Cash isn’t dead..and unlikely to be either

My first post in this focussed on a survey from the US which suggested that cash would be dead in the US within a generation. And as my blog points out, that is highly unlikely for many other reasons, not least because millions of US citizens can only use cash currently.

This second post was triggered by a report hosted on LINK’s website, (the UK ATM operator) that had some interesting numbers in it. Some of the data was incorrectly reported in places as signifying the death of cash in the UK. To be clear, that isn’t what LINK or the report claim.

I think we need to step back from the figures first, and see what they’re actually saying.

By volume, cash represents 45% of all transactions in the UK. That is a significant shift, in a relatively short period of time – indeed, a drop of 6% last year, around 1 billion transactions lower than in 2014. This is what caught the eye of many people, and why they made their predictions.

But let’s look at the figure another way – at 17 billion transactions, that’s both more than nearly all the other payment types added together, and 70% more than the payment type with the second highest usage (debit cards).

That's not to say we shouldn’t dismiss the changes. In 2005, cash accounted for 64% of transactions by volume. By 2015 that had dropped to 45%; by 2025, the forecasts suggests just 27%. I think that's a triffle low, but we're only differing by a percentage point or two.

However, we still have to put that number in context. With a forecast drop of over 1/3rd over the coming decade, it would still leave the volume of cash transactions with a greater combined total of Faster Payments, CHAPS, Direct Debit and Direct Credit that we see today. It's therefore as much that the other payment types are growing as payment types falling.

Once you scratch below the surface, it becomes clearer.

One concept I have talked about in my reports  Noncash Payments: Global Trends and Forecasts, 2014 Edition is that of payment occasions and payment frequency. The occasion is why you make the payment – utility bill, mortagage payment etc – and the frequency you make it.

One of the reasons for the large decline in share of payments has been in the growth of contactless payments, and in particular, their usage for the London Transport system. This is a good example of how occasion and frequency make an impact. Until recently, most commuters in London would use an Oyster card, with cash rarely used (and indeed, banned on many buses). This took a large volume of cash transactions out of the mix – previously that saw 2 transactions a day, times every day commute, equalling approximately 550 cash transactions a year.

With Oyster, that became a card transaction to top up the balance on the oyster card, rather than a per journey transaction. Even estimating topping up once a week (more likely to be monthly I would imagine), that’s 52 transactions a year maximum.

The difference today is that many people now use their contactless debit cards instead of an Oyster card, resulting in a card payment every day – so from 52, to more than 200 a year.

The net result is cash usage drops significantly, with a corresponding smaller increase in card volumes, followed by a larger increase in card volumes. Yet still just one payment occasion.

The point in highlighting this? Reducing cash will have to be done on an occasion by occasion basis. There are some big wins out there – even just making all transportation cashless for example – but the challenge is that there is a very long tail of occasions that rely on cash.

The second challenge is whether the Government even allows cash to die. The case for removing cheques is much easier to make, and far easier to do, yet the Government has told the industry that it can’t. On that basis, it’s difficult to see under what circumstances that the Government would ever allow even a discussion about cash retirement.

Cash lives. Long live cash.

Are You Ready for Cardholder Transaction Alerts?

Quite a few issuers around the world already offer transaction alerts to their cardholders. They find them a helpful tool to reduce fraud, reduce false positives (i.e. unnecessary card declines), and strenghten their engagement with customers.

However, in a few months, this will no longer be optional for issuers in the US. Effective October 14, 2016, Visa is mandating all the US issuers to offer their cardholders an option to enroll into transaction alerts. In other words, customers still have the opportunity to decide whether to use the alerts or not, but the issuers must make the option available to them. The mandate applies to consumer Visa credit, debit and reloadable prepaid cards; currently, commercial cards and non-reloadable prepaid cards are exempt. MasterCard has similar requirements – dual brand issuers also must comply by October 2016; MasterCard-only issuers have until April 21, 2017. Importantlly, unlike EMV deadline, which was a liability shift, these are real mandates which the issuers must comply with.

