The four stages of payment development

By Jesper Domargård, Director Marketing Payment at Morpho

All over the world, the payment industry is transforming at an unprecedented pace. Broadly, one can sort the various countries and regions into four different stages of development, and for the payment industry it will be pivotal whether the transformation is "linear" from stage to stage, or if consumers take the leap directly from cash to mobile payments.

1/ Cash to cards transformation

Cash still widely dominates as the way to pay in many parts over the world, but according to Euromonitor International global consumer card payments surpassed cash payments for the first time in 2016. As it is recognized that electronic payment is a key enabler of economic growth, numerous government-driven initiatives strive to stimulate a reduction in cash payments. The arguably most dramatic example is India, where the government with little notice banned all 500 and 1,000 rupee notes in November of last year, thereby taking 86% of the country's cash out of circulation. China initiated an active conversion approach more than a decade ago, and today the Chinese card network UnionPay is the world's largest in terms of cards as well as transactions.

In some countries, notably in Scandinavia, the transformation away from cash has gone so far that more and more stores no longer accept cash.

2/ Magstripe to chip (EMV) migration

The world's first payment cards saw the light in New York in 1950. These were Diners cards made out of cardboard, with printed ink displaying the card details. The payment card proved an enormous success, and by 1970 evolved into a plastic card with a magnetic stripe (magstripe) containing the card details. Over the last few years, many markets have migrated from magstripe to chip cards, notably as a mean to increase security. The US, the world's biggest non-cash payment market in terms of value, is currently in the midst of such a migration, and consequently fraud decreased by 52% at chip-enabled US merchants during 2016. In India, the regulator has mandated that all (Indian) banks replace existing magnetic stripes on credit and debit cards to EMV chip cards by December 2018.

3/ Enabling contactless card payments

Typically, a magstripe card is swiped through a terminal, and the payment slip signed by the cardholder, whereas a chip card is inserted into the payment terminal and the transaction is authorized by the cardholder by entering a PIN in the terminal. In order to increase speed and convenience (notably for transactions under a certain threshold, e.g. €30) more and more cards are being equipped with an antenna to enable contactless card payments. The card is simply tapped to the terminal, and for low-value payments no further authorization is required. Europe is leading the charge when it comes to contactless transactions, notably in Eastern Europe and the UK. In the Czech Republic, well above 60% of the card payments are contactless. Outside Europe, Asia-Pacific is the region with the highest levels of contactless transactions, notably Japan, Australia, New Zealand and Singapore.

4/ Trend to in-store payments from a smartphone

In recent years, shopping (and payment) has evolved dramatically, not the least via e-commerce. We have also seen an uptake in the consumer being physically present in a store, paying with his or her smartphone. Two main usages have emerged:

  • either the consumer orders and pays in an app, gets a payment confirmation in the app, shows this payment confirmation to the cashier, and the cashier hands over the goods (the Starbucks app arguably being the best-known and most successful example),
  • or the consumer taps his or her smartphone to the payment terminal and the smartphone communicates with the terminal in the same way as a contactless card (Apple Pay, Samsung Pay and Android Pay being the most frequently cited examples)

So far, the adoption rates have fallen somewhat short of expectations, though segments like quick service restaurants expect ordering and paying ahead through apps to account for 10% of sales by 2020.

As mentioned above, the payment future will to a large degree depend on how and to what extent regions and countries evolve through these stages. Will countries where cash dominates today embrace card usage tomorrow, or will they "jump" directly to mobile payments? Countries such as Kenya, where the mobile payment solution M-Pesa has been extremely successful, would suggest the latter. However, history speaks for the first, as the path of economic growth and development has gone from unbanked to banked, with "banked" meaning a current account and consequently a bank-issued payment card. Furthermore, in countries where card payments have long dominated, habits take time to change: despite several attempts to abolish them as a means of payment, 477 million checks were written in the UK in 2016 alone. The most recent development indicates that one form of payment will not necessarily replace the other, rather that they will co-exist to enable not just new ways to pay, but a whole new consumer journey.