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How payments changed in UK in 2014 and what's next

We in the United Kingdom already use so little cash that we could easily have gone the way of the Nordics, where consumers have such good payment systems that mobile payments took a back seat. Yet this year the UK pulled ahead in The Digital Money Game. At the player category level too we saw major upsets to the apple-carts of more than one category of providers, and a perfect storm is now in the brewing for others.

While the acceleration happened on several levels, in this blog I focus on how mobile payments took off this year and consumers now enjoy a raft of payment services on the go. It is fortunate that the Payments Council, Vocalink and Zapp had time to get a head start, as the likes of Apple Pay and Alipay prepare to descend on the UK in early 2015.

What do British consumers really need?

In the UK with a population of 64 million, we have over 84 million mobile connections and more than 72% of these are smartphones. An increasing number of ‘phablets’ are rapidly coming into use.  We have 90.5% banked and a high penetration of internet services of over 84%.

We take internet banking for granted, and have enjoyed bank transfers in minutes for years now, thanks to Faster Payments. An estimated 5.7 million mobile banking transactions take place daily in the UK. We expect to pay everywhere with cards, with over 55 million credit cards and 95 million debit cards issued over the last year.

So do we really need mobile payments? We may feel overcharged by our banks, and while we may resent surcharges on card payments at some merchants in general domestically the use of cash is more of a lifestyle choice than a necessity. I can’t recall when I last used a cheque book. Yet survey results this month claim that enthusiasm for mobile payments has skyrocketed over the last 15 months, with 44% of those polled prepared to even switch accounts to access mobile payments.

London transport goes cashless

Absence of a real need may be one reason why the promise of NFC remained unfulfilled since 2005, but neither consumers nor merchants quite invited it in- until recently. I have been closely involved in projects involving mobile payments and NFC since the early days when Transport for London (TfL) was considered to be the major prize that everyone worked hard to win. Yet it took a decade before mobile payment services on the TfL network launched and even today while it is possible to pay using mobile phones, people are just beginning to use their contactless cards. While in theory mobile payments are available on EE and Vodafone, in practice some elements of the consumer experience remain to be ironed out.

Contactless payments – here at last!

It was quite a novelty to see the new Barclaycard contactless payment gloves trialled for Christmas shopping at some stores this season. The Barclaycard gloves have an embedded contactless chip that is linked to a credit or debit card to pay for transactions of up to £20. Contactless payments are also supported by the Barclaycard PayTag on London buses, McDonalds, Pret, Starbucks and many other chain stores.

We’ve had contactless payments infrastructure building up for years now, accelerated by the 2012 Olympics, attracting major investments from Visa Europe and others. Today across the UK, an estimated 300,000 terminals accept contactless cards. There are over 48.3m contactless cards issued, with a quarter of all plastic new cards being contactless-enabled. Over 2014 UK consumers are expected to spend £2 billion through contactless payments,

What does it mean for the consumer in everyday life?

As a British consumer, paying for things has now become easier. Apart from the danger of card clash, for which we have been most soundly educated, we have to be savvy to protect ourselves from a constant stream of marketing offers. From the consumer perspective, the winners are those who use the new features to shop smarter, save money and stick to their budget.

We now need even less cash, and at stores there are many more self-service checkout points that there were in 2012. You won’t have to tote around a load of loyalty cards either – Tesco has already begun to trial their PayQwiq service at 32 stores. Triallists use the online grocery service and add card details for use through the app. In store they buy up to £400 a day, sign into the app with a four-digit PIN and pick the card they want to use. A QR Code appears on their phone which the till scans to take payment and credit them with Clubcard points.

Life has become easier in many ways. Just as you can easily hail a cab and pay for it through the Uber app, something that London black cabs have not been too pleased about, expect more “Uber-like” innovations wherever there are pain points to be found.

New ways to pay: Pingit, Pay-em or Zapp-em?

This April the Payments Council launched an important service called Paym. This allows convenient transfer of money between participating UK bank account holders. Earlier, Barclays supported Pingit, since 2012 as a great new way to send money in minutes using a phone, but Paym is integrated into customers’ existing mobile banking or payment apps as an additional way to pay, making it possible to send and receive payments using just a mobile number.

