Aversion to debt
The most recent changes in our 20-year history have involved the arrival of Buy Now Pay Later (BNPL) as well as the New Payments Platform (NPP).
BNPL has effectively leveraged the desires of Gen Y and Millennials for control, immediacy and aversion to debt. While the growth of major players such as AfterPay has been significant over the last two years, the inroads made by BNPL actually only currently equate to around 1 per cent of the value of credit, charge and debit transactions.
Given the majority of BNPL purchases are funded by a debit account, these transactions are helping to drive debit growth. Unlike the credit and charge card model, BNPL transactions are primarily funded by the merchant. We will be interested to see how these charges might move in coming years.
The average fees to merchants on Visa and MasterCard credit and debit have declined from 1.45 per cent in 2003 to 0.70 per cent; American Express dropped from 2.51 per cent to 1.37 per cent; whilst eftpos increased from 0.19 per cent to 0.27 per cent.
Higher charges on credit and charge were accepted by consumers when they were clearly delivering incremental higher average ticket size business and accounting for a relatively small share of turnover. This is the scenario for BNPL today and, even with their capacity to deliver valuable marketing support, we question if a fee of around 4 per cent will be sustainable in the longer term.
Payment used to often mean “the cheque’s in the mail”. This could mean payment in a few days or weeks or, perhaps, never.
As implied previously, the cheque appears to be approaching the end of its product life cycle and now plays a relatively minor role. There have been electronic payment options but these were increasingly slow by today’s standards and could carry a limited amount of value-add data.
The New Payments Platform (NPP) kicked off in early 2018 and is now growing rapidly. There were 74 million transactions in 2018 with a value of $A61.7 billion; this increased to 275 million transactions in 2019 with a value of $A250 billion. The average value of a payment on the NPP has been gradually increasing to over $A900 as business and corporate customers increasingly move to this platform.
In their March 2020 paper “Two years of fast payments in Australia”, the RBA reported the median transaction value on the NPP to be $A170, reflecting the fact that just over 40 per cent of transactions are less than $100 with these being predominantly retail payments.
The OSKO service operated by BPay was the first overlay product to leverage the NPP and is now the principal driver of growth over the NPP. In 2019, it accounted for 78 per cent of traffic with 90 per cent of the value across the NPP.
The era of virtually real-time transfer of funds has arrived.
The extent to which participants in payments have increased in number is perhaps one of the most significant changes as well as being a portent of what lies ahead.
In the era of cash and cheques, the commercial and retail banks together with the Reserve Bank were the key players. As cash began to be replaced for personal use, new participants emerged.
Names like Diners Club, American Express, eftpos, BankCard, Visa and MasterCard became familiar alongside the suppliers of terminals, switches, plastics, communications equipment and all the support gear necessary to operate payments in the digital world.
To have suggested 20 years ago the list could expand to include the likes of a supplier of phones would have received an incredulous response. Yet today we see names such as Google, PayPal, Apple, Tyro, FIS, Square, Flexigroup, Volt, Revolut, Worldpay, Adyen, Stripe, Bitcoin, Zip, Afterpay and more in the payments space.
The increasingly digitised nature of payments combined with a growing demand for security, convenience, utility and data has meant the payments world has opened to specialised players. In many cases, these have been able to develop targeted solutions in a faster and less-cost manner than the traditional participants who will need to decide if, in the long-term, payments will continue to be a key strategic component of their business.
Paying in a pandemic
Through the lens of the COVID-19 pandemic, the world has changed to an extent that would have been considered unimaginable just two months ago.
The long-term ramifications of the upheaval in employment, education, leisure, retail and health care are going to take some time to become established but as far as payments are concerned, some aspects are already apparent.
Turnover in segments such as restaurants and all aspects of tourism are being hit severely whilst demand for some consumer staples soared significantly. Combined with directives to limit movements from home to essential activities, we can expect to see fewer payment transactions but with a higher average transaction value.
This is contrary to the long-established trend of a decline in the average value of a purchase. We expect however other results of the pandemic will accelerate trends already noted in MWE Consulting’s latest report.
Cash decreased from 18 per cent of household purchases in 2016 to 10 per cent in 2019 and the significant increase in retailers now refusing to accept cash for health and social distancing purposes will see cards (particularly contactless) take an even more prominent role. ATM transactions declined by 8.2 per cent in the 12 months to February 2020, a further sign of the ongoing decline in demand for cash and this rate of contraction will almost certainly increase.
A quarter of the value of card transactions three years ago were processed with the cardholder remote from the retailer. That share increased to a third by early 2020 but the requirement for Australians to limit movement due to COVID-19 is causing a spike in card transactions made online.
It is too early to determine just how much of this altered payment pattern will stick but the increased familiarity with online purchasing will see a further shift to transactions where the cardholder is not present at point of sale. It would not be surprising to see online purchases quickly move from around one-in-six to one-in-five.
The desire to limit interaction at point of sale resulted in the value threshold at which a PIN is required to be lifted by the major banks from $A100 to $A200. Already accounting for a very large share of card present transactions, expect contactless transactions to quickly move to over 90 per cent of purchases made with a card.
This is likely to contribute to an acceleration in the transition from a card to a hand held device as the instrument of choice to effect the transaction.
It’s been an exciting 20 years, unfortunately being reached with the arrival of a hugely disruptive and threatening event.
If nothing else, it has demonstrated the capability of digital payment systems to cater for payment patterns and behaviours which could not have been entertained during previous pandemics.
Mike Ebstein is Founder & Principal at MWE Consulting