We are entering a new era of payment. Just as half a century ago, cards revolutionised the way we pay for services - and just as e-commerce disrupted the market as we entered the 21st century - now the march of mobile is changing the payment landscape. In 2014, for the first time, fewer than half of all payments by customers and businesses were made using cash.
Industry association Payments UK predicts that the volume of cash payments is set to fall by 30 per cent over the next decade as people migrate to debit cards, and particularly contactless payments. Every month, around 40m contactless transactions are made. Take the places where people are still most likely to spend their cash: newsagents, pubs or clubs and convenience stores. These are all environments where contactless payment is making significant inroads, and small payments are its most common usage. Currently, a quarter of all payments are for a value of less than £1, and more than half are for totals less than £5.
This is a widespread social shift. Last July, taxi driver Ian Cable became the first cabbie to accept payment by mobile phone, while the progress of Uber speaks for itself. Londoners can no longer count out their shrapnel to get on a bus, and now the arrival of Apple Pay means that commuters can even use their smart watch to pay for their journey to work, demonstrating the speed of the rise of 'wearables' in our increasingly digital economy.
Other companies vying for your digital coin include our buy tip Barclays (BARC), which has a bPay wearable range including a wristband, fob and even a sticker that can be used with participating retailers. Visa (US:V) has its own V.me, which can be used online or via a smartphone to save you fumbling for the correct card at the checkout. Add to that the phone pay products from Google (US:GOOG), Samsung and others and you have a plethora of digital payment options.
For the retail investor, there is a range of London-listed players that can give exposure to the cashless payment industry. These companies provide consumers with the technology to pay for parking without having to scrabble around in their glove box for spare change, or settle their gambling bills without having to take a slip to the counter of their high-street bookies. Our technology correspondent, Theron Mohamed, has identified the listed companies that hope to gain from the slow death of cash (see box).
Dirty money The public perception of cash as dirty is bang on the money. A 2012 study carried out by Oxford university in conjunction with MasterCard (US:MA) found the average bank note contained 26,000 bacteria. That is perhaps not surprising, given the £20 note changes hands more than 2,000 times in its lifetime. Cash is widely seen as dirty - a MasterCard survey last year showed that consumers across Europe see it as less hygienic than bar snacks, or public transport hand rails. But despite this, only one in five people wash their hands after using cash. More than a third (39 per cent) of the survey respondents said they would consider using card or contactless payment rather than cash in a bid to be more hygienic. But it should be added that our trusty smartphones are not much better on this front, with a recent Which? survey finding these devices quite literally had more bacteria than an office toilet. |
Digital cash
Payment technology is just one example of how the high-street banks are racing to catch up with the changing face of personal finances. Earlier this year, Barclays became the first bank to let you pay someone via their Twitter handle (you can find me at @iankmsmith). That is via its Pingit app, which currently boasts 3.7m downloads and 57,000 companies signed up.
The major high-street lenders are all also signed up to Paym, a system that lets you pay someone using their phone number, rather than having to take down their account number and sort code. More than 1m people signed up to this within 100 days of its launch, according to banking trade body BBA. Within the first nine months, £26m had been transferred. The most common payments have a social flavour: reimbursing a friend for a meal or a concert ticket, or buying a group present.
The banks are further investing in start-ups in an attempt to find the latest technology to engage them with digitally savvy customers. These attempts encompass the weird and wonderful. It is fair to say that banks are not close to the nation's hearts, but Halifax - one of the retail banking operations of Lloyds Banking (LLOY) - is doing its best to change that. It is trialling technology that will verify customers for its banking app based on their heart's electronic signal.
Royal Bank of Scotland (RBS) offers the ability to log into mobile banking via fingerprint technology. Mobile is a huge and growing area of importance for the lenders. Some 23m banking apps have been downloaded so far, according to a BBA report published this summer. That figure was up more than 8m in a single year. Some £2.9bn is transferred each week using banking apps.
Social payment
Howard Allen, development director at social payments app Payfriendz, describes himself as a "human ATM". In his office of digitally savvy 20-somethings, he is a vital resource as one of the few more mature colleagues who still carry cash - proving that the old school still holds some sway.
Payfriendz is a social platform built on a payment infrastructure, which allows people to send and request money from friends and colleagues, from a pre-paid account, "whether it is a social event or a couple of mates going out for lunch," says Mr Allen. Users can also draw on their balance to shop online.
Payfriendz's online advertising campaign features a millennial totting up the cost of a night out before the payments from his friends come flowing in. Mobile payment, in this social form, is more than just an extension of e-commerce, argues Mr Allen. It is more of a social phenomenon.
