Lightness of touch: the rise of contactless commerce
One of the most significant changes in behaviour brought on by the Covid-19 pandemic has been the rise of contactless payments. As things return to normal, this shift in consumer behaviour will remain with us, writes Jason Walsh
Just over a decade ago, Ireland was an island of commerce, and not in the sense of being a trading centre. While some banks had begun to issue Visa and Mastercard branded debit cards, the dominant card, Laser, was an Irish-only affair.
Despite eventually acquiring co-banding with Maestro, Laser cards rarely worked internationally, locking consumers out of much of the wide world e-commerce, and this was at a time when local e-commerce was in its infancy.
More broadly, cash was still king, accounting for 50 per cent of transactions in 2010.
Today, the picture could not be more different. In September 2021, the Central Bank of Ireland published statistics for 2020 indicating that the total value of electronic payment transactions had increased by 52 per cent.
“During 2020, 2.14 billion payment transactions were recorded by Irish resident payment service providers (PSPs), a 12 per cent increase from 2019. This amounted to just over €7.58 trillion, representing a 52 per cent increase on the €4.97 trillion recorded during 2019,” it said.
Traditional card payments are a part of the picture, including contactless of course, but new payment methods including mobile wallets and the use of secondary accounts from neo-banks including Revolut and N26 are growing in importance.
In addition, e-commerce has boomed. International bank JP Morgan said Irish e-commerce was worth €7 billion, and that mobile commerce (m-commerce) accounts for 42 per cent of the e-commerce market.
Describing the country as having a mature market, JP Morgan noted that Ireland was “a market boosted by young people’s consumer spending and a willingness for cross-border spending that will attract international merchants”.
The coronavirus pandemic has had an accelerating effect, of course, and this is particularly noticeable in the cash crash.
By mid-2021, statistics from Banking and Payments Federation Ireland indicated that cash machine withdrawals had dropped by 44 per cent during the pandemic. Other forms of transaction boomed, with rises in credit transfers and a rocketing of in-store contactless payments, including use of smartphone wallets, by some 47 per cent.
With many shops effectively closed, e-commerce merged with bricks-and-mortar retail, too, resulting in the rise of deliveries and click-and-collect, both of which relied on electronic payments.
As we now stagger out into daylight there is a widespread expectation that the change will be permanent. Certainly, the industry expects electronic payments, particularly contactless, to continue to grow. One report from Deloitte, Contactless Economy: Are you prepared?, estimates that at-home consumption will increase more than twofold amounting to $3 trillion (about €2.74 trillion) by 2025, with almost 20 per cent of this resulting from the uplift caused by the pandemic.
The top three sectors with the largest market size in this economy will be consumer products, leisure and recreation, and education. The top three sectors with most growth will be financial services, health and consumer products, Deloitte predicted.
More than just a move away from coins and notes to waving plastic cards and smartphones, the change in how we pay for goods and services is ushering in a new stage in our social relations underpinned by an ever-deepening use of technology.
Payments are supporting the development of digital economies and are driving innovation, said Joachim Goyvaerts, director for Benelux and Ireland at PayPal, “all while functioning as a stable backbone for our economies”.
“The pandemic has shown that the shift towards digital commerce – online, mobile and social – will continue to increase and Irish businesses need to be ready to meet their customers across all sales channels,” he said.
The key to successful implementation of contactless payments is that it is as smooth as possible for both customer and retailer. In other words, ask too many questions and customers will walk, or click, away in frustration, and this is a serious issue.
“The more challenges you put in front of a consumer the more likely it is that they will walk away from the transaction in frustration,” said Garrett Clifford, general manager for Ireland at payments processor Worldpay from FIS.
This is backed up by research from Stripe, the rapidly rising Irish-American payment processing software player.
Shoppers expect a fast, intuitive payment experience, said Eileen O’Mara, head of EMEA revenue and growth at Stripe: “21 per cent of the European consumers we polled said they would cancel a purchase if it took more than one minute to check out. Just one minute.”
Whether online or in person, consumers want simplicity, security and choice.
“That’s why you see payment methods like ApplePay, GooglePay or Klarna really take off, and cash and cheque payments increasingly disappear,” she said.
At the same time, however, retailers require protection from fraud and consumers are also entitled to protection in the form of implementation of the EU’s payment services directive (PSD2).
In practical terms, PSD2 went into force in December 2020 demanding the use of strong customer authentication in online payments, something customers will certainly have noticed as it means confirming their purchases through the likes of smartphone app.
