Where to next - cash on steroids?

The payments industry is in flux, but the new direction may yet be unclear, as Stephen Armstrong reports


In the slow spring of 2013, it’s a brave high street retailer who invests heavily in future technology. If we’re having trouble predicting the global economy, how can we know what consumers will choose to spend with in 2015? There’s a format war out there that’s every bit as fierce as the 1980s’ VHS v Betamax tussle and no one wants to end up spending heavily on the third-placed Philips Video 2000 system. The Philips what? Exactly.

Payment technology is an overly-cluttered marketplace right now. iZettle, Adyen, payleven and Square jostle alongside PayPal, F-commerce, NFC (near field communication) and contactless in a bewildering smorgasbord of payment solutions. But how successful are these solutions on the ground and which players are likely to be here to stay? And what will they ask of retailers, who often bear the brunt of the cost of upgrading point-of-sale systems?

“The payments industry hasn’t been fair to retailers over the years,” says Raja Ray, director of solutions at VeriFone, the UK’s leading supplier of point-of-sale equipment with roughly 50 per cent of the high street using its payment systems. “The systems can be complex and expensive, especially for mid-sized retailers who don’t have an IT department. What’s needed is simplicity; if a new payment system matches cash for cost and speed that’s still not enough. People need incentives to abandon cash.”

 More than 25 per cent of our spontaneous transactions are made on a debit card with the average transaction size at £42 and falling

According to figures published in March by the Payments Council and the Bank of England, if cash isn’t king, it’s still very important, making up 60 per cent of all payments in 2011 and over 56 per cent of UK shop payments. However, it’s clear this is falling fast – cash accounted for 75 per cent of shop payments in 2001 – and right now the replacement is the debit card. More than 25 per cent of our spontaneous transactions are made on a debit card with the average transaction size at £42 and falling. Credit cards meanwhile have plateaued out. Some 8 per cent of transactions are on credit cards, with an average value of £56.

Credit cards, says KPMG’s UK head of payments Mark Hale, aren’t going to die off any time soon; consumers tend to twin them with air mile or reward schemes, both online and in the high street. However, newer payment systems gain extra trust after card-related disasters, such as when hackers accessed 46 million credit card records at the parent company of discount retailer TK Maxx. Industry estimates have the company effectively losing $106 in loss of business, goodwill and reputation for each record accessed.

Investing in strong security is thus one reason why one-click payments from Apple and Amazon are growing, and m-commerce is one way bricks-and-mortar retailers can counter this.

“Retailers are facing massive pressures from showrooming – shoppers experiencing items in store then purchasing them at a discount online or elsewhere,” explains Gareth Mackown, mobile lead at IBM, who works with shop chains on in-store technology. “New payment technologies can help with that, especially mobile. At the moment retailers know when a customer’s visit has ended if they pay on the way out. Increasingly, however, customers are leaving stores simply because the till queue is too long. If there are well-matched geo-targeted, personalised offers, with easy redemption at point of sale, it encourages shoppers to stay.”

Yet some are worried that recent undelivered promises leave consumers unimpressed. “We’ve been waiting for NFC technology for ten years,” says Wendy Dobson, head of innovation at DataCash. “Each time another iPhone comes out without NFC, it locks away another million consumers who aren’t going to be using it any time soon. With TfL [Transport for London] leaving the payments business and making the Oyster card an NFC contactless payment, it’ll be interesting to see if that pushes consumers to start demanding tech companies include NFC. I suspect that’s good news for Android phones.”

And in many ways, the industry is already finding ways to circumvent NFC. “Starbucks mobile payment proposal is effortless,” says Ed Chandler, chief executive of Kalixa Group. “You can pay through the app, you earn gold stars, it includes a store finder, plus ‘keep track of your favourite coffee and offer you free e-books and iTunes downloads’ when you’re in-store.”

PayPal, which handled $14 billion in mobile payments last year, devised a similar app for PizzaExpress. “PizzaExpress didn’t need to replace their systems to make this possible. It’s a great example of how the line is blurring between the online world and the high street,” according to Cameron McLean, managing director, PayPal UK. “We’ve also worked with Oasis and Karen Millen to enable shoppers to use their smartphone in-store as well as return goods and get a refund.”

Perhaps we’re finally seeing the dawn of mobile payments. At Visa’s annual conference in Cannes, with 750 invited banks, retailers and mobile players, that seemed the prevailing mood. “Twelve months ago people were wondering if the payments revolution would really happen,” explains one of the guests, Alastair Lukies, chief executive of Monitise, the mobile payments provider. “Now it’s clear it’s happening much faster than expected.”

Mr Lukies predicts mobile banking will grow from 10 per cent penetration today to 50 per cent over the next three years, followed by mobile payments to friends and family, and then m-commerce. Visa, which released digital wallet V.me in November 2012, expects half of all payments to be made through mobile devices by 2020.  “Everyone’s basically agreed that 10 per cent of a big market is better than 100 per cent of nothing,” says Mr Lukies. “The industry’s big threat is two kids in a Californian basement getting set to disrupt the ecosystem.”

For KPMG’s Mr Hale that threat may already have arrived in the shape of Bitcoin, the open source digital currency that’s gained attention in the past year. “Banking hasn’t really changed since the days people would send livestock to market and get a piece of paper in exchange,” he says. “People have lost trust in the banking system. Today money is simply bits and bytes, and Bitcoin transactions are a digital accounting book change taking place in the cloud, which have become a new international currency. It’s the first proper revolution in payments – everything else is simply cash on steroids.”