By Stefan Merz, Chief Strategy & Growth Officer at PPRO
2020 was a year of momentous change for the payments industry. Previously emerging trends saw a massive acceleration as a result of the pandemic. Cash, for instance, waned even further last year amidst rumours that handling cash could spread infection. In March, ATM withdrawals in the UK plummeted by 60%, leading to predictions that cash payments will fall to just 9% of all transactions by 2028.
The pandemic – while undoubtedly awful – has been rocket fuel for digital transformation, providing an opportunity for the payments industry to innovate. Online payments via bank transfer have continued to proliferate, whilst ‘buy now pay later’ (BNPL) schemes have been named as the fastest growing online payment method for the UK and worldwide.
So, after a year of such rapid transformation, what can we expect to see this year? And how will permanently altered consumer behaviours shape online payment preferences?
Buy now pay later (BNPL) will be the new payment method of choice
It is safe to say local and alternative payment methods – any payment method other than credit or debit cards – have seen huge growth over the last couple of years. These local payment methods (LPMs) continue to play a key role in accelerating cash substitution, particularly in developing countries.
According to Paysafe’s LiT research, 56% of global consumers used a new local payment method in the first month of the pandemic.
Interest-free ‘buy now pay later’ (BNPL) concepts such as Klarna and ClearPay are leading the charge. In fact, Klarna reported a 43% jump in the value of transactions in the first nine months of 2020.
Research from Kaleido predicts that BNPL value will reach over 12% of total global e-commerce spend on physical goods by 2025. What’s more, Europe will be responsible for $347 billion of e-commerce spend via BNPL mechanisms by 2025, representing 30% of total e-commerce spend in that year.
Ongoing furlough measures and job losses have seen consumers face unprecedented financial strain this year, resulting in a reliance on ‘pay later’ schemes over traditional payment methods. With the economy not expected to recover to pre-COVID-19 levels for some time, this is a trend we see continuing into 2021. As such, this is certainly a payment method online merchants need to offer. Now.
Staying competitive in an increasingly digital age will be harder
The ‘quickening’ effect, as coined by McKinsey, describes a 10-year shift in e-commerce experienced in just 90 days. During the month of June 2020, amidst the height of the strictest lockdowns for many countries, e-commerce sales grew 34% year-on-year – the highest growth rate reported since March 2008. And consumers were not turning to their trusted brands during this critical period.
Disruptions in brand loyalty have created a wealth of opportunities for businesses, pushing them to take their operations online and across borders. Facebook even launched its own shopping feature to enable growing businesses to sell to customers.
Across Europe’s three largest markets (France, Germany and the UK), up to 80% of shoppers are now making at least half of their purchases online. What’s more, research from Visa reveals 74% of UK consumers think they will continue to prefer online shopping even after the lockdown restrictions start to lift.
In 2021, it won’t be adequate for merchants to only support card transactions online.
According to PPRO’s own research, 44% of UK consumers will abandon their baskets if their payment method is not available at checkout. We expect this demand for payment choice to increase, putting pressure on retailers to expand current offerings.
Seamless payments have to meet stricter security standards
As digital payments head towards a global tipping point, the need for greater regulation and security will only continue to grow. For Europe, PSD2 has been a topic of discussion for some time now. And, despite being delayed to allow adequate preparation time following COVID, the new September 2021 deadline will come around soon enough.
For countries outside of Europe, two-factor authentication is also growing in popularity. In 2019, Australia released the Card-Not-Present (CNP) Fraud Mitigation Framework, requiring Strong Customer Authentication (SCA) when a merchant’s fraud rate is above the recommended rate for two consecutive quarters. India requires two-factor authentication for all domestic debit and credit card transactions over Rs 2000.
This year and beyond, payment providers and merchants must collaborate to ensure they’re prepared to adapt digital shops to these new requirements, whilst also ensuring the payments process is completely seamless for the customer.
This will be the year for action – ensuring customers are adequately protected in an increasingly cyber world.
Payments should prepare for hypergrowth
Rather than an evolution, the pandemic has been a revolution. It’s turbocharged digital payments and changed customer expectations and behaviours overnight.
More and more global customers are now online, looking for products or services that suit their specific needs. Merchants could reach untapped cross-border markets by offering the right mix of goods, user experience (UX), local payment methods and delivery options.
With over 500 significant local payment methods across the globe, each country will have different payment preferences. To be able to scale up and succeed in the new normal, merchants must work with payment service providers to activate as many payment methods as possible at the checkout page.
2020 saw a huge change in relation to consumer payment preferences, but 2021 is all about addressing that change and seizing the opportunities that have emerged. Merchants must get ready now, or else, risk losing out to the competition.
While 2021 will certainly be another challenging year for the economy, the future for local payment methods (and savvy retailers who offer them) will be very bright.