Paying the way through 2020

Payments are a good barometer of the mood of an economy and early in 2020 the expectations were for a continuation of some long-standing trends in how Australians pay.

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Pic: Cashless café Industry Beans

But with the start of the year struck by national disasters, a global pandemic hit. There was of course massive disruption to the way Australians work, live, play, learn, communicate and trade.

"The shift to debit has now been evident for many years but became manifestly more pronounced in 2020 when it continued to grow at an uninterrupted rate while the value of credit markedly contracted.”

That translated to a slower level of growth in payment activity. Payment card transactions had been growing in number at an average of 11.7 per cent from 2010 to 2019 but that fell to 5.4 per cent in 2020. The annual increase in value of these card payments had been 7.2 per cent but again this fell to 1.5 per cent in 2020. That card payments continued to grow at all through such a difficult period says something about the increased role they occupy in commerce.

In the early years of this century, credit and charge cards were the principal card payment option in Australia. Since 2003, when a wave of regulation was introduced by the Reserve Bank (RBA), the prior high growth of credit card use was tempered by their relatively higher fees and reduced reward card value. In addition, the growth of debit cards offered by global payment schemes provided the functionality and control younger users were increasingly seeking.

The shift to debit has now been evident for many years but became manifestly more pronounced in 2020 when it continued to grow at an uninterrupted rate while the value of credit markedly contracted. In fact, in 2020 the value of purchases on debit increased 13.5 per cent, its highest rate of growth since 2009. In contrast, credit and charge card purchases reduced by 10.7 per cent.

The change in momentum towards debit can be seen to have commenced with the start of the lockdowns and restrictions across the country. The share of value of purchases made with debit increased from 37.2 per cent in 2010 to 50.4 per cent in 2019. Following that 13.2 per cent lift in share over nine years, the share on debit jumped by a further 6.0 per cent in just 12 months with the lift accelerating from March 2020.

Ten years ago, the annual value of purchases on credit and charge exceeded those on debit by 69 per cent; five years ago that had reduced to 28 per cent; in 2019 debit overtook the annual value of purchases on credit and charge and in 2020 exceeded credit and charge by 29 per cent.

International travel ceases, cross-border spend plummets

One of the outcomes of the inability to travel internationally has been a large fall in international card spend by Australian cardholders as well as a big reduction in card spend by international cardholders within Australia.

The value of international cash advances by Australian cardholders fell 62.6 per cent in 2020 while international purchases were down by 51.7 per cent. The value of credit and charge card purchases by international cardholders at Australian merchants was reduced by 41 per cent in 2020 from the prior year.

Repayments accelerate, balances fall

A further change in behaviour by credit and charge cardholders in 2020 was the manner in which they managed card balances. A rate of repayment of 100 per cent means repayments are being made at the same rate as card spend is occurring. The repayment rate had been at around 102 per cent from 2016 to the start of 2020, meaning cardholders had been seeking to progressively reduce their credit card balances. This altered significantly in early 2020 as the repayment rate jumped to a record high.

This more aggressive management of card balances appears to be a result of the absence of growth in credit card spend together with the receipt of social benefits designed to alleviate the trauma of economic disruption.

The slowing in growth of credit card spend combined with the increased rate at which balances were being repaid caused a marked decline in balances on credit and charge cards in 2020. By the end of the year, they had fallen back to the levels of mid-2008. There had been softness in total card balances but this became much more pronounced as the year progressed.

Cash on the nose in 2020

Over recent years, the growth in number of card transactions has outpaced that for value. The resultant reduction in average value of a card transaction was primarily due to the uptake of contactless technology and accompanying displacement of cash for lower value transactions.

Surveys by the RBA into household payment patterns showed in 2007 cash was used in the majority of transactions up to $A41. This had fallen to $A12 by 2016 and by the 2019 survey cash was reported as being the major payment tendered for transactions up to just $A4.

Since 2010, the number and value of transactions at ATMs has been in decline but crashed in 2020 as more transactions were made online and more merchants refused to accept cash to minimise direct contact with customers.

Staying home

Technology certainly alleviated the impact of lockdowns with an ability to stream, communicate and trade remotely. The popularity of e-commerce saw the use cards where the cardholder is remote from the merchant move from 1 in 8.3 to 1 in 6.2 transactions in 2019 and then up to 1 in 5.5 in 2020.

A larger share of purchases is made remotely on credit and charge than debit with 2020 recording one in 4.2 compared with 1 in 6.2 for debit.

2020 saw an acceleration of already apparent trends in payments as distinct from markedly altered patterns. One exception was the huge hit to inbound and outbound card spend as a result of the restrictions on international travel. Although data are not yet available, anecdotal evidence suggests a further major shift was an increase in use of e-wallets in 2020. The RBA had reported usage of around 1 per cent of household payments in 2016, increasing to about 5 per cent in 2019 but this may well now be close to 10 per cent.

Buy now, pay later (BNPL) products had already begun to make inroads into the payments arena in Australia, particularly with the 18 to 35-year-old segment. Despite some initial concerns about this primary catchment source for BNPL being particularly impacted by the economic upheavals of COVID-19, this developing payment option continued to gain increased exposure through an enlarged merchant catchment area. BNPL was a factor in the growth of debit transactions. BNPL enjoyed considerable growth but has a value of transactions that is still estimated to be less than 2.5 per cent of total credit, charge and debit purchases.

The extraordinary circumstances of 2020 highlighted the ability of digital payment products to provide options that satisfied the needs of the day. The shifts to remote purchasing, minimal physical contact and desire for increased control and flexibility of budgeting were all pre-existing. 2020 therefore saw not so much a revolution in changes to payments as an acceleration of already apparent trends.

Having watched credit and charge decline from 65 per cent of the value of purchases made with a card 10 years ago to 50 per cent in 2019 and 44 per cent in 2020, it begs the question of whether a return to “normal” will see any recovery in the share of payments for this once-dominant product?

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.

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