In line with our risk management framework, today we published our Q4 2019 performance update.
Retail finance and the future of payments
The old adage ‘cash is king’ has never seemed wider of the mark than it does today. In 2017, cash was eclipsed as the most prominent medium for payments in the UK, falling 15 per cent from the year before to a total of 13.1bn transactions. Debit card transactions, on the other hand, grew 14 per cent to reach a total of 13.2bn.
Back in 2006, cash payments accounted for 62 per cent of all UK transactions. However, by 2026 it is predicted that this will have plummeted to just 21 per cent, according to data from UK Finance. The firm also found that nearly 3.5 million Brits now eschew cash almost entirely, while two thirds of the population use contactless cards. Even in the over-65 age group, more than half of people are making contactless payments. It would seem that it is convenience, rather than cash, which is king.
The role of technology in payments
It isn’t simply a straight shootout between cash and cards. In fact, for all the popularity of debit cards (which more than 95 per cent of UK adults own), just 60 per cent of Brits aged 18 or over use a credit card. Instead, it is the rise of technological innovation which is blazing a trail. This has been underpinned by fintech, most prolifically with regard to mobile and wearable payments. Apps, watches and mobile wallets are commonplace, and, not only are they a convenient way to make payments, but they also enable seamless integration of things like loyalty points.
Technological disruption isn’t only customer-facing. A good example of this is Starling Bank, an app-based provider offering a new service that gives other lenders and fintechs access to a technology that enables their customers to make real-time payments. In effect, it gives these firms direct access to the UK’s payment schemes (eg: BACs), rather than having to go through high-street banks and building societies.
Digital payments are also creating value, and stimulating growth in the UK economy. At the point of sale, the average size of a digital payment is between two and four times higher than cash or cheque payments, which, in itself, boosts economic activity and tax receipts for the Treasury. But digital payments create all kinds of other efficiencies too. For example, no one needs to count up bank notes. No storage space for cash is required. No security is needed to protect physical currency. Barriers and costs to purchasing goods or services overseas are eliminated. And payments are instant, prompt, and guaranteed.
So it isn’t just about convenience. Technology within payments is driving up economic value, fuelling growth, and perpetuating further innovation.
How retail finance fits into the picture
Retail finance, also known as point-of-sale (POS) finance, embodies the same virtues highlighted above, and the main result of its inexorable growth in recent years has been a vastly-improved shopping experience for customers. Additionally, retailers who have embraced POS finance have enjoyed the treble boon of bigger order values, an uplift in conversion and improved customer retention.
Some would argue that the rise of retail finance has been born out of necessity. Aside from retail marketplaces becoming ruthlessly competitive, feet through the door is something stores can no longer bank on. According to findings from Mastercard, roughly 57 per cent of UK consumer spending is conducted online, with more than a quarter taking place on a smartphone or tablet.
In terms of retail shopping, data from Statista reveals the steady rise of ecommerce as a share of turnover in recent years – climbing from 14.4 per cent in 2015 to 18 per cent in 2018.
It therefore isn’t simply about offering products which stand out in the online space: it’s about providing a smooth customer journey from product selection to checkout. Embracing payment technologies is key to this, and cross integration between retailers and third-party specialists is thus occurring at a rapid rate.
That said, retail finance isn’t purely online-based. Besides, the lines between online and in-store shopping are becoming rather blurred these days. At its core, POS finance is about giving the customer the opportunity to spread the cost of a purchase over a set of fixed, affordable instalments, thus making purchases with otherwise-prohibitive price tags a reality for the ordinary shopper. But simply facilitating retail finance is only half the battle. Whether the customer is using ApplePay, or making the payment through a call centre, a seamless payment experience can make all the difference.
Future of payments: the key questions
Is cash going to disappear in the UK?
As if to typify the rapid decline of cash, nearly 5,000 ATMs disappeared between July 2017 and June 2018. And with the debit card now overtaking cash as the preferred payment choice in the UK, Expert Market predicts that ATMs will no longer exist by 2037. Others predict that just 10 per cent of payments will be made in cash within the next 15 years.
Certainly the momentum is significant, but an imminent cashless society isn't a foregone conclusion. A recent report by the independent Access to Cash Review found that 8 million Brits believe cash is still vital to the economy. Furthermore, the amount of cash in circulation remains robust. A total of £68.9bn in banknotes was in circulation in 2018 - flat on the previous year, but roughly £5bn up on 2016. Indeed, the trend of increasing cash circulation is true of almost every country in the world, except for Sweden.
So while the importance of cash is likely to diminish in years to come, it may be some time before Britain goes completely cashless.
What does the future hold for credit cards?
