The online payments market is poised to grow at a steady -- if not super-fast -- rate over the next few years.
According to Capgemini estimates, the segment, which includes closed loop/mobile apps, digital wallets, mobile money and virtual currencies, accounted for between 6.3% and 10.5% of global non-cash payments volume at the end of 2014. The main drivers that the research firm cited were customer adoption of contactless and mobile payments systems in mature markets, payments infrastructure modernization efforts (like EMV: Europay, Mastercard and Visa), and implementation of immediate payments systems across markets.
Non-cash payments volumes are still concentrated mostly in the U.S. followed by Europe but China is growing the fastest.
The demand for online payment systems depends primarily on the speed, convenience, broad availability/acceptance and security of payments systems at the lowest possible cost.
In addition, most customers would like to feel special, and companies taking the trouble to solve customer problems regarding payments are likely to do better. For instance, customers using a regular-use app like Uber might find a monthly history of expenses useful. Customers using a digital wallet for ecommerce might welcome the ability to store reward/loyalty cards, peer-to-peer payment facilities, bill payment facilities, tips on how to manage expenses, etc.
A recent Gallup poll of over 11K U.S. adults and a panel study of over 6K adult Americans revealed that digital wallet usage remains low at this point . The study revealed that engagement levels and a customer's desire to feel special were important drivers of adoption.
Engagement levels are so important, in fact, that engaged customers act as brand ambassadors. They are emotionally attached, and try to use the wallet at every possible opportunity. The study revealed that 96% of Apple ( AAPL ) Passbook users were expected to use Apple Pay within the next 12 months. On the other hand, 82% of people using other digital wallets like Alphabet's ( GOOGL ) Google Wallet or PayPal ( PYPL ) preferred to continue using those wallets, again indicating loyalty.
A McKinsey consumer survey of 1K consumers found that not all digital wallet prospects are the same. Surprisingly, they are rather hard to define by standard metrics like age, household income and smartphone usage. Instead, needs and attitudes define a person's interest in these payment systems.
All except security skeptics prefer fast checkout (47% of this category use smartphones and just 15% are younger than 35 years old).
Low-interest borrowing and peer-to-peer transfers are important to both mobile enthusiasts (73% use smartphones, 47% under 35) and bank loyalists (66% use smartphones, 32% under 35).
But there is also another important category referred to deal hunters (73% use smartphones, 32% under 35) for whom rewards, loyalties, fast checkout and digital goods are important. So a wallet with these attributes is likely to be well accepted by the majority of the population inclined to use the new payments system.
Payment Infrastructure Modernization
Of course, customer adoption doesn't take off without basic infrastructure modernization, and any payment system doesn't work or become popular unless there is broad acceptance. This is the reason that ecommerce and mobile apps are the main drivers of digital payment systems right now with broader retail acceptance expected to be only a gradual process.
A PayPal study from earlier this year of 17,600 consumers in 22 countries, pegs mobile commerce multi-country average CAGR between 2013 and 2016 at 42% percent, much faster than overall ecommerce growth of 13%. While m-commerce is expected to grow 26-32% through 2016, there are other strong emerging markets like UAE, China and Turkey, where mobile shopping is a respective 24%, 21% and 19% of overall online spending.
Unsurprisingly, younger people who grow up with the devices are more inclined to use them to buy things. Of those surveyed, 33% said they'd used their devices to buy, with 64% of shoppers saying they preferred apps to browsers because of speed and convenience (instant payment confirmation and reminders to use discounts, coupons, etc.). Smartphone screen sizes are the leading deterrent to completing purchases using these devices.
While most countries are taking measures to improve payment infrastructures, the large-scale move to EMV-enabled POS systems in the U.S. is likely the factor with the greatest near-term impact on this emerging payments segment.
A Research & Markets report on POS Terminals and EMV & NFC Status Review 2015 says that the transition to EMV-enabled terminals is well underway. It estimates that there are 33 million merchant establishments in the U.S., of which Tier I and II retailers number 4 million. But this is a very important category because these 4 million establishments account for 75% of retail transactions.
The earliest and most enthusiastic adopters are the specialty, mass merchants & grocery and pharmacy/drug store segments, with over 60% having migrated by the end of 2014. Gasoline stations, which have a 2-year relaxation on the liability shift, quick service restaurants and smaller merchants will be slower to make the move.
An Aite Group study, based on findings from a 2014 telephone survey of U.S. merchants found that a third of smaller merchants were unaware of chip cards. But adoption among larger merchants appears to be picking up. The Aite Group estimates that EMV/NFC-enabled hardware terminals will reach 59% of the installed base this year, growing to 73% next year and 90% in 2017.
Instant Payment Systems
Given the amount of innovation going on in the payments processing business, banks can't afford to ignore the implications. Now that customers have access to electronic devices (their smartphones) 24x7, they increasingly expect them to perform in the same way all the time. So there can't be regular banking hours.
Also, the most enthusiastic adopters of new systems are young -- a demographic everybody wants because of the implications for future growth. And they like everything to fall into their laps immediately. That's why they are warming up to technology companies enabling payment-processing capabilities.
Yes, digital wallets are a bit of a commodity service at the moment, so supporting all the leading wallets is a good strategy for banks. But these wallets can increasingly add value because of other services technology companies provide that can increasingly be offered as part of the wallet. There is also an erosion of brand value for banks because customers don't handle the credit/debit cards any more -- they just enter pins and the payments network does the rest.
But this very demand for immediacy creates an opportunity for banks in the form of immediate payment systems (IPS). The Accenture Immediate Payments report sees this as a huge opportunity because of benefits to governments, businesses and individuals.
But banks are not on the same page about the necessity for such real-time availability of funds. A Glenbrook Partners survey of 89 payments industry practitioners around the world found that 49% believed that immediate funds transfer should constitute immediate messaging and settlement, with 36% in favor of immediate messaging and batched settlement throughout the day and the remaining 15% thinking that immediate messaging and next-day settlement should suffice.
Advantages: Accenture says that governments would benefit from reduced cash and check handling, as well as easier management of economic risks. Big businesses making salary payments can hold on to their cash longer, and also collect valuable data from buying/selling transactions.
The UK has gone the farthest along this path with its Faster Payments Service. Australia and Singapore have also developed their own systems called New Payments Platform and FAST (Fast and Secure Transfers), respectively. The United States Federal Reserve Banks is researching ways to improve the payment system in the country.
All signs point to strong adoption of digital wallets over the next year or so, and as the service gains momentum there will be measures to differentiate leading to more innovation.
What this means today is an increased tendency to collect customer data by retailers, wallet providers, payment processors, banks, etc. Data mining and data analytics will become commonplace in the payments landscape as everyone with a vested interest scrambles to deliver value.
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