How COVID-19 has affected the payments industry

October 11, 2020

COVID-19 and the subsequent lockdowns and social distancing practices have dramatically altered the way many of us conduct commerce. On-demand economy platforms are the big winners of the pandemic. As an alternative to public transport, eating out, fetching groceries, going to the office and living in crowded cities, those who could, opted for apps that offer ride-hailing, food delivery, ordering groceries online, freelancing and finding a short-term rental on a lodging platform. Behind the scenes of all these platforms is complex digital payments infrastructure.

 

It’s not just platform providers and e-commerce businesses that saw a surge in new users and increasing order volumes. The underlying payment providers who process these transactions saw a dramatic rise in payment volumes.

COVID-19 boosts revenues of payment facilitators

To highlight the rapid increase in digital payments, here are some statistics from leading payment companies during the first half of2020; a period when most nations were experiencing COVID-19 related lockdowns.

 

In the second quarter of 2020, PayPal’s payment volume amounted to US$221.7 bn, which represents a 29% year-on-year growth. In the same period, PayPal’s Venmo processed payment volume of US$37 bn, which means a52% year-on-year growth[1]. In the first half of 2020, payment facilitator Ayden processed volumes of €129.1 bn, which means a 23% year-on-year growth[2].Similarly, Zelle processed volumes of US$133 bn, which represents a growth of21% compared to the previous two-quarters[3].

Cash is not king in a post-coronavirus world

Digital payments have been on the rise for years. For obvious reasons, during coronavirus lockdowns and mass migration to online shopping for everyday essentials, the demand for cash dropped. Another narrative that was voiced by the media and health experts was the hygiene risks of using cash. These changes in perspective have led to some chains like Pizza Hut in the UK moving to cashless payment methods only, even when dining in[4].

 According to LINK, the UK’s largest operator of ATMs, cash withdrawals have been declining throughout 2020, with sharp drops in March, April and May. As you can also see, there is already a noticeable downtrend pre-pandemic[5].

 

COVID-19 is affecting corporate payment solutions

In the same way that consumers don’t want to head to the mall or supermarket, business owners and managers aren’t thrilled by the idea of running to their local bank branch to provide or sign documents, that’s if their bank’s premises are even open for appointments. This change of habit has also pushed organizations to look for alternative corporate banking and payment solutions.

 The banking and finances industries are well known to be laggards when it comes to digital innovation. While banks are being forced into adopting a digital-first approach, they need to reimagine their legacy solutions and workflows completely.

 Meanwhile, existing fintech companies are already well-positioned to take market share as they already perform online verifications, have robust KYC, anti-money-laundering and anti-fraud systems in place.

Could COVID-19 push banks out of the payment processing function?

It’s not just the lack of digital innovation pursued by banks that poses a threat, but banks are dealing with more functions than only payment processing. Banks also issue credit, trade securities and invest capital. During the economic downturn, banks will be dealing with underperforming investments, volatile assets and debtors who are defaulting on their debt. Also, in Europe, initiatives like PDS2 and SEPA have opened the door to more competition in the payment processing and remittance space. Bank shave been strong-armed into reducing fees and processing times to compete with innovative fintech companies. Funds transfer services are no longer profitable for banks, which may see them dropping this service altogether and passing the touch to fintech firms.

Better conditions make e-wallet solutions a necessity

It’s not just convenience factors that threaten banks in the payments space, but also the dramatically better conditions e-money companies can offer. The notion that nothing can be cheap, fast and good is proven wrong by corporate e-money solutions. Electronic money companies leverage the latest technology to process real-time settlements, whereas banks are stuck with legacy systems from the ‘70s, like SWIFT. These legacy systems are expensive to maintain and operate that adds a cost which is inevitably passed to the client. Electronic money institutions are under a high level of scrutiny from regulators, making them just as reliable as banking institutions. To conclude, with a corporate e-wallet solution businesses can take advantage of lower transaction costs, especially when it comes to cross-border transfers and foreign exchange fees, instant settlements with electronic money and much faster payouts to bank accounts.

 


[1] https://investor.paypal-corp.com/static-files/ec252376-4083-4ffd-bd50-77b43b5a5424

[2] https://www.adyen.com/investor-relations/h1-2020

[3] https://www.zellepay.com/press-releases/consumers-and-small-businesses-significantly-increase-use-zelle-1st-half-2020

[4] https://www.pizzahut.co.uk/restaurants/blog/pizza-hut-is-back/

[5] https://www.link.co.uk/about/statistics-and-trends/

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