Over the last few years, the world has experienced significant changes in the way people and businesses conduct transactions. Payment options have been evolving with existing solutions improving and new technologies replacing progressively standard payments. Following the year 2020 and the pandemic, some of these changes and new payment trends have accelerated due to the urgent need for companies and consumers to adapt to new methods. It has mostly benefited to e-commerce businesses and digital payment solutions, proving their strengths in increasingly connected economies.
Global e-commerce has continued its growth in 2020 with a total of USD 4.6 trillion in transactions, an increase of 19% compared to 2019. Based on the last few years’ growth, it is estimated that e-commerce penetration has accelerated by almost three years. E-commerce is directly linked to digital payment solutions, hence e-commerce growth has driven the increase in use of digital payments.
E-commerce transactions are nowadays originated from three main ways/categories:
Desktop browser-based commerce is the largest and most mature category. In the browser channel, there are three primary ways for consumers to pay:
Demand for mobile browser-based transactions has been bolstered by the proliferation of tablet computers and smart phones, and the availability of high-speed data. However, transaction abandonment rates are typically higher on a mobile devices (relative to desktops) given the tediousness of keying in payment card data and shipping information on smaller screens. To that end, many online merchants have simplified the check-out process by allowing consumers to save their payment card and shipping information under a profile, dramatically reducing the number of key strokes needed to complete a transaction, or by offering third-party payment wallet checkout options (e.g., PayPal, Apple Pay, Pay with Amazon, etc.).
Mobile in-app commerce is similar to desktop browser-based commerce, except browsing and payment occur within the retailers’ own mobile apps. Demand for mobile in-app commerce is also helped by the proliferation of smart phones/tablets, retailer apps and the availability of high-speed data.
Abandonment rates for mobile in-app transactions are lower than mobile browser based transactions because: (1) the consumer often has a stronger relationship with the retailer (evidenced by the fact they downloaded the retailer’s app in the first place), (2) it’s relatively easy for the retailer to re-engage the consumer who has abandoned their shopping cart by sending an alert or notification, and (3) consumers often save their payment card and shipping information to their profile in the app, which reduces the need for (and pricing power of) third-party payment wallet options.
Mobile in-app transactions are gaining share relative to mobile browser-based transactions and competition among third-party payment providers for acceptance and placement within in-app mobile applications is intensifying.
Digital wallets were the main payment method used in e-commerce in 2020, with 44.5% of transactions.
Use of digital/mobile wallets is at the expense of credit cards, bank transfers and cash on delivery (COD). According to WorldPay, digital wallet will account for 51.7% of e-commerce transaction volumes by 2024. One method that should also continue its expansion is “Buy now, pay later (BNPL)” solution, which gained importance during the pandemic. Debit and credit card use for online transactions should decline over time.
On the other hand, point-of-sale (POS) volumes were logically impacted by -4.4% in global transaction volume compared to 2019 due to Covid-19. Lockdowns and business restrictions all led to the decline of cash usage. In addition, the pandemic increased the use of contactless payment methods at POS. In the coming years, we should expect this trend to continue, as consumers will move their preferences to more convenient payment methods.
In developed markets, the card remains the primary funding mechanism for mobile payments. However, emerging markets rely heavily on alternative funding methods, including prepaid and direct debit card (ACH), with a heavier focus on QR-code tech (e.g., Alipay, Tenpay, Paytm).
Middle East and Africa
As highlighted above, the decline of cash use will be at different paces across regions. It will depend on the development of local regulations/infrastructure and of course consumer preferences. Contactless payments will continue to be adopted as consumers realised their convenience in addition to the safety aspect and embrace the trend toward the future of faster-commerce.
Towards a cardless and contactless future
The contactless trend and technologies were already well present before Covid-19, which helped the fast adoption during the pandemic. Such a trend came along with the constant increase of smartphone ownership globally and the surging use of smartphone as financial management tool. In parallel, the trend was supported by years of investment in technological capacity for efficient contactless payments. More and more POS terminals have the capacity to accept “Near Field Communication” (NFC) payments, a technology allowing wireless data transfer in close proximity. Nowadays a majority of smartphones support mobile wallet (Apple Pay for Iphones, Android Pay, Samsung Pay) thanks to NFC chips.
Mobile wallets are usually linked to physical credit/debit cards, but card issuers have started to offer virtual cards. This additional solution improves the application process as the card could be issued immediately. Issuers can target new markets at a lower cost and new type of issuers (small banks, FinTechs) can also enter into the space.
