Retailers have still to be convinced of the cost benefits and consumer demand for new types of electronic payment, reports Glynn Davis
Growth in the use of prepaid cards, contactless technologies, mobile devices, and electronic wallets is frequently held up as signifying the end of consumers paying
for goods with cash. But evidence suggests that the death of cash has been greatly exaggerated.
Research including the annual Cost of Payment Collection Survey from the British Retail Consortium (BRC) indicates that alternative forms of payment are growing in
popularity, but at extremely slow rates. Between 2007 and 2009, the amount of cash used decreased modestly from 33.8% of all transactions by value to 32.2%. It also accounted for 58.2% of transactions by number in 2009 compared with the marginally higher 60.6% in 2007.
“For a number of years we’ve seen a move away from cash in the UK to plastic cards”
Edward Chandler, MasterCard
QPQ payments consultant Scott Thomson says: “Despite all the talk about cash, it’s remained fairly static. The card schemes can say they are making in-roads but there is no evidence at all. And, from what I’ve seen, the numbers are also going to be largely static for 2010.”
Edward Chandler, general manager, business development at MasterCard, disputes the claims that cash is holding its position and cites the company’s own internal research than that of the BRC.
“For a number of years we’ve seen a move away from cash in the UK to plastic cards – debit and credit cards and prepaid. Our data says this. Although the BRC report is interesting, we base our strategy on our own data,” says Chandler.
Although he won’t actually disclose MasterCard’s figures on cash versus plastic transactions for reasons of commercial confidentiality, he argues strongly that the position is clear and UK consumers and retailers are eschewing cash and paying with their various pieces of plastic instead.
On the high street, value retailer Poundland, which started accepting plastic cards in its stores only as recently as August 2007, has seen strong growth in plastic. Credit and debit card sales have grown to account for 12% of the company’s total sales by value.
Poundland chief executive Jim McCarthy says this figure has been helped by the fact that there is a minimum card usage level of £5, which translates into card payments being double the average basket size.
The MasterCard argument appears to stack up when you consider card usage has grown by between 10% and 15% over the past year at Poundland; but it is useful to drill down into the reasons for this growth. McCarthy puts it down to a couple of trends: “We’re getting new, more affluent customers that prefer to use cards and existing customers who are looking to save more money by shopping with Poundland.”
“We’re getting new, more affluent customers that prefer to use cards
Jim McCarthy, Poundland
Other retailers questioned about their payment trends say there has been no noticeable move to plastic. At Stanfords and the Whittard and Past Times chains there have been no such changes.
Whittard senior business analyst Simon Watson says: “The split of cash to plastic across both brands [Whittard and Past Times] is 50:50 and we’ve seen no significant change over the past year or so. There has not been a shift away from cash.”
It is the same story at the travel specialist Stanfords flagship store in Covent Garden. The store’s January-to-March figures for 2010 and 2011 show plastic is remarkably consistent at between 75% and 77% of total transactions.
Stanfords chief executive Chris Powell says: “At this level of plastic use, you’ve probably gone as far as you can go. Not everybody wants to pay for one of our postcards using a credit card. There will always be cash and this won’t change until they [the banks and card schemes] force it on us.”
What the card schemes and banks would like to see widely adopted by the retail industry and consumers is contactless payments. McCarthy says: “The banks are driving this change as it’s another profit source. If I were the BRC then I’d be taking an interest.”
That is exactly what the BRC is doing, as the big issue is that as the banks and card schemes promote contactless as the more convenient way to pay than cash, the downside for retailers is that the transaction costs attributed to contactless payments (and any other form of plastic payment) are higher than for cash.
“Retailers are agnostic about payments.”
Richard Braham, BRC policy advisor
The 2009 Cost of Payment Collection Surveyfound cash transactions cost an average of 2.1p to process whereas a debit transaction typically costs retailers 8.5p and a credit card is a much higher 33p to process.
The cost of retailers accepting prepaid cards varies widely according to BRC policy advisor Richard Braham, who says there are over 270 different levels of charges (interchange fees) on various plastic cards – the and Visa branded.
“Retailers are agnostic about payments. They are not sitting there favouring one method over another. Everything the BRC has done is for fair costs for processing payments. We don’t understand why with a swipe function, where we should be getting more cost efficiencies, we are seeing a rise in fees. And it is non-negotiable and non-accountable,” explains Braham.
Despite this, Chandler is adamant that “there is a definite appetite for merchants to move to contactless”. He adds: “It is an investment and you can get good returns on this. We are seeing a critical mass of cards and the largest retailers are adopting the technology. This is causing tipping points.”
This is not the case yet at Whittard where Watson says he will take a look at the technology over the next year but regards it as mainly relevant for very busy stores in central London where people are in a hurry at peak times.
And Powell is also less than convinced at this stage: “Contactless means all organisations will have spend on the software [and hardware] and it is being done for other motives than what customers want.”
Although Poundland is one of the national retailers to install contactless readers, it is a very modest implementation – in only two stores – and McCarthy says it is merely an exercise to see whether the equipment could be integrated into the existing Poundland point-of- sale infrastructure.
“It’s such a small test and there are very few transactions going through. We only get the report [on the transactions] every quarter so this shows how important it is. We don’t want to be a pioneer but if customers want it then we’ll take a commercial decision. Ultimately, contactless debit cards will be replaced by a chip in mobile phones.”
Move to mobile
Certainly making payments via mobile phones is where much of the payments industry has great expectations and the ultimate realisation of consumers having electronic wallets on their phones is expected by many experts.
Among them is Cameron McLean, general manager for merchant services at PayPal, who says: “We’re seeing huge consumer behavioural changes as people move to smartphone technologies… and a lot of that is helped by PayPal offering ways to pay.”
In May, Barclaycard and mobile operator Orange launched the UK’s first contactless mobile payment service, allowing customers to use a mobile handset in place of a contactless payment card for purchases of £15 and under.
Another driver of phone usage in the shopping environment is the massive take-up of discount vouchers that are often received and paid for on mobile phones. The ability to redeem them in-store electronically is a natural next step and McLean believes this will inevitably lead to general payments being accepted in physical stores through mobile devices.
“Five to 10 years from now, the mobile will be our wallet and if proximity [contactless] payments are accepted in store then they should also be possible via phones. The bridge linking electronic wallets with retailers are being built,” he suggests.
Although McLean paints a picture of a world where electronic commerce with mobile devices replaces the trusty leather wallet and purse he still acknowledges that “cash will always be a part of consumers’ behaviour”. But the debate on just how much of a part it will play rages on.