UK payments outlook 2024

Our friends at PaymentsUK have released their latest forecasts, the ever excellent UK Payments Market 2015. Whilst we don’t have a copy of the full report (hint, hint…), the press release does give us some interesting insights. For example, payments will hit 44 billion transactions a year by 2024. This is a net growth of 3.4 billion, which hides significant and continued declines in both cash and cheque usage (53% to 33%, and 1.1% to 0.4% respectively). The table provided (and replicated below – the link above has a better quality version) shows that, for consumers at least, cards continue to drive the growth. There are obvious reasons for this: consumers switching from Oyster-like cards to contactless, and indeed, contactless generally, is just one good example.   Number of annual consumer payments made per adult uk pay 3 One thing that really stood out for me is the final line before the total – the “other” category. Celent’s forecasts typically count prepaid and store cards into our debit forecasts. But what is notable is that PayPal is explicitly mentioned… and mobile payments aren’t. At all. We’ve not seen the full report, so it may be explained there, but given what we read in the press, this is hugely surprising. Recent examples include: Actually, it’s not surprising. Firstly, what is a mobile payment? That in itself will cause heated debates! Secondly, for the latter to be true, I ought to know at least someone who is making those mobile payments – or rather, every other person I know! I’m being slightly tongue in cheek – read Zil’s post from a few weeks back about him at least trying. However, I’d still argue that even this wasn’t a true mobile payment – the mobile device is just holding the card credentials. I refer you to my first point! So what are the takeaways? Firstly, the growth may continue – but in reality is perhaps less strong than you may initially think. A 3.4 billion growth in 10 years is actually only a CAGR of c 0.5% a year. Compared to some developed countries (France for example) that’s good, but compared to some developing countries that’s low. Secondly, there may be 101 new ways to pay, but they’re unlikely to make significant inroads, instantly. Current methods are deeply embedded in our every day life. Indeed, many of the “new” methods run on top of the existing rails, and the volume often gets counted as the old method. This doesn’t mean that there are no improvements to be made but that they are just that – tweaks to the existing. Finally, perhaps the phrase of there are lies, damn lies and statistics, ought to be caveated that many of the issues seem to be with PR people and journalists. Many inadvertently misread the numbers, but some of the latest releases underline that we all ought to find the original source rather than necessarily solely relying on what’s being reported.

Cashless Britain – not coming to a town near you soon

There have been a number of reports in the UK since the beginning of the year heralding a cashless Britain, suggesting that cash “dies” this week. Of course, I’m being somewhat tongue in cheek, but it was suggested that February 2015 would be the last month that cash was king. That’s true in many ways – the share of cash on a total transactions basis will drop below 50% for the first time in the UK this year. But that doesn’t really tell the whole story. Firstly, “not cash” isn’t a single payments type of course. There are debit and credit cards, ACH payments,  still (shudder) some cheques. Fact 1 – by volume of transactions, cash is by far the most dominant, as at 50% share, it’s obviously the same size as all the other payment types …combined. So cash isn’t dead, and not even mildly under the weather! Secondly, the decline isn’t quite as dramatic as it may first seem. There are lots of new payment occasions being created (iTunes, mobile phone subscriptions, cable TV etc) that are electronic only. And conversion from cheque to direct debit generally sees an increase in payment volumes (ie quarterly cheques becoming monthly direct debit). Fact 2 The net result is significant growth in the overall size of the pie, biased to electronic payments – yet the share of cash has only decline by a few percentage points rather than the significant drop implied. This is particularly important to remember in the coming months. Early indications suggest a significant increase in contactless is coming. Fact 3 It’s a migration from Oyster that will drive massive contactless growth this year, rather take-up of contactless. This is important as Oyster had already forced a conversion from cash, with individual cash transaction (ie for each journey) into a single top-up transaction. The switch to contactless is unbundling this back into individual transactions, albeit applying a daily cap. We’re not saying that contactless isn’t going to grow impressively, just we mustn’t simply look at the headline numbers and draw conclusions. It’s not all negative. That Oyster habit converted to cards will help create a contactless habit which will spread. Coupled with the raising of the limit of £30, and with many cash payments being below that value, there is the possibility to see some levels of cash replacement that could move the needle. Cash is far from dead but we are certainly moving into a LessCash rather cashless world.  

