The payment services industry has been an evolving landscape for many years. Contactless payments and the use of digital wallets are on the rise, whilst physical denominations of currency are on the decline.
According to the latest UK Payment Markets Report from UK Finance, in 2019, cash payments decreased by 15%, whilst over half of all payments in the UK were made by card for the first time.
Unsurprisingly, the Covid-19 pandemic has accelerated the innovation and development of alternative digital payment methods. How will the pandemic shape the payment services industry going forward?
Whilst international cross border e-commerce and money remittance has been on the rise, cross-border transactions are expensive, slow, and less transparent when compared to its domestic counterpart.
In 2019, the cost of remittances stood around 6.82%, much higher than the UN sustainable development goal of 3% by 2030. Challenges include compliance with new Secure Customer Authentication (“SCA”) rules for proving customers identity (included in the second Payment Services Directive (“PSD2”)), and increasing threats to security, with new instances of fraudulent acts and cyber-attacks.
So, what affect will Covid-19 have on these challenges and trends?
The obvious effect of Covid-19 has been the accelerated shift towards digital means of payment. The closure of businesses, especially in the retail sector, alongside self-isolation, has led to many turning to online shopping. Digital transactions have inevitably been on the increase.
The change in user experience because of the pandemic, has meant that many traditional businesses are being forced to improve or fast track their online presence, for the fear of being overshadowed by others in the market. For example, companies with well-established online businesses and frameworks, such as Amazon, have reported large increases in profits.
Changes in customer behaviour will drive digital innovation and increase the demand for digital payment services. For example, due to the health risks posed by the spread of Covid-19 via banknotes, the use of contactless cards has increased. The banking and finance industry has responded by increasing the spending limit for contactless payments from £30 to £45 across the country.
An increase in the use of digital payment methods may also be attributable to the increased security they provide. With fraud rates rising by 33% during the Covid-19 lockdown, people are increasingly wary of becoming a victim of cyber-crime whilst shopping and doing business online. Digital wallets provide the ability to prove the identity of customers, allowing for ease in monitoring, controlling and combatting transactional fraud. Biometric authentication is one way in which this is possible; Google are currently piloting a solution where voice authentication may be used for transactions. It also assists in the streamlining and onboarding of clients, and in compliance with the SCA rules. The decentralisation of data also increases its resilience to cyber-attacks.
Moving forward, it will be important to avoid creating a divide between those who use digital payments and those who do not. An increase in adoption of digital payment services is no bad thing, as long as it does not leave cash users vulnerable with less commerce options.
Whilst most digital payments still operate via more traditional means, such as by card and bank-to-bank transfer, the continuing development and emergence of cryptoassets is disrupting this tradition.
Fintechs and some big technology firms are leading the way in diverging from these traditional means of payment through block chain and cryptoassets. This was established by Christina Segal-Knowles, Executive Director for Financial Markets Infrastructure at the Bank of England, in her speech on the impact of Covid-19 on payments. We expect there to be a rise in the adoption of tokenised payments following on from Covid-19 pandemic because of:
Whilst blockchain is not suitable where superfast transactions in milliseconds are needed (because of their decentralised nature), they do have their place and we see them being increasingly part of the payments services industry “toolbox”. This is because blockchain has the ability to keep immutable records of all transactions.
The impact of the virus has resulted in people being stranded in non-home countries. Some have struggled to access funds to cover their extended stay and where there is access, remittance prices have then increased. The use of cryptoassets can provide an alternative to local currencies and exchanges and can be a solution to the threat of inflation or simply access difficulties in obtaining traditional currency.
Central banks are also currently considering the application of digital currencies. Whilst central bank money is currently only available in physical means and reserves, there is room for these banks to issue their own electronic form of money, a central bank digital currency (“CBDC”).
A CBDC could similarly help to solve the issues discussed above, by leading the way in a digital economy and by providing a safer, more secure alternative to privately owned cryptoassets. Although, this is not without risk. For example, how would CBDC work in harmony with commercial banks in relation to deposits and transfers? The Bank of England has recently started a dialogue regarding CBDC, to evaluate whether its benefits outweigh the risks, it will be interesting to see what the result of this discussion is.
With customers seeking further integration with their payments and their technology, following the rise in digital transactions, providers will have to adapt and innovate. This innovation will have to take place on an international scale, where the global economy will need support through cheap and secure cross border transactions, in order to put the world back on its feet again.
It’s key to consider whether the regulatory frameworks in place to support the growing development of these technologies are sufficient and able to evolve at the same rate as the technology itself, and whether the central banks control of the public’s money is the provision an outdated concept in a post-covid world.