From the beginning of the coronavirus pandemic, many consumers have started avoiding cash transactions and using contactless card payments as they do not require physical interaction with a human or a terminal and are easy to use. Banks in many European countries, such as the UK, Ireland, Poland, Norway and Hungary, promptly responded by raising the limit for contactless payments without a pin entry (e.g. in the UK the limit increased from £30 to £45). Belgium and the Netherlands followed suit, even raising the cumulative limit for several consecutive contactless transactions. Those limits could potentially increase further in the coming weeks, as not all EEA countries have implemented the maximum limits originally set out in the PSD2 technical standards. So, are digital payments becoming the new norm?
With people confined to their homes, e-commerce is stronger than ever. E-commerce sales globally have increased since the lockdown, particularly for groceries and health products, even though many retailers are struggling with logistics. In the UK, for example, online retail order volumes have risen by over 200 percent on some products since the coronavirus outbreak. For health and hygiene products, online sales have increased by a staggering 78 percent in China, while in Germany, the UK and the US, the growth rate is respectively 36, 39 and 46 percent. In the same three countries, groceries and food ordering has grown by between 25 and 33 percent. In addition, banks are helping smaller retailers to acquire new technology to enable them to set up web shops and sell via social media.
The current context will also contribute to the success of mobile payments through devices such as mobile phones and watches. Before the pandemic outbreak, mobile payments were expected to reach two-fifths of in-store purchases in the US, and already represented half of in-store payments in China. There is no doubt that these numbers will be even higher once our global economy has recovered from the looming economic crisis.
ARE CASH AND ATMS BECOMING THINGS OF THE PAST?
Until recently, one could have argued that cash would never disappear due partly to the unwavering trust in its value during troubled times. But the current pandemic has completely turned the tables on this argument, as it is safer for people to avoid cash (or the physical contact it requires). Countries such as China and Russia have started disinfecting banknotes before putting them back in circulation.
For banks, maintaining and distributing cash through their ATM network requires regular investments, so this could be an opportunity for banks to rethink these investments. Belgian banks have already joined forces a few months ago to create bank-neutral ATM networks, to eliminate the cost to each bank of managing its own network. The increase in digitization has also led to a reduction in the number of available ATMs, and this trend could easily continue if the preference for card and mobile payments takes hold.
DIGITAL CURRENCY PIONEERS
While some governments and central banks have been cautious about developing digital currencies, with only Sweden and the Bahamas launching pilot projects so far (E-Krona and Sand Dollar respectively), the corona crisis is now pushing countries to accelerate the pace of research on how digital currencies could transform economy and to seize the momentum to make CBDC (central bank digital currency) a new reality.
The Dutch central bank believes that the nation’s declining use of physical cash is one of the reasons it may do well in a CBDC trial and that the eurosystem’s CBDC would be more programmable than bitcoin. In March, France’s central bank published a request for proposals for CBDC ‘experiment’ applications, while the Bank of England formally issued a discussion paper on digital currency, seeking feedback from the industry. The US has created an advisory group to steer the Digital Dollar Project. Earlier this year, the Bank of Canada decided after extensive research to not issue its own digital currency but noted that this decision could be revised if cash usage was to drop.
If the use of cash remains as low as it is now, CBDCs could be a viable cash replacement for some transactions and a way to ensure financial inclusion for all. In developing countries, for example, where many people do not have access to a bank account, the use of mobile phones and e-wallets holds great potential for allowing these unbanked communities to use alternative payment methods.
WHAT DOES THIS MEAN FOR FINTECHS AND BANKS?
Despite the fact that the COVID-19 pandemic is accelerating the rush to digitization across financial services, the booming fintech industry will face its challenges during and after this crisis and payments revenues are expected to drop due to the global downturn in economic activity. However, players with the right business model will survive and would be in a stronger position to ride the next wave.
A Dutch fintech firm Adyen posted a 34 percent surge in first-quarter revenue as coronavirus boosted online payments. Gold-purchasing app, Glint Pay, reported a monumental 718 percent increase in its traffic in the last week of March. Before coronavirus, Apple Pay had expected to command around 47 percent of the US proximity-based mobile payment market by the end of 2020 - this forecast is now set to increase.
As far as banks are concerned, this pandemic could lead to a spike in digital channels activities, however this spike will test their ability to handle increased volumes. Greater utilization of digital channels will also test how easy to use these channels are, especially for first-timers for whom the new digital experience is a direct result of coronavirus concerns.
Banks can use this as an opportunity to rethink and enhance their digital offerings to provide smoother customer journeys for managing money. They may need to consider upgrading their payment (cloud) infrastructure to handle the increase in payments and to partner with fintechs to provide superior and cost-effective solutions. Having experienced the ease and convenience of digital payments in the time of crisis, it is likely that consumers will want to continue using them, sustaining the current increasing volumes once the pandemic is over. Banks must prepare for this outcome.
Jeroen Dossche, Partner
M +32 478 22 11 80