"There is a completely different set of consumer behaviours that will change over the next five years," he says, adding that cashless transport was encouraging a wider change: "[That] has been instrumental in changing and moving consumer behaviour along."
Stuart Haire, managing director of direct banking at RBS, where he is responsible for digital banking services for RBS and NatWest, says the key ingredients of payment are "ubiquity and ease".
Paym is an obvious example, but the banks are all trying to find a balance between removing the barriers to payment and protecting security. For example, RBS is now allowing customers to send payments below £250 without having to add a payee via a card reader.
This is responding to clear customer demand for easier payment options. For example, the bank was "blown away" by the adoption of Apple Pay, Mr Haire added. "There is a group of customers that really just want this type of stuff and we are there to give them the choice."
Those looking for positives from this shift for the major lenders will present the newer technologies as ways for them to improve their relationship with their customers. Mr Haire says: "For a bank it will be about being agile, and mobile, and responsive." He argues that it is not about getting rid of cash, it is about "respecting customer choices".
Uncertain future for note printers? It may be unsurprising given the tone of this feature that we have banknote printer De La Rue (DAR) on a sell tip. In fact, it is the tough competitive environment in the printing market that has been hard going for the company. Over-capacity in its core markets has led to lower prices on bank note paper and printing has hits its turnover. In the year to the end of March, its revenue from this business was down 7 per cent to £318m. The company tried to move with the times by creating its own more durable polymer banknotes, but it has competition here from overseas in the form of Giesecke & Devrient of Germany and Oberthur of France. De La Rue is also trying to grow its security and identity divisions, the latter including holograms, which are used to verify bank notes. At 498p, the shares are down 10 per cent on our sell tip (551p, 30 Apr 2015). |
The Digital Provvy
Provident Financial (PFG) is probably not a name that many would associate with the cashless economy, as it remains better known in some quarters for its home credit, or doorstep lending, business.
In fact, the home credit business is close to being equalled in revenue terms, and is already being dwarfed in profitability by the company's subprime credit card division, Vanquis, which also lends to people that have a spotty credit history.
Vanquis customers apply online, and only need submit to an in-depth credit check and phone call before they receive their first credit line, which starts out as little as £150. Customer numbers hit 1.4m by the end of June, up 16 per cent on the year before.
The Provvy is also investing heavily in Satsuma, its home credit product for the cashless economy. This is a growing business for people who want to borrow small sums of money online without the need for a visit from one of the company's local agents. "Satsuma has a younger audience, while the typical home credit audience is middle-aged people with kids," says chief executive Peter Crook.
The younger online borrower is also equally likely to be male as female, whereas the typical doorstep lending customer is female, usually using the cash to manage the family finances.
The rise and fall of doorstep lender Wonga is another clear example of how financial services is adapting to a generation that wants access to short-term cash online, rather than physical cash on the doorstep.
Not dead yet
Building on massive demand, the upper limit of £20 on a contactless transaction is to rise to £30 from September, which should further drive the growth in these payments and the number of retailers that offer them.
But clearly contactless payment is not without its flaws. A study in July by consumer group Which? found that a very ordinary card reader bought off the internet could be used to remotely steal people's card details.
Researchers were able to read the card and expiry number - though not the security code - from all of the 10 cards it tested, which were a mixture of credit and debit. They were then able to use the details online to buy a £3,000 TV.
Aside from these security concerns, it is clear that cash will continue to have a role in our changing economy. There are many groups for which it will remain relevant, such as the 'unbanked' population; those who have less access to lending due to a poor credit history, for example; or simply those who do not want purchases to show up on their bank statement.
This staying power is borne out by the Bank of England's own figures. The number of bank notes in circulation has increased every year for the past decade and now stands at 3.2bn, although inflation is undoubtedly a factor. "People were trying to write off cheques for years, you know, and they were quite hard to kill," says Payfriendz' Mr Allen. "I think cash will be like that too."
Indeed, cheques have been given another lease of life by mobile imaging. Legislation passed earlier this year will require banks to process all cheques as images by 2017. Following on from innovation in the US and abroad, Barclays' customers can now take a photo of their cheques to pay them into their bank account.
The digital social links between friends and families and casual acquaintances are building all the time - just consider the march of WhatsApp, Snapchat, Instagram and other social platforms. Payment between these groups as a digital social transaction is clearly the direction of travel. While the growth of e-commerce, 'one-click' shopping and online lending demonstrate consumers will indeed follow the path of least resistance to get what they want. Contactless payment eliminates just one more hurdle. These are very much the baby steps of our cashless economy.