Squaring this circle requires technology. Goyvaerts said PayPal welcomed the regulatory tightening, and had long been providing strong customer authentication (SCA) for its users.
“In many ways, PSD2 promotes the same open approach that PayPal has advocated for some years within the industry. We believe collaboration is crucial to realise the full potential of technology to transform financial services,” he said.
Given these conflicting demands for simplicity and security, the role of payment processors is to leverage technology to make the experience frictionless. Given the variety of systems involved in payments, not to mention the complex regulatory landscape, this is no easy task.
One of the things key people didn’t see when making a payment, O’Mara said, was how complex things actually were behind the scenes. This at least suggests the technology has been a success, though.
“There are hundreds of different payment methods out there, incredibly stringent regulatory requirements, different online and offline dynamics – and the space is evolving all the time,” she said.
Because merchants cannot afford errors, and for a consumer to have that good payment experience, a lot of work has gone on behind the scenes to make it seamless. Previously, a lot of this was done by the merchant, today it is no longer possible for them to keep up, O’Mara said.
“They have a business to run and there are much better alternatives to take care of this. That’s where companies like Stripe come in. Merchants integrate our financial infrastructure platform and we take care of all of the complexity for them.
“We support 50-plus payment methods, and we make it incredibly easy for merchants to offer them to their customers, because the last thing we want is for a merchant to lose out on revenue because they can’t offer the most popular local payment methods.”
Paypal’s Goyvaerts said good payments technology made buying the centre of attention, not its technical underpinnings.
“Our aim is to innovate and enable authentication in ways that are invisible to our customers. We believe we can strengthen security around payments, without compromising on a faster and convenient checkout experience,” he said.
Worldpay’s Clifford put it in stark terms: shoppers know who their bank is, and know who Visa and Mastercard are, but have no desire to know about payment gateways and processors.
Worldpay’s goal was to do the heavy lifting, reducing the cost and time for merchants. This means integrating payments with other vital aspects of commerce such as stock control and, increasingly, making data available to retailers.
“The mission statement is that this is invisible. It is invisible, and it should be invisible,” he said. “We can fit in wherever the [merchant] customer needs us; we can be as embedded as the customer requires, providing integration with payment gateways, web pages, platforms provided by the likes of Magento to manage stock control. There’s an awful lot of data that we can pick up and we provide a plug in for the integration work.”
Despite the undeniable progress, Ireland is not a leader in payments. Among European Union countries, Sweden, now effectively a cashless society, leads the way, followed by Finland, Estonia, Belgium and, surprisingly, former cash holdout France (though France appears to play both sides, with 84 per cent of people still having a chequebook).
The laggards are Cyprus, Germany, Austria and Malta, where consumers continue to express a preference for cash.
Ireland is very much a mid-table player, with a December 2020 European Central Bank report finding that here, along with Belgium and Spain, “more than half of the respondents . . . were paying less with cash since the pandemic”. Cards and contactless accounted for half of payments in the country.
Interestingly, despite their high visibility, payments with a mobile device, such as a smartphone or smart watch, “did not show a breakthrough” across the EU because many respondents said they did not have a suitable device.
Some countries also had other payment systems that might boost adoption, said Worldpay’s Clifford.
“The Irish market is a bit behind. In the Netherlands, iDEAL, a bank transfer method, is the largest online payment method. It’s a pure bank-to-bank transfer; it doesn’t run on Visa or Mastercard,” he said.
iDEAL is cheaper for merchants as it removes costs associated with card payments, and settlement is instant, which has a positive impact on cashflow.
Increasing interoperability between banks may see payments move in this direction elsewhere, and already neo-banks like Revolut have carved out a niche in person-to-person transactions, including splitting bills.
“We’re seeing movements in the open banking market. What Revolut and others have done is enabled immediate payment between one person and another, as well as business to consumer,” Clifford said.
Stripe’s O’Mara said things differed in different countries as payments were, in fact, a cultural phenomenon, but at the end of the day, consumers just wanted to be able to pay using their preferred payment option.
“This is just taking an Irish perspective, where most people use a credit or a debit card to make a purchase. In Germany or the Netherlands, for example, very few people use cards. In China, everybody uses Alipay or WeChat Pay. In Japan, people often pay for online purchases at a local Konbini or convenience store,” she said.
