Europeans expect to be able to complete any purchase at any time of the day or night, irrespective of the channel or the device they are using. Consumers have grown accustomed to an omni-channel approach that provides a seamless shopping experience where there are no transactional hurdles or constraints. For example, a typical consumer’s purchase might start on a laptop at home and be completed on a tablet or a mobile in a café or on a train. Being able to pick up where the purchaser left off, removes the inconvenience of having to start the procedure from the beginning at each stage of the transaction.
A complicated market
Even though the introduction of the Single Euro Payments Area () is making substantial progress in bringing standardisation to the making and receiving of payments, the European payments landscape is actually becoming more complex. New regulations, coupled with new technological capabilities and new requirements from consumers, mean that merchants must now serve customers who are located in different countries and using a widening range of different channels to transact. Merchants increasingly define their payment or acceptance strategy on a pan-European basis rather than on a country per country basis.
What global convergence of payment means
Thanks to new payment vehicles, such as SEPA Credit Transfer (), new initiation channels (e.g. QR Codes, online bill payments), and new technologies (instant payments), the various payment means are aligning on several key value propositions: easy reconciliation, payment guarantee, and instant authorisation. Also, ISO 20022 is now a reality on SCT and SEPA Direct Debit (SDD) and will gradually become the standard for card transactions, replacing ISO 8583. These developments provide the opportunity for greater convergence and for the adoption of common processing units at bank or at central infrastructure levels, with shared modules for fraud management and authorisations for example.
The future of instant payments
With the payments stage thus set, it is worth considering what the future may hold. In accordance with the global trend towards instant confirmation and rapid delivery, the demand for instant payment arrangements looks set to eventually replace their batch homologues.
Instant payments in the sharing economy
At present customers across Europe are very comfortable with conventional payment methods such as cards and cash. Innovative payments methods, by contrast, have recently become significantly more widespread across Europe, among banks and corporates. Most current use cases for instant payments are in business-to-business (B2B) and business-to-employee (B2E) spaces, that is to say they are primarily used by corporates, not consumers. However, there is a potential for this to shift and for instant payments to become a point of sale option that suits both consumers and merchants.
One area where payment innovation has clear potential is the rising group of ‘sharing economy’ businesses. Some of the major players in the sharing economy include Airbnb, Uber, Lyft and BlaBlaCar, all of which currently use technology enabled card-based payment systems, due to both customer trust and ease, as well as robust security and trusted payment processes. However, because securing and confirming payment quickly and safely is integral to the viability of these businesses, increasing availability and adoption of instant payments as a peer-to-peer () could be an appealing value proposition to those sharing platforms.
Instant payments could also prove very useful to those wishing to ensure payment completion at the point of delivery of goods rather than before. Merchants are keen to be able to offer prompt refunds to their customers and to ensure that those customers get an immediate notification or guarantee that the refund has been completed.
The advantages of instant payments are providing significant traction in areas where they can easily replace the traditional options of cash, cheques or batch credit transfers. However, as their prominence in the corporate and banking sphere becomes more assured, it is worth considering the prospects for instant payments at point of sales, where cards and cash are currently very dominant.
1) Payment guarantee
The advent of instant payments is not without challenges, many of which are borne by merchants. The merchant’s overriding priority, especially at point of sale, remains the guarantee of payment. Instant payments provide this payment guarantee, but so do cards and cash, so for merchants all payment means can be considered equivalent. But there are other areas where the pros and cons of instant payments differ greatly.
2) Check out time
Accelerating check out time is a key goal for many merchants, yet at the initiation stage, instant payments remain a complex prospect. The bank account number has to be transferred, either from the consumer device to the merchant acceptance system, or from the merchant acceptance system to the customer device. QR codes and other initiation methods are still clumsy and take time to use. Compared with card transactions, instant payments take longer to process (about 10 seconds more), though this gap is closing.
Since instant payment systems are usually processed and managed on different infrastructures to traditional payment methods, maintaining support for both instant and conventional payments carries additional costs. Card transactions currently cost less than instant payments and will become even less costly when the Multilateral Interchange Fees (MIF) cap comes into force. Some merchants may therefore feel the price is not commensurate to the benefits that instant payments currently provide. That said, the cost of accepting instant payments is also likely to decrease when volumes start to grow exponentially. As far as cash is concerned, merchants are also inclined to underestimate its real costs, believing that cash payments come without a price tag. This, of course, fails to take account of the hidden costs associated with cash management, including transport, physical damage to hard currency and loss of interest.
