The Long-Lasting Impact of COVID-19 on Digital Payments

The pandemic is pushing contactless payment and mobile wallets into the mainstream, setting up a cascade of implications

Photo by Jonas Leupe on Unsplash

Back in April when we identified the COVID-19 pandemic as a trend accelerator, one of the developments that we recognized was the uptick in contactless payment usage. Now, a few months later, it is becoming evident that 2020 is an inflection point for digital payment adoption in the U.S.

The sustained need for public hygiene at checkout, along with heightened demand for easier ways to shop on mobile, to receive stimulus checks, and to make donations to social causes, has significantly bolstered core segments of digital payments, such as mobile proximity payments, digital wallets, and peer-to-peer (P2P) payments. While the pandemic will eventually subside, the impact it leaves on payments and banking will be long-lasting.

As a result, this accelerated shift in consumer payment behavior will likely further disintermediate consumers from traditional banks and financial service providers, ushering in a more dynamic industry landscape. In response, industry incumbents must quickly adapt to shifting consumer behavior and market reality by rounding out their digital payment ecosystem, both in terms of infrastructure and services.

Accelerated Adoption on All Fronts

Prior to the COVID-19 outbreaks, digital payments, especially mobile payments, were growing incrementally in the U.S. Despite the earnest efforts of major platform owners and fintech players, the penetration rate of mobile proximity payments among U.S. smartphone users last year was only 29%, according to data from eMarketer, which pales in comparison to the near-ubiquitous 81% penetration rate in China¹, but is ahead of other developed markets such as the UK (19%), France (16%), and Germany (13%). One key reason for this lagging adoption in developing countries was simply inertia: people didn’t bother because there had not been a widely known advantage to using mobile payments over existing non-cash payment methods — until now.

The pandemic has changed how people think about their choice of payment options. Following the initial stay-at-home orders in March, the hygiene concerns over handing over cash or payment cards to a cashier and touching the keypads at grocery store checkouts quickly drove many consumers and retailers to adopt contactless payments. According to a recent study from Forrester Research, retailers reported a 69% increase in contactless transactions since January. Further aided by the rise of online orders, digital payments suddenly became a necessity for many.

According to a yStats report released in June, nearly 50% of global shoppers were using digital payments more than before the pandemic, and the majority plan to continue doing so after the virus is contained. In the U.S., nearly one in five respondents to a J.D. Power survey, cited by eMarketer, said they plan to use mobile payments to make in-store purchases more often due to COVID-19. Digital wallets like Apple Pay and Google Pay, as well as EMV cards issued by major credit card companies², are the top beneficiaries of this behavioral change. As consumers made the switch, many retailers and quick-service restaurants followed suit and encouraged using contactless payments.

Besides contactless payments, three additional factors also aided the accelerated adoption of other forms of digital payments, although their specific contributions may be harder to pin down quantitatively:

1. The shift towards online shopping, especially mobile and social commerce, led some to explore digital payment services like PayPal or Apple Pay. The latest data from App Annie shows that mobile commerce boomed during the first six months of 2020, surpassing 2019 holiday shopping levels. Given that most apps and ecommerce sites now integrate with mobile wallets like Apple Pay or Google Pay to create a frictionless checkout experience, it seems safe to assume that at least some mobile shoppers started using mobile payments for a better, more secure shopping experience.
2. The need for a fast and easy way to receive stimulus checks in April drove some people, especially those who were unbanked or underbanked, to sign up for digital payment services like Paypal, Venmo, or Square’s Cash App, all of which allow users to set up direct deposit within their apps without a bank account, instead of waiting for a physical check to arrive in the mail. Digital bank Chime offered up to $200 cash advances a week ahead of the stimulus payments in the hope of acquiring new users.
3. The need for an easy way to make and receive online donations for financial hardships caused by COVID-19 or for causes related to the Black Lives Matter movement prompted some late adopters to download P2P payment apps like Venmo and Cash App, the latter of which recently hit 30 million active users in June, which analysts attributed to recent upticks in crowdfunding and donations, as well as its ability to receive the COVID-19 stimulus payments. Similarly. Venmo also posted record performance in transaction volume and reported over 60 million active users in July.

All of these factors dovetailed to facilitate the adoption and usage of mobile proximity payments and mobile wallets, which present new challenges for banks and credit card issuers. For one, it is harder for issuers of new cards to contend with the default card used in digital wallets like Apple Pay. Studies have shown that most people don’t regularly change the default card in their digital and mobile wallets. For another, it further disintermediates banks and credit card issuers from their customers, as most digital payment solutions have started moving up the stack and branching into banking services.

From E-Wallets to Neo-Banks

Naturally, accelerated adoption of digital payments brings about a correspondingly rapid pace of digital disruption in banking. As mobile payments and fintech apps enjoy their pandemic boost, many are looking to leverage their customer relationships to expand their services. Every digital wallet today is a neo-bank in the making, looking to shake up the financial service industry.