Much Ado About Nothing

Today the European Commission released its long awaited study into the cost of merchants accepting cash and card payments. A copy of the preliminary presentation can be found here. It’s long awaited for a number of reasons. Firstly, it is supposed to finally address the issue of comparing actual costs. Whilst there have been many studies in the past that looked at this, nearly all had a flaw. Those commissioned by one of the interested parties had such inherent biases that it rendered them almost unusable. For example, the anti-cards lobby conveniently chose to inhabit a magic kingdom where labour was free and cash magically appeared and disappeared from stores, free of charge!  Academic studies have typically been too academic – lots of interesting formulae, but not grounded in reality. The Commission set out, once and for all, to get a definitive answer. That’s the second reason why it is important. The Commission has taken what many believe as an “anti-card” stance, with a view that cards are unnecessarily expensive. At the same time, they are actively promoting electronic payments as paper/cash is costly and inefficient, but not taking into account some fundamental differences, such as cards are a commercial business, whilst cash is supplied in essence by the State (I know, I know – that sentence is a whole debate in itself!). The study then was supposed to create an unambiguous fact-base. The more cynical of us has wondered what happens if the study presents data that is contrary to the stance of the Commission, and that could contradict the last decade of activity from the Commission in this area! The programme has not been without it’s problems. A previous study commissioned a few years ago has never been released, and has been perceived as not reaching the answer the Commission wanted. This is primarily because the consultancy selected is highly regarded for their integrity and knowledge – by not sharing anything about the study, the market has reached it’s own conclusions. In the introduction to the document today though was a comment that it had “Unsatisfactory methodological recommendations.” Secondly, the request for a subsequent study was woefully underfunded. Unsurprisingly, the target number of merchants to study was not met by a considerable margin. This isn’t to criticize the firm that won the tender, more that the opportunity to do this right was never there. Alot of preamble – what did we learn? Not much. I wasn’t able to attend the presentation, so there is – literally – only the afore mentioned deck to study. For me the initial take-aways are:
  • The fact that no clear conclusions could be reached yet, and that the sample size achieved was only 50% of the initial target highlights, either just how hard this is to do and/or, actually it’s much closer than they thought. For example, if one payment type had substantially more costly than another it’d surely have been highlighted
  • The low response rate and the bias to large merchants is likely to leave the survey open to criticism
  • More detail is required to give comfort – for example, the cost seems to suggest some significant missing costs (such as CIT fees, bank cash handling fees, etc)
The net result is that we’ve not really any clearer, and we’re left wondering why they didn’t wait until they had reached some conclusions. Whilst we don’t have the commentary given during the presentation, the fact that the event and presentation didn’t even warrant its own press release suggests that not much was said. And so we’re left still in the dark, and probably, on balance, even less optimistic that we’ll get the answer that we all seek. Much ado about nothing!

Now, Virtual ATMs?

All things mobile are so hot right now, and for good reason. Smartphones are quickly overtaking mobile telephony devices at breakneck speed. Remember when people talked on their mobile phones? AT&T activated 8.6 million iPhones and 10.2 million smartphones in the last quarter. Verizon iPhone activations increased by 47% in th3e past quarter. 6.2 million of the 9.8 million smartphone activations in the past quarter were iPhones. Beyond the growth in smartphone usage, it seems new mobile payment options are emerging with mind-numbing regularity. But what about cash? As much as mobile payment proponents would love to see it occur, cash hasn’t shown much migration to digital payment alternatives. Will the erosion of cash usage accelerate? I think so, but cash will be commonplace for the foreseeable future. In fact, that’s why there are so many ATMs. Until recently, 90% of bank-owned ATM transactions were one thing…cash withdrawals. This need for cash spawned the installation of 135 ATMs per 100,000 adults in the US – that’s roughly one ATM for every 750 people (including non-bank owned devices)! As far as we know, this represents the highest ATM density in the world, except for Spain and Canada (see below).

ATM Density

ATM sales have stalled over the past few years to no surprize. We probably have enough of them deployed – in developed countries at least. But what if there were a credible alternative to ATMs for cash dispensing? Apple apparently thinks it has one. It has filed a patent application accordingly. I was made aware of this courtesy of Janney Capital Markets.