Alerts via email or SMS are the easiest but also the most basic option. In our view, issuers should look beyond the "compliance" requirements and take the opportunity to deploy notification, alert and control platforms that are integrated into their channels of customer engagement, such as mobile banking or payment apps. Advanced solutions in this space offer a range of alert delivery options, as well as ability for consumers to control their cards (e.g. turn off their use for certain transactions, such as e-commerce) and deliver other types of notifications, such as various offers.

Issuers must decide how they will be delivering the service. They can develop it in-house, deploy a third party solution or rely on their processors to offer the service on their behalf. The networks also offer their own solutions. In fact, in order to pursue any of the above options, the issuers had to notify Visa by April 29 this year that they wish to opt out of Visa-branded alerts service.

Visa itself offers a few alternatives and has just announced this week a "Visa Digital Commerce App, an issuer-branded mobile commerce solution that enables financial institutions to offer their own mobile app to customers with valuable card management services." In addition to the card management features, including the alerts, the issuers can also build HCE-based contactless payments into their apps. While a number of large US issuers (e.g. Capital One, Wells Fargo) have either launched or announced their HCE-based wallets, Visa's offering should help increase adoption of cloud-based payments and issuer-branded apps with contactless payment functionality.

Of course, there are a number of other vendors offering card control platforms or tokenised cloud payments, as well as processors with their capabilities. As an issuer, you have to make sure your choice fits your broader payments strategy. Whatever the decision, you have to make sure you can offer your cardholders the option to receive alerts by October.

First-time success rate of my Apple Pay transactions today: 0%

Yes, you did read this right – today I could not complete a single Apple Pay transaction successfully first time. This was my experience today:
  • I tried using Apple Pay five times – four times to get in and out of the London transport network and once at a coffee shop to buy an espresso.
  • Not once did I manage to complete the transaction right away.
  • Only once I could complete the transaction via the fingerprint. And before you accuse me of sweaty fingers, on all occasions I made extra efforts to wipe clean my phone’s TouchID reader and my fingers before approaching the terminal. And while I did have some issues with TouchID in the past, now the fingerprint unlocks the phone just fine most of the time.
  • Three other times, I had to type in my password, which then completed the transaction.
  • I could not get my coffee on Apple Pay at all – no matter what I did, the transaction would not go through. My default card is Amex, so I asked the merchant if they accepted Amex cards in the first place (I couldn’t see any obvious signs that they did). He confirmed that they accepted Amex, but not if the card was contactless! Which I guess explains my lack of success in that instance, but there was no way of me knowing it in advance – the shop clearly had contactless terminals, so I assumed my Amex inside Apple Pay would work just fine. In the end, I embarrassingly put my phone away and paid cash.
OK, I admit, the sample size is not big – only five transactions and I haven’t tried a diverse POS environment (TfL and a coffee shop), so maybe I’ve just been unlucky. But it’s not the first time this is happening to me. I already highlighted my trepidation of going up with Apple Pay to the tube gates in an earlier blog. And I had other bad experiences: after trying to pay with Apple Pay and failing at a local Co-op shop, I was told that I couldn’t just use a plastic contactless card or pay by cash – I had to insert my actual Amex card into the reader and type in the PIN code to complete the transaction. Really?? Looks like I am not alone struggling with Apple Pay in the UK, as this Twitter conversation demonstrates: I also have a Visa debit card registered with Apple Pay, so I will try it out as well, but based on Richard’s comment, it doesn’t look like it’s a card type-specific issue at the moment… I love the idea of Apple Pay and easy payments by mobile phone. And I know that people like Jeremy and Richard are just as passionate about payments as I am, so we will continue to persevere and keep trying. But what will a “normal” consumer do if they have a bad experience? Will they be excited enough to come back and try again or will they just give up on mobile payments before they had a chance to succeed? I hope they don’t, but these early Apple Pay glitches clearly show how difficult it is to create a truly great customer experience in payments, especially at the POS.

