If money makes the world go round, then what happens to the payments industry when the world comes to a standstill?
Needless to say, even with vast swathes of the world in COVID-19 induced isolation, payments still need to be made between businesses and individuals. But that doesn’t mean payments firms will be unaffected. These firms are grappling with the same issues touching financial institutions at the moment (if you haven’t read our recent COVID-19 checklist for financial services firms, check it out here), as well as ever-present cybersecurity concerns (read here for more on cybersecurity in the time of COVID-19).
But other pressures are particularly relevant for payment firms right now:
- Enabling e-commerce – mobile and internet shopping continues unabated, as consumers buy goods and services that will help ease the transition to isolation (anecdotally we hear of surges in sales of exercise equipment and home office supplies, not to mention toilet paper…). Gig economy workers delivering food will be busier than ever, and payment firms will be called on to facilitate faster payments to these workers. The challenge will be to provide a frictionless service despite the sudden change to consumers’ spending habits and challenges associated with having staff supporting the platform working from home.
- Remote onboarding – national lockdowns have forced habitual ‘bricks and mortar’ shoppers online, meaning many are looking to set up digital payment solutions for the first time. This creates a challenge for the digital onboarding of customers when physical offices are closed. This challenge will be most acute in areas where there is a high unbanked population, no ‘golden source’ datasets, and outdated rules-based KYC standards. The FATF guidance on digital identity is timely, as the industry needs to work out how digital identity (ID) systems can be used to conduct customer due diligence. But it remains to be seen whether digital ID technologies can evolve rapidly enough and give rise to an adequate variety of digital ID systems to cope with new demands.
- Payment in installments – recent years have seen a marked shift, primarily among millennials, from credit cards to installment payment providers like AfterPay and Klarna (and plenty more who have been angling to break into this space). Changes to job certainty and timing for salary payments increases the potential utility of these types of deferred payment solutions, it also gives rise to potential distressed situations. There are growing concerns around the lack of stable income among this consumer segment, particularly for gig economy workers. Deferred payment terms are, after all, essentially an unsecured loan, meaning that installment payment providers (and their shareholders) will need to prepare for losses or be aware of the often restrictive rules around recouping consumer credit.
- P2P payments – as the World Health Organization warns of the dangers of handling physical cash and encourages social distancing, expect more person-to-person and business-to-person payments to be handled electronically. Payment firms of all types are currently looking to crack this market and enable money transfer services for individuals and businesses domestically and internationally. Traditional payout options for recipients may also change, as fewer people opt to receive money for cash pickup and instead opt for mobile wallet deposits or even direct payment of utility bills. Similarly, transport payment schemes (which have a high penetration rate among consumers) have already opened up to private operators and the pace of change is likely to continue to grow with increases in thresholds for contactless payments and additional payment functionalities. Offering new services is not a quick process, as these types of activities can require authorisation as a credit institution, remittance firm or e-money issuer – although in certain jurisdictions payment firms will be able to make creative use of existing licences to broaden the services they can offer.
- Diversification – the uneven impact of COVID-19 underpins the importance of diversification for payments firms, both in terms of geographies (as there are vast differences in the extent to which countries have been affected by the virus) and sectors (as the virus will have a disproportionate effect on those firms with greater exposure to travel and tourism – as opposed to e-commerce, digital media or shipping). Beyond COVID-19, the looming possibility of central banks issuing their own cryptocurrencies or stablecoins also creates an impetus for payment firms to expand the scope of services they can provide efficiently. While it will undoubtedly take time for firms to implement any diversification strategies, the payments industry has in recent years shown itself to be adept at reshaping itself quickly through mergers and acquisitions. Don’t expect COVID-19 to put a stop to this trend of inorganic growth in the sector.
