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Digital payments reach point of no return

Digital payments could have reached a point of no return as one in five European adults used them for the first time during lockdown, according to a new report from Forrester, which predicted that changes to behaviour will have long-term consequences for banks, networks, payment processors and retailers.

The market research firm found that trends in digital and contactless payments and the shift to online services are likely to last, with nearly half of the European online adults surveyed planning to use cash less often.

A survey of European consumers, including 1,154 in the UK, found that 17 per cent had made contactless purchases in-store with a credit card during lockdown, while 10 per cent had made contactless in-store purchases with a digital wallet on their smartphone.

A further 15 per cent had paid online or used mobile bill pay as a result of not being able to make in-person payments.

When it came to retail, Forrester predicted a 3.6 per cent contraction in retail sales across the UK, France, Germany, Spain, and Italy in 2020 — equivalent to a drop of €103 billion.

“Gig economy firms like Deliveroo, online commerce platforms like Shopify, and marketplaces such as ASOS are on a much sounder footing and are able to pivot to offer services tailored for these scenarios,” the report explained, adding that: “Understanding weak links - or potential acquisition targets - in the supply chain is imperative.”

The study showed that consumers are changing their funding sources and switching to debit cards, with UK credit card use halving in May.

Looking to the future, Forrester found that innovative payment methods, such as digital wallets and QR codes, which have seen a resurgence as part of test and trace systems, will play a greater role in the payments landscape in the post-pandemic era.

The report stated that QR codes were most likely to see a “renaissance” in digitising online payments, at table ordering, with over-the-air tickets, and underpinning COVID tracing.

Much of the long-term impact on payments is yet to manifest though, with changes in the mix of payment options, usage patterns and funding sources likely to persist for several years.

“While pandemic-driven preferences benefit some areas, notably online marketplaces, the gig economy, and wallet and mobile payment providers, many established financial services firms will face systemic issues,” the report warned.

It explained that permanent damage to consumer and business confidence will lead to depressed transaction volumes and collapse of parts of the value chain, and that FinTechs which had not diversified their offering in response to the pandemic may struggle to survive.

Payment FinTechs should focus on four factors in the coming months: their level of diversification; their sensitivity to their customers’ needs; their financial health when COVID-19 hit; and their ability to adapt rapidly.

“Firms with a narrow focus will be particularly sensitive to the impact of consumer behaviour change and broader economic distress and may become the target of takeovers or - worse - collapse.”

The report’s authors concluded: “Firms have an opportunity to turn forced adoption of online shopping and digital payment methods into permanent migration, particularly when viewed alongside consumer reluctance to go back to cash.

“Digital business leaders must also understand their altered customer,” they said, adding: “Banks must remodel risk and lending models for the COVID-19 consumer; retailers must rebuild checkout experiences to satisfy new behaviours; and payment providers must support their new-to-online-commerce businesses." 

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