Woman uses a mobile phone to make a digital transaction on an e-commerce website.

Fintech Payments: The Shift to Digitization


The pandemic has caused an increase in contactless payments. We talk about the future of buying behaviors, e-commerce, and risks to consumers and business.

The effects of the COVID-19 pandemic are far-reaching, extending to nearly every business sector, and touching their operations in unprecedented ways. Among the areas that have experienced disruption is the payment space, which has seen major shifts, mainly driven by the change in consumer behavior in the wake of the global crisis.

Some reports have indicated that these shifts due to COVID-19 have accelerated the growth of online spending, technology evolution, adoption of contactless payment, and growth of mobile banking by several years—possibly even an entire decade. As a result, many merchants have had to quickly evolve in order to accommodate changing preferences for payment methods.

The pandemic has both sparked growth in some areas while simultaneously constricting other traditional methods of payment such as cash and checks. It has created novel security challenges, too. Many of these developments and changes may have long-term implications for the payment space.

The Importance of Contactless Payment

The accelerated adoption of contactless payment has been one of the most notable effects of the COVID-19 pandemic.

Pre-crisis, many consumers didn't see the need to use contactless payment when they could use their card directly at a point of sale, says Dan Komitor, Managing Director, Technology, Media & Telecommunications Group at Fifth Third Bank. Now, with many consumers being more cautious about their behaviors, contactless payment use has risen significantly across multiple age demographics.

Tap-to-pay and e-wallet transactions rose 40% in the first quarter of 2020. The number of cards enabled with contactless technology has surged as well; according to S&P Global, Visa reported the addition of more than 80 million contactless cards in the first half of 2020 alone and saw a notable rise in tap-to-pay penetration across 50 countries. Forecasters believe these shifts in behavior will be permanent.

Digital wallet payments, through the use of near-field communication (NFC), have also increased and are likely to continue high rates of adoption. As this type of payment use rises, major financial institutions have had to raise transaction limits for contactless devices to enable customers to pay in their new, preferred manner.

Komitor adds that merchants have had to quickly adapt to being able to facilitate "card not present" transactions—something that some, particularly smaller merchants, were not set up to do before the pandemic. Now, these merchants are able to help customers who can't be present with their physical credit card, both because of preference as well as necessity, due to stay-at-home guidelines. This has been essential to enabling brick-and-mortar stores to transition to click-and-collect shopping destinations, both enabling these merchants to generate revenue and meet specific, new customer demands.

The E-Commerce Explosion

Even though retail sales were down significantly across the U.S. during the first six months of 2020, e-commerce is booming due to COVID-19. Along with a higher volume of sales across e-commerce, the percentage of transactions performed online is expected to rise to a quarter of all retail sales. Data from one survey showed that e-commerce purchases spiked 25% from early to mid-March. Goods including groceries, games and hobbies, and health supplies have experienced significant sales booms; the same survey showed that restaurant take-out alone jumped 29%.

The main drivers for this transformation include both necessity and preference. For instance, some merchants may no longer accept cash due to concerns around hygiene. In addition, many consumers who are used to shopping in brick-and-mortar locations are hesitant to do so because of safety concerns around virus exposure.

He adds that many smaller merchants that did not have an online portal for sales have had to quickly set up a digital payment system, which means they are often turning to fintech companies that can help them rapidly implement an e-commerce setup. These resources for small businesses are essential, as competition has skyrocketed among merchants due to this quick—and necessary—shift to e-commerce amid the pandemic.

A higher volume of e-commerce payments brings challenges to small merchants, however. Komitor points out that merchants are also experiencing higher risk with increased digital payments, particularly regarding chargebacks—especially those in leisure and travel spaces, where consumers are canceling future events amid global uncertainty. For smaller merchants, these chargebacks can be devastating, especially if they don't have the liquidity to cover the portion for which they're now responsible.

