In line with our risk management framework, today we published our Q4 2019 performance update.
Contactless, fintech and the future of payments
As an economy, we're a collective of buyers and sellers. One thing both parties have in common is that they want the process of making a payment to be as quick, convenient and safe as possible. Technology has played, and continues to play, a significant role in making this happen.
It's precisely why the role of cash appears to be diminishing - particularly so in the UK, which is said to be the third most 'cashless society' in the world (behind Canada and Sweden), and is likely to see cards overtake cash as a share of spending volume this year.
In 2006, cash accounted for 62 per cent of all payments. Yet this number fell to 40 per cent in 2016, and it is predicted that this will tumble to just 21 per cent by 2026. In the last five years alone, the number of annual cashpoint withdrawals has dropped by roughly 200 million too.
The rise of contactless payments
Contactless cards - which have a chip that emits radio waves to a payment terminal, and do not require a PIN - have been central to this. Back in 2006, the technology wasn't in place. Yet in 2016, of the 11.2 billion card transactions, around 22 per cent were from contactless debit or credit cards, according to UK Cards Association. The number of card transactions is set to reach 18.5 billion by 2026, of which more than half will be accounted for by contactless payments.
This upward trend is further substantiated by the findings of UK Finance, which showed that £52 billion was spent via contactless cards in 2017 - double that of the year before.
At present, half of credit cards are contactless, and more than a third of debit cards are too. Most banks these days issue contactless cards by default, and Barclays reported last year that just one per cent of customers requested cards requiring a PIN instead.
An open goal for fraudsters?
The convenience of contactless cards has given rise to fears that they present fertile ground for fraudsters, who can simply steal or clone the card, and tap and go as they please (until the card is blocked). While payments are capped at £30 per tap, and banks limit the number of transactions (on a random basis), there is undoubtedly risk involved.
A study for the Mail on Sunday found that over £14 million was stolen by fraudsters from contactless cards in 2017, which dwarfs the corresponding figure for altered cheques (£9.8 million). And while this money is guaranteed by banks, and should be returned to the customer's account, there is a clear sense of violation involved with being a victim of fraud - not to mention the potential inconvenience involved with securing reimbursement from your bank.
Nevertheless, some perspective should be maintained, and £14 million is not a huge proportion of overall annual banking fraud, which stood at £732 million in 2017. That is not to encourage complacency - vigilance and a proactive approach in the fight against fraud should be the order of the day. But most would agree that the advent of contactless payments has been a force for good, and an excellent platform upon which to build as we move into a future dominated by fintech and AI.
How fintech payments shape our economy
Mobile payment systems have become a cornerstone of fintech, with digital wallets such as Apple Pay and Google Pay being common examples. These systems enable contactless payment through Near Field Communication technology, which means the customer simply holds their smartphone in the vicinity of a payment reader. Instant payments can also be made to friends using the system too.
According to global payments technology specialist Ayden, mobile devices account for 34% of global browser-based online transactions. Yet this is an area where the UK underlines its position as an early adopter, with 49% of online transactions here being facilitated by mobile devices.
The trend is a clear one: transactions are disappearing into apps, and borders or currency barriers are being melted away by the technology pioneered by fintech. Long, arduous form completion is giving way to fingerprints and instant payments, and it is consumers and businesses who are reaping the benefits.
Safety, and consumer needs, first
There is still concern among many people when it comes to security, fraud and data breaches associated with these types of technology, and this is one area where agile, innovative fintech firms have a deficit: trust. Unlike established counterparts such as banks, the onus is very much on them to develop their own reputation. Yet this, rather than being a burden, also acts as a strong incentive for fintechs to prioritise safety in the technology they develop.
Consumers appear to be voting with their feet, with the majority of our nation demonstrating how enthused they are by these rapid advances in payment technologies, and embracing the benefits they have to offer. The numbers speak for themselves, and demand and supply for these innovative and evolving systems are growing in equal measure.
Cash's demise is not inevitable. It is up to fintech companies to prove to us that better, safer and more-convenient alternatives await. But thus far, it's fair to say fintechs – and particularly British firms - are doing a remarkably good job of it.
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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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