrastructure provider found many consumers check their balance several times a day and70 per cent of smartphone owners check their bank balance using a mobile app.
Given the time it takes merchants to get paid, it is not surprising that another survey, carried out by Accenture at the end of last year, found 45 per cent of UK consumers said retailers have made it easier for them to use a mobile device to complete a purchase, up from 30 per cent of those participating in a similar 2012 survey.
While new payment competitors may threaten the traditional role of the high street bank, research from professional services firm PwC shows that 61 per cent of consumers still trust banks with their money over new providers. And Zapp research confirms that 81 per cent of consumers say theyare more likely to adopt such services if they are provided by their bank.
Telefonica, for example, abandoned its O2 Wallet service earlier this year, just 18 months after it launched. It required registered users to transfer funds into its app before using it. By contrast, Barclays Bank continues to offer its payment app Pingit, which enables users to link their bank accounts to their mobile numbers in order to transfer funds to each other and a selection of retailers.
Other providers looking to crack the mobile payments market include Orange’s Quick Tap, Moneto and PayPal. But even the PayPal scheme, despite its recent partnership with Samsung to use biometric identification built into the handset maker’s smartphones, still requires users to entrust the electronic payments company with bank or credit card details. This is why Zapp launched with five UK high street lenders, including Nationwide and Santander.
Mr Dunne says the challenge with mobile payment systems that rely on existing card systems is they can take a long time to get off the ground in terms of testing and acceptance procedures. “Smaller innovative providers can be more nimble, but create little islands of usage that restricts take up,” he adds.
Stephen Whitehouse, retail and commercial banking partner at PwC, saysdespite customers’ appetite for new and innovative digital banking offerings, and the fact they are willing to pay for these, the majority of banks still only provide basic mobile and internet banking services. “Banks are clearly missing a trick if they don’t start to invest in their digital offerings and only see digital as a way to reduce costs,” he says.
Consumers want to use one single system for all purchases that also eliminates the need to share bank details with merchants
Paym, another new payment method launched in the UK this April by the Payments Council, is attracting a lot of attention because it relies on mobile phone numbers to route payments, and has the backing of nine high street banks and building societies, which means it is supported by 30 million customers across the country. And a reported 300,000 consumers signed up to use the service in the run-up to its launch.
Adrian Kamellard, the Payments Council’s chief executive, says: “Paying someone back just got easier for millions of people.” But, designed to facilitate interpersonal payments, he adds that Paym would serve as “another safe and easy option to pay friends and family”. As such it does not necessarily address demand for secure payments for goods and services.
The emerging markets for mobile payments also rely heavily on mobile manufacturers, the underlying wireless communications infrastructure and its standards. Analyst firm Ovum flags up the slow adoption of near-field communication, for example, citing challenges it presents issuers, developers and other third parties.
Eden Zoller, principal analyst with Ovum’s consumer practice, says consumers will not adopt multiple digital wallets. “The best positioned will be those associated with the financial brands that consumers trust most and are familiar with. It is digital wallets of this kind that have the best chance of achieving scale and also attracting the advertising dollars needed to bolster the business model,” he concludes.