Forget Digital Wallet. Apple Wants to Turn YOU Into an ATM Via Ad-Hoc Cash Dispensing Network A recent patent application filed by Apple (AAPL – $456.83; Buy, Janney analyst Bill Choi), describes an iTunes-based ATM network. “Need some quick cash right now and there’s no ATM around? Launch the Cash app, and tell it how much do you need. The app picks up your location, and sends the request for cash to nearby iPhone users. When someone agrees to front you $20, his location is shown to you on the map. You go to that person, pick up the bill and confirm the transaction on your iPhone. $20 plus a small service fee is deducted from your iTunes account and deposited to the guy who gave you the cash.” The patent application makes 24 claims and makes interesting reading. The idea invites a few questions…
  • Could Apple pull it off? Effortlessly! It has all the requisite components: a critical mass of iPhone users, geolocation enabled on the vast majority (I think), a distribution mechanism for the requisite apps and its iTunes accounts each iPhone user must maintain.
  • Would anyone use it? That invites a less obvious answer. Both Apple and the cash provider would need some incentive. Research suggests consumers aren’t fond of ATM surcharge fees, particularly as they grow over a couple of bucks. The fee structure would be key as would the user experience. A few attempts with poor response, or fast response by a total jerk, for example, would likely present an adoption barrier.
So if this comes to market, it might never see widespread usage. Even so, the cost to deploy is so small compared to maintaining vast fleets of ATMs, I find the idea compelling. I hope it is available the next time one of my kids asks me to borrow 20 bucks.

Fiserv: Changing the Game with RCC

Remote cash capture (RCC) is the deployment of secure, validating currency accepting and recycling equipment (aka smart safes) at merchant locations coupled with information reporting and provisional credit mechanisms. Such equipment has been in use for nearly 15 years in the US as a means to improve merchant cash cycle control. The advent of bank-offered provisional credit based on validated currency residing at the merchant location has been a relatively recent phenomenon with the first implementations in 2004. Its emergence has caused a surge in interest and adoption of these devices. The offering of provisional credit by participating financial institutions has significantly improved the merchant business case for remote cash capture. But, the float benefits involved are secondary. The primary benefit of provisional credit is its enablement of wholesale reengineering of the cash cycle within merchants and between merchants, armored couriers and banks cash vault networks. In the process, RCC removes the substantial cash handling burden historically carried by bank branch personnel, largely without the assistance of meaningful automation. In short, RCC is a win-win-win wherever the merchant business case warrants. Remote cash capture relies upon four components.
  1. Secure, in-store safes that accept, validate and count currency with a high degree of accuracy and dependability. Such safes have been available since 1995, but have only recently been linked with banks for provisional credit.
  2. Same-day electronic transmission of the precise safe deposit information to central treasury and optionally, the merchant’s financial institution.
  3. Ability and willingness for the financial institution to grant ledger credit for remotely validated cash. A growing number of banks are offering provisional credit based on the validated currency. Commonly, cash logistics providers guarantee the funds, covering any losses resulting from discrepancies discovered following physical cash verification.
  4. Associated cash logistics servicing. This includes armored cash pick-up, change order servicing, web based reporting, deposit aggregation, virtual vaulting and equipment maintenance.

    RCC's many Moving Parts

Closed-Loop System Historically, RCC has been a closed-loop approach to cash management. Each armored courier’s solution is proprietary. One provider’s safes will not communicate with another courier’s information system. As a result, interested financial institutions must invest in systems integration and file validation and testing efforts to get in the game. To do so with multiple armored couriers requires additional cost and ongoing overhead. As a result, only a few dozen banks have participated, and only the four largest armored couriers. Fiserv is about to change all that. Deposit Manager from Fiserv is a device- and transportation- agnostic solution, which means banks and retailers have the freedom to choose devices and service vendors based on the needs of each retail location, regardless of geographical footprint. With Deposit Manager, Fiserv owns the IT infrastructure, just like they do for ATM monitoring. This may be a game changer for RCC. With Fiserv’s device and transportation agnostic solution:
  • The barrier to entry for regional armored couriers will be significantly lowered. This will likely increase competition for RCC solutions at the courier level, improving service levels and settling prices.
  • A significant number of smaller banks are likely to enter the fray.
  • Service dynamics are likely to become fluid across the board. Historically, the armored couriers were in the driver’s seat, with the banks playing a secondary role – mere providers of provisional credit. Now, banks may start selling RCC while capturing the cash processing business too, rather than conceding it to the couriers. The couriers may evolve to play the lesser role – mere transporters of cash. Should this occur, participating banks could capture more than just deposits with RCC.
This will be very fun to watch! Thanks to a systemic change in how RCC can be delivered, the business case for participating banks may be a rosy picture over the coming few years. Wouldn’t that be a welcome surprise?