For example, Square has already been expanding Cash App’s features beyond simple P2P transfer with things like Cash Card (a debit card), Cash Boost (a rewards program), and Cash App Investing. Last week, it announced it is testing a small, short-term loan service, which will allow select users to apply for loans in a range of $20 to $200, with a payback period of four weeks. Given that the debt holiday is ending soon, plus the current uncertainty about further stimulus plans, it is a smart move for Cash App to branch out and lend help to users in need.

Interestingly, in order to receive stimulus checks via Cash App, users need to apply and get approved for a Cash Card first. Similar requirements are also in place for PayPal and Venmo, promoting new users to engage with more than its basic in-app features. The goal, of course, is to entrench deeper in users’ personal finance management with a comprehensive set of services.

[Update Sep. 2, 2020: It appears that the unique circumstances have pushed Cash app to a new height in recent months. Driven by the popularity of Cash App, Square’s stock is up 28% in the past month and 166% in the past year; Cash App saw revenue double to $325M million in Q2 2020, the Wall Street Journal reports.]

Another common objective shared by many fintech services is to eventually level up and build a commerce ecosystem that serves both consumers and merchants. Both PayPal and Square are aiming to serve both sellers and buyers with a mix of business-oriented and consumer-facing products. Square is one of the market leaders in digital POS systems and provides a “one-stop shop” service to its business customers with integrated payroll and banking services, whereas PayPal also sells credit card readers and POS software that primarily serve small businesses.

Apple also recently got into the vendor side of digital payments by acquiring Mobeewave, a Montreal-based startup whose flagship app can turn iOS devices into NFC-equipped POS terminals. Considering that Apple has a history of acquiring startups and integrating their core capabilities into their own services, it seems safe to assume that one day soon, merchants will be able to use their iPhones to receive contactless payments from others, no tangling credit card reader plugs needed. While this may hurt Square’s business, it would significantly broaden the use case for Apple Pay and build out Apple’s financial service ecosystem underpinned by the Apple Card³.

Rival smartphone maker Samsung has also been planning to expand its financial service footprint. Its answer to the Apple Card, the Samsung Pay Card, officially launched in the UK on Monday. Powered by London-based fintech Curve, it allows users to consolidate all of their existing bank cards into a single card and digital wallet. Samsung Pay Card users will also get access to other financial management features from Curve, such as instant spend notifications, peer-to-peer payments from any linked bank account, and the ability to switch payment sources retroactively. By partnering with Curve, Samsung is able to build out its banking services overnight by proxy.

Together, these latest developments in digital payments point to the growing ambition of digital payment providers. At the beginning of the pandemic, some cited the shut-down of Moven, a U.S.-based digital bank, as an example of market turbulence impacting VC funding and spelling trouble for the cash-burning neobanks. But it turns out that some neo-banks were able to rise to the challenge of increased consumer interest, as market leaders Chime and Current have posted some of their best quarters to date during the pandemic.

Adapt or Wither

Conventional wisdom says it takes about two months to form a new habit, and since the pandemic is unlikely to subside until 2021, U.S. consumers will certainly have longer than two months to become accustomed to digital payments. Given the accelerated shift in payment behavior and fintech disruption, the path forward for the market incumbents is clear: adapt or wither. In response to the impact of COVID-19, banks and credit card companies should consider prioritizing the following three tactics.

1. Ramp up mobile wallet education. It is evident that consumers are warming up to mobile wallets amid the pandemic. According to a Paysafe survey conducted in early April, 50% of US consumers still feel uncomfortable entering financial data to make an online payment, and 44% of U.S. shoppers regarded Apple Pay or Google Pay as “more secure” than bank-issued contactless cards. Therefore, it is increasingly important to educate customers about how to set up mobile wallets and streamline credential-sharing to ensure an easy onboarding process. Informational campaigns with simplified tutorials may be helpful in getting more people acquainted with mobile payments and occupy the default payment card position. Brands should also do their part in promoting the mobile payment options they support to raise customer awareness.
2. Strive to be the default payment option with targeted rewards. As previously mentioned, most people don’t regularly change the default card in their digital wallets, thus suppressing the usage of newer cards. In this regard, rewards designed to influence the choice of primary card in mobile wallets could be helpful. Chase, for instance, has utilized wallet-specific rewards, offering cashback for purchases made through PayPal and Apple Pay in promotional campaigns for its credit cards.
3. Build out a digital service ecosystem that supports vendors. As vendors, especially small businesses, start to realize the need for adopting a modern POS solution to accommodate changing shopper behavior, those businesses will likely gravitate towards payment solutions that handle both online and in-store payments, like Square and Stripe, as they’ll allow merchants to accept the same wallets across channels. Still, there is a real opportunity for incumbents to fight off the aforementioned fintech challengers with a smart M&A strategy. For example, American Express recently announced it is acquiring digital lending platform Kabbage to bolster its cash management offering to small businesses.

Footnotes:

1. In fact, China is so far ahead of the curve in digital payments that it recently started rolling out a digital currency operated by its government-owned central bank that will gradually replace its fiat currency.
2. Usage of contactless cards has risen significantly in the U.S. in the past year as more issuers rolled out NFC-enabled cards when existing EMV cards expired. Talk about good timing!
3. The upcoming App Clips will also facilitate more Apple Pay transactions in offline retail and QSR settings.