The Generational Behavior Discrepancy

Younger consumers, such as Millennials and Gen Z, are generally more comfortable with modern payment technologies including contactless and digital wallets. However, their habits have changed in the wake of the pandemic as well, particularly with regard to increased adoption of peer-to-peer payment services, such as Venmo. These groups have also moved toward digital banking—nearly half of 18- to 34-year-olds adopted online or mobile banking for the first time amid the pandemic.

Changes have occurred for older generations, too. Many older consumers who are used to paying for utilities with cash or check, have had to quickly migrate to using online bill pay, says Komitor. He also notes that this online bill payment is among the top payment methods seeing in an increase in usage due to COVID-19.  Older consumers have adapted to some new mobile banking features, such as Zelle, to make payments. Since March 2020, Zelle has seen a substantial increase in both new users and person-to-person payment volume.

Pre-pandemic, Komitor says that the digital migration for older generations had been slow because many within this group have traditionally been concerned about the security of online bill payment. However, these consumers have now come to rely on mobile platforms to complete transactions—a more relaxed attitude that has allowed older generations to catch up to their younger peers.

Effects on the Unbanked

Those without bank accounts have experienced a shift toward digitization as well. Prior to the pandemic, the unbanked and underbanked have been excluded from using digital payments or had significantly less access to them. The reasons varied—for example, some had bank accounts but no home access to the internet, while others did not have a bank account at all. Now, however, access has opened due to both policy shifts, new innovations, and consumer demand.

For instance, amid the pandemic, instant access to wages is more important than ever. As a result, many employees have encouraged employers that traditionally pay via check or direct deposit to implement digital same-day payroll solutions. This allows immediate access to wages, tips and reimbursements, which may encourage unbanked consumers to participate in digital payments in order to reap the benefits.

Both the U.S. government and large financial institutions are also implementing changes that may help unbanked and underbanked customers enter the digital payment space. For instance, future COVID-19 relief payments may be issued through new prepaid cards, according to a new ruling from the Bureau of Consumer Financial Protection. Subsequently, consumers may become aware of the ease of use and convenience of prepaid cards, which could, in turn, help move unbanked individuals toward utilizing digital payments.

The Security and Risk Challenges

Although many elements of the payment space have seen boosts, there have been some drawbacks to increasingly cashless consumption. Particularly, fraud and phishing have become major concerns.

With the increase in purchases via card not present transactions, fraud has increased, says Komitor. The volume of digital transactions is another factor in increased fraud; he adds that cash is more difficult to defraud since there isn't an element of data access with these types of payments. Additionally, Phishing attempts have increased, with one major security firm reporting a nearly 700% spike in these attacks since March.

All of these changes have exposed a new, obvious need for advanced fraud protection. There is an opportunity and urgency for companies to update existing modes of protection as well as the opportunity to innovate with new technologies to thwart criminals.

The Future of the Payment Space

Although it's impossible to be certain of the pandemic's long-term effects on the payment space, there are early indications that many of the shifts that have happened amid the coronavirus may endure. For instance, 70% of consumers who tried contactless for the first time report that they'll continue to use the technology, even after the pandemic has been contained.

As such, new consumer preferences for innovative payment options and e-commerce portals may drive increased adoption of new technology, and continue to be the preferred methods to pay for goods and services. Additionally, since it's unknown how long the pandemic will continue, these new consumer preferences may continue to drive the adoption of digital technologies, for both merchants and consumers.

For the foreseeable future, consumers will likely place a priority on ease of use, safety and hygiene and will be sensitive to touching surfaces. This means that they are likely to avoid using cash and pushing buttons during checkout, and may be reluctant to visit physical stores, even when they open. Additionally, according to S&P Global, experts forecast that increased contactless adoption will endure far past the COVID-19 pandemic. As a result, the fintech payment space is poised to continue to develop rapidly, opening both consumers and merchants to new technologies and alternatives in rapid succession.

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