Why I won’t be using Apple Pay during rush hour on London transport

I am finally a proud user of Apple Pay! It came to the UK on July 14th while I was away on holiday, but I managed to set up my first card even while I was abroad. And I was very proud and pleased when I got back and completed my first Apple Pay transaction. My experience has been more or less as expected. I got an email from American Express announcing that Apple Pay is available and suggesting that I should add my card to it. I have been using my Amex for iTunes, so adding it to Apple Pay was relatively straightforward. Somewhat unexpectedly, I now also get notifications on the phone for all transactions, including those made with a card – I would have thought Passbook would only have my Apple Pay transactions, but I guess it does make more sense to see all transactions on the card in the same place. I also added a debit card issued by my bank. The bank also promoted Apple Pay to me, and when I logged into my mobile banking app, Apple Pay was featured prominently at the top of the “home screen.” Clicking on the banner took me to the screen within the bank app which explained about Apple Pay and had an “Add Card” button. Given that I was already inside the bank’s app having authenticated myself via TouchID, I was expecting that this button would give me a list of the bank issued cards I have and I could add any of them to Apple Pay by just clicking on it. Somewhat disappointingly, I was taken out of the bank’s environment into the regular Apple Pay “add card” process and had to scan my card, wait for the text message with a security code to arrive, and set it up just like I would have done with any other card. I can imagine that what I wanted is perhaps challenging technically, but it still seemed like an opportunity missed to “surprise and delight” me as a customer. When everything works as expected, the transaction experience is brilliant. However, I already expressed my concerns about the reliability of TouchID on these pages before, and they proved to be true – TouchID does not always work for me when trying to use Apple Pay. While this is not much of an issue in a retail setting, it is not something you want when fighting the crowds to get on a tube or train platform during rush hour in London. As Transport for London confirmed in response to a number of complaints about over-charging, you have to touch in and out with the same device throughout the day to ensure the correct fare is charged; touching in with Apple Pay and out with a card or Apple Watch might result in being charged twice, even though all payments might eventually come out from the same card. The other thing is that Apple Pay quickly conditions you to getting transactions confirmed on the phone. Because TfL has daily and weekly caps, it cannot confirm each transaction instantly. Instead, I was charged 10p when I touched in with Apple Pay, with the balance for the day’s travel being charged to my card much later. While this is understandable and a minor gripe, it still contrasts with the experience of other transactions. None of this is TfL’s fault, which deserves plaudits for continuing to improve and give options to how we pay for travel. However, while I will definitely continue to use Apple Pay at the retailers, I am going to stick with a tried and tested Oyster card or a bank contactless card when travelling in London. It is simply not worth fretting every time I approach the gates whether the technology will work at the speed needed to keep the crowds flowing.

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.  

