CARI Analysis: Digital Payments No Longer a Luxury in the New Normal

CARI Analysis: Digital Payments No Longer a Luxury in the New Normal

Author: Imran Said Shamsunahar | Research Editor: Eleen Ooi Yi Ling
Webmaster: Nor Amirah Mohd Aminuddin | Research Director: Hong Jukhee

1) Health concerns driving increasing usage of digital payment services

The COVID-19 pandemic has led to increasing concern over the possible transmission of the virus through the handling of physical cash. It has generally been understood by scientists that the risk of viral transmission by banknotes is low as compared to other frequently touched objects.¹

The head of the German public health institute, Lothar Wieler, noted in March 2020 that “(viral) transmission through banknotes has no particular significance”, as airborne droplets from infected individuals are the main infection risk. Moreover, experts note that washing hands after touching cash or other objects may help to reduce the risk of transmission.²

Regardless of expert opinion, recent research by the Bank for International Settlements found a huge spike in Internet searches concerning viral transmission by hard cash during the COVID-19 pandemic (see Figure 1).³

Breaking down the searches by country, it was noted that searches were more prevalent where more small-denomination banknotes (the ones commonly used in everyday transactions) were in circulation relative to the GDP (see Figure 1).⁴

According to Capgemini Research Institute, health concerns caused by the pandemic have seen 46% of global consumers say they will increase their usage of digital payment systems in the next 6-9 months (see Figure 2).⁵

The research by Capgemini recommended that retailers around the world aggressively increase the adoption of e-payment systems such as digital payment wallets and contactless cards as consumers put more stock into health and safety practises by businesses.⁶

41% of respondents in the survey also noted that they would prefer to frequent stores that do not have touch-based self-checkout systems for the next six to nine months (see Figure 3).⁷

In response, retailers were also recommended to adopt autonomous self-checkout systems with mobile phones, as it allows consumers to practise social distancing and avoid as much physical contact at the point-of-sale as possible.⁸

2) Use of cashless payments are expected to boom during and post-COVID-19

Research by the Asian Banker has found that the share of cashless payments are expected to grow by 9% in leading economies in 2020, led by China, Japan, Singapore, and the UK (see Figure 4).

Bain & Company had raised their estimations of the share of global transaction values conducted digitally in 2025 by 5-10% in response to the structural changes caused by COVID-19 (see Figure 5).¹⁰

3) Not all digital payment options are risk free from physical contact

It should be noted that not all cashless payment methods are immune from physical contact and the risks of viral transfer. A 2020 study by van Doremalen et al (2020) found that COVID-19 survives best on non-porous materials, which could include credit/debit card terminals or PIN pads (see Figure 6).¹¹

This could prove problematic for certain digital payment options such as debit and credit card transactions, which generally require a signature or PIN entry at a merchant-owned device for larger transactions.

Contactless card options, on the other hand, do not require a PIN for smaller transactions. An April 2020 survey by Mastercard of 17,000 consumers in 19 countries worldwide saw contactless card transactions grow twice as fast as non-contactless transactions globally in February and March 2020. Mastercard attributed this to increasing concerns by consumers over health and safety at the point of sale when buying essential goods, as well as wanting to reduce time spent at stores by as much as possible. ¹²

Among their findings included:

• 46% of respondents globally swapped their top-of-wallet card for one that offered contactless. In the Asia Pacific, 51% of people made the swap.¹³
• 82% of respondents globally viewed contactless as the cleaner payment method, with 80% in the Asia Pacific saying the same.¹⁴
• 74% of people globally and 75% in the Asia Pacific stated they would continue to use contactless after the pandemic is over.¹⁵
• Data by Mastercard found 40% growth in contactless transactions globally in the first quarter of 2020. More than 80% of contactless transactions were under US$25, a range typically dominated by cash.¹⁶
• Mastercard saw the number of tap-and-go card payments at grocery stores and pharmacies grow twice as fast as non-contactless transactions globally and 2.5 times faster in the Asia Pacific alone.¹⁷

Digital wallets or other smartphone-based payment systems (such as stored card details or QR codes) are another solution due to the lack of physical contact required. Online banking is of course another alternative for a non-contact cashless payment system.

4) Digital Payments will spearhead the growth of Digital Financial Services in ASEAN

A joint study by Temasek and Google conducted prior to the pandemic found that Digital Payments were expected to spearhead the growth of the larger Digital Financial Services industry within ASEAN. The Digital Payments industry was expected to cross US$1 trillion by 2025, with e-Wallets alone composing US$114 billion (see Figure 7). It was believed that by 2025, digital payments would account for nearly one in every two dollars spent in the region.¹⁸

However, widespread usage of digital payments may have a long way to go. According to a January 2020 survey by We Are Social, only Thailand and Singapore saw a higher percentage of its population use mobile payment services monthly as compared to the global average of 27%, with Thailand measuring at 40% and Singapore at 31%, respectively¹⁹ (see Figure 8).