Customers register their phone number and the account they want payments made into with their bank or building society and people can then pay directly into the account using just a mobile number – no sort codes or account numbers are needed.

How Paym works

To send a payment, you select the mobile number to pay from your list of contacts, along with an amount and a reference. Behind the scenes the sender’s bank accesses the Paym database to confirm that the recipient is registered with the service and to retrieve their bank or building society account details.

The app helps to confirm details and receive immediate confirmation. The real magic behind this is managed by the Faster Payments Service or by the LINK network, whether or not the recipient phone is on or within coverage. In most cases the payment reaches the recipient account almost immediately and they see it in recent transactions on their account.

How Zapp proposes to work

Zapp, announced early in 2014 now claims partnerships with major merchants including Asda, Sainsbury, House of Frasers and more. People will be able to pay for goods and services using Zapp, authorising the transaction from their mobile banking app. The payment will be made directly from their bank account, with the use of tokens to offer better security.

What is most interesting really is the effect this will have in enabling payments to small businesses. Shaving off pennies on each transaction can bring welcome relief to a number of traders and servicemen who can expect to take payments using their mobile phones.

A perfect storm brewing

If you are a provider, this is no time to be complacent. Consumers are set to “select and forget” their means of payment and many will make their choice in 2015. Merchants too are selecting their partners just now.

With Paym, banks continue to compete through P2P services that bear their own brand and can be differentiated in some ways. Zapp, on the cards for (delayed) launch in early 2015 will further put the banks in the driving seat as far as payments go.

Weve, a joint initiative of mobile operators in the UK was to roll out Pouch but has already announced it would close the wallet this year. With the HCE initiative announced by the card schemes in February this year, mobile operators no longer dictate terms with regard to NFC services, and in the UK also have the larger consideration of M&A on their minds, with the proposed acquisition of EE by BT on the cards.

With Apple Pay, already in use in the US and preparing to enter the UK market, I think we may expect a mega-battle on the cards for 2015. Google Wallet, Amazon and others are already highly active in the market.

Besides, we have not even begun to discuss the wider digital money picture. This includes a host of innovation from newly funded players including not just Fintech startups but well-funded Alipay, richer by $25 billion with the largest IPO having come through this year, and WorldRemit and Transferwise, expanding rapidly in remittances.

UK then is the place to watch. Shift Thought continues to do in-depth research on this market. Our detailed interviews with leading UK providers will shortly be published. Do drop me a line at contact@shiftthought.com if you have further questions.

Digital Money in the United Kingdom in 2014 Viewport

Comments: (11)

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 05 January, 2015, 06:321 like 1 like

I remember using contactless cards at a couple of stores - PRET and Krispy Kreme, if I'm not mistaken - in Canary Wharf back in 2007. The CX was great. 8 years later, they still don't seem to have entered the mainstream. When it comes to alternative payments, looks like change doesn't happen even in 10 years, contrary to Bill Gates's famous quote. 

A Finextra member
A Finextra member 05 January, 2015, 07:401 like 1 like

So true Ketharaman! I was recently in India and there too for too many years nothing happened. Yet there was quite a lot of movement in 2014. So many factors must come together for a change to happen.

In the UK parking is a great example when it comes to how we changed habits. I recall when SMS parking first launched, I landed up early morning and and tried to pay by cash and found it was no longer possible - hence signed up for SMS on the spot, no alternative. I was at Asda Walmart a couple of days ago and almost half the checkout aisles had changed to self-service. As it becomes easier to go with the flow rather than against it, people's habits do change.

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 05 January, 2015, 08:59Be the first to give this comment the thumbs up 0 likes

@CharmaineO:

Mass transit, parking - these are examples of near-monopolies that can drive behavior change with little or no risk of losing customers. I don't see too many free-market enterprises having the luxury to dictate the mode of payment of an entire population. Even TfL introduced OysterCard over a decade ago and promoted it with discounted fares for a long time but it’s only recently that it has been able to go totally cashless. If that's the condition with a virtual monopoly, how many private sector companies can survive until so many factors to come together for alternative payments to go mainstream? To paraphrase the famous saying by John Maynard Keynes, the market can be stuck in cash / plastic for longer than alternative payment providers can remain solvent. 