4) Availability of funds
While not as pressing as their concerns regarding securing a guarantee of payment, reducing check out time or associated costs, the availability of funds is also an important factor for merchants, and one on which instant payments obviously have an advantage. Also, some card schemes currently offer several settlement cycles per day (e.g. a transaction made in the morning is credited to the merchant’s account in the afternoon). At present this speed of transfer suits many merchants. If funds availability were to become more important, it is likely that this process could even be accelerated among card schemes, limiting the potential advantage of instant payments.
The above seems to suggest that there are not many truly compelling reasons for merchants to adopt instant payments. However, this does not mean instant payments have no potential to grow as a point of sale option. Although the merchant has decisions to make on which payment methods to accept, it is an inescapable fact that it is the customer who decides how he or she wants to pay and will select a payment method based on a different set of priorities or criteria.
For consumers, a growing number of payment methods, brands and channels have appeared in recent years, usually with still a rather limited reach. This can create confusion. The customer will generally choose the most convenient channel (e.g., mobile, NFC, QR code, home banking) and payment brand to initiate and complete the transaction, taking into consideration ease of use, security and cost. The actual payment means (card, credit transfer, direct debit) behind the scenes is less likely to be the key decision factor.
The priorities for consumers include:
Methods of payment are habitual and take time to change. End users have become accustomed to paying by card. They are comfortable with the process knowing that their risk is limited. Trust has been developed, so as a method of paying for goods and services, it is not set to change quickly. With the arrival of instant payments, questions of trust must be addressed, such as knowing that their account details are secure and not kept by the merchant.
Initiating a card transaction is a quick and convenient process, which almost everyone in Europe knows and is familiar with. Initiating an instant payment at point of sale, by contrast, is not yet as familiar or convenient. For instance, the customer may be unsure about which device initiates the transaction: whether it is their mobile phone or one of the merchant’s devices or a combination of the two. As different initiation technologies are proposed for instant payments, they also involve many customer experiences. It is likely that there will be a number of trials and different initiation methods before one or two emerge as the preferred, and therefore standard, options.
Another key aspect of convenience is the acceptance network. All merchants will accept cash and almost all merchants will accept cards, but until all merchants accept instant payments, customers will, rather inconveniently, still need to always have cash or cards to hand.
Because most people dislike being charged when purchasing goods and services, we assume here that all means of payment are free to the end users, at least on a per transaction basis. Therefore, all payment means can be considered equal on this criteria.
Most customers feel secure when paying by card using a PIN as they know that they have some financial protection if their card is lost or stolen and used fraudulently. End users may eventually accept that instant payment is as secure as paying by card, but question whether their account details are safe. Cash has some physical risks of loss and damage, but is a far more limited way compared to identity or card information.
Deferred debit and credit cards enable customers to pay for large transactions in instalments if they wish. They can also make decisions to make purchases they cannot instantly afford and manage repayment. Cards will continue to have this advantage over cash and instant payments.
Instant, cashless payment is a powerful trend which will continue to expand and take market share from conventional methods. It will eventually replace its batch homologues. However, there remain several major problems which must be solved if it is to become a significant means of payment at point of sale: consumers must be comfortable with the transaction initiation process, have the same degree of trust in instant payment as they do with card payments, and the acceptance network needs to grow dramatically. The other issues of transaction cost and transaction time will likely be solved as the procedure becomes more widely adopted and understood. These challenges, while significant, are surmountable.
Pierre-Antoine Vacheron is the Executive Vice-President and CFO of Ingenico Group
Related articles in this issue:
Related articles in previous issues:
Instant Payments – a Winning Bet? ( Newsletter, Issue 26, April 2015)
The European Court of Justice Has Ruled that Interchange Fees Are Permitted if They Provide Benefits to Merchants. What are the Implications of the MasterCard Judgment for Interchange Fees in Europe? (EPC Newsletter, Issue 24, October 2014)
Card Interchange Fees Regulation: What is the Right Question? (EPC Newsletter, Issue 21, January 2014)
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