While mobile wallets create a more level playing field and introduce more disruptors into the ecosystem, scale matters and incumbents remain vital to the mobile evolution.
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Another digital tool for smarter checkout experiences is using loyalty points as a currency. Improving loyalty programs with simple payment experience can be a powerful vehicle. Intuitive loyalty programs can provide valuable business intelligence on customers, on their purchase and payment behaviours. In some platforms, loyalty points can be easily used for payments:
The velocity of payment has increased and represents great value for governments, businesses, consumers, banks and technology providers for faster payments and authentications.
On businesses’ side, the need for efficient and convenient payment solutions became a survival tool, hence B2B payments solutions are playing more and more a vital role. It is a very competitive market between real-time payment rail/system providers as the market is estimated at USD 125 trillion globally.
Digital transformation through e-commerce is also changing retail stores, as many businesses of any size become omni-channel experiences. As customers are increasingly exposed to digital platforms and payments, expectations will follow for retail experience once people will return to shops. Digital tools will also help stores in their overall shopping experience for making it convenient and efficient. Payment and checkout tools can make the payment part “invisible” and staff focus only on servicing customers. For example, Amazon is testing “just-walk-out” checkout technology and will introduce the digital technology to Whole Foods outlets in Q2 2021.
There is demand for real-time payments. It became a key factor for consumers when selecting financial institutions. Consumers who are more prone to use such system are usually young consumers, and the ones with lower income as they have more tendency to look closely to their account. Overall, the interest in real-time payments mainly comes from the simplification of payment experiences and better visibility and management of accounts and cash flows in real time.
For financial institutions, most common and important features for client are trust and protection of personal data, but real-time payment services can add value to institutions service offerings. In the US, common payment rails/system have been put in place with services such as The Clearing House’s (TCH’s) Real-Time Payments (RTP) network. However, integration to such networks remains a challenge for smaller players who don’t have enough capital or technological tools to be linked to RTP networks.
Financial institutions, namely banks, will inevitably need to take a new approach towards modern payments. Their services will need to be linked to the fast and connected economy. Demand for connected services has also driven the creation of digital banks, whose number has grown 200% globally since 2015. Such growth demonstrates the market potential for underbanked/unbanked consumers in developing markets. Financial institutions/banks and technology partners play a vital role to innovate and provide the infrastructure for the digital ecosystem. As commerce shifts rapidly to digital channels in a couple of weeks/months (see exhibit below), digital processing capabilities need to be delivered instantly by banks, with the access to new approaches and digital applications.
The popularity of e-commerce and digital payments expanded to different commerce, including segments such as healthcare, professional services and education. These businesses, small or large, were able to develop their digital channels through marketplace platforms. During the pandemic, platforms like Amazon, Shopify or Etsy registered 70 to 150 % more merchants. According to McKinsey, digital marketplaces could account for 60% of digital-commerce volume in 2023.
Merchants moving to marketplace platforms is a secular trend of businesses trying to follow consumer behaviour and demand, but also a way for any type of merchant to expand their business, customer base and enhance their overall operations. Most of these marketplace platforms offer integrated software vendors (ISVs) and built-in payment channels. SMEs investing in the integration of digital ISVs are looking to implement value-added services for their operations (SME financing, payment infrastructure), but also for their customers with rewards redemption at POS, POS financing. For many SMEs, e-commerce and digital operations is not anymore a nice tool to have, but a vital one.
The 2020 pandemic has boosted the speed of changes in the payment ecosystem, even though such trends were already observed before Covid-19. Active players say that the transformation of the payment market has accelerated by four or five times faster than expected. All actors of this market should move forward and welcome innovation in order to gain or preserve their role.
Within the payment market, companies that are providing new payment infrastructures and digital services should continue to grow and gain market shares as the future will lead to more applications and services around digital payment and e-commerce. In the last few years, we can observe that financial markets already perceived some of these changes and the importance of payment companies who were the best performers across financial services segment.
Banks have had less momentum in their payment business as they had to deal with a challenging environment for them with compressed net interest margins, pressure on interchange and cross-border fees by regulation and competition. With digital investments and technology costs, banks should continue to struggle in generating growth and profits in their payment segment. In addition, the competition will intensify as payment companies devote large investments to develop their capabilities. For investors, we believe the payment segment and its actors are important to observe in the context of the evolution of businesses’ operations and approach towards consumptions in the future.
Sources: Alacriti, Clark S. Berg Insight, FIS Global, Goldman Sachs Research, i2c Inc, Mckinsey & Co., MSCI, Pymnts, Company Press Releases and Investor Reports and CIGP Estimates.