(Alternative) payment methods in focus – trends and developments – Part 3

Cash

With the emergence of new technologies, the use of cash is considerably impacted, as more and more payment methods lead to the displacement of coins and notes across the globe. According to Euromonitor International, 2016 was the first year in which we witnessed cash being dethroned, as the amount of money spent with cards was for the first time higher than the amount spent with cash. The payment world is digitising, and banks are closing branches at the fastest pace in decades; 1700 banks branches were closed in only one year in the US.

Despite the enthusiastic uptake of electronic payments, 1.7 billion adults are still operating outside the traditional banking system, close to 40 million in the EU alone, being either unbanked or underbanked. There are people that have basic accounts (checking or savings), but they rely on alternative financial services providers to handle their day-to-day transactions. Some have all of the standard financial services products, but they prefer to pay with cash for various reasons. According to a report by the European Central Bank (ECB), cash is still used in 79% of all transactions, amounting to 54% of the total value of all payments. The demand for cash is also growing – the value of euro banknotes in circulation has increased by 4.9% over the last five years, according to the European Central Bank. Even though there are many endeavours towards a cashless society, we are starting to witness the emergence of online cash payment options (Paysafe with Paysafecash, YesByCash, BSPayone – Barzahlen.de, Cashly, and more). Given the low operational costs of kiosks, companies are increasingly looking to implement them to their businesses. Cash payments are also popular for gaming (PayNearMe), offering an affordable and convenient way for players to fund their online gaming accounts with cash. The ability to load accounts with cash at a retail store seems a major draw not just for customers without access to credit cards or a checking account, but also for customers who simply prefer to fund their accounts with cash.

Some markets are already much closer to going cashless. In Sweden, consumers already pay for 80% of transactions using something other than cash, in the Netherlands 55%, in Finland 46%, and in Belgium 37%. Britons use digital payments in 60% of all transactions, 33% of them stating they rarely use cash. In Sweden, Riksbank predicts that cash transactions will make up less than 0.5% of the value of all payments made in the country in 2020. Even more than that, 900 of 1,600 Swedish bank branches do not store any cash, and some of them do not even have an ATM. South Korea is targeting to go coinless in 2020.

The cashless trend is not following the same route in other technologically and economically powerful countries, such as Germany. 53% of German transactions as of 2017 were still made with cash. One possible explanation for the reason why Germans still prefer cash to other payment methods is related to the socio-demographic situation. The number of older people prevails in Germany, and older people are sticking to their old payment habits. The explanation stems for the country’s traumatic past, the collapses of its currency in the past, and a general pessimism about the future.

Despite local preferences for cash and the use of cash-based payments in certain cases, there are some clear signals that we are heading towards a future with less cash, instant payments are on the rise (since November 2017, when the European Instant Payments initiative went live, it has become possible to transfer euro amounts in less than ten seconds), cards will lose market share in the coming years, voicebots are opening up new ways for merchants to connect with customers, and cash is expensive (according to Mastercard, printing and distributing cash can imply high costs for national economies, of up to 1.5% of GDP).

Direct carrier billing

In 2018, the number of mobile phone users is expected to reach almost 5 billion. With more mobile phones than credit cards worldwide, a simple checkout flow, and a bigger payments coverage, direct carrier billing (DCB) is a payment method that in emerging markets is almost all the time the only way one can purchase online. Emerging markets represent over 40% of the global DCB, generating app-store conversion rates about five times higher than credit cards. Ovum, in “Carrier Billing Global Market Trends and Forecasts”, 2015, forecasts that DCB revenues will increase to USD 24.7 billion in 2019, from USD 14.5 in 2014.

In emerging markets, but also in some economically powerful countries like South Korea, a variety of purchases can be billed on a mobile phone. In Norway, DCB is the second most popular payment method for digital gaming, while in the other Nordic countries carrier billing has a 10-21% market share from digital content payments. The popularity of carrier billing is attributed to its more user-friendly payment experience: consumers do not need to sign in or create additional accounts to make payments, nor do they need to share their personal data online.

However, even with the advantage of a one-click payment flow for the user and a wide coverage, there are a few obstacles when considering implementing this method: large transactional fees that are charged to the merchant whenever a customer uses DCB, Mobile Network operators (MNO) that charge app retailers, the average price of just-in-time purchase of minutes, regulatory constraints, the complex DCB ecosystem in emerging economies. PSD2 is seeing single DCB transactions being capped to a maximum of EUR 50 per transaction, with a maximum monthly limit of EUR 300, and will continue to allow electronic money institutions to extend the scope of DCB from digital content to the purchase of physical goods.

Nevertheless, we continue to witness a growth of DCB in premium rated services: subscription-based content models, charity donations, TV voting, and competitions. For the subscription-based model, DCB as a payment method registers an increase: according to Juniper Research, the value of digital content transactions paid for by carrier billing is expected to reach USD 47 billion by 2020, more than 4 times 2015’s figure of just under USD 11.3 billion.

Despite its wide adoption, this payment method has yet to realise its full potential. In Europe, its growth was constrained by a regulatory structure that was originally conceived with a limited vision of the utility of DCB. The new e-Money based version of DCB (eDCB) removes these regulatory constraints and paves the way for the accelerated growth of this form of payment.

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.