CARI Analysis: Digital Payments No Longer a Luxury in the New Normal

By CARI | 8 July 2020

CARI Analysis: Digital Payments No Longer a Luxury in the New Normal

Author: Imran Said Shamsunahar | Research Editor: Eleen Ooi Yi Ling
Webmaster: Nor Amirah Mohd Aminuddin | Supervisor: Hong Jukhee

Synopsis
CARI Analysis: Digital Payments No Longer a Luxury in the New Normal looks at the increasing importance of digital payments as public health concerns now affect everyday transactions. We investigate public concerns over the possible transmission of the COVID-19 virus through hard cash, and which digital payment systems are more suited in meeting this demand for safer payment methods. We discuss whether digital payments will prove useful in promoting greater financial inclusion for the region’s large unbanked populations, and finally how the success or failure of individual digital payment providers will be dependent on their respective exposures to different economic sectors.

(This article contains 11 charts and best viewed on a desktop or horizontally on your mobile.)

KEY MESSAGES

a) Concerns over the possible transmission of the virus through hard cash has led to a boom in the usage of digital payments systems, with an April 2020 survey finding that 46% of global consumers stating they will increase their usage of digital payment systems in the next 6-9 months.
b) Survey by Mastercard in April 2020 saw contactless card transactions grow twice as fast as non-contactless transactions globally in February and March 2020 due to concerns of possible transmissions of COVID-19 through physical contact.
c) Prior to the pandemic, ASEAN’s Digital Payments sector was projected to spearhead the growth of the larger Digital Financial Services within the region. Just prior to the epidemic, the industry was expected to cross US$1 trillion by 2025.
d) Under-banked Consumers, rather than purely Un-banked Consumers, have been identified as the true growth engine of ASEAN’s Digital Financial Services Industry.
e) A 2019 survey found that one of the largest hindrances to more widespread usage of e-wallets in Southeast Asia was the lack of adoption by merchants, with only an average of 28% of retailers in Indonesia, Malaysia, Thailand, and Vietnam accepting e-wallets as a payment method.
f) Despite mass shifts towards digital payments worldwide, the revenue of global payments industries is expected to decline due to slumps in global transaction volumes. A March 2020 report by McKinsey projected that global payments revenue would possibly decline by 10-12% in 2020 as compared to 2019. Different payments players will also be impacted by exposure to different sectors.

1) Health concerns driving increasing usage of digital payment services


1a. No concrete evidence to show physical cash can transmit COVID-19

The COVID-19 pandemic has led to increasing concern over the possible transmission of the virus through the handling of physical cash. It has generally been understood by scientists that the risk of viral transmission by banknotes is low as compared to other frequently touched objects.1

The head of the German public health institute, Lothar Wieler, noted in March 2020 that “(viral) transmission through banknotes has no particular significance”, as airborne droplets from infected individuals are the main infection risk. Moreover, experts note that washing hands after touching cash or other objects may help to reduce the risk of transmission.2


1b. Huge spike in Internet searches on related topics concerning hard cash and viral transmissions

Regardless of expert opinion, recent research by the Bank for International Settlements found a huge spike in Internet searches concerning viral transmission by hard cash during the COVID-19 pandemic (see Figure 1).3

Breaking down the searches by country, it was noted that searches were more prevalent where more small-denomination banknotes (the ones commonly used in everyday transactions) were in circulation relative to the GDP (see Figure 1).4


1c. 46% of global consumers to increase usage of digital payments in next 6-9 months

According to Capgemini Research Institute, health concerns caused by the pandemic have seen 46% of global consumers say they will increase their usage of digital payment systems in the next 6-9 months (see Figure 2).5



1d. Retailers encouraged to adopt e-payment and self-checkout systems

The research by Capgemini recommended that retailers around the world aggressively increase the adoption of e-payment systems such as digital payment wallets and contactless cards as consumers put more stock into health and safety practises by businesses.6

41% of respondents in the survey also noted that they would prefer to frequent stores that do not have touch-based self-checkout systems for the next six to nine months (see Figure 3).7

In response, retailers were also recommended to adopt autonomous self-checkout systems with mobile phones, as it allows consumers to practise social distancing and avoid as much physical contact at the point-of-sale as possible.8


2) Use of cashless payments are expected to boom during and post-COVID-19


2a. Share of cashless payments expected to grow by 9% in leading economies in 2020

Research by the Asian Banker has found that the share of cashless payments are expected to grow by 9% in leading economies in 2020, led by China, Japan, Singapore, and the UK (see Figure 4).


