King Cash Losing its Crown with COVID-19 as an Accelerant

November 17, 2020

Jonathan Kriegel


McKinsey’s 2020 Global Payments Report highlights the profound changes to the payment services market precipitated by lockdown restrictions introduced to combat the spread of the Coronavirus worldwide, notably the shift to e-commerce purchases amongst business and consumers and a greater preference for digital payments (including contactless) at the expense of cash transactions.

However, the management consulting firm also saw an estimated 22% decline in overall payments revenue in the first half of 2020. Turnover dropped by almost US$220bn from the FY19 total of US$2tn as a slowdown in overall economic activity reduced spending levels, and people stopped using cash in physical retail outlets. Some industries, such as travel and entertainment, saw a colossal 80-90% reduction in spending, for example. 

While McKinsey expects payments volumes to have recovered in the second half of 2020 in tandem with the easing of restrictions in some geographies, total revenue is still forecast to come in 7% below FY19 levels and 11-13% below the company’s pre-pandemic predictions.

Consumer shift in buying behaviour

The pace of development in certain market segments was sufficiently pronounced for McKinsey to estimate that the Coronavirus crisis has compressed five years of change into less than a year. The big story was the huge decline in the use of cash as people worried about contracting COVID-19 during visits to high traffic ATMs, whilst some retailers too refused to accept banknotes and coins for payments. ATM usage fell by 47% in India during April for example and 46% in the UK between March and July 2020.

McKinsey expects that trend to continue post-pandemic, particularly in mature markets like Japan, Korea, Singapore, the US, the UK, Finland, Sweden and the Netherlands where many banks and financial institutions have already started to shut down branch offices and remove ATM terminals, though emerging markets which have historically been more cash reliant are also forecast to see significant falls in cash transactions, especially China.

All forms of electronic peer to peer and consumer to business payments have been boosted at the expense of cahs. That included an increase in debit card use aligned with lower value transactions and the raising of spending limits for contactless payments orchestrated by financial institutions and retailers. Countries in Asia also saw increased use of alternative payment methods (APMs) such as instant payments and mobile payments (including electronic wallets) though credit cards remained the favoured option for e-commerce and POS transactions.

Instant payment based solutions and eWallets have gained particular traction in China where they generated US$49bn of revenue in 2019, more than double the rest of the world at US$22bn. Other countries of the world seeing double-digit growth rates for electronic transactions include India, and Nigeria, Romania, Russia, Malaysia, Greece, Mexico, Peru, Poland, Pakistan and Argentina, the Czech Republic and Slovakia, the total transaction value is still small in many cases.

In India, spending via mobile payment apps built on the unified payments interface (UPI) increased 70% over the first seven months of 2020, according to McKinsey. The UPI is the instant real-time mobile-only payment system developed by the National Payments Corporation of India (NCPI) and regulated by the RBI. It allows users to send and receive money between multiple bank accounts using a single mobile app, and various methods including virtual payment addresses (UPI ID), mobile telephone numbers, account and Aadhaar numbers, and QR codes. As of March 2019, there were 142 banks live on UPI with a monthly transaction volume of 800m worth an estimated US$19bn according to the NCPI. Even before the pandemic took hold, the volume of UPI transactions had grown to an estimated 1.3bn and could hit 2bn by the end of this year.

The shift to electronic payments was reinforced by changes in retail payments as millions of consumers started shopping online for the first time due to travel restrictions and closures of physical stores. McKinsey estimated that shoppers spent US$347bn online with US retailers in the first six months of the year, a figure up 30% from the same period in 2019. Amazon’s second-quarter yielded 40% year on year growth, driven by a tripling of grocery sales and changes in the habits of the older generation. 

APM investment and SMEs

McKinsey noted that banks maintaining merchant accounts to accept credit cards had invested heavily in core payment-enabled services like authentication, fraud and APM acceptance as they try to fend off competition from specialist players such as Adyen, and Stripe. But the rapid growth of pandemic-induced e-commerce activity has put significant pressure on existing systems and highlighted the importance of moving quickly to support contactless payments. Those coupled with enhanced authorisation, fraud and chargeback mitigation solutions and speeding up merchant onboarding and payment remittances.

The integration of APMs into existing acquirer portfolios will play a key role in future success. Paying more attention to the needs of their small to medium enterprise (SME) customers will also pay dividends in the long run. The majority of merchant service providers revenue growth was already being driven by smaller companies sufficiently agile to offer more innovate payment options long before Coronavirus took hold. McKinsey estimates SMEs have accounted for around 75% of all new revenue growth in the merchant-services space over the last three years, for example.

Yet the Coronavirus crisis has accelerated digital migrations for many of those SMEs. Moving to takeaway order and food delivery apps for restaurants, for example, has now moved many previously in-house transactions online, often into APMs, with closed retail premises also doing more business over the web.

The findings echoed research conducted by Wakefield Research and commissioned by Visa earlier this year, which found nearly a third of small to medium businesses have either accepted less or stopped accepting cash completely since the onset of the pandemic as I had observed in my recent blog SMBs Going Digital to Beat the Coronavirus Disruption. And while many of those companies are stepping up their efforts to make their businesses more digital orientated, some are being held back a lack of resources to set up the e-commerce, billing and data security platforms needed to facilitate the transformation.

As the second national lockdowns in Europe and other parts of the world start to mount, the decline in the use of cash and parallel growth of digital payments is set to accelerate further. Banks and merchants alike must be ready to accommodate whatever method of payment consumers and businesses prefer as they fight to claim their portion of a what could prove to be a smaller transaction pie in the last months of 2020.

To do that they must also be prepared to partner with APM aggregators and third-party payment service providers like us to capture the expanding share of digital transactions that these payment methods will increasingly come to command.

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