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February 23, 2009updated 04 Apr 2017 4:18pm

Consumer preferences dictate change

No stranger to payments innovation, the UK gave the world the cheque and the ATM, and in 2008 added the Faster Payments Service to its list of achievements Next on the change agenda are mobile banking and contactless payments, both of which face the big challenge of gaining broad consumer acceptance Undoubtedly the most significant development in the UK payments market in some two decades was the launch of the much-awaited Faster Payments Service (FPS) on 27 May 2008

By EPI editorial

No stranger to payments innovation, the UK gave the world the cheque and the ATM, and in 2008 added the Faster Payments Service to its list of achievements. Next on the change agenda are mobile banking and contactless payments, both of which face the big challenge of gaining broad consumer acceptance.

UK payments market. Faster Payments ServiceUndoubtedly the most significant development in the UK payments market in some two decades was the launch of the much-awaited Faster Payments Service (FPS) on 27 May 2008. The product of a development process initiated by 13 major UK financial institutions in May 2005, FPS has slashed the clearing period on low-value funds transfers from three working days to virtually real-time.

Running on UK payments processor VocaLink’s Faster Payments Central Infrastructure platform, FPS was first introduced for internet and phone payments followed in June by standing order payments. FPS has been enthusiastically embraced by the public with volumes by the end of 2008 running at five to six times levels originally envisaged by that stage, Paul Taylor, MD of VocaLink Europe told EPI.

According to payment industry body APACS, FPS volumes stood at 19.74 million payments in December 2008 while the value of transactions processed was £6.51 billion ($9.3 billion).

In value terms single immediate payments made up the bulk of usage of FPS in December, accounting for £3.97 billion (61 percent) of total FPS transactions followed by forward-dated payments £1.39 billion (21 percent) and standing order payments at £1.15 billion (18 percent).

The maximum value for internet and phone payments is set at £10,000 and for standing orders at £100,000.

In volume terms standing order payments were the most significant, accounting for 10.92 million transactions (55 percent) followed by single immediate payments at 6.91 million (35 percent) and forward-dated payments at 1.88 million (10 percent). FPS, which now accounts for some two-thirds of all internet and phone payments, is far from stretched in terms of capacity – having already processed some 1.5 million transactions per day at peak levels.

But despite the success achieved by FPS there are still a number of flaws requiring attention, stressed consultancy MPI Europe in a recent study of the new system. Among MPI’s concerns is that while existing banks and building societies linked to the FPS account for some 97 percent of transactions, 35 percent of non-clearing banks are unable to receive faster payments.

Of more significance MPI warned that the speed of FPS presents security and fraud challenges which are yet to be fully addressed by some banks.

“Some banks have had to put in place temporary measures to address these issues, said MPI’s managing director, John Cant. “Addressing them on a more universal and permanent basis is one of the main tasks in this area for 2009.”

Economy hits tough times

Unfortunately, in tandem with countries worldwide, the UK began feeling the impact of the growing global financial crisis in 2008. Worse it seems is yet to come with the European Commission predicting that the UK’s economy will contract by 2.8 percent in 2009.

The impact of the sharp reversal in the UK economy’s fortunes is already evident in consumer transaction data released by APACS which reveals that card transaction growth stalled in the closing months of 2008. In December the total value of card transactions of £32.3 billion represented a mere 0.3 percent year-on-year growth rate while the average transaction value of £44.95 was the lowest in six years.

Also indicative of the sharp deceleration in the UK economy in the closing stages of 2008, total spending on cards in the year as a whole increased by a healthy 6.8 percent to £371.7 billion.

Hardest hit in December 2008 was spending on credit cards with the total value of transactions down by 4.8 percent to £10.8 billion and the volume of transactions down 2.2 percent to 498 million. Total spending on credit cards in 2008 came in at £126.3 billion, up 1.9 percent compared with 2007.

Continuing a trend evident for four years, consumers relied increasingly on debit cards in 2008. Even in December 2008 spending on debit cards lifted 3.1 percent compared with the year-ago period to £21.6 billion, while the volume of transactions increased by 6.7 percent to 532 million. For the year as a whole the value of debit card transactions increased by 9.5 percent to £245.4 billion.

Last year was also one in which UK consumers looked for value – to find it they went shopping online in record numbers.

Indicatively, research firm Nielsen Online reported that the top 10 UK online retail websites recorded on average a 37 percent increase in unique visitors in the fourth quarter of 2008 compared with the fourth quarter of 2007. In sharp contrast with this credit information, specialist Experian estimated that the number of people visiting shopping centres and city centre stores fell 2.3 percent in December 2008 compared with December 2007.

Putting a figure on the UK online business-to-consumer market, research firm eMarketer reports that online spending in 2008 totalled £59.8 billion, up 28.3 percent compared with 2007. Online retail spending in 2008 represented about 17 percent of total retail purchases in the UK.

