Back to the future of payments

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The burning question of the moment is ‘What is the future of payments?’ Last year saw non-cash transactions overtake cash payments for the first time, but does that mean cash is on its way out? Do the underwhelming receptions of Apple Pay and Apple Watch mean people aren’t yet ready to move on to newer payment traditions?

Here we explore what the next decade has in store for payments made using cards, mobile devices and wearables.

Cards

The future of cards is an intriguing one. When Apple Pay first went live it inevitably opened a Pandora’s Box from which slipped reports from every conceivable source saying ‘cards are on the way out’. The reality turned out to be different.

A report by Payments UK forecasts that credit and debit cards will account for 60% of all non-cash purchases in 2024, up from 51% in 2014. It also predicts that the volume of debit card purchases is expected to grow from 9.2bn in 2014 to 16bn in 2024.

This idea that card payments will actually increase is echoed by the fact that in the course of the next five years, we will see twice as many card-accepting card outlets in the world, spurred on partly by cards expanding to geographic areas and merchant sectors where they could not be used previously, but also because of the incredible popularity of contactless cards.

The fact that we can use cards as contactless or debit shows why they’ll remain very popular: their versatility and nigh-on universal acceptance means they cater to a myriad of different consumer needs.

This article first appeared in our Payments Revolution magazine

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This is reflected in the European contactless card statistics. Mastercard’s 2015 research into its own Tap&Go contactless technology  revealed that in the second quarter of 2015, tap transactions in Europe grew by almost 170%  year on year and consumers already using contactless have tapped 20% more. Contactless spend (in Euros) tripled in Europe compared to Q2 2014.

There is another reason why the future of cards appears promising. It’s not just because we physically use cards; it’s because we’re using them when we think we’re not. As Adrian Buckle, chief economist at Payments UK, points out when discussing Apple Pay: “At the end of the day, payment is being taken as a debit or credit card payment”.

Whatever the mobile payments service, Buckle points out, it still needs a card. It’s a fine observation, and one that reveals how deep our attachment to cards goes.

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Wearables

While our relationship with cards appears stable, our relationship with newer payment methods is less predictable. In that sense, it’s rather strange discussing the future of wearable technology when its present is unclear.

The response to Apple Watch has been underwhelming, and initial predictions that it would sell 30m units in its first year now look like serious overestimates. According to Paul Pike, director at Intelligent Venue Solutions, it’s not enough to merely allow payments to be made on wearable devices. “Consumers have to want them,” he stresses. If a recent poll by YouGov is anything to go by, that simply isn’t the case:  just six per cent of the UK adult population currently own a wearable.

However, it is important not to be hasty. YouGov caveats the research by pointing out that the uptake of wearables is similar to the uptake of tablets, suggesting that this will be a long game.

Despite Apple Watch’s limited success, it played an important part in bringing wearables to mainstream attention. As Nick Mackie, head of Contactless at Visa Europe, notes,Because of their leadership position in the world of consumer devices, Apple drives interest in whatever they are doing. I think [the Apple Watch] has definitely helped increase interest in – and validation of – wearable technology, particularly around payments.”

And corporate interest has not waned. Last summer Barclays released a range of wearable devices including a wristband, a fob and a sticker.

Visa also remains interested in wearables, although its path is more sartorial, partnering with designer Henry Holland on a contactless ring and asking Central Saint Martins fashion students and graduates to consider how wearable payment devices could look and function by 2020.

Even traditional watchmakers such as Swatch, Fossil and TagHeuer believe there is something important about wearables, while the ease with which startups like Kerv and Blocks are surpassing their fundraising targets on Kickstarter indicates a strong interest brewing amongst consumers.

According to researchers this interest, bubbling on the surface, will soon reach boiling point. In 2015 76.1m wearable units will have been shipped, up 163.6% from 2014. By 2019, worldwide shipments will reach 173.4m million units, resulting in a five-year compound annual growth rate of 22.9%, according to IDC.

Mobile Payments

Mobile Payments have much in common with wearables, in particular the apathy they inspired in 2015 – as Apple can testify. Just like its watch, the company found the apparently burgeoning mobile payment market rather cold.

In 2015, Tim Cook pronounced the year of Apple Pay. Instead, it turned out to be the year of exaggeration. Apple Pay accounted for just one per cent of all retail transactions in the US after one year, according to research group Aite. In the UK, just 13% of people made a mobile payment in-store in 2015, according to Deloitte, which also said that just one per cent use their phone to make payments on a regular basis.

According Adrian Buckle the problem with mobile is simple: people already have cards and “need a good reason to use mobile”. He points out that consumers struggle to work out where mobile payments are accepted, and that the public feel it takes longer to wave a phone around than to use a contactless or debit/credit card. And don’t expect people to use mobile payments because they are new or fun. As Buckley puts it: “People don’t pay because they enjoy paying.”

But he does go on to say that the future of mobile payments isn’t as bleak as the present suggests, emphasising it is more an “evolution than revolution”. People don’t like to change their habits, so any new payment method will be seen as “adding to the payment experience, rather than changing it”.

This is enforced by research showing that mobile payments are gradually increasing in Europe. A quarter of European consumers are actively banking on mobiles, marking a significant increase from the nine per cent recorded in 2011, according to Forrester.

The stupendous amount of options will also help technology in general. For those who do not like Apple there is Samsung Pay, which racked up $30m in transactions in its first month. If Samsung is still too constricting, Android Pay works on any Android phone. Even the networks and banks are getting in on the act with the likes of Orange Cash and Barclays’ Pingit.

Cash: Last – but not least?

The future of cash is perhaps the most interesting. In a world of contactless cards, mobile payments and wearables, how can something as ancient as cash have a future?

And yet the experts are nearly unanimous: cash will not disappear for the foreseeable future. The Bank of England said in autumn cash will be “resilient” and “not likely to die out any time soon”. Visa’s Nick Mackie also doesn’t think “we’ll be a cashless society within the next five years”.

But why?

The answer boils down to convenience and tradition. Physical money has been used for more than a thousand years; wearables have been around for mere months. People won’t change their payment behaviour just because a new method is available. Cash is extremely simple to use, whereas mobile payments and wearables require initial – and usually rather hefty – investments and set up. While cash is almost universally accepted, mobile payment coverage is limited.

Even countries dropping lower denomination of coins altogether do not believe cash is on its way out. The Republic of Ireland recently dropped 1c and 2c coins, but according to Ronnie O’Toole of the Central Bank of Ireland this does not spell the end for cash. Rather, he stresses that it was a way of making cash more efficient. “Cash will be around for a very long time,” he says.

This is enforced by recent statistics from the European Central Bank that revealed cash still accounted for more than half (54%) of all payment transactions across Europe in 2014, showing that EU member states on the whole prefer to pay with banknotes.

It is also interesting that, in the same report where Bank of England said cash will not go out any time soon, it pointed out that the UK population is hoarding £3bn domestically – about £345 per hoarder. That may be the single most important reason why cash will not disappear into the annals of payment history: reliability. Cash is seen as a safety net, a back-up plan for when everything else ceases to work. Cards may fail, smartphones may run out of battery, but cash will always be there.

The truth of the matter is that the future will likely be very similar to the present. Payments UK predicts that in 2024 cash will still account for one third of all transactions, while contactless technology has prolonged the lifespan of cards greatly, and experimentation with mobile and wearables will gradually become more appealing as awareness and acceptance increases.

One thing remains certain: in terms of the number of ways in which people pay, the future is very bright, indeed.

 

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