22 Apr 2020
In 2000, the first MWE Australian Payment Card Reports were issued. Twenty years has gone by in a flash but not without having witnessed profound changes in the way payments are managed.
Today as Australia and most of the world face the extraordinary lifestyle, economic and health issues presented by COVID-19, the manner in which payments are managed is undergoing further change.
"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.”
Rather than fundamentally effecting change, I believe the impact of COVID-19 will accelerate already apparent trends.
Let’s take a walk down memory lane and look back at the landscape of the 2000 reports.
In early 2000 the MWE Reports found:
“Spend per account is growing at an extraordinary rate with the figure of $A6,427 in the latest 12 months being 65 per cent above that of 2 years ago in 1997.
The rate of growth in [credit card] spend is still increasing but probably close to peaking
Cardholders perceive credit cards very differently today to 10 or even five years ago when they were regarded as a payment vehicle in times of cash flow shortfall. They are regarded today as a legitimate alternative to cash and cheques.
Together with this altered perception, the drivers of growth have been loyalty schemes, broader merchant acceptance, an increased awareness of the convenience of card based payment systems, and the buoyant economy.
The lower than expected value of credit card purchases delivered further evidence that the boom in growth of card spend has finally peaked. The annual growth rate in credit card spend has now dropped from 34.8 per cent in February to 33.6 per cent in March to 32.3 per cent in April. Although still strongly positive, it is moving into a declining trend for the first time in seven years.
In May 2000, total card purchases in Australia are set to pass $A100 billion for the preceding 12 months. This level has doubled from the $50 billion spent in the year ending May,1997. In this time, credit card spend has grown 127 per cent with debit card spend up 68 per cent.”
Clearly, this was written in a period of enormous growth in credit card spend. But as predicted, that was about to change.
Regulations, technology, economic volatility and innovation have all contributed to a very different payments environment in 2019 to what existed in 1999. The value and composition of card transactions over that period starts to tell the story.
Payment cards have increased by a staggering $A649.6 billion in 20 years with debit accounting for 57 per cent of that growth; very different dynamics to pre-1999 when credit had all the momentum. It’s dramatically altered now with personal credit card account numbers, spend and balances all in decline.
The pattern of card use has altered hugely over these 20 years. In 1999, the average annual per capita use of a credit, charge or debit card was around 57 purchases; by 2019, that had soared to 409.
However, the mood has changed with the payments environment having evolved from “pay later” on a line of credit (credit cards) to “pay now” from my funds (debit cards) to “pay later” again - usually from my funds (buy now pay later). In an increasing number of these transactions, there is no card directly involved.
A number of factors have driven these changes.
The high growth rates in credit and charge card use 20 years ago were being largely driven by the popularity of co-branded cards with attached reward programs, launched in the mid-1990s. To some extent, they were also lifted by the then relatively new use of credit cards for online bill payments.
The regulatory changes introduced from 2003 dampened the market. These included reduced interchange rates, approval of surcharging, restrictions on limit increases, curbing of supplementary charges and changes to repayment hierarchies.
These had the overall effect of increasing the cost of credit cards relative to other payment products whilst reducing the benefits of the attached reward programs. At the same time, the ongoing reductions in the cash rate were not being matched by reductions in credit card interest rates so credit and charge cards became relatively expensive funding options.
The Global Financial Crisis (GFC) arrived and consumers increasingly shied away from non-housing personal debt, preferring the discipline and control offered by using their own funds via debit cards. Accordingly, debit moved from 37 per cent of the value of card purchases in 1999 to 50 per cent in 2019 coming from a 71 per cent share of transaction volume.
In this period when card turnover increased by $A649.6 billion, cheque values plummeted.
Data only go back to 2002 but since then the annual value of cheques dropped by $A1,499.5 billion to $A544.1 billion. Cheques per account, per annum declined from 81.7 to just 4.1.
The decline in annual value of cheques over the last three years of $A610.8 billion is almost as much as the growth in card transactions over the last 20.
The Reserve Bank of Australia’s (RBA) ongoing household payments surveys provide a good insight into altering payment patterns.
Under the mattress
If we go back far enough - and it’s not really all that long ago - cash was ubiquitous.
Together with cheques, cash comprised almost all consumer and commercial payment options. In 2007, the RBA survey showed cash still accounted for 70 per cent of the number of household payments with 44 per cent of value. That is now down to just over 27 per cent of transactions with about 10 per cent of the value.
The conundrum is that over the last 20 years, the value of banknotes on issue has continued to climb steadily from $A28.1 billion to $A84.0 billion. However, this increase in value is not correlating with use.
Annual ATM transactions were around 447 million in 1999, peaked at 854 million in 2009 and have since retreated to 535 million. Cash is still circulating out there but much of it is has no velocity and remains under the mattress or in the black economy.
The same is true for cheques with the number of personal accounts now about twice the level of 20 years ago. But where an average personal cheque account used to produce over 33 transactions per annum in 1999 that has now fallen to just 1.7.
Tap and go
One of the most significant developments of the last two decades was the roll-out of contactless card capability.
Twenty years ago, there was no such thing as contactless transactions but by 2016 the RBA household payments survey noted almost two thirds of all card transactions at point of sale were contactless. This has now increased to 83 per cent in 2019.
The ability to use a contactless card or mobile device to effect a speedy transaction at point of sale has been instrumental in displacing cash for transactions under $A10 while displacing non-contactless card in higher value transactions.
The average value of a purchase made with a card had been increasing until the arrival of contactless capability but after peaking at just over $A100 in late 2008, the average value has fallen to $A64.50. Debit, credit and charge cards have moved from just over a quarter of household payment transactions in the 2007 survey to almost two thirds in 2019 with debit soaring from 15 per cent to 44 per cent.
Bye bye cards
For many Baby Boomers, ATMs were their introduction to digital payments. Usage began to gain momentum in the early 1980s with some initial anxiety about the replacement of over-the-counter transactions by a machine.
Increasing familiarity saw the number of ATMs pass 10,000 by 1999 and peak at over 32,000 in mid-2017. The decline in demand for cash is now seeing a contraction in the ATM network with numbers down to 28,000.
For Gen Z, cash and cheques are something of an incidental in the payments process. ATMs also have increasingly marginal utility.
Gen Z’s entry vehicle to the world of payments is increasingly in the form of their hand-held device. The RBA’s 2019 Consumer Payment Survey reported 5 per cent of in-person payments were made by tapping or waving a mobile or wearable device in front of the terminal instead of using a physical card.
The propensity to use a device for payment is markedly greater for consumers under the age of 39 (used regularly by about 18 per cent of this demographic) whilst 97 per cent of those over age 65 are continuing to use a physical card.
The appeal of purchasing online, facilitated initially by a computer and now increasingly by a hand-held device, has led to an increase in the share of card payments in which the purchaser is remote from the merchant.
RBA details are available for the last decade showing the share of purchases where the purchaser is remote. While the share of credit and charge transactions made online has remained quite steady, their share of the value of total purchases has increased considerably as the mix has moved towards higher average transaction values.
The share of debit online is much lower, although it has been increasing rapidly as scheme debit made inroads into the total debit market. In total, one third of all credit, charge and debit spend is now classified as “card not present”, where the purchaser actions a transaction remotely from the seller. This share represents considerable growth from the 20.8 per cent of ten years ago.
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
The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.
22 Apr 2020
26 Aug 2019