Though credit and debit cards still account for the lion’s share of the online shopping market, alternative payment service PayPal has made substantial inroads, accounting for about 20 percent of online spending. Running a somewhat distant second in the alternate payments space is Google Checkout with a market share of about 9 percent.

Online shoppers’ quest for value is also highlighted by security specialist CyberSource’s 2009 UK online fraud report. In a survey of online shoppers CyberSource found that potential for saving by shopping online was a compelling reason for 67 percent of respondents. Even more notable was convenience and saving of time, which was a major motivating factor in shopping online for 81 percent of respondents, and instant access to the widest range of goods, cited by 84 percent of respondents.

However, even the convenience of online shopping is not enough to convince all UK consumers of its attractiveness. According to CyberSource, by the end of 2008 51 percent of consumers had never shopped online, though this was down from 53 percent a year earlier.

Based on data from European Union (EU) statistical body Eurostat, the UK now ranks joint third in the EU behind Denmark and the Netherlands where some 55 percent of consumers shop online.

For UK consumers who do not purchase goods online, CyberSource found that lack of access and understanding are clear barriers: 47 percent said that they have no access to the internet; 36 percent said that they do not know how to use a computer and 62 percent just prefer shopping in a store.

Significantly, however, for 41 percent of those who do not buy online – 21 percent of UK consumers – it is concerns about security that dissuades them from doing so. Across all survey respondents including those that do shop online CyberSource found that two-thirds are concerned about the safety of shopping online.

Considering that there is no evidence to suggest there is any greater fraud or theft risk to shopping online when compared against shopping in a store, this should be of great concern to the online industry, commented CyberSource’s head of client and technical services, Akif Khan.

But despite reservations about online security UK consumers are anticipated to continue flocking to online retailers’ websites. However, while likely to outpace their high street counterparts there is realism among online retailers – 51 percent of respondents to CyberSource’s survey forecasted sales growth in 2009, down from almost 80 percent that anticipated growth at the start of 2008. Of those retailers forecasting growth in 2009, one-fifth anticipate that their sales will increase by more than 20 percent.

Somewhat more optimistic than CyberSource’s findings would indicate is eMarketer’s forecast of a 22.7 percent increase in UK online retail sales in 2009 to £68.4 billion. Looking further ahead, eMarketer forecasts that online sales will achieve a CAGR of 12 percent between 2008 and 2012.

Changing payments landscape UK payments market. Card transactions Curiously British consumers’ adoption of online shopping has not been matched by their adoption of online banking. According to a survey undertaken by Eurostat in the second quarter of 2008 of individuals aged 16 to 74, 38 percent of respondents in the UK banked online. Out of 27 EU countries this ranked the UK tenth, well behind the top-three countries: Norway (75 percent), Finland (72 percent), and the Netherlands (69 percent). The EU average for EU internet banking use was 29 percent.

However, despite what may seem to be consumer resistance to online banking, UK mobile banking and payments technology developer Montise strongly believes that widespread adoption of the mobile phone for online banking and payments in the UK is inevitable. Monitise’s view is based on an in-depth study undertaken for it by Experian unit Future Foundation.

Future Foundation’s reasoning is simple. Telephone banking was the first service to enable consumers to manage their financial affairs remotely. In turn the more versatile internet banking came into play with a consequent steady decline in the use of telephone banking. The next logical step is the adoption of the ubiquitous mobile phone to provide access to banking and payments services anywhere and at any time.

“Consumers crave ease, speed and convenience and when new technologies provide those benefits there is a ready and substantial market for it,” noted Future Foundation.

Optimistically, Future Foundation highlighted that “mobile banking is already showing the highest rate of growth of any channel.” Underscoring this, the research firm quoted Will Jones, head of innovation delivery at The Royal Bank of Scotland.

“We’ve seen a dramatic ramp up in the past six to nine months in the appetite of our core 12 million customers to want to use the mobile device as a mechanism for managing their money and there will be other things in the future that will be equally helpful,” said Jones.

But despite this mobile phone banking can hardly be said to have taken-off in the UK with, according to Future Foundation, only 4 percent of UK consumers currently using mobile banking.

Optimism on the future of mobile banking in the UK was also dealt a blow by a survey undertaken by research firm International Communications Research (ICR) for US technology developer Unisys in May 2008.

The key finding of the survey was that 80 percent of respondents do not intend to use their mobile phone for online transactions such as payments and shopping. The primary reason cited was uncertainty relating to security. According to ICR, 32 percent of respondents feel that mobile online transactions are not very secure, 24 percent feel they are not secure at all and 23 percent feel they are somewhat secure. Only 5 percent of respondents believe mobile online transactions are very secure.

Future Foundation concedes that security is central to mass-market adoption of mobile banking. “Clearly some of the concern stems from the fact that most people are unfamiliar with how mobile banking could work, they aren’t aware of the security that’s there,” noted Future Foundation.