Apple’s earnings call: an encouraging story about Apple Pay

Yesterday Apple announced its results for Q1 2015: revenue of $74.6 billion, profit of $18 billion over the three months, apparently the largest quarterly corporate earnings of all time. While these numbers are hugely impressive, of course, the payments industry was looking for any hints of Apple Pay performance. This is what we learned:
    • On enabling consumers:
      • Apple sold over 74 million units of phones, mostly iPhone 6/ 6+, which is ~9 million more than expected by the investment analysts. This matters to Apple Pay, as the new phone is a prerequisite to be able to use Apple Pay. This is a global figure, but it still means that there are millions, if not tens of millions of new phones in the US where Apple Pay has been first launched.
      • 750 banks and credit unions have signed up with Apple Pay. Of course, as we discussed in our earlier blog, the number of FIs actually already supporting Apple Pay is much smaller – 54, but the momentum is clearly there. Furthermore, the participating institutions represent over 90% of credit card transaction volumes.
    • On enabling merchants:
      • Tim Cook, Apple CEO admitted he was “positively shocked” at how many merchants were already supporting Apple Pay and revealed that POS suppliers were reporting “unprecedented demand” from merchants. Undoubtedly, the ongoing EMV migration is helping stimulate that demand for new terminals.
      • USA Technologies announced a nationwide rollout of new acceptance points for Apple Pay. This will add about 200,000 acceptance points, “bringing the advanced mobile payments service to owners and operators of coffee brewers, vending machines, kiosks, laundry equipment, parking pay stations and other self-serve appliances.”
    • On actual usage:
      • Apparently, Apple Pay is responsible for $2 out of $3 spent on Visa, MasterCard and American Express contactless transactions. While the specific statistics were not revealed, and two thirds of not much is still very little, Apple certainly demonstrated ability to acquire market share in a short period time from competitors such as Google Wallet and Softcard.
      • Apple Pay represents nearly 80% of mobile payment transactions at Panera Bread, while Whole Foods Market had seen an increase in mobile payments by more than 400% since the launch of Apple Pay.
    • On evolution and future plans:
      • Tim Cook acknowledged the opportunities around both in store and in app use cases of Apple Pay and that market specifics will determine which will be more important in any given geography.
      • As expected, Apple Pay will be expanding internationally. The management acknowledged that each market is different and will require “heavy lifting to scale,” but confirmed they were ready to tackle the challenge.
Tim Cook concluded that 2015 will be the year of Apple Pay. This might be debatable, but Apple Pay certainly had a very encouraging start. This also further validates Celent’s perspective we articulated in the latest edition of our Top Trends in Retail Payments report, which was published yesterday and is available to our clients.

The Resurgence of NFC

This is the time of the year when we begin to cast our eye back to 2014 as well as forward to 2015, and reflect on the top trends we are seeing in the market. One of the constants over the last few years in our annual Top Trends in Retail Payments report (coming up again in January 2015) has been our commentary on the ups and (mostly) downs of NFC and contactless payments. Yet, for the first time in years, it genuinely feels that NFC has finally taken a large step towards establishing itself as a major technology standard in mobile payments. Without a doubt, the biggest event in payments in 2014 was the launch of Apple Pay. Having resisted NFC for so long, Apple has finally added NFC capability to its latest devices, such as iPhone 6, thus opening up NFC to iOS. And, in a typical Apple fashion, it didn’t just add a bit of hardware, it created a fully-fledged solution with unparalleled user experience. However, the first few weeks after launch seem to have confirmed our concerns that Apple Pay was not going to be an overnight success. While the early news was encouraging with more than 1 million credit cards activated in the 72 hours following the launch, so far too few consumers are actually using Apple Pay. According to the InfoScout blog, 90.9% of iPhone 6/ 6+ users have never tried Apple Pay, and only 4.6% of those who could use Apple Pay during Black Friday, actually did. This has prompted some commentators to announce the death of Apple Pay and argue that its fate will be the same as that of many other attempts to revive NFC. The future of the payments industry remains hard to predict and the NFC “nay-sayers” may yet prove to be correct. However, we see a number of signs to be optimistic, both about Apple Pay and NFC adoption overall. The ongoing US migration to EMV and growing consumer awareness and adoption of new devices over time will help boost Apple Pay usage. More importantly, globally, as Apple Pay launches internationally and more banks become aware of Host Card Emulation (HCE) technologies, the issuers will have genuine options to deploy NFC solutions. Of course, contactless and NFC payments, even when they do gain mass adoption, are not going to be the only mobile payments option in the market. However, if for so many years it felt that the NFC land has been gripped by a long and harsh winter, we expect that it will feel a lot more like spring in 2015.

