Debit cards leading contactless revolution

The volume of payments by contactless debit cards hit their highest-ever levels in August, accounting for 62 percent of all settlements by debit cards, according to the latest figures from UK Finance in yet another demonstration of the growing impact of the transaction revolution.

Further, 45 percent of transactions by all types of credit cards were contactless, up 14.6 percent on July, out of a total spend of £8.2bn.

These increases in contactless payments occurred in spite of a slight decline in overall transactions, whether by debit or credit card. Combined, they fell by 1.3 percent to 1.2bn. However the figures underline the trend towards debit cards, with total spending amounting to £58.4bn, up by 12.5 percent over August 2019.

“As lockdown restrictions continued to be eased in August, we saw record numbers of customers choosing to make contactless payments using debit cards,” explains UK Finance’s managing director of personal finance, Eric Leenders, while also citing a general flight from card-based debt.

“The percentage of credit card balances attracting interest and the annual growth rate of outstanding balances on credit cards continued to decline, with the latter dropping by 12.6 percent over the 12 months to August.”

As more than a million lost their jobs, some credit-card holders were unable to meet payments, figures from UK Finance also confirm. Lenders agreed 1.13m deferrals on payments as well as 793,000 deferrals on personal loans along with the offer of 27m interest-free overdrafts.

The robustness of digital payments comes in the middle of an accelerating fintech revolution partly spurred by the pandemic, with funds pouring into the industry. According to Bank of England figures, so far in 2020 London-based fintechs have booked no less than $3.6bn in funding, second only to San Francisco. “The fintech wave is affecting every dimension of financial services, from lending to insurance to asset management,” Bank of England chief economist Andy Haldane told TheCityUK conference last week.

And payments are a major beneficiary. The Bank of England reports that the use of physical cash for transactions is in rapid decline – withdrawals from ATMs crashed by about 25 percent in October compared with a year ago. By contrast, contactless and remote payments rose by more than ten percent in the 12 months to July, now accounting for more than six out of every ten card transactions.

“The combination of new technology and shifts in behaviour resulting from the pandemic, present a real opportunity to refashion the payments and lending landscape for good, in ways which benefit households, companies and the economy,” Haldane said.

Until now, the cost of payments to the end-consumer has been high, according to research in the United States and UK. For instance, the merchant service charge on each transaction is borne by consumers and businesses through higher prices. The Payment System Regulator estimates the weighted average merchant service charge at around 0.6 percent. But for SMEs with low turnover, the average charge jumps to as much as 1.9 percent.

“Card fees operate like a regressive tax on smaller businesses and their customers,” says Haldane. “More generally, these card transactions seem high for what is, by banking standards, not an especially complex task.” Other Bank of England research shows that charges on cross-border payments can be much higher.

But that could be changing. In the third quarter of 2020, payments companies globally raised almost $4bn across over 100 deals, significantly higher than any other fintech sector. And some of those companies are working on the next generation of the transaction revolution – and it may not include cards at all.

“In several countries alternatives to card payments are developing, with app-based retail payments that allow fast, online person-to-person and person-to-business payments,” says the chief economist, citing companies such as Swish in Sweden, iDEAL in the Netherlands and Zelle in the US.

Meantime in Britain, Open Banking needs more fintech innovation. In October, reports the Bank of England, there were more than 80 live apps and products in the Open Banking app store, some consumer-facing while others were built around accountancy and tax, debt management, loans and alternative lending, and financial management for SMEs.

But there’s room for improvement, according to Haldane. “The full potential of Open Banking remains largely unrealised,” he says, pointing out that around two third of bank customers have never even heard of it.

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