The research firm continued that few consumers appreciate that, in some ways, the mobile phone is an inherently more secure device than a personal computer, that nobody has yet broken the GSM or 3G mobile telephony encryption algorithms and that security systems are in place to obliterate information if an incorrect password is entered more than three times.

“There’s an education task here and it’s a substantial one,” stressed Future Foundation.

Going contactless

While adoption of mobile banking and payments can be viewed as still very much a technology-push exercise in the UK, adoption of contactless payments appears to have the very significant advantage of meeting the consumers’ perceived desire for convenience. This is particularly true where consumers have had an exposure to contactless payments in applications such as London’s Oyster transport payment card.

The convenience factor came through strongly in a consumer survey conducted in December 2008 by consultancy Loudhouse Research for French electronic payment terminal developer Ingenico.

Particularly detailed, the Ingenico PayPoll Survey confirmed that consumers still view cash as a dominant payment mechanism. Indeed, on average, survey respondents had £29.30 in their wallet/purse on any typical day. Taken across the entire UK population this equates to almost £1.3 billion.

However, only 31 percent of respondents stated that cash was their preferred payment mechanism while 33 percent said they would rather use cards than dig out change from their pocket. Overall 76 percent of respondents stated that they would be most likely to use a debit card to pay for purchases.

Clearly this leaves the path open for the adoption of contactless payments in card or mobile phone-based format. Significantly, the survey found that consumer readiness and intentions in relation to the adoption of contactless cards and mobile phones equipped with contactless payment technology is high.

Overall, 62 percent of respondents view convenience as the primary benefit of contactless payments. Among those with direct experience of contactless payments or who said that they would definitively use contactless payments, 84 percent stated that convenience was the primary motivator. Queue avoidance and reduced reliance on cash were cited as other major benefits.

Warnings of potential fraudulent loss expressed by opponents of contactless payments also appear to be largely without significant merit given attitudes towards the loss of cash. In this regard the survey revealed that consumer tolerance in relation to cash loss is high. On average, respondents would need to lose £71.30 cash before reporting it to the police, while 58 percent of respondents aged 44 years or under stated that the amount would need to be in excess of £100.

How contactless payments are facilitated also appears to have little impact on consumer attitudes towards risk, with the survey respondents having a marked parity of comfort in relation to the average spend they felt confident undertaking when using contactless cards or mobile phone payment technologies. Specifically, the average spend value via a contactless-enabled mobile phone is £30.10, contactless pre-paid cards £27.80 and contactless debit/credit cards £35.10.

Significantly, the Ingenico survey found that more respondents (20 percent) were aware of mobile handset payments compared to contactless prepaid cards (16 percent) and contactless debit/credit cards (12 percent).

However, the survey also revealed that consumer acceptance of mobile handset payment technology appears hampered by limited familiarity with the concept due to lack of exposure. Just 4 percent of survey respondents had used mobile handset payments compared with 13 percent who had used a contactless prepaid card and 8 percent who had used a contactless debit/credit card.

As a result of respondents who said they would definitely use or consider contactless payments only 41 percent said they would use mobile handsets compared with 52 percent who would use a contactless prepaid card and 49 percent who would use a contactless debit/credit card.

However, Ingenico stressed that once consumers have had direct experience of using mobile handset-based contactless payments they become “clear converts.” Indeed, noted Ingenico, one-third of respondents with mobile handset-based payments experience expressed a preference for carrying one phone containing multiple card details.

Ingenico added that acceptance of the benefits of using mobile phone payment technology are high among early adopters, suggesting that the mechanism is “proven by use.” In addition, stressed Ingenico, parity between the average value of cash respondents carry in their wallet/purse and the average amount they felt comfortable spending using contactless credit/debit cards and mobile handset technology suggests that both these payment methods could provide a viable alternative to what it termed “pocket money.”

Ingenico also believes that an increase in the current £10 contactless payments limit would have strong consumer support. This, in turn, suggests that adopting organisations such as major retailers should not base their contactless payment implementation decisions too closely on the existing £10 limit, concluded Ingenico.



The cheque turns 350

Morris and Clayton Bank has long disappeared but it holds the honour of being the first British bank to have had a cheque drawn against it.

Dated 16 February 1659 the cheque was for the then substantial sum of £400, ($570)according to industry body the Cheque and Credit Clearing Company (CCCC).

For most of the next three and a half centuries the cheque reigned supreme reaching its peak in 1990 when 11 million cheques were being written daily in the UK.

However, the advent of electronic payments has steadily eroded cheque use and by 2007 volume had fallen to 4.4 million cheques per day, noted the CCCC.

Cheques are now primarily used by businesses with only 2.8 percent of retail spending by value still paid by cheque, while only one in 11 regular bill is paid by cheque – compared with one in five as recently as 2000.

Cheque use is set to continue falling with the CCCC predicting that by 2017 only some 2 million cheques will be written daily.

Notably, all cheques in the UK are still processed manually.


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