I have a confession to make. I spend too much money at a certain online merchant. This particular merchant delivers food to my front door. And it’s not Deliveroo.
Why do I mention this?
Well, paying by card as I do, I have a bugbear. That is, being stung for 25p every time I use my card. No, it’s not enough to stop me ordering from this merchant, but just enough to slightly raise my heckles every time I place an order.
This 25p represents a charge that my card issuer levies on to the merchant, which is then duly passed to me. But will it always be this way? Are there new technologies which will see the payments industry brought in to the 21st century?
The payments industry today is in massive flux as consumers change how they shop, and retailers and merchants undergo entire paradigm shifts.
Recently, UK consumers have become used to paying with contactless and latterly mobile wallets while shopping physically. The growth in online retail has also been obvious – see Amazon’s $14.5 billion of UK sales in 2018 as the first exhibit.
At the centre of this revolution is Open Banking. To everyday consumers, the changes may as yet seem minimal or non-existent. Scratch the surface however and big changes are already underway. Charges for card use could disappear, online retail will become more secure, and short-term credit can be bought in seconds at the touch of a button. Within these pages we will also explore whether the rise of faster payments and mobile payments will continue unabated or will the tech behemoths from Asia who use QR codes win over?
As we know young adults entering the workforce are generally more tech-savvy than their older peers, having grown up with the internet and mobile applications. Their demands for their bank and banking infrastructure to be as digitally cohesive as their lifestyles has been one of the reasons behind the rise in the digital banks such as Monzo, Starling, Revolut, N26 and others. This has also exacerbated the demise of the cheque, and increasingly, cash. There has been myriad studies into this, see here, here, here and here as examples.
Over time the UK payments system has begun to introduce and promote newer and faster payments systems designed with progressive technologies that meet consumer expectation.
The first of these was Faster Payments. Introduced in 2008, and now operated by Pay UK, Faster Payments was the first payments service to be set up in twenty years. It allows for payments to be made and received by the recipient within minutes rather than the traditional three days as seen by BACS, representing a massive step forward for remittances. Today, the success of Faster Payments is being built upon by the new body, Pay UK, in the shape of the “New Payments Architecture”.
The New Payments Architecture, set to be introduced by 2021 will see the end of the three day BACS clearing cycle. Direct debits will also become faster and more secure under the new scheme, which also proposes a role for Third Party Providers (TPPs).
Mobile and wearable payments
According to the website Toolbox, the first example of a mobile payment was used by Coca-Cola in 1997 whereby users could pay for a soft drink by sending a text message on their phone.
In the twenty plus years from this innovation, payments made through mobile – usually in the form of digital wallets - has become commonplace. The most common digital wallets in use today are Google Pay, Samsung Pay and Apple Pay.
In the UK, digital wallets work through NFC (Near Field Communication) technology. By opening up the digital wallet on a phone, the NFC tag, which is hosted on a microchip within the phone, sends electromagnetic waves to the card reader. This works within a radius of about 4 inches.
Mobile wallets are on the rise within UK and Europe. Mobile Payments Today state:
“Juniper Research issued a new report that estimates mobile wallet use will surge to 4 billion users by the year 2024 from the current estimates of 2.3 billion users, with wallet transaction volume rising 80% to about $9 trillion per annum.”
The convenience afforded by mobile or digital wallets is key to their growth in use. Users can dispense with both cash and cards, safe in the knowledge that they can continue to pay for items as they would do with them. With only a small chip required to make payments, digital wallets are increasingly being found in wearables, such as smart watches.
While some work requires to be carried out to ensure consumer confidence is high in the use of mobile wallets, security is one of their primary benefits. When a physical wallet is lost, everything within it is gone from, cash, to cards to ID. When a phone is lost, it can be digitally locked to ensure access is denied to anyone with nefarious motive.
Blockchain & Cryptocurrency
Following the launch of Facebook’s - or more strictly speaking Calibra’s - ‘Libra’ last week, no conversation on the future of payments would be complete without speaking on the rise of blockchain and cryptocurrencies.
For its part, blockchain has threatened to revolutionise the payments industry for several years now. Blockchain offers the advantages of much higher levels of security, better auditing and faster processing. Outwith of some small startups however, it has yet to make a significant dent in the industry.
