Covid-19 accelerates changes in global payments industry

The crisis has compressed a decade’s worth of change into less than one year, finds a new McKinsey report

The pandemic has accelerated existing trends in the payments industry, including shifts toward touchless payments, instant payments and cash displacement. Getty Images

Global payments revenue in the first six months of 2020 contracted 22 per cent, or $220 billion, from a year ago due to the  impact of the Covid-19 pandemic, according to a new report by McKinsey & Company.

The management consultancy expects revenue for the entire year to be about $140bn lower than in 2019, a 7 per cent decline from a year earlier.

"Remittances, which constitute a large portion of the payments revenue in our region as Saudi Arabia and the UAE are two of the top remitting countries in the world, are expected to decline by 20 per cent this year in the Middle East," associate partner Jon Chan told The National.

“For credit cards businesses in the UAE, the halt in international travel [took] a toll on banks because 20 per cent of all transactions come from travellers to the UAE," he said.

"With travel halted, that revenue was foregone. Overall spending declined, particularly in non-essential categories locally, and international spending also decreased as many residents and citizens in countries across the GCC could not travel during the pandemic.”

The pandemic has also accelerated existing trends in the payments industry, including shifts towards e-commerce, digital payments including touchless transaction, instant payments and cash displacement.

“The crisis is compressing a decade’s worth of change into less than one year. Change in 2020 takes place four or five times faster than before. This puts all actors on the payments landscape under pressure to transform and adapt in order to preserve their positions and results,” the report said.

The pandemic and the stay-at-home restrictions it triggered resulted in a steep reduction in discretionary spending globally.

“Our consumer surveys and research show that consumers expected to spend 50 to 70 per cent less after the pandemic outbreak, across discretionary categories such as footwear, apparel, jewellery, accessories, furniture and appliances," Mr Chan said.

"There is increased preference for credit cards for online spend, followed by digital wallets, while payments at points of sale suffered a setback especially during the lockdown.”

There will be a 35 to 45 per cent net increase in customers who will shift spending online, particularly in categories such as groceries, home essentials

As the global economy begins to emerge from what is considered to be the deepest recession since the Great Depression, analysts predict the uptake of digital payments will accelerate.

In the UAE, two thirds of people expect the country to become fully cashless by 2030, according to a new poll by Standard Chartered.

The McKinsey report noted a significant consumer shift from point-of-sale transactions to digital commerce, which resulted in the reduced use of cash.

Cash has been the dominant method of payment across all Mena countries. Before Covid-19, it accounted for 70 per cent to 98 per cent of all retail transactions, depending on the country.

A McKinsey survey of UAE customers about their spending habits revealed that they were 10 per cent more likely to use a credit card or a digital wallet, while 20 per cent were less likely to use cash when making a payment.

“We have seen cash decline across all countries, partially due to lower spend overall but also because of a shift towards the use of cards and digital payment methods,” Mr Chan said.

Cash has been the dominant method of payment across all Mena countries. Prior to Covid-19, cash accounted for 70 to 98 per cent of all retail transactions, depending on the country. Photo: Ryan Carter / The National

The report estimates a shift of 4 to 5 percentage points in the share of global payment transactions made through cash, down from 69 per cent in 2019, in both mature and emerging markets.

While there is no single number to gauge the decline in cash use, McKinsey used several measurements to ascertain the drop in cash use.

All forms of electronic peer-to-peer and consumer-to-business payments, however, received a boost. Higher limits for contactless payments also triggered rising adoption rates globally.

While there has been rising adoption of debit cards for lower-value transactions among contact-averse consumers, users in certain geographies were paying off their credit cards in preparation for challenging times ahead, report said.

“In Australia, credit-card share among total card spending fell by five percentage points between February and June 2020, in favour of debit cards," the report said.

"In Asia, however, alternative payments, such as instant and mobile payments, grew, while credit cards retained their strong incumbent position supporting e-commerce and PoS transactions.”