With the UK being the third largest ecommerce market in the world, it comes as no surprise that all eyes shift on the machinations of this ecosystem when trying to predict how the future of retail payments might shape up in the next few years. Speculations over the rise of A2A payments as viable mass adopted payments methods in online shopping after the democratisation of Open Banking and Open Finance, along with the recent global boom of Buy Now, Pay Later since 2020 are just some of the payment methods predicted by specialists to overthrow what seemed to be a decades-long governance of card payments in this sector.
This debate has recently become even more intense when Amazon, the largest retailer in the UK (with a market share of around 30%) announced it will stop accepting Visa credit cards issued in the UK, starting with 19 January 2022. This is on top of the retailer’s wider agenda of renouncing Visa as a partner altogether in more markets, such as the US, its main reasoning gravitating around high transaction fees.
Card payments in the UK
The era of Buy Now, Pay Later and A2A Payments - If the doom and gloom voices are right regarding the downfall of credit card payments in general, what are the best alternatives for shoppers?
Card payments dominance in the UK
“The cost of accepting card payments continues to be an obstacle for businesses striving to provide the best prices for customers. These costs should be going down over time with technological advancements, but instead they continue to stay high or even rise. As a result of Visa’s continued high cost of payments, we regret that Amazon.co.uk will no longer accept UK-issued Visa credit cards as of 19 January, 2022’, an Amazon spokesperson declared for The Paypers.
The EU did introduce a cap on such fees in 2015 under the Interchange Fees Regulation (IFR). However, in fairness, in the context of IFR covering the grounds of the EU and with Brexit in full effect, transactions involving a UK card used to shop at an EU merchant fall outside the scope of this regulation. Even though the biggest card issuers in Europe apply the IFR on a voluntary basis, both Visa and Mastercard pushed transaction fees up significantly over the course of 2021.
These pushes from credit card issuers come in a context where card payments are the payment method with the largest level of adoption in the UK. A recent report by UK Finance attests there were 1.6 billion debit and credit card transactions in the UK in April, a whopping 76.4% more than in April 2020 and 2.7% more than April 2019. The total spend of GBP 65.6 billion was 53.4% higher than April 2020 and 11.2% higher than April 2019.
It is no wonder that big retailers are trying to find alternatives that safeguard loyalty through keeping prices lower, but also manage to keep extra costs at bay. Amazon recently announced a collaboration with Venmo and Affirm in the US. Earlier in 2021 in Poland, the retailer launched a new store with P24 and BLIK (both bank transfer-based payment methods). They are active endorsers of iDEAL in The Netherlands and leverage cash-based payments with Paycode in Italy and Boleto in Brazil.
It is also worth mentioning that the same Amazon is currently making a push for its own credit card issued by Visa’s main competitor, Mastercard, which holds a larger share of the UK’s credit card spending – a move that may usher in a mere switch in governance, but not necessarily an immediate looser grip of credit cards as a preferred payment method for shoppers.
Interchange fees and card payment dominance. An urgent plea for stricter regulation
The question remains as to what can be done about high transaction fees governing the decision-making process of big (and small!) retailers in the UK and beyond. As Andrew Cregan, Payments Policy Adviser at the British Retail Consortium, commented for The Paypers:
‘Card payments accounted for over four-fifths of UK retail spending in 2020, with just two firms facilitating 98% of these payments. With retailers now spending over GBP 1 billion to accept card payments, it is no surprise many retailers are frustrated by these surging fees. The Payment System Regulator must urgently intervene to tackle these anti-competitive card charges, and both the Government and Parliament should ensure that they do. Ultimately, it will consumers who suffer higher prices unless these spiralling costs can be brought to heel.’
More and more voices in the industry (including Open Banking payments facilitators) concur on the theme of stricter regulation. With the IFR covering little ground both for UK merchants and for the European ones activating in the British market, it seems there is a legislation vacuum that allows credit card issuers to strike up deals and ultimately push merchants to integrate higher fees into the retail price.
Payment Systems Regulator officials have clarified that ‘from a regulatory perspective, there are real questions about how well the cards market is working. We've highlighted our concerns around scheme fees before, and recently published analysis that shows how they have risen (Card Acquiring Market Review Final Report – see chapter 5). We note the action Amazon is taking and are engaging with all relevant parties to understand the impact on people and businesses.
Our existing work on interbank payments (sometimes called ‘bank to bank’ payments) is an important way to provide alternative payments in the future. However, as part of our ongoing work in this area, we have been considering our next steps. Following our recently published market review into card acquiring, we approved an additional phase that will look into how well this market is working, including the issue of increasing card fees. If necessary, we will intervene to address any issues we identify. We will provide more information with our final Strategy, which will be published in the new year.’