The Networks’ Support for HCE Breathes Life Into NFC Payments

In my report on Top Trends in Retail Payments published a few weeks ago, I wrote the following paragraph: “Of course, doubts remain over HCE. For example, the payment schemes are yet to clarify on whether they will deem the security and performance of the technology acceptable. However, we view it as a positive development. Inexplicably, HCE was being described by some as the “NFC killer.” Yes, if successful, it might indeed kill the SIM-based business model (and have a negative impact on Trusted Service Managers), but it might actually breathe life into NFC and contactless payments.” The developments this week removed some of those doubts. Both Visa and MasterCard announced their support for Host Card Emulation (HCE) technology, paving the way for banks to offer NFC-based secure payments without relying on the secure element inside the phone. HCE reduces the need for banks and telcos to cooperate, thus helping overcome the business model challenge. However, approval and recognition from the networks was a critical pre-requisite to the technology’s success. Networks executives stressed that it is not an “either/ or” situation and they will continue to support the “traditional” SIM-based secure element solutions. As such, it doesn’t immediately change any of the established ventures, such as Isis, but it certainly makes it easier for others to take an alternative path. I would expect HCE to be important in Europe, which already is further ahead than the US in terms of deploying contactless terminals. European banks have been issuing contactless cards, and HCE will make it easier for them to make use of that infrastructure for mobile payments as well. Having said that, HCE technology is only available on Android, so iOS devices continue to be excluded from these developments at least for now. It will be interesting to see what Apple does in payments. I plan to publish a short report soon speculating on how Apple might enter payments more aggressively – keep an eye on it!

Weve and MasterCard Collaborate on UK Mobile Payments

I’ve been following today various news reports about the announcement that Weve and MasterCard have partnered to drive forward contactless mobile payments in the UK. I am still hoping to speak to my contacts at the companies involved, but wanted to share some of my early thoughts. It is not surprising to see Weve, the JV between three leading UK mobile network operators (MNOs), pushing into payments. After getting approvals from the European authorities, Weve started with building out a “single point of contact” infrastructure for retailers and other parties to deliver marketing messages to consumers. However, it always had the ambition in payments, and after hiring David Sears, a seasoned payments executive, as a CEO, it was always only a matter of time before we would hear more about it. This seems like a significant win for MasterCard, although the devil will be in the details. All the indications are that this will be a “traditional” SIM-based NFC payments solution, but the announcements so far have been a little vague about the set-up and the role of various partners. The Financial Times and other sources reported that “under the terms of their agreement, MasterCard will provide technology and integration services to banks and financial institutions that use Weve’s payments platform.” What kind of “technology and integration services” will MasterCard be providing to banks? Who are the other parties involved, e.g. TSM services? Another question crucial to the success of any NFC initiative is how the business model issues will be solved, i.e. the commercial terms between banks and Weve acting on behalf of MNOs. Mobile Marketing reported Weve CEO saying that they now have a “‘commercial agreement’ with banks, via the MasterCard partnership. Banks will be able to plug in their existing payments infrastructure and pay for the service on a general usage rather than a percentage of transaction model.” This could potentially represent a breakthrough and fresh thinking in how banks and MNOs can work together. Weve is reportedly in discussions with many banks, although at this stage, no bank has yet announced its support or participation. Finally, most of the UK’s card spending is on debit rather than credit cards. Debit card spending is also growing at nearly twice the rate of spending on credit cards. According to the UK Cards Association, spending on debit cards in 2013 was £31.8bn which grew by 7.2% since 2012 compared to £13.7bn and 3.7% respectively for credit cards. MasterCard’s strength in the UK is in credit cards, whereas Visa leads in debit. To succeed, Weve needs to ensure all major networks, including Visa and American Express, are eventually part of its ecosystem. At this stage, there are still perhaps more questions than answers to the outsiders, but it is certainly a welcome development in the UK mobile payments market.