2b. Share of global transaction values conducted digitally in 2025 projected to rise by 5-10%

Bain & Company had raised their estimations of the share of global transaction values conducted digitally in 2025 by 5-10% in response to the structural changes caused by COVID-19 (see Figure 5).10

3) Not all digital payment options are risk free from physical contact


3a. Debit or credit card transactions often still require physical contact

It should be noted that not all cashless payment methods are immune from physical contact and the risks of viral transfer. A 2020 study by van Doremalen et al (2020) found that COVID-19 survives best on non-porous materials, which could include credit/debit card terminals or PIN pads (see Figure 6).11

This could prove problematic for certain digital payment options such as debit and credit card transactions, which generally require a signature or PIN entry at a merchant-owned device for larger transactions.


3b. Contactless card transactions grew twice as fast as non-contactless transactions globally in early 2020

Contactless card options, on the other hand, do not require a PIN for smaller transactions. An April 2020 survey by Mastercard of 17,000 consumers in 19 countries worldwide saw contactless card transactions grow twice as fast as non-contactless transactions globally in February and March 2020. Mastercard attributed this to increasing concerns by consumers over health and safety at the point of sale when buying essential goods, as well as wanting to reduce time spent at stores by as much as possible. 12

Among their findings included:

  • 46% of respondents globally swapped their top-of-wallet card for one that offered contactless. In the Asia Pacific, 51% of people made the swap.13
  • 82% of respondents globally viewed contactless as the cleaner payment method, with 80% in the Asia Pacific saying the same.14
  • 74% of people globally and 75% in the Asia Pacific stated they would continue to use contactless after the pandemic is over.15
  • Data by Mastercard found 40% growth in contactless transactions globally in the first quarter of 2020. More than 80% of contactless transactions were under US$25, a range typically dominated by cash.16
  • Mastercard saw the number of tap-and-go card payments at grocery stores and pharmacies grow twice as fast as non-contactless transactions globally and 2.5 times faster in the Asia Pacific alone.17

Digital wallets or other smartphone-based payment systems (such as stored card details or QR codes) are another solution due to the lack of physical contact required. Online banking is of course another alternative for a non-contact cashless payment system.

4) Digital Payments will spearhead the growth of Digital Financial Services in ASEAN


4a. ASEAN Digital Payments industry expected to cross US$1 trillion by 2025

A joint study by Temasek and Google conducted prior to the pandemic found that Digital Payments were expected to spearhead the growth of the larger Digital Financial Services industry within ASEAN. The Digital Payments industry was expected to cross US$1 trillion by 2025, with e-Wallets alone composing US$114 billion (see Figure 7). It was believed that by 2025, digital payments would account for nearly one in every two dollars spent in the region.18


4b. Mobile payment services usage in ASEAN is relatively low

However, widespread usage of digital payments may have a long way to go. According to a January 2020 survey by We Are Social, only Thailand and Singapore saw a higher percentage of its population use mobile payment services monthly as compared to the global average of 27%, with Thailand measuring at 40% and Singapore at 31%, respectively19 (see Figure 8).


5) Digital Payments may not necessarily promote greater financial inclusion


5a. 198 million adults in Southeast Asia lack bank accounts

Temasek and Google found that 104 million adults in SEA are fully Banked, meaning they enjoy access to full Financial Services. A further 98 million are Underbanked, meaning they have a bank account but lack access to credit, investment, and insurance services. A remaining 198 million in Southeast Asia are deemed Unbanked, meaning they have no bank accounts at all (see Figure 9).20

In ASEAN countries such as Vietnam, Indonesia, and the Philippines, the unbanked compose the majority of the populace (see Figure 9). 21

Among the reasons for this can include issues of cost. In a sprawling region where physical infrastructure is lacking, it is prohibitively expensive for financial institutions to build physical branches that can serve all customers. Other challenges include the absence of public registers, identification systems and reliable credit information; basic prerequisites for financial institutions. Moreover, banking is a tightly regulated sector in many Southeast Asian nations, a legacy of the 1998 Asian Financial Crisis. Competition and innovation, as a result, have been stifled. 22


