Voice of the Industry

(Alternative) payment methods in focus – trends and developments – Part 1

Monday 24 September 2018 09:24 CET | Voice of the industry

As the payment methods used for purchases change yearly, tracking down the factors that determine their growth is key for understanding the payments landscape

Credit and debit cards

Cards remain the most popular non-cash-based payments in the world and their usage is growing. In emerging countries, cards have found a good ally in mobile payments. As payments interfaces like UPI in India make it easier for consumers to link their cards with their e-wallets account, card transactions are booming, especially in developing markets.

Card schemes have put a lot of effort towards forging important partnerships with fintechs and innovation. Visa has launched the pilot of a new dual-interface (chip- and contactless-enabled) biometric payment card with Mountain America Credit Union and Bank of Cyprus. This will be the first pilot in the US to test an on-card biometric sensor for contactless payments. Cards with embedded biometric authentication will make it easier for consumers to pay in-stores and online. According to Visa’s own research, shoppers will also prefer fingerprint authentication to chip and PIN.

Visa and Mastercard are also working on tokenization, which will offer cards enhanced security. The idea is to hide all card details, when making a payment, behind a token (a series of numbers that encrypt the card information). In this way, card details will not be revealed during a transaction. The measure aims to make cards more secure for online shopping, a channel in which consumers are more reluctant to share their card information. Furthermore, tokenization will also solve the problem of recurring payments with card on file who cannot be processed because the card has expired and the consumer did not update the details.

Finally, by providing a more secure way of communicating card and payment details, tokenization can have a big impact on the way different devices can be connected and used to make payments. The Internet of Things could be the next big thing in payments and security technologies such as these could solve urgent security issues and allow users to make payments via connected devices.

Speaking of ecommerce, both Mastercard and Visa are thinking of implementing a one-payment button. This would allow online users to shop in a simple and seamless way, similarly to how they would make a PayPal payment. The project is still in early stages, but it is based on the two companies’ tokenisation technologies.

In the US, the credit card market shows significant innovation. Rewards programmes of all kinds proliferate, and many credit cards have digital portals to help consumers manage purchases, debt, and account security. It also seems that physical cards are becoming less and less important as most consumers engage with financial products on their computers and mobile devices.

Prepaid cards

Prepaid cards have always been a preferred payment method of (underbanked) unbanked consumers. The cards allow consumers to engage with online merchants without requiring a bank account. High fees counterbalance the convenience these cards offer. Consumers have to pay the issuing fee and may have to pay a fee when they charge money to their prepaid card.

The prepaid card sector continues to grow by capitalising on the needs of the unbanked, a category usually associated with low-income consumers but, according to a study by KPMG, a large portion of those unbanked or underbanked are young adults.

Prepaid cards can appeal to a younger audience thanks to their usability and low-entry barriers. The gaming industry has quickly capitalised on prepaid cards, offering younger consumers the option to purchase games online and make in-game purchases. Prepaid cards can also feature rewards programmes, which encourage usability and customer retention.

Prepaid cards can be found within a card scheme offering such as Mastercard or Visa, but some, like paysafecard, work outside traditional credit card schemes. Consumers can purchase a paysafecard at an outlet and then use the voucher code to make purchases online. The company also offers a virtual wallet, ‘mypaysafecard’, which allows consumers to pay on ecommerce websites by entering their username and password.

E-wallets/Mobile Payments

The new possibilities that e-wallets bring are appealing for several reasons: they are easy to integrate on multiple devices, they are relatively easy to start using for customers, most of them can be used across channels, and they open the door for extensive loyalty and marketing programs.

In Europe, the most popular e-wallet has been PayPal for years, but there is increased competition from both local initiatives at a national level, such as Yoyo Wallet (UK), Lydia and Lyf pay (France), or Moneta (Poland). Furthermore, the Big Tech wallets - Apple pay, Samsung pay, and the recently relaunched Google Pay (which merged Android Pay and Google Wallet) - are making strides towards wider acceptance by merchants, integrating their services with several POS terminals. There is an abundance of choice for the European consumer, supported by banks, fintech, Big Tech, and merchants. However, none of these e-wallets succeed in providing the consumer with a superior, all-encompassing solution, so the e-wallet landscape in Europe remains fragmented. Consequently, we see e-wallets offering extra value to consumers, which they provide by forging partnerships with large retail chains, like OK with Dutch retailers or Lyf Pay with retail giant Carrefour, or with other e-wallets and fintechs, like Google Pay and Boon.

Especially in Asia we see the promise of e-wallets be fulfilled: WeChat Pay, supported by TenCent, and Alipay, supported by Ant Financial and Alibaba, have become increasingly present and encompassing in consumer’s financial lives due to the connections to services outside of P2P or C2B payments, causing mobile payments in china to surge to CNY81 trillion (USD 16.7 trillion). Besides offering almost complete coverage of online and offline shops in China, Alipay also offers a wide range of other financial services, such as travel booking, money market investments, insurance, and even loans, whereas WeChat pay is widely integrated in social media hosted by WeChat, and can offer merchants very targeted marketing options. Furthermore, both services offer food delivery options, tax services, bill payments, and many other services through integrated partners. This approach to e-wallets, i.e. offering an abundance of other services, has caused e-wallets to be the most popular online payment method in China.

In India, the two largest e-wallets, Paytm and Mobikwik, are also widely used, but they are far less integrated into other verticals. In the last few years, the Indian government has pushed for an increasingly cashless society, and e-wallets have profited from this trend, offering a more convenient payment option than most banks. However, e-wallets face a new competitor: Unified Payment Interfaces (UPIs). UPIs are increasingly adopted by consumers and merchants, as it is backed by the banks, allowing for direct transactions from one bank account to another. Furthermore, India is about to impose increased KYC regulations that threaten the existing non-bank e-wallets which could heavily impact the use of e-wallets, but UPIs are exempt from these regulations. November 2017 marked the first month that UPIs had a higher transaction volume than e-wallets.

This editorial was first published in our Payment Methods Report 2018 – Innovations in the Way We Pay. The Payment Methods Report 2018 presents the key trends and developments in global and regional payment methods by highlighting the innovation, challenges, and developments in the use of the most important payment methods across geographies and verticals.

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Keywords: payment methods, cards, mobile payments, fintech, ecommerce, internet of things, UPI, e-wallet, contactless payments, biometric authentication, tokenization, payments
Countries: World