Specificities on what shape will tie a stronger regulatory noose around credit card issuers in ecommerce transactions on British soil are yet to be determined, but what we are sure of is that this last move on Amazon’s side has sparked more apparent need than ever for a concrete set of measures.
Open Banking and A2A Payments. Is it time?
Alexander Ellwood, Senior Vice President, Insights & Advocacy for CMSPI paints a holistic picture of the current situation:
‘The payments ecosystem is diversifying with customer demand for more payment types, with things like open banking, direct payments, BNPL etc, and the difference between this time and previous fights like this is merchants do have some alternatives. That said, there are high-barriers for these alternatives to take over cards - which are still the most prominent form of payment.
There’s a lack of competition in the card payments space specifically - which has led to a scarcity of useful innovation or pressure to tackle some of the fundamental issues. For example; we have seen billions of Euros in new card fees come into place since Interchange Fee Regulation in 2015, in addition to the latest set of Brexit related cross-border transactions. Merchants need more protection from regulators. Merchant payments is now more challenging than it has ever been, with the proliferation of payment types, rising fraud, evolving check-out journeys, issues with transaction success, and costs ever-increasing.’
Neither Visa, nor Mastercard are oblivious to the animosities caused by the measures they’ve taken over the course of 2021. One direction both card schemes seem to be headed in is a strategic dive into Open Banking. Visa just made a relevant investment in Australia-based startup Basiq, after acquiring Tink in June, and Mastercard entered an agreement to acquire Open Banking technology provider Aiia.
As David Parker, CEO of Polymath Consulting, puts it, ‘if cards were that important going forward, they would not be spending all this money. Cards are convenient today, but will they be the main payment channel of the future? Not sure. Already in many markets they are not. Account-to-account payments, for example, operate on new payment rails — as opposed to the traditional card systems of Visa and Mastercard. They are growing in popularity — accounting for 13% of checkouts in Europe, according to a new Accenture report
They are growing hugely every month, iDEAL in Netherlands covers 75% on all online transactions – a type of A2A payment. Open Banking PISP payments will revolutionise and disenfranchise the card schemes as will A2A payments.'
Parker concludes that the story revolving Amazon dropping Visa for card payments in the UK is the centre of discussion right now, ‘but in 3 years Amazon will be griping at how much banks charge them to accept PISP payments in as this will be their biggest cost.’
To this effect, there seems to be a consensus about the growing popularity of A2A payments. Data provided by openbanking.org.uk cited by Token shows that 4 million British consumers and businesses use Open Banking-enabled products. The most recent study on the matter from Juniper Research shows that the value of global payment transactions facilitated by Open Banking will exceed USD 116 billion in 2026, from just under USD 4 billion in 2021
The information seems to be concurring with the feedback offered for The Paypers from independent Chair, Adviser, and Speaker, Dr Louise Beaumont:
’Amazon's dominance and the existence of alternative payment options gives them the power to ban Visa credit cards without risking material loss of custom. Aside from trying to force Visa to lower their prices, the real motivation may lie in another development; Pay By Bank - which uses Open Banking to transfer money directly to a merchant from the customer's bank account, thus cutting out the need for cards entirely. Merchants adopting Pay By Bank remove not just the need for cards, but the costs as well.’
Buy Now, Pay Later. Can it be a contender?
Buy Now, Pay Later (BNPL) operators such as Clearpay, Laybuy, and Klarna have seen a soaring rise in popularity in the UK since the beginning of the pandemic in the UK (with Klarna becoming a full-fledged payment method covering any and all types of payments as of recently, starting with the US). However, an estimated 7.7 million Britons have accumulated outstanding balances with BNPL companies averaging GBP 538 for each user, according to a Credit Karma survey cited by The Guardian.
This has led to another conversation about regulation in this system, with MPs and financial consultants pushing for clearer regulation related to debt increase caused by this payment method. The irony of it is that it has been proven that the costs associated with BNPL are higher than the ones exhibited by credit card issuers. However, BNPL providers sell some benefits that Visa or Mastercard find it hard to compete with, such as larger purchases, higher conversions, reduced cart abandonment, and low cost of customer acquisition, not to mention a studied tendency from Gen Z and Millennials to steer away from credit cards.
Conclusions
In all the ruckus that Amazon sparked in the ecommerce payments industry, from alternative payments providers to merchants, and financial consultancies, to the regulators themselves, it’s clear that there is strong animosity on all sides directed towards charges practiced by credit cards on merchants. Moreover, if there are a couple of strong contenders to fill in a possible gap left behind by credit cards, they come with their own shortcomings – either lack of mass adoption or lack of proper regulation.
We need to pay close attention to the market and see if Amazon’s move will be followed suit by other relevant merchants from the UK and beyond, in order to draw infallible conclusions as to a real shrinking of credit card popularity in the very near future. So far, it’s a glimpse into a possible outcome.
About Alexandra Constantinovici
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