5) Digital Payments may not necessarily promote greater financial inclusion

Temasek and Google found that 104 million adults in SEA are fully Banked, meaning they enjoy access to full Financial Services. A further 98 million are Underbanked, meaning they have a bank account but lack access to credit, investment, and insurance services. A remaining 198 million in Southeast Asia are deemed Unbanked, meaning they have no bank accounts at all (see Figure 9).²⁰

In ASEAN countries such as Vietnam, Indonesia, and the Philippines, the unbanked compose the majority of the populace (see Figure 9). ²¹

Among the reasons for this can include issues of cost. In a sprawling region where physical infrastructure is lacking, it is prohibitively expensive for financial institutions to build physical branches that can serve all customers. Other challenges include the absence of public registers, identification systems and reliable credit information; basic prerequisites for financial institutions. Moreover, banking is a tightly regulated sector in many Southeast Asian nations, a legacy of the 1998 Asian Financial Crisis. Competition and innovation, as a result, have been stifled. ²²

Different consumer segments present different opportunities and can be best served by different players. Underbanked Consumers have been identified as the true growth engine of the Digital Financial Services industry. The report by Temasek and Google suggested that Consumer Technology Platforms (such as regional Internet platforms such as Gojek, Grab, Lazada and Sea Group) are best placed to serve this segment, due to their large customer base.²³

Contrary to popular narratives, serving Unbanked Consumers may prove to be the hardest undertaking. Acquiring customers in this segment can be expensive as compared to the returns made. Established Consumer Players such as telcos and retailers may be best placed to serve them through their extensive physical distribution networks.²⁴

Despite claims that digital financial tools such as e-wallets are a means to improve financial inclusion, a 2019 report by Boston Consulting Group (BCG) on e-wallets usage in Southeast Asia found that it was largely utilized by customers who already use traditional banking services. ²⁵

In Indonesia the same research found that 57% of banked respondents used e-wallets, compared with 26% of underbanked Indonesians and only 14% of the unbanked. In Vietnam, e-wallet usage was 42% among the banked and 17% among the unbanked. Thirty-one percent of banked Malaysians used them, but only 9% of the unbanked (see Figure 10).²⁶

The BCG survey also found that one of the biggest hindrances to widespread adoption of e-wallets in most Southeast Asian countries was acceptance by merchants. 56% of respondents across the region in BCG’s survey cited ‘not accepted by merchants’ as the main problem with using e-wallets. They also found that only an average of 28% of retailers in Indonesia, Malaysia, Thailand, and Vietnam accept e-wallet payments.²⁷

When analyzing reasons why merchant adoption of e-wallets was so low, BCG found that 58% of merchants across the region agreed with the statement ‘I do not completely understand this payment process’ as the most important reason for not accepting payments through e-wallets. Another 45% stated that inconvenience in processing the payments through this option was their top reason (see Figure 11).²⁸

6) Digital Payments platforms will still face a tough 2020

The global payments industry will see decreasing revenues in 2020, with a slowing global economy in the wake of shuttered businesses, restricted movements and closed borders contributing to a slump in global transactions. A March 2020 report by McKinsey projected that global payments revenue would decline by US$165 billion in 2020, 8% lower than in 2019 (instead of a 6% increase against the base of US$1.9 billion projected before the crisis) (see Figure 11).²⁹

A more pessimistic scenario, which would see a muted recovery by global economies, projected a decline in global payments revenues of 10-12% in 2020 as compared to pre-crisis levels. McKinsey determined that 80% of the decline would be due to a drop in the volume of global payments (see Figure 11). ³⁰

Different payment players will be impacted differently depending on their exposure to various sectors. An April 2020 report by PricewaterhouseCooper projected that payment platforms with large exposure to the aviation, tourism and hospitality, electronics and consumer durables sectors would be negatively impacted by the decrease in transaction volumes. Concurrently, those exposed to sectors such as physical retail, telecoms, e-Commerce and healthcare and pharmaceuticals could expect to see increases in consumer transactions. ³¹

7) Conclusion

The rapid spread of COVID-19 in the beginning of 2020 has meant that health concerns, particularly public worries about the transmission of the virus through the exchange of physical cash, are now a new factor in consumer’s choice of payment options. Although the scientific consensus thus far is that the risk of viral transmission of the virus remains limited, many retailers and consumers have sought to play it safe by increasing the usage of digital payments under the ‘new normal’.

ASEAN governments have also encouraged the adoption of digital payments. In early April 2020, the Monetary Authority of Singapore stated they were working closely with The Association of Banks in Singapore (ABS) to promote greater adoption of e-payments among individuals and businesses. Likewise, in early March Vietnamese Prime Minister Nguyễn Xuân Phúc requested the State Bank of Vietnam (SBV) to develop a pilot plan to popularise mobile payments, and later in April requested the Ministry of Information and Communication to join forces with the SBV to put mobile payments into circulation.³²

Not all digital payments options are completely immune from requiring some form of physical contact. Debit and credit card transactions often require a PIN entry or signature at the merchant-owned terminal for transactions above a certain amount. This may prove problematic, as a 2020 study by van Doremalen et al suggested that COVID-19 survives best on non-porous materials including credit/debit card terminals or PIN pads. Contactless card payments, on the other hand, often do not require a PIN for small transactions, and indeed on March 25, 2020, the European Banking Authority encouraged payment service providers (where possible) to raise their contactless payment thresholds to the maximum threshold of €50 per transaction.³³

Although studies have suggested a mass shift towards digital payments options in the wake of the ‘new normal’ (and which is expected to persist over the coming months), not all digital payments platforms are expected to benefit equally. A global slowdown brought on by supply chain disruptions and government-enforced lockdowns will inevitably cause a drag on global expenditure. Greater exposure to vulnerable sectors, including aviation, tourism and hospitality, and consumer electronics, will prove detrimental to revenues due to slumps on transaction volumes.