by Hugh Mullan, Technical Specialist and Economist, PSR
Increased competition between card payments and instant interbank payments could bring many benefits to those who make and receive payments, as discussed here. This might occur with technological developments, such as the New Payments Architecture.
However, even with the greatest payments infrastructure in the world, innovative alternative payment methods will only be used if the incentives can be created for people to use them. And how one creates those incentives, and makes adoption attractive, is difficult.
Here I consider what are the incentives to use alternative payment methods to cards?
A country of card payments
In 2019, for the first time, card payments represented over half of all payments in the UK. Payment cards account for a majority of payments by consumers and consumers account for over 35 billion of the 40 billion payments which were made in the UK during 2019. The strength of cards, relative to other payment methods, is particularly pronounced if you consider consumer payments made to retailers, whether online or offline.
Cash-use is declining rapidly, consumer usage of cheques has all but disappeared. 80% of adults made a contactless transaction in 2019. There are no prizes for predicting that consumer card use will increase relative to cash in 2020. Card payments rule OK.
Cards are so convenient and fast. They can pay for things in the shops and online. They can pay for the tube. They are even accepted now at outdoor markets and school fetes, especially with the growth of payment facilitator firms. Cards provide security and some protections when things go wrong.
But the rest of the world does not appear to be quite as card-obsessed as the UK.
In Sweden there is Swish. The service works through a smartphone application, through which the user's phone number is connected to their bank account, and which makes it possible to transfer money in real time, and confirmation is received by both parties within a few seconds. Swish was originally intended for transactions between individuals, but soon it started to be used for flea markets and collections at church services, and by sports clubs and other organisations as payment at small events where a credit card reader was perceived to be too expensive or otherwise impractical. Small companies who wished to avoid credit card charges and simplify online payments soon followed suit.
In Canada, there is Interac e-Transfer. It allows online banking customers to send money to anyone with an e-mail address and a bank account in Canada. The Interac Online service allows customers to pay for goods and services over the Internet using funds directly from their bank accounts. Because no financial information is shared with the online merchant, the Interac Online service is more secure than online credit card payments.
Are we missing out on something?
And having such a high proportion of consumer payments through card schemes may not be such a good thing. What about resilience? What about competition? What about choice? Might other payment methods be more efficient by costing less across all participants in a payment?
The UK developed world-leading Faster Payments (after a push from regulators), allowing rapid person-to-person and business-to-business interbank payments. We all walk around with powerful computers in our pockets, with sophisticated and easy-to-use software. We live in a world of rapid technological change.
And yet, despite all of this, the payment method which we use most to pay business is remarkably similar to how it has been since Barclaycard launched its credit card, back when England won the football World Cup. Sure, there are chips and pins, there is contactless, but one might have thought we might already have developed some attractive alternatives to card payments based on the technology we have. Faster payments is not a mobile payment system like Swish or Interac e-Transfer. It does not link customers of different banks through a smartphone app, common between banks, and allowing transfers with mobile phone or email addresses, and account number.
Even when we pay with our smart phones, using the likes of GooglePay, ApplePay, and Samsung Pay digital wallets (which 40% of 25-34 year olds did in 2019), these technologies are just riding on the back of the payment card schemes. They are a different way of using the same underlying payment method. And they certainly don’t compete with card payments.
There have been some attempts to introduce P2P alternatives in the UK - Paym, launched in 2014, is a mobile payment system in which recipients are identified by their mobile phone number instead of bank details. Similarly, Pingit allows payments and requests for payments using only a mobile phone number. Over time, these payment methods might have developed into provi