Cryptocurrencies very definitely represent a revolution in the industry. The ability to make payments anonymously, free of public scrutiny and securely are all reasons why they have been widely touted. That said, the fact that they cannot be manipulated by Government (ie, central banks) is primarily why they have yet to be endorsed by major states. The anonymity behind crypto payments are also a worry to legislators, in that it could be used to facilitate transaction for guns and drugs, or become the new face of money laundering. As cryptocurrencies are not pegged to any major countries currency, their price can also deviate widely over time. In 2017, we saw Bitcoin max out at around $20,000 per coin, then drop dramatically. Today it has stabilised, and trades at around $13,000 per coin.
The recent bounce in the price of crypto can be attributed to Facebook, and the news this week on the development and launch of its new ‘stablecoin’, Libra. Unlike Bitcoin, Libra will be pegged to a basket of some of the major currencies ensuring that it has a consistent value over time. Facebook has also stressed that by removing itself from the platform (it will be overseen by the Calibra Association – a 28 member grouping, all of whom have invested $10m to join) that users data will be secure.
Reaction to the news has, of course, been mixed. Facebook has worked to emphasise the role that the new currency will have on issues such as social inclusion, stating in their news release:
“For many people around the world, even basic financial services are still out of reach: almost half of the adults in the world don’t have an active bank account and those numbers are worse in developing countries and even worse for women. The cost of that exclusion is high — approximately 70% of small businesses in developing countries lack access to credit and $25 billion is lost by migrants every year through remittance fees. This is the challenge we’re hoping to address with Calibra, a new digital wallet that you’ll be able to use to save, send and spend Libra.”
Given the sheer scale of Facebook – it has 2.4 billion users of the 7.6 billion people on the planet – it could be possible for Facebook to capture a massive share of the world’s annual payments. Dependent on your stance this could be a massive opportunity to remove barriers to inclusion by allowing payments to be sent to anyone with a smartphone, or a threat to democracy and the nation-state.
Within his Mansion House speech last week, Bank of England Governor, Mark Carney, said:
“Libra, if it achieves its ambitions, would be systemically important. As such it would have to meet the highest standards of prudential regulation and consumer protection. It must address issues ranging from anti-money laundering to data protection to operational resilience. Libra must also be a pro-competitive, open platform that new users can join on equal terms. In addition, authorities will need to consider carefully the implications of Libra for monetary and financial stability. Our citizens deserve no less.”
As we can see from the above graph, Facebook will have to work hard to capture the trust of the public across the globe. Confidence in the tech behemoth’s corporate governance has been shaken by the Cambridge Analytica scandal and other data breaches.
Commentators have also noted that this new offering from Facebook is a direct response to the domination of tech companies in the Far East.
At this time, the market in China is dominated by two of the world’s biggest tech giants; WeChat (from Tencent), and Alipay (from Alibaba). The scale of their dominance has seen cash almost disappear from Chinese streets. Alipay was launched in 2004 and accounts for 54% of mobile payments. WeChat, a later arrival, benefited from already having an active user base, being a messaging app, and quickly became the main rival to Alipay.
The major difference from American or European payment systems is that in China QR codes are used instead of NFC. In ease of use, speed and security, there is little to separate the two systems.
This anecdote from Chris Skinner highlights the challenges faced if you aren’t registered with either of the big two providers.
The growth and ubiquity of mobile payments in China can be seen in this graphic.
But the dominance of both these players in one of the world’s largest financial markets means that they are no longer content to dominate domestically - international expansion is in their sights. The first and most obvious way to do this, is to work with foreign merchants who can capitalise on Chinese tourists knowledge and use of Alipay and WeChat in their domestic markets. We have already seen examples of this.
In the UK, Barclaycard is teaming up with Alipay to help British retailers benefit from the influx of Chinese tourists. The new agreement will allow Chinese visitors to the UK to make payments in British retail outlets using their phones. Barclays currently has around 11,000 retailers on its network. In their statement, Barclays state that Alipay was the most used app on the planet outwith of social media platforms. VisitBritain recently announced that it was expecting almost half a million tourists to the UK from China, who would spend a cumulative £1 billion. Rob Cameron, CEO, Global Head of Payment Acceptance at Barclaycard, said:
“Thanks to the significant investments we’ve made in our platform, our clients have access to a growing range of payment types, each of which can help them increase market share by meeting the needs of new customers.
