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GUEST COMMENT: Is the dust settling? Or is the payments industry just getting revved up for 2021?

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It has been a year of momentous change for the payments industry. Previously emerging trends have seen a massive acceleration as a result of the pandemic. Cash, for instance, waned even further this year amidst rumours that handling cash could spread infection. In March, ATM withdrawals in the UK plummeted by 60%, leading to predictions that cash payments will fall to just 9% of all transactions by 2028. According to McKinsey’s 2020 Global Payments Report, by the end of 2020, we can expect a drop of four to five percentage points in the share of global transactions made with cash.

The pandemic – while undoubtedly awful – has been rocket fuel for digital transformation, providing an opportunity for the payments industry to innovate. This year, for example, online payments via bank transfer have continued to proliferate, whilst ‘buy now pay later’ (BNPL) schemes have been named as the fastest growing online payment method for the UK and worldwide.

So, after a year of such rapid transformation, what can we expect to see in 2021? And how will permanently altered consumer behaviours shape online payment preferences?

Buy now pay later (BNPL) will be the new payment method of choice

It is safe to say local and alternative payment methods – any payment method other than credit or debit cards – have seen huge growth over the last couple of years. These local payment methods (LPMs) continue to play a key role in accelerating cash substitution, particularly in developing countries. In China, for example, LPMs generated $43 billion in revenue in 2019.

In 2020, consumers have been more inclined than ever to try different payment methods such as mobile payments, bank transfers and e-wallets, in a search for greater convenience and heightened security during national lockdowns. According to Paysafe’s LiT research, 56% of global consumers mentioned that they used a new local payment method in the first month of the pandemic.

The payment method that has taken the world by storm is the interest-free ‘buy now pay later’ (BNPL) concept, with payment providers such as Klarna and ClearPay leading the charge. In fact, Klarna reported a 43% jump in the value of transactions in the first nine months of the year.

Research from Kaleido predicts that BNPL value will reach over 12% of total global e-commerce spend on physical goods by 2025. What’s more, Europe will be responsible for $347 billion of e-commerce spend via BNPL mechanisms by 2025, representing 30% of total e-commerce spend in that year.

Ongoing furlough measures and job losses have seen consumers face unprecedented financial strain this year, resulting in a reliance on ‘pay later’ schemes over traditional payment methods. With the economy not expected to recover to pre-COVID-19 levels for some time, this is a trend we see continuing into 2021. As such, this is certainly a payment method online merchants need to offer. Now.

Staying competitive in an increasingly digital age will be harder

It’s no surprise that the figures from 2020 reflect a massive boom for global e-commerce. The ‘quickening’ effect, as coined by McKinsey, describes a 10-year shift in e-commerce experienced in just 90 days. During the month of June 2020, amidst the height of the strictest lockdowns for many countries, e-commerce sales grew 34% year-on-year – the highest growth rate reported since March 2008. And consumers were not turning to their trusted brands during this critical period. Many shoppers branched out to new retailers.

Disruptions in brand loyalty have created a wealth of opportunities for businesses big and small, pushing them to take their operations online and across borders. Facebook even launched its own shopping feature to enable growing businesses to sell to customers.

Across Europe’s three largest markets (France, Germany and the UK), up to 80% of shoppers are now making at least half of their purchases online. What’s more, research from Visa reveals 74% of UK consumers think they will continue to prefer online shopping even after the lockdown restrictions start to lift. In 2021, it won’t be adequate for merchants to only support card transactions online.

According to PPRO’s own research, 44% of UK consumers will abandon their baskets if their payment method is not available at checkout. Recent findings reveal that the global average rate of cart abandonment is as high as 75.6% – causing brands to lose up to $18 million a year in revenue. We expect this demand to continue, putting pressure on retailers to expand current payment offerings.

Seamless payments have to meet stricter security standards

As digital payments head towards a global tipping point, the need for greater regulation and security will only continue to grow. For Europe, the second Payment Service Derivative, also known as PSD2, has been a topic of discussion for some time now. And, despite being delayed for a second time to allow adequate preparation time following COVID, the new September 2021 deadline will come around soon enough.

For countries outside of Europe, two-factor authentication is also growing in popularity. In 2019, Australia released the Card-Not-Present (CNP) Fraud Mitigation Framework, requiring Strong Customer Authentication (SCA) when a merchant’s fraud rate is above the recommended rate for two consecutive quarters. India requires two-factor authentication for all domestic debit and credit card transactions over Rs 2000. 

SCA, which falls under the new PSD2 regulation has been designed to reduce fraud and make online payments more secure. However, this will require retailers to build additional authentication into the checkout page for any transactions over €30.

As we head into 2021, payment providers and merchants must collaborate to ensure they’re prepared to adapt digital shops to these new requirements, whilst also ensuring the payments process is completely seamless for the customer. Whilst the pandemic delayed initial plans for many implementing new PSD2 processes, it also created a greater need and awareness around verifying customers remotely.

2021 will be the year for action – ensuring customers are adequately protected in an increasingly cyber world.

Payments should prepare for hypergrowth

Rather than an evolution, the pandemic has been a revolution. It’s turbocharged digital payments and changed customer expectations and behaviours overnight.

More and more customers are now online, looking for products or services that suit their very specific needs. A shopper might look across borders for what they want: better-quality products, payment methods accepted, stronger brand loyalty, and more. Merchants could reach untapped markets by offering the right mix of goods, user experience (UX), local payment methods and delivery options.

With over 500 significant local payment methods across the globe, each country will have different payment preferences. To be able to scale up and succeed in the new normal, merchants must work with payment service providers to activate as many payment methods as possible at the checkout page.

2020 has seen a huge change in relation to consumer payment preferences, but 2021 will be all about addressing that change and seizing the opportunities that have emerged. Merchants must get ready now, or else, risk losing out to the competition.

While 2021 will certainly be another challenging year for the economy, the future for local payment methods (and savvy retailers who offer them) will certainly be very bright.  


Stefan Merz, chief operating officer at PPRO

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