NFC Payments: Still for Patient Payments Geeks Only

Recent launch of the iPhone 5 made me decide that it was time to upgrade my old iPhone 3GS. I knew I was going to stay with my current telco provider (Orange, or as they are now known, EE), so I just went into an Orange shop to discuss my options. To cut a long story short, instead of buying a new iPhone 5, I ended up getting Samsung Galaxy S3. Among the reasons for getting an S3 was the fact that it was one of a small but growing number of NFC handsets in the UK market and I knew that Barclaycard and Orange have just made their Quick Tap wallet available on the S3 and I was keen to try it. Here are some observations based on my first-hand experience: 1. Telcos could and should do a much better job at marketing the new services, such as NFC, and need to ensure that their front-line staff are properly trained. An example of my conversation with an Orange salesman: – Me: “This (S3) does have NFC, doesn’t it?” – Salesman: “NFC?? Oh, I am not too sure, let me check.” … – Me: “And how do I sign up to the Quick Tap wallet?” (followed by me explaining to him what a Quick Tap wallet is) – Salesman: “Oh, I think you probably have to call Barclaycard to get it set-up, I don’t really know.” As it happens, both Orange and Barclaycard websites had a description of the wallet, but I didn’t see any links or suggestions how to obtain it. Finally, I downloaded the app from Google’s PlayStore and followed the relatively straightforward steps in the app to register and link a card. Only when I got home I realised that my phone packaging box had a sticker on it saying “Hold your phone here to get started with Quick Tap”, but I didn’t notice it at the time and the salesman didn’t point it to me either. In other words, I knew what I wanted and was able to get it; someone less determined than me may not even realise their phone had these capabilities. 2. The experience of using NFC seemed to get better over time. Armed with my new mobile wallet, I set out to try paying with it (you see, unlike a “normal” customer, I actually think about payment!) I went to my local town (Bromley) and into the Boots store, as I knew it was one of the early adopters of contactless terminals. My suggestion that I was about to pay with my mobile phone was met with visible excitement from the cashier staff – there was no queue, so two of them came over to take a look, saying “How exciting! We’ve seen contactless cards, but not the mobile phone payments yet!” However, the first transaction was actually quite painful – I touched the phone against the terminal and nothing happened; I thought perhaps I needed to log-in to the app (the answer is, I don’t), so I did that, and the result was the same. Finally, after a few times of trying, there was a beep and much to our relief, the transaction went through. However, the second transaction was better (only took a few taps) and the third onwards have been absolutely smooth – literally, “tap and go”. I don’t think I was doing anything different and I even went back to the same merchant, so perhaps the phone needed “to go through the motions” to properly activate the NFC chip? Again, I am a patient geek and I want this to work, so I persevere; the question is, how many “normal” customers would have had the courage to try it again if their first transaction was anything like mine. 3. There are more merchants accepting contactless than we think, but they could do a better job telling us about it. I knew I would be able to pay contactless at Boots, Pret-a-Manger and a few other well publicised merchants. I was positively surprised that I could actually pay in a lot more places than that, including small independent merchants, such as my local independent CD store and my local fishmonger. The “where you can pay” feature inside the Quick Tap wallet showed that even a cafe at my Virgin Active gym was accepting contactless. More visible signs of contactless acceptance at the counters would be helpful though – some terminals are obviously different, but others look just like regular card terminals, so I couldn’t really tell if I could use my phone without asking about it. 4. Merchant cashier staff are crucial to shaping customer opinions and should become “the ambassadors” for new technology to succeed. When buying breakfast and coffee this morning at Pret-a-Manger I again tapped the phone to pay, the cashier’s response stunned me – “Do you realise that if someone gets hold of your phone, all your money is gone?”, he asked me. After I regained my speech, I said, “is this what you tell all your customers?” Unfortunately, the overly emphatic “No!!!” could only mean, “yes, I do”… How does that help the already security-anxious consumer? Overall, I’ve enjoyed tapping my phone over the last few days. Having said that, more often than not I reached for my actual wallet only to remember to take out my phone (old habits die hard!) While the experience now is easy – literally, “tap and go”, it’s not really a step change from paying by card. And there are no additional services for now, other than the summary of transactions I get on the phone. It’s enough to excite my inner payments geek, but my experience seems to suggest that we are still some time off from a mass market adoption of NFC.