While the big high street chains and major retailers move steadily towards cashless payments, ‘micro’ merchants – the small independent shops, the sole traders, the home-based businesses – are lagging behind. They cite the cost of cashless transactions, low demand from customers and the additional administrative time involved in reconciliation as the hurdles to adopting electronic payments.
Even so, there are many reasons why micro merchants should embrace cashless payments, and we believe that they will do so in increasing numbers.
Here are the main factors driving cashless payment take-up:
- More customers want to make cashless payments.
The spread of contactless and smartphone payment systems means that consumers are growing used to cashless payments and many often leave home without much cash. Additionally, impulse purchases can be lost or limited by the cash a customer has with him or her. The more a merchant hears the phrase ‘I don’t have the cash’, the quicker they will adopt cashless payment technology.
- New European legislation is pushing towards cashless payments
From 1st January 2016, merchants in Austria with a turnover in excess of EUR15,000 per year will have to use a till system to process transactions. Similar legislation is anticipated elsewhere on the continent. So the days of unregulated and unaccountable cash payments are numbered.
- Costs per cashless transaction will fall dramatically in future
Today there are cashless systems that charge as much as 3%on a transaction which is a disincentive to many merchants. But the prospect of peer-to-peer (P2P) and peer-to-merchant (P2M) payment systems, using mobile apps for example, will mitigate these costs and are likely to reduce the gap between cash and cashless transactions levels.
Technologies such as mobile payment service Pingit, offered in the UK by Barclays Bank andthe Zapp service, introduced by several banks, are increasing take-up by consumers, linking their bank accounts and their mobile phones, so that all you need to make a payment is your phone number.
Elsewhere in Europe, the Paymit service in Switzerland, introduced by SIX Payment Services, is growing in popularity. Six major Swiss banks – BanqueCantonale de Genève, BanqueCantonaleVaudoise, LuzernerKontonalbank, Raiffeisen, UBS and ZürcherKantonalbank – have signed up to the system, which needs only a Swiss mobile phone number and bank account, or credit/prepaid card, to operate. Recently, even Swisscom, the country’s largest telecommunication operator, entered into co-operation with SIX to help drive Paymit into retailing.
We think that this model, where banks take the lead in offering cashless payment systems to their customers, will become more common across Europe. This will increase the adoption rate and encourage micro merchants to join in and offer cashless options to their customers.
There are certainly still obstacles to widespread take-up of cashless payment systems by micro merchants, including high costs of adoption for some technologies and the administrative burden of reconciling transactions, versus the ease and flexibility of cash.
Where the transaction cost is higher than for cash, it is easy to understand the reluctance of micro merchants to offer cashless payments. They naturally feel that they are being pushed into adopting something which is more relevant to large retailers, with little perceptible upside for them. The high cost of technologies such asa point of sale terminal, for example, may dissuade some from acting.
For payment service providers, the challenge is to offer reliable cashless payment acceptance at low cost with easy reconciliation. Second generation mPOS devices provide low cost terminals linked to “pay-as-you-go” low cost web tills with mainstream merchant service charges.
Commonly, micro merchants may have the capacity to offer cashless payments, but only as a back-up, in case their customers are unwilling or unable to pay by cash. They prefer to take payment by cash but won’t lose out on the sale if this is not possible. This means that while take-up of the systems is increasing, actual use is rising less quickly.
The Payment Service Directive II, while it acts in the interests of European consumers by limiting surcharges, could potentially dampen micro merchants’ enthusiasm for cashless payments, since some have grown used to levying additional charges on card payments to cover the perceived difference in transaction costs they face.
There are also downsides from the payment services providers’ point of view: heavy KYC (know your customers) documentation and risk analysis costs mean that some providers prefer not to offer the full range of services to micro merchants. Banks and other providers who have thrived on merchant service charge income for decades now face an uncertain future, with P2P transactions undercutting their business model. Customers using services like Paymit are bypassing card payments and taking a chunk out of some providers’ income. Banks, card schemes and acquirers have to work out how they are going to make up this shortfall as P2P services grow, so the whole financial ecosystem is changing rapidly.
We believe that consumer demand will ultimately drive the uptake of cashless payment solutions amongst micro-merchants, particularly as new technology removes obstacles and reduces costs. Legislation is also a factor in the process as regulators look to clamp down on untraceable payments.
So the message is clear: be prepared. Cashless payments are coming, like it or not.
Emma Allen is Head of Merchant Solutions at SIX Payment Services