The world has entered an era of turmoil in financial services and financial markets. Investment banks have been hit hardest: their basic business model is under threat. But the credit crunch is challenging for commercial and retail banking as well. Despite these events, the international payments infrastructure has proven resilient and robust. The stability of global payments systems is not under question.
Payment systems continue to evolve and develop despite the turbulence. New entrants, new technology, regulatory developments and evolving customer demands are all shaping an international payments landscape which is increasingly global, dynamic and competitive.
Global payment trends
Cash is still king, at least for the time being. It makes up the majority of transactions in most developed economies despite healthy growth in non-cash payments. The 2008 World Payments Report notes that in the Eurozone, non-cash transactions per person grew at 6% compound annual growth rate (CAGR) between 2002 and 2006, but cash in circulation grew by 11% CAGR. However, there are large variations between countries in cash usage versus non-cash transactions.
In countries with well-developed non-cash payment mechanisms, electronic payments are substituting for cash payments. The UK Payments Council, in its 2008 Payments Market report, predicts the value of total non-cash payments by consumers will outstrip cash transactions in the Great Britain by 2017. In Australia, the Reserve Bank sees a similar trend, based on data indicating that cash withdrawals are declining relative to household consumption.
By contrast, cheque volumes globally continue to decline. Even in the traditionally strong cheque market of the US, research released by the US Federal Reserve System in December 2007, found usage had declined by over 6% per annum between 2004 and 2006. In late 2007, major UK retailers such as Sainsbury’s and Boots announced they would no longer accept cheques from retail customers.
Globally, card and electronic payments continue to grow steadily, although experience varies markedly in different markets:
- North America, the Eurozone and the United Kingdom account for around 73% of global non-cash transactions, but less than 12% of global population. In these mature economies with well-developed payments infrastructure, growth is steady but unspectacular: 5% CAGR since 2001 for the USA and UK, 7% for the Eurozone and 6% for Canada.
- Brazil, Russia, India and China (the so-called “BRIC” economies) represent the future growth story. Comprising around 30% of the world’s population, these markets are less than 12% of the world’s non-cash payments market, indicating the scope for increased payments automation if the infrastructure can be developed to support it. China and Russia are already harnessing this potential with impressive CAGR in non-cash payments since 2001 of 46% and 32% respectively.
- Japan, South Korea and Australia are the surprise packets: mature economies that, through highly developed payments infrastructure, continue to enjoy high growth in non-cash payments. These markets are less than 4% of global population, but represent almost 8% of the global non-cash payments market. Growth since 2001 was an impressive 17% CAGR overall; Australia recorded 26% CAGR over this period.
Amongst non-cash payments, card transactions have been the fastest growing category. The World Payments Report 2008 indicates that the share of non-cash payments made with cards has grown from 39% to 54% between 2001 and 2006. Recent statistics from the Bank of International Settlements from selected developed economies notes a CAGR for number of card payment transactions of slightly above 10% internationally from 2001 to 2006. The strongest area of growth has been cards with a debit function, which have seen a 15% CAGR over the same period.
Emerging players
Two of the most discussed global evolutions over the past decade have been the economic emergence of China and the development of the internet as a serious retail marketplace. Both of these mega-trends are having an impact in the payments world, with some newer players coming into their own.
2008 marked the 10th anniversary of PayPal. Riding the phenomenal growth of online auction provider eBay, PayPal now operates in 190 markets using 17 currencies, with 60 million active accounts. Total net payment volume has doubled in the past three years to over $47 billion by calendar year 2007.
Another recent entrant starting to break through is China Union Pay. Founded as a domestic card association for China in 2002, some industry observers believe Union Pay’s end game is to become a major competitor of the international card schemes. By 2007, CUP was putting up some staggering numbers; 1.5 billion cards issued, as well as 1.1 million POS terminals and 740,000 ATMs deployed.
Though PayPal and China Union Pay have a long way to go before they challenge global giants such as the major financial institutions or international card schemes, their recent success points to an increasingly competitive payments environment, both in cyberspace and in shopfronts worldwide. Both warrant close scrutiny in the emerging global payments marketplace.
New technology
Technology remains an important driver for change in the industry. Concern over rising levels of fraud has seen significant chip and PIN roll-outs in a number of jurisdictions. In Canada, for instance, a successful trial in Kitchener-Waterloo, Ontario is leading to an ambitious roll-out of 90% of cards chip-enabled by 2010, chip only ATMs by 2012 and chip only POS terminals by 2015.
Various contactless and micropayment card initiatives and trials have been rolled out, though to date the most successful schemes appear to be those, such as Oyster in London or Octopus in Hong Kong, that leverage off of mass transit card schemes. The highly successful Oyster card trialled EMV contactless technology in September 2007 and is aiming for this to be the basis for its next generation of card.
Regulatory and industry developments
After years of planning, January 2008 saw the Single European Payments Area (SEPA) go live with the SEPA Credit Transfer Regime. While the number of SEPA transactions has been relatively low, it is expected that SEPA will increasingly dominate the European payments environment. An important element of SEPA has been the embrace of the ISO 20022 standards framework for messaging. Some observers believe it is only a matter of time before this becomes the global standard for messaging in the consumer payments space.
After years of regulatory debate between the Government and the payments industry, the UK gave birth to some major developments in May 2008. The UK Payments Council, a widely representative body of payment industry stakeholders, released its National Payments Plan which provided an industry-wide roadmap for future development. Faster Payments was launched in the same month, permitting near real-time transfers between participating financial institutions - transfers that previously took up to 3 days. Though take-up, like SEPA, has been slow, there remains significant optimism that Faster Payments could provide a platform for long-term industry improvements.
Against these policy developments in electronic payments, global card payments policy remain focused on the role and future of interchange fees. In December 2007, the European Commission struck down MasterCard’s cross-border interchange fee arrangements in Europe. Intense negotiations on the implications for domestic interchange fees and other forms of cost sharing continue. In the United States, the Credit Card Fair Fee Bill was introduced into Congress. The Bill contains proposals for collective bargaining by merchants and specialist judges to deal with the issue of interchange fees. The outcome of these developments is unclear, but further regulatory attention to the competitive implications of multilateral interchange fees seems very likely.
Customers
New entrants, new technology and regulatory pressures will only heighten the competitive pressures within payments. We are witnessing an increasingly frictionless and global payments market. Relentless pressure on pricing as well as meeting the ever-rising expectations for improved convenience, simplicity, security and speed will bring its own challenges for industry and greater choice and leverage by consumers.
