Among all the industries that got shaken up by COVID-19, the payments industry is arguably the one that saw the most disruption. A half-decade worth of change was brought about in the last half a year alone in the payments industry. This has been a dramatic year when compared to the previous years in every conceivable way.
In the first six months, the global revenues for payment systems declined by an estimated 22% when compared to the same period in 2019. According to BCG, from 2019 to 2024, the global payments revenue is likely to increase by around 1% to 4%, depending on the speed of recovery from the pandemic. However, even in a best-case scenario where the rebound is quick, the expected growth rate would be half the rate of the prior 5 years.
However, in the past six months, e-commerce, digital payments, and other online services have all registered excellent growth. The pandemic has reshaped how consumers and businesses interact with each other and this will shape the future of the payments industry.
Here are a few of the trends that were observed during this time.
Cash to Non-cash conversion
Even countries that have been traditionally cash loyal have experienced a drop in the use of cash for transactions and have seen a rise in digital payments. For instance, the UK has seen a 50% drop in cash usage in March 2020. Payments made in-person are reducing every day, as people are being encouraged to stop handling cash to curb the transmission of the virus. In fact, most businesses encourage contactless payments, with some going so far as to not accept them at all.
Electronic peer-to-peer and consumer-to-business payments have experienced growth during this time. Debit cards, normally associated with lower value transactions, have also exhibited growth. On the other hand, ATM transactions and cash use had experienced a decline during the same period – In India, ATM usage fell to almost 50% and a steep decline was observed in the UK as well. It was estimated that transactions executed via cash will decline by 4 to 5% during this year, which is around 4 to 5 times the annual decrease experienced during the last couple of years.
Boost for e-commerce
The pandemic forced a significant percent of the population to shift towards digital channels for their retail purchasing activity. Industries that depend on travel such as hospitality and tourism as well those that depend on density such as entertainment are likely to be unfortunate casualties in the short term, based on how the crisis has been progressing. However, niche segments such as fresh food, pet supplies, in-home entertainment, and so on are expected to grow at better rates. In the retail sector especially, a shift in buyer behavior was observed with customers moving from brick-and-mortar to online retail shopping. This was evident from Amazon’s second-quarter numbers that recorded a 40 % Y-O-Y boosted by the growth in grocery sales.
This shift in consumption could also lead to a shift in the payment method used. For instance, in place of using credit/ debit cards, consumers could shift to contactless payment modes such as digital wallets or cryptocurrencies.
Move from “physical” to “virtual banking”
Banks in various parts of the world are closing branches either temporarily or permanently due to the current scenario. This has been aided by the adoption of technologies for real-time payment facilities.
In the words of Deepak Sharma, Chief Digital Officer at Kotak Banks, India – “Ninety-five percent of transactions moved out of branches post-COVID. Unless there is a great need for customers to visit branches, we don’t see it happening (again anytime soon). “
“We have also seen fast adoption of WhatsApp banking and conversational banking bots. Very soon, we will see (these changes apparent) while doing small business transactions and loan origination as well. Even after we come out of COVID, this shift in habits that we (have seen) will continue,” he added.
Cross-border payment flows severely affected
Because of lockdowns introduced by Governments, international travel came to a grinding halt causing a massive decline in international transactions. This was further worsened by waivers offered on the transaction to boost demand. Inter-regional trade had a deeper impact than intra-regional which further hurt cross-border payments, while at the same time the prices of commodities such as oil dropped since demand declined. This had a 2-fold effect on the transaction values since both the volume as well as the unit price dropped.
To conclude, crises often create an opportunity for firms to take a good look at how they conduct business. COVID-19 is no different except for the speed at which it has managed to affect change. Payment systems have been forced to accelerate and meet the challenges raised against them. The most talented firms that adapt to the situation, leap ahead of the competition, and deliver exceptional value to customers will survive and shape the industry.