Old habits are hard to break, and innovation in the payments industry is usually slow, hard-fought, and met with resistance from all fronts. Look at Visa and Mastercard’s shift to Chip & PIN payments in the United States five years ago as an example. The announcement was met with fury from merchants and customers alike. Customers didn’t like having to “dip” their card, and merchants resisted the idea of needing to replace their legacy equipment. In the end, the rollout was faced with delays, the addition of special exceptions for industries like gas stations and restaurants, and ultimately the payment method became Chip & Signature instead of the original Chip & PIN it had intended to be. To this day, it is still common for consumers to have their cards swiped using the magnetic stripe.
When the payment industry needs to convince tens of millions of merchants and hundreds of millions of credit and debit cardholders to change their habits - change is slow.
Then COVID-19 arrived, and everything started changing fast - really fast. It is already a cliche to say that COVID has accelerated trends forward by 10 years in just a few months, but that doesn’t make it any less true.
From contactless payments, QR codes, online purchases, and cash, here is how I’ve seen COVID-19 quickly become a catalyst for change in the once slow-moving payment processing industry, and what my seven predictions are for the future of payments.
1. Contactless payments unleashed
One of the obvious and immediate winners of the pandemic has been contactless payments. “Tap & Pay” has been around for over a decade, and represented one of the best in-person payment experiences out there. You simply tap your card or smartphone wallet, and your transaction is approved - nice and easy. What has always shackled contactless payments was their transaction amount limits, reducing their use to just small convenience purchases.
The sudden fear of touching PIN pads changed that in a hurry, with card-networks, banks, and governments around the world quickly raising limits 2 or 3 fold higher than before. The United States and Canada raised limits to $250 and Europe to €50, with other countries following suit. Suddenly, so many more daily purchases could be made using tap, from visits to the dentist, groceries, to bigger retail purchases. Reducing barriers to spending while unleashing one of the best in-person payment experiences is a win-win for merchants, customers, and banks.
Prediction: Contactless transaction limits will continue to rise significantly in the next few years as banks realize that the increased spending with their issued cards is worth the potential fraud risks of tap payments.
2. QR codes will finally have their moment in North America
A few years ago, I was watching a news report on how China leapfrogged North America and Europe’s payments industry. Without decades of legacy payment networks, equipment, and consumer habits to overcome, the country had a blank slate to build its payment system. The video showed every merchant accepting either AliPay and WeChat Pay transactions using QR codes. These patterns were printed on stickers and stuck to every checkout counter, food truck, and even self-service items like bicycle rentals. Chinese consumers opened their smartphone camera, scanned the QR code, and had the payment automatically charged to their mobile wallet.
At the time I remember thinking how great it would be if consumers here were willing to give it a try - what a better payment experience it would create. But then I remembered how challenging it would be to try and change the ingrained purchasing habits of both consumers and merchants. QR codes remained on the fringe of the payments industry.
It took a worldwide pandemic and huge shocks to our daily habits, but all the sudden QR codes went from a fringe novelty to the de facto way that most of us looked at restaurant menus. In a very short period, QR codes are no longer unfamiliar to the average consumer.
Payments companies have been rushing to capitalize on this new trend, with Square and Helcim both recently releasing QR code functionality to their restaurant food ordering solutions. Helcim went a step further and enabled QR code payments for all merchant industries. While seemingly simple on the outside (scan a code, get redirected to a specific order or payment page), QR codes are quickly creating new opportunities for consumers and their local merchants to interact.
Prediction: Forget the rise of self-serve kiosks and unattended payment terminals, the future will be easy-to-deploy QR codes that enable smartphone transactions. People will do everything from purchasing transportation, giving a gratuity, and ordering from their favorite food trucks using QR codes. Consumers will appreciate being able to initiate the transactions themselves and merchants will benefit from the low deployment costs and creative customer experience they can create for various touch-points throughout their business.
3. The accelerated decline of legacy processors
Legacy payment processors including Global Payments, First Data, and Moneris have been dinosaurs for a long time, but their meteor has just entered the atmosphere. Plagued by a lack of innovation and what seems like an inability to develop in-house software solutions merchants love, legacy providers have instead been holding on to their trusty cash cow for some time: the stand-alone payment terminal.
Cheap to manufacture and understood by all merchants, these “dumb” merchant terminal have remained a staple way to accept payments. But in just weeks after the start of the pandemic, millions of merchants took a second look at those old bricks on their countertops and realized how useless they were in helping them adapt. Their customers now needed online stores, email and SMS payments, QR codes, and more - and their terminal did none of those things.
Even worse, their legacy payment processors didn’t have a clear path to offering them the technology and software needed to deliver the new online payment solutions customers were looking for. Merchants found themselves scrambling to find a new payment provider, or tried to stitch together other software packages and plugins - hoping for something to work.
Merchants using next-generation payment companies that put technology first, like Square, Stripe, and Helcim, were able to adapt much more quickly to the new needs of their customers because their payments provider offers built-in online payment solutions.
With more economic hardship to follow, numerous businesses of all sizes will fail and close their doors permanently. And as the economy recovers, the empty spaces that they leave behind will be filled with new merchants who aren’t burdened with old terminals and POS systems, but who are empowered by cutting-edge payment providers that give them the tools they need to start adaptable new businesses.