I've seen people paying by cash and plastic at the self-checkout aisles at ASDA / WalMart. Unless ASDA has started declining those modes of payments lately, I'm not sure whether self-checkout can drive greater adoption of alternative payments.

A Finextra member
A Finextra member 05 January, 2015, 09:451 like 1 like

Ultimately it's about making payments easy and "invisible". Retailers have launched a raft of online - offline - connected business models and services over 2014 and together these let them (1) save money with less staff to manage higher volume business (2) make it easy for people to shop with an "Amazon like" experience (details in our report (3) manage loyalty and the end-to-end consumer experience in exciting new ways.

So you are right, consumers may still pay in the same old ways, and it is important this is supported but the new combination services into which payments is blending in unseen, are bringing something extra and the retailers who fail to pick up on this will find it hard to survive.

Stephen Hart
Stephen Hart - Cardswitcher.co.uk - Manchester 07 January, 2015, 13:14Be the first to give this comment the thumbs up 0 likes

Its a pity Zapp/PayM etc won't have chargeback protections for consumers.  Limits their appeal for certain types of purchases.

A Finextra member
A Finextra member 07 January, 2015, 14:58Be the first to give this comment the thumbs up 0 likes

Stephen, that is a great point and one I raised when I was on a panel with a Senior Executive from Zapp in London recently. It would be good to get a response from Zapp and The Payments  Council but in the interim here is my understanding from what was said.

We were assured that Zapp payments would be covered by protections that exist for debit card payments. As you state, this may not go far enough in comparison with credit card payments. Also Zapp is the underlying enabler. I can see that banks offering the services may not deal with it exactly the same way, which could make it hard for the consumer.

So you are right, it is a 2-sided market and so far I see how the merchant will benefit from cheaper acceptance, but it may not be easy to translate this to benefits for the consumer. Consumers get loyalty points and protection from credit card payments, and will expect that plus something overcome inertia.

Having said that, studying payments volumes across Europe and world-wide a huge volume is done today on debit cards. Also, where I pay cash to my gardener or in taxis today, I would expect the experience to be better than cash rather than credit card.

Nick Collin
Nick Collin - Collin Consulting Ltd - London 21 January, 2015, 10:43Be the first to give this comment the thumbs up 0 likes

@ Ketharaman.  Too true!  When it comes to innovation in the payments industry or a long time now I've adopted this modified version of Bill Gates' famous quote:  "after 10 years you're amazed at how little progress has been made; after 20 years at how much"!

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 21 January, 2015, 12:00Be the first to give this comment the thumbs up 0 likes

@NickC: Good one! The elongated period puts an even greater question mark on the survival of alternative payments providers. I just saw a headline that Amazon has pulled the plug on its mobile wallet product. 

A Finextra member
A Finextra member 21 January, 2015, 13:061 like 1 like

@NickC @Ketharaman, yes the Amazon wallet beta  is being discontinued, and Google Wallet, V.Me, O2 Money, Weve have all gone through trajectories that were much slower than expected. My recent interview with Kristian Sorenson of Nets addressed some of these points and interestingly Kristian did say, as you do Nick, that when the change does happens it tends to be much more than what was originally anticipated.

My thesis has been to look at not simply NFC or mobile wallets, or a single market, and what is becoming clear is that money is going digital in a myriad of different ways and investment/M&A continues apace with brands being built and broken.

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 05 February, 2015, 06:36Be the first to give this comment the thumbs up 0 likes

@CharmaineO & @NickC:

According to his tweet, Bill Gates himself seems to have pushed back the the period of significant change in retail payments to 15 years!

https://twitter.com/BillGates/status/563010428511735810

Today, 2 billion people don’t have a bank account. In 15 years they’ll be making payments with their phones: b-gat.es/1F65ZXa @verge 

A Finextra member
A Finextra member 05 February, 2015, 07:491 like 1 like

Well Alipay just got over 5 million digital red envelopes sent out in a matter of several days. There are different kinds of changes, across a massive variety of services, happening in different ways around the world. Our latest report on China catalogues some of these changes, such as the Transfer Telephone for rural areas. I believe change is happening as we speak and it's clearly disrupting incumbents!