5b. Underbanked Consumers – true growth engine of ASEAN Digital Financial Services industry

Different consumer segments present different opportunities and can be best served by different players. Underbanked Consumers have been identified as the true growth engine of the Digital Financial Services industry. The report by Temasek and Google suggested that Consumer Technology Platforms (such as regional Internet platforms such as Gojek, Grab, Lazada and Sea Group) are best placed to serve this segment, due to their large customer base.23


5c. It can be difficult to reach Unbanked Consumers with Digital Financial Services

Contrary to popular narratives, serving Unbanked Consumers may prove to be the hardest undertaking. Acquiring customers in this segment can be expensive as compared to the returns made. Established Consumer Players such as telcos and retailers may be best placed to serve them through their extensive physical distribution networks.24


5d. E-wallets in ASEAN largely utilized by already banked customers

Despite claims that digital financial tools such as e-wallets are a means to improve financial inclusion, a 2019 report by Boston Consulting Group (BCG) on e-wallets usage in Southeast Asia found that it was largely utilized by customers who already use traditional banking services. 25

In Indonesia the same research found that 57% of banked respondents used e-wallets, compared with 26% of underbanked Indonesians and only 14% of the unbanked. In Vietnam, e-wallet usage was 42% among the banked and 17% among the unbanked. Thirty-one percent of banked Malaysians used them, but only 9% of the unbanked (see Figure 10).26



5e. Only 28% of retailers in ASEAN accept e-wallet payments

The BCG survey also found that one of the biggest hindrances to widespread adoption of e-wallets in most Southeast Asian countries was acceptance by merchants. 56% of respondents across the region in BCG’s survey cited ‘not accepted by merchants’ as the main problem with using e-wallets. They also found that only an average of 28% of retailers in Indonesia, Malaysia, Thailand, and Vietnam accept e-wallet payments.27


5f. 58% of ASEAN merchants believe complexity of e-wallet payments is biggest hindrance to adoption

When analyzing reasons why merchant adoption of e-wallets was so low, BCG found that 58% of merchants across the region agreed with the statement ‘I do not completely understand this payment process’ as the most important reason for not accepting payments through e-wallets. Another 45% stated that inconvenience in processing the payments through this option was their top reason (see Figure 11).28

6) Digital Payments platforms will still face a tough 2020


6a. Global payments revenue to decline by between 8-12% year on year in 2020

The global payments industry will see decreasing revenues in 2020, with a slowing global economy in the wake of shuttered businesses, restricted movements and closed borders contributing to a slump in global transactions. A March 2020 report by McKinsey projected that global payments revenue would decline by US$165 billion in 2020, 8% lower than in 2019 (instead of a 6% increase against the base of US$1.9 billion projected before the crisis) (see Figure 11).29

A more pessimistic scenario, which would see a muted recovery by global economies, projected a decline in global payments revenues of 10-12% in 2020 as compared to pre-crisis levels. McKinsey determined that 80% of the decline would be due to a drop in the volume of global payments (see Figure 11). 30


6b. Payment platforms exposed to aviation and consumer electronics to be negatively impacted

Different payment players will be impacted differently depending on their exposure to various sectors. An April 2020 report by PricewaterhouseCooper projected that payment platforms with large exposure to the aviation, tourism and hospitality, electronics and consumer durables sectors would be negatively impacted by the decrease in transaction volumes. Concurrently, those exposed to sectors such as physical retail, telecoms, e-Commerce and healthcare and pharmaceuticals could expect to see increases in consumer transactions. 31

7) Conclusion


7a. Health concerns now a new factor in consumer’s choice of payment options

The rapid spread of COVID-19 in the beginning of 2020 has meant that health concerns, particularly public worries about the transmission of the virus through the exchange of physical cash, are now a new factor in consumer’s choice of payment options. Although the scientific consensus thus far is that the risk of viral transmission of the virus remains limited, many retailers and consumers have sought to play it safe by increasing the usage of digital payments under the ‘new normal’.

