By Andrew Doukanaris, Fintech Business Director, Intellias
We have come a long way since cash was king and the first choice for most shoppers. In fact, cash is set to account for just seven per cent of in-store purchases in the UK by 2024. This is part of the long journey of digitisation of transactions.
The rise of contactless payment
I well remember being part of the team at Visa responsible for planning for the London Olympics with a goal of making it contactless. Back then, getting London cabbies to try contactless payments was a challenge. Nevertheless, when drivers realised they could become safer, faster and more efficient, getting them on board became easy. That’s just one example of how the nature of payment can shift rapidly.
More recently, we have had to deal with the scourge of Covid-19 and the associated lifestyle changes it has prompted. Among these was the widespread adoption of contactless payment in shops of all sizes and for even small purchases, even a simple cup of coffee. This has driven real behavioural change and encouraged even the strictest luddite to experiment with new payment methods.
At the same time, contactless payment makes travel more attractive. Most people when they arrive in a new country would rather not visit an ATM, pay extortionate rates and then carry round bundles of cash. Instead, they expect to touch and go with transparent exchange rates and fees.
Covid-19 also prompted the use of QR codes. Once seen as an outdated gimmick, the need for remote ordering and minimal personal contact made them genuinely useful during the pandemic, although their use has notably diminished since. We can see further afield in China and Japan, QR codes, in tandem with Alipay and WeChat, are hugely popular methods of payment, which may well influence behaviour globally.
Introducing Open Banking
Perhaps the most significant development in financial services is Open Banking. Put simply, open banking cuts out the middleman, connecting the merchant to the consumer directly. As a result, merchant fees are greatly reduced or even eliminated and transactions and payments are processed instantly – not within three working days.
Open Banking also uses APIs to enable third party developers to create applications around more traditional banking services. In practice, this means you can gather different services within one portal or banking app. So, I can see all my accounts and loyalty cards, as well as real time transactions, stock market investments and crypto, in one place. Companies like Monzo, Starling and Revolut are leading the way in this brave new world, aiming to take on established traditional, established banking industry leaders, such as HSBC, Lloyds and Barclays, by providing a one stop shop for multiple services.
However, there are always obstacles to adoption and this is certainly the case when it comes to something as sensitive and valuable as money. Number one is consumer confidence – all it takes is one high profile hack or company collapse and people will fear the volatility of the relatively unknown. Overcoming the inertia associated with established payment methods is a challenge.
It is also worth mentioning the rise of cryptocurrencies. Although these are currently volatile, there can be no doubt that they have become an important payment method. Will they ever reach a level of acceptance in the broader consumer world? Despite the well-publicised fluctuations on the crypto market, an increasing number of sectors and retailers are accepting cryptocurrencies as payment. That suggests a bright, if unpredictable, future for this latest payment evolution.
Open Banking, QR codes and contactless payment are very much in the here and now. What might be coming down the track in five or ten years?
There are a number of areas to keep an eye on. Ever-increasing environmental, social and governance (ESG) pressures will drive financial institutions, like most other large businesses, to introduce net zero policies. Faced with the very real threat of climate crisis and plastic pollution, emissions will be minimised and the use of plastic reduced. That could mean the elimination of traditional plastic cards and the primacy of mobile contactless apps instead.
Buy-Now-Pay-Later (BNPL) schemes have become a practically overnight sensation. And they are set to continue their ascent. One recent study, conducted in 2021, found the market is set to reach a value of $3.98 trillion by 2030. That’s a huge increase from only $90.69 billion in 2020. And Gen Z use of such services grew six-fold in 2021 so it is likely that it will inform consumer behaviour far into the future. The risk comes when these BNPL operators overextend and face a Wonga-style collapse or if consumers are driven into too much debt with interest rates rising and disposal incomes falling further.
Central Bank Digital Currencies (CBDC) are also a striking prospect and could prove to be a turning point for crypto credibility. The UK Treasury has already begun its consultation on the merits of CBDC as have many other federal banks. The question is how do governments protect the existing system and strong currencies like the US$? At the same time, existing networks like Mastercard and Visa are trying to enter this sector because they see this as a challenge to their space.
Further into the future
Looking further beyond, will physical shops even exist? We already know about the value of data and how retailers and banks build up vast amounts of behavioural data to predict your likes and dislikes. This data and the associated algorithms will continue to be at the heart of understanding the consumer. It will also be augmented with new data types, such as facial recognition which recognises what makes users’ eyes light up in real time.
Will that lead to a Minority Report-esque future where personalised ads are served up wherever we are, according to well tracked behavioural cues? A shop that doesn’t even need a conventional physical footprint because the goods will be shipped the final mile directly to the consumer’s home? No-one can say for certain, but some trends are already beginning to form. The ongoing abandonment of the high street can be seen in the conversion of two floors of John Lewis on Oxford Street, London, to office rentals.
Taking all these trends and developments into account reveals the fluidity and volatility of the current financial ecosystem. The old days of rigid legacy banking systems, long payment delays and the primacy of venerable financial institutions are gone and in their place is a more flexible, agile and customisable network of established players and disruptive start-ups. That means businesses in the banking industry must be open to change and modernization if they are to thrive and meet the expectations of a new generation of retail and commercial customers.
One thing is for sure: payments will continue to evolve, becoming ever more consumer-centric. We want everything that’s important to us, not just payments, in one secure, accessible and transparent place. Open Banking promises to make that desire a reality.
Very good insights here and spot on in my view.