Credit cards aren't merely a convenient means of buying something now, and paying for it later. They are also dynamic, insomuch that specialist cards can help to build a credit rating (credit builder card), spread the price of a purchase (purchase card) or cut the cost of other credit card debt (balance transfer card). Credit card purchases in excess of £100 also enjoy valuable payment protection under Section 75 of the Consumer Credit Act 1974.
However, the APR on a typical credit card is usually very high, and, as the wealth of cost-effective, hassle-free payment alternatives increases, so too credit cards will have to evolve if they are to remain as abundant as they are at present.
Are cryptocurrencies the future?
Just over a year ago, the world was in the grip of cryptocurrency mania, as the price of Bitcoin and the likes went through the roof. But while the bubble has since burst, cryptocurrencies have not gone away, and there is no denying the dynamism and potential they have.
For one thing, the technology behind it - blockchain - has the power to improve consumer privacy and data security. Cryptocurrency is also borderless, and, for the most part, involves no fee for global transactions. It also creates a significant efficiency, in that it eliminates the need for a third party in a transaction such as a bank or credit card provider.
But there remain significant challenges for virtual currencies. Accessibility, price volatility, transaction delays, logistical issues and reputational damage will need to be addressed if they are to establish themselves within the mainstream of personal finance, and forge an established path within the landscape of UK payments.
What impact will AI have on payments?
Digital customer support and voice command are just a couple of the ways AI has been integrated into commerce, and it already plays a key role in things like fraud prevention, fulfilment and logistics. The power of AI is immense, and there is no exact science to predicting how it will shape the future of payments. However, there are at least two areas where it will surely lead the way: personalisation and connectivity.
Through machine learning, chatbots and the likes will be able to personalise everyone's shopping experience from enquiry to checkout, and this will become increasingly refined over time. And then there is connectivity. Synonymous with the rise of the Internet of Things is the ability to pay for anything, anytime, and anywhere. AI will augment the interconnectedness of this ecosystem, and reduce friction at every level when it comes to making payments.
Are digital payments secure?
In 2017, payment fraud amounted to nearly £1bn, despite the best efforts of UK banks, who are estimated to have prevented a further £1.4bn in scams. It is estimated that 58 per cent of this payment fraud related to debit or credit card use, while authorised push payments accounted for 24 per cent. A further 16 per cent was attributed to remote banking, while just one per cent came from fraudulent cheques.
So clearly, digital payments have increased fraud risks. Yet it isn't all one-way traffic, and there are cutting-edge AML and anti-fraud technologies coming into the market all the time. Payment protections like the aforementioned Section 75 cover are also a valuable safety net, while, in most cases, you will be eligible for full compensation from your bank if you fall foul to identity theft, debit/credit card fraud and other forms of financial crime.
You can also go some way to ensuring that it doesn't come to that. Being vigilant, and protecting your details closely will help to ensure that your experience with digital payments is a safe one.
How will Open Banking help retailers?
Open Banking brings two key benefits for retailers in the UK. Provided they receive the requisite consent, retailers will have access to a greater level of customer data which will enable them to tailor their products, personalise the customer journey, and provide a flexible service.
It will also enable them to eliminate the intermediary when it comes to payments, as they can initiate payments directly with the customer's bank or building society. This means cutting out card networks and associated fees; reducing costs and the risk of payment fraud as a result.
The advent of Open Banking has also inspired a wave of fintechs to develop new technologies, and establish themselves as key service providers within payments and lending. For retailers, this means greater opportunity for platform integration, and further enhancing the quality of their payment systems.
It remains early days in the Open Banking era, so it is difficult to assess the extent to which the above has had a tangible, positive effect on UK retailers. But the signs for the future are promising.
What is the future of retail in the UK?
Barely a week seems to pass without stories about the 'bloodbath' on the high street, and even high-profile stores are closing their doors at a jarring rate. But it is important to keep perspective. Retail still accounts for the most jobs in the private sector, with one in 10 Brits working in retail.
The retail behemoth also boasted an impressive £380bn in turnover in 2018 according to the ONS, and, for all the incessant talk about people abandoning the high street, YoY growth in retail sales remains steady in pound terms.
Ultimately, it is consumer behaviour and customer preference which will shape the future of retail. It is a supply to satisfy a demand, rather than the other way around. If convenient, online payments are what customers want, then that is what retailers will deliver. And not just in a reactive sense. By proactively taking the lead, and providing world class services like POS finance, retailers can ensure that they not only gain a bigger slice of the pie, but help to grow the pie itself. Such innovations with respect to payments, and harnessing the expertise of other fintech platforms, will ensure the longevity of UK retail in the face of challenging circumstances.
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Since opening our doors back in 2014, we’ve always prided ourselves on living and breathing two key principles at Lending Works: innovation, and putting the customer first in everything we do.
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