The pandemic experience did change things, but it was not transformative, because many people have been e-commerce savvy since the 2010s.
“What the pandemic changed is that it forced everyone to have an online strategy, often for the first time. Take healthcare, for example. When GP consultations moved online, so too did payments. GP surgeries all over the country had to change their systems and make the transition to online.”
New payments for new services
If consumer behaviour really has changed forever and businesses have had to evolve to meet consumer demand and survive, then we will soon see the effects. After all, payments are the lifeblood of commerce, online or off.
Jordan McCarthy, sales director at Checkout.com, said the interaction between the change in technology and that in consumer behaviour, including that forced by the pandemic and its attendant lockdowns, was a complex one. The full impact of this was only beginning to unfold.
“A big focus has been placed on optimisation and payment performance, to ensure a safe and secure environment for consumers to transact online, while keeping bad actors at bay. Many merchants have also pivoted their business model to include marketplaces, subscriptions and in-store deliveries, all of which has impacted the landscape.”
One such change has been the rise of ‘buy-now, pay-later’ (BNPL), the return of an old idea – think catalogues – but this time facilitated by internet and payments technology.
BNPL has risen in a number of markets and is particularly popular in Australia, but it is making inroads in the EU. Checkout.com’s internal research has found an average of 23 per cent of consumers across Europe have used it at least once, mostly for lower-priced items.
“It’s not just popular with millennials: 48 per cent of 45 to 54-year-olds intend to make use of BNPL in the next 12 months, and almost a quarter of 65 to 74-year-olds [and] we expect to see a sustained increase in this space for years to come,” said McCarthy.
If the return of staggered payments comes as a surprise, perhaps it indicates a change not only in how we pay but in what we are buying and, indeed, in the growing expectations of consumers living in a hyper-fast and always-on world.
New methods of payments and the availability of new products and services underscore that payments are not simply the last stage of a transaction. They are the transaction and, therefore, a key part of the wider economy, so better payments will be a vital enabler for economic growth.
“The pandemic has shown that the shift towards digital commerce – online, mobile and social – will continue to increase and Irish businesses need to be ready to meet their customers across all sales channels,” said Goyvaerts.
Recent improvements, whether driven by ongoing development or by necessity, have demonstrated that customer and merchant willingness can be met by the technology.
Clifford said cashless transactions had grown because the technology had improved to the point where they were more convenient than carrying wads of notes or having pockets weighed down by coins. The next step, he said, was to further increase the speed of transactions, whether at the counter, online or in terms of reconciliation.
“People want instant gratification; they want their money immediately, and so do merchants,” he said.
BOX: Cash concerns
While the rise of contactless payment has been broadly welcomed, there are concerns regarding the decline of cash. A number of factors stick out. Firstly, the most vulnerable in society are those most likely to use cash, including the poor, the elderly and those with less access to technology.
In 2020 the Bank for International Settlements noted that the pandemic illustrated a divide between those who were comfortable with alternatives to cash and those who were not, with low-income and vulnerable groups facing difficulties in making payments and receiving funds. At home, groups including Age Action and the Consumers’ Association of Ireland have expressed concerns about people being effectively locked out of society.
Industry awareness exists: “Payments are becoming increasingly cashless, and the industry’s role in fostering inclusion has become a significant priority,” said PayPal’s Joachim Goyvaerts.
Secondly, there are concerns around privacy. In a society where, increasingly, the transaction itself and the data trail it leaves behind are a secondary source of revenue for some businesses, electronic payments require regulation to ensure data mining does not go wild. Even then, there is simply nothing as inherently private as cash.
Thirdly, the networks are potentially a risk: the Central Bank of Ireland noted that while cash can be lost or stolen, cashless payments are not risk-free as electronic payment systems are vulnerable to failure and cyberattacks that could leave retailers unable to function.
“This is an important attribute of cash relative to electronic payment methods and is a basis for arguing that a cash reserve should be retained as a contingency in the event of a systemic failure in the wider payment system,” it said in a January 2021 publication.
The European Central Bank has emphatically said that cash is here to stay. In a 2022 statement it addressed precisely these concerns, noting that cash ensured freedom and autonomy, allowed for privacy, was secure and inclusive.
“Digital means of payment may be convenient for many people, but they do not suit everyone. Contactless payments will not replace cash as a payment instrument, but will instead exist alongside cash,” it said.
In the end, though, what the future holds for cash will come down to what consumers do. After all, the customer is always right.