“Our new agreement with Alipay gives retailers a vital tool to help them seize the revenue opportunity posed by the growth of Chinese visitors to the UK. At the same time, Alipay users will benefit from a more convenient and familiar in-store payments process – enhancing their overall shopping experience.”
Nathan Shao has covered similar expansionist policies in the North American market, writing:
“... the global mobile payments market is expected to grow to USD $3.3 trillion by 2023. Both Alipay and WeChat pay have recently expanded into North America to match the influx of Chinese tourists overseas. Instead of creating an equivalent app overseas, WeChat and Alipay have focused on signing oversea merchants who would implement their payment systems.”
From QR Codes to Open Banking
Our discussion thus far has taken us from payments in the UK, through to the rise of mobile payments and their use of NFC to the competing Chinese vision of QR codes.
So, what might the next major advancement be?
We’re pleased to say that it already with us. Anyone familiar with these pages will know The ID Co. is the foremost proponent in the use of bank data. Since the introduction of Open Banking in January 2018, Open Banking has provided the opportunity to reshape the payments system.
- Dutch national airline KLM has teamed up with Adyen to use Open Banking when customers buy airline tickets. During the checkout process, customers will have the option of using Open Banking
- NatWest customers will soon be able to use Open Banking when shopping online. This will cut down on the need to enter long card numbers and CVC codes. Instead, consumers will be directed to their internet banking login. This will also allow them to check their available funds to ensure sufficient money is available for purchases
- Starling Bank has entered into an agreement with Bottomline technologies which will allow corporates “to send, receive and track payments in real-time to any UK bank account”
These advancements in retail, ecommerce and corporate payments represent the tip of the iceberg in the practicalities that Open Banking represents. Open Banking has significant advantages in security, speed and convenience over existing technologies, and can be adapted for any sector. As we progress through 2019 and 2020, announcements such as the above will become commonplace.
Using Open Banking will also allow merchants to dispense with card fees, offering better customer service, and lowering rates of abandoned shopping carts, as noted recently in a BusinessCloud article:
“A further incentive for both shoppers and merchants is that open banking can provide a faster payment option with lower fees bypassing the payment rails of the big payment companies and with no need for retailers to hold customer card details.”
Should they wish it, consumers will also be able to request and access cheap, short term credit when checking out with their purchases. Open Banking will afford them the opportunity to access the best rates tailored for their needs.
As well as advantages for consumers, retailers will also benefit from the introduction of Open Banking. These include:
- Real-time remittances
- Understand consumer behaviour, purchases and buying history with far more detail
- Buying process in-store and online will look the same
From Faster Payments to Real-Time, Omni-channel, Fee Free, Credit Offering Payments
All considered, it feels rather dated now to make a purchase on a website, and then have to fill in a form with your details, long card number, expiration date, CVC number and more.
For everybody, from retailers and online merchants to consumers want payments to be made with maximum convenience and efficiency, ensuring that the payment is secure and will arrive with the vendor immediately.
In the commentary above, I have illustrated the state of the UK payments system, while also taking note of the growing presence of QR codes emanating from China. The role of cryptocurrencies and blockchain has yet to be clearly defined and much will depend on whether they are embraced or shunned by national regulators and central banks.
The introduction of Libra by Facebook makes for an excellent talking point, but until the coin is launched, it is too early to make any assessment on whether it has the capacity to become a truly global coin that could supplant national currencies. Should it do so, the question of payments will become irrelevant as the argument moves to whether nation states and national banks could be subverted on the whim of a Harvard graduate.
Moving back to the here and now, making payments over £30 (the maximum for contactless) or online can still be expensive and time consuming. Chip and pin, though secure, gives no benefits such as instant credit or checking account balance. Shopping online requires input of multiple fields and no benefits.
The battle within payments may yet come down to the availability of QR codes and how widespread they become beyond the Asian states versus the convenience and additional benefits that are seen through Open Banking.
One thing is for certain. I won’t be paying that 25p for too much longer.