ASEAN governments have also encouraged the adoption of digital payments. In early April 2020, the Monetary Authority of Singapore stated they were working closely with The Association of Banks in Singapore (ABS) to promote greater adoption of e-payments among individuals and businesses. Likewise, in early March Vietnamese Prime Minister Nguyễn Xuân Phúc requested the State Bank of Vietnam (SBV) to develop a pilot plan to popularise mobile payments, and later in April requested the Ministry of Information and Communication to join forces with the SBV to put mobile payments into circulation.32


7b. Not all cashless payment options are free from risk of viral transmissions

Not all digital payments options are completely immune from requiring some form of physical contact. Debit and credit card transactions often require a PIN entry or signature at the merchant-owned terminal for transactions above a certain amount. This may prove problematic, as a 2020 study by van Doremalen et al suggested that COVID-19 survives best on non-porous materials including credit/debit card terminals or PIN pads. Contactless card payments, on the other hand, often do not require a PIN for small transactions, and indeed on March 25, 2020, the European Banking Authority encouraged payment service providers (where possible) to raise their contactless payment thresholds to the maximum threshold of €50 per transaction.33


7c. Not all digital payment platforms will benefit from the digitalization of transactions

Although studies have suggested a mass shift towards digital payments options in the wake of the ‘new normal’ (and which is expected to persist over the coming months), not all digital payments platforms are expected to benefit equally. A global slowdown brought on by supply chain disruptions and government-enforced lockdowns will inevitably cause a drag on global expenditure. Greater exposure to vulnerable sectors, including aviation, tourism and hospitality, and consumer electronics, will prove detrimental to revenues due to slumps on transaction volumes.



Footnotes

1 Reuters, ‘Banknotes carry no particular coronavirus risk: German disease expert’, March 2020, Bank for International Settlements, ‘BIS Bulletin 3: Covid-19, Cash, and the Future of Payments’, April 2020.
2 Ibid.
3 Ibid.
4 Ibid.
5 Capgemini Research Institute, ‘Global consumer sentiment research in the consumer products and retail industry’, April 2020.
6 Ibid.
7 Ibid.
8 Ibid.
9 The Asian Banker, ‘Cashless payments in leading economies forecasted to grow 9% in 2020 due to COVID-19’, May 2020.
10 Bain & Company, ‘The Covid-19 Tipping Point for Digital Payments’, April 2020.
11 van Doremalen, N, T Bushmaker, D Morris, M Holbrook, A Gamble, B Williamson, A Tamin, J Harcourt, N Thornburg, S Gerber, J Lloyd-Smith, E de Wit and V Munster (2020): “Aerosol and surface stability of SARSCoV-2 as compared with SARS-CoV-1”, NEJM.org, March 2020.
12 Mastercard, ‘Press Release: Mastercard study shows consumers moving to contactless payments for everyday purchases as they seek cleaner, touch-free options’, April 2020.
13 Ibid.
14 Ibid.
15 Ibid.
16 Ibid.
17 Ibid.
18 Temasek & Google, ‘SEAN Internet Economy Report 2019’, October 2019
19 We Are Social, ‘Digital 2020: Global Digital Overview’, January 2020.
20 Temasek & Google, ‘SEAN Internet Economy Report 2019’, October 2019.
21 Ibid.
22 Ibid.
23 Ibid.
24 Ibid.
25 Boston Consulting Group, ‘Southeast Asian Consumers Are Driving a Digital Payment Revolution’, May 2020.
26 Ibid.
27 Ibid.
28 Ibid.
29 McKinsey & Company, ‘How payments can adjust to the coronavirus pandemic—and help the world adapt’, March 2020.
30 Ibid.
31 PricewaterhouseCooper, ‘Impact of the COVID-19 outbreak on digital payments’, April 2020.
32 Monetary Authority of Singapore, ‘Press Release: MAS Urges Use of Digital Finance and E-Payments to Support COVID-19 Safe Distancing Measures’, April 2020, Open Gov Asia, ‘Vietnamese government promotes digital payments’, May 2020.
33 van Doremalen, N, T Bushmaker, D Morris, M Holbrook, A Gamble, B Williamson, A Tamin, J Harcourt, N Thornburg, S Gerber, J Lloyd-Smith, E de Wit and V Munster (2020): “Aerosol and surface stability of SARSCoV-2 as compared with SARS-CoV-1”, NEJM.org, March 2020, European Banking Authority, ‘EBA provides clarity to banks and consumers on the application of the prudential framework in light of COVID-19 measures’, March 2020.



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