Prediction: Next-generation payment companies like Square, Stripe, and Helcim will accelerate their growth and continue to take market share away from legacy providers. Unable to adapt, legacy providers will shrink in size, fighting the inevitable through mergers and acquisitions to try and show growth to their shareholders.
4. Checks finally meet their nemesis: remote work
Almost overnight, companies around the world were forced to send their staff home and find creative new ways to make it all work. For many, remote work will now become the default, letting companies save on office space and helping workers reduce their commutes. And while many people found themselves able to stay productive, there is one business unit that found itself quite challenged by the remote work: the paper-based AR (accounts receivable) department.
Checks still count for the majority of B2B payments, but without anyone at the office, finance departments around the globe started asking questions like “Who has the office mailbox key? Who will go collect the mail? Who will be processing the checks? Who is going to go to the bank? Which bank branch is open and when?”
Many organizations had resisted electronic payments for their account receivables due to costs or simply because familiarity is hard to overcome. But once again, companies that had already shifted to credit and debit card payments, bank transfers, ACHs, EFTs, and other digital payment methods found themselves in a much better position during the pandemic, with fewer worries about maintaining cash flow and collecting dues from their customers.
Prediction: Companies will be on an accelerated path to move AR departments towards digital payments. Check usage will see a significant and permanent decrease for B2B payments as companies embrace their new digitized practices once implemented.
5. Cash is dethroned in more countries
Cash’s place in the world of payments varies greatly by region. Before COVID-19, cash payments represented 80% of transactions in Europe, 31% in the United States, and 30% in Canada, with the latter already seeing a 40% drop in usage in the past 5-years alone.
Despite studies showing that the virus is not easily transmitted by cash, consumers recoiled from the payment method, with large numbers of merchants refusing to accept cash altogether. Consumers had to adapt. Merchants have reported that even the strongest proponents for cash, older consumers, are building new habits of using card payments for an increasing number of purchases. Consumer’s new habits will likely become permanent, as people move past prior fears of having their card numbers stolen and become accustomed to the convenience.
The pandemic also reduced the availability of retail banking services, including reduced branch hours, and branches permanently closing. Some ATM networks have witnessed drastic reductions in cash withdrawals, which has been slow to recover even after the reopening of the economy.
Prediction: With fewer people carrying cash and fewer merchant locations accepting it, a vicious cycle will make many countries cashless faster than originally anticipated. The reduced number of ATMs and bank branches will further amplify this trend. Governments will have to quickly adapt new digital currencies and digital payment solutions to address the impacts of a cashless society on low-income consumers and the underbanked. Two groups that have traditionally relied more heavily on cash than others to complete their day-to-day purchases.
6. Online stores become the new default
You need only look at the stratospheric rise of Shopify’s stock price to see the world’s conscious awareness that e-commerce is really important.
Many of today’s new businesses are considering starting online first, and moving towards in-person if and when it makes sense. This is the reverse of what was the norm for so long. Traditionally when opening a new business, whether a retail store, clinic, or mechanic shop, your first step was to pick a point-of-sale provider or payment terminal and open your doors. Then, if you could find the time, you would set up an online store to generate a few more sales. Selling online was often seen as a “nice-to-have”. But today for so many businesses - it is now the first step.
Prediction: Merchants will first seek out e-commerce platforms and providers when starting their business, enabling those companies to build early relationships with new merchants. Legacy payment companies and POS providers with weak e-commerce offerings will see further declines in new merchant signups.
7. In-person payments will stay, but adapt
When it comes to payments, what COVID-19 has ultimately done is forced both consumers and merchants to break long-standing habits, and be accepting of new ways of making purchases. This has allowed society to try new ways to do business.
Even with the accelerated growth of online sales, in-person payments still represent over 80% of all retail transactions and will continue to be a staple to how we spend. What will change is the definition of what an in-person transaction means, for both merchants and consumers. If you order food on your smartphone using a QR code, is that an in-person transaction, or is it an online transaction? What about when you visit your dentist and they charge your card-on-file? Or if you reserve a new television online, but pick it up from the store and pay using your credit card?
Prediction: COVID-19 will force omnichannel to move from being a trendy buzzword to reality, truly blurring the lines between in-person and online payments. Needing their data consolidated under one platform, merchants will ditch their stand-alone “dumb” countertop terminals and move towards smart, omnichannel solutions to power their in-person payments. Customers will expect a unified experience from retailers and local merchants, including reward programs that don’t differentiate between retail and online purchases. As online volumes increase, large merchants will lobby Visa and Mastercard to review their interchange rate policies and stop penalizing keyed transactions with higher interchange rates.
Future trends outlook
Covid-19 is a tragedy on a world-scale, from the loss of life, the permanent damages of the illness, and the economic toll experienced — with still more to come.
When it comes to payments, the pandemic will have rippling effects on both merchants and providers alike. Those that can adapt will benefit from new consumer habits and a willingness to try new ways of doing business. Those that have been stuck in their ways trying to protect their legacy business will suddenly find themselves in a new world who sees them as irrelevant to its new needs.
A normally slow-moving industry is now finding itself forced to change very fast.