The rapid spread of COVID-19 has affected nearly every individual on the planet in some way. In the United States, where one-quarter of the population is currently under orders to “shelter in place,”i commerce and banking have certainly been altered. In this blog I take a look at the early indicators suggesting the level of impact the pandemic will have on products covered in Mercator Advisory Group’s Debit and Alternative Payment Products practice. The full impact will not be known for several months, so the projections and insights provided here will certainly be adjusted at a future date. In the words of Johnson and Johnson’s CFO, Joseph Wolk,ii used when describing his company’s forecast delivered during the early days of the pandemic: “One thing I know for certain is we’re going to be 100% precisely wrong.” But we can look back on market crises of other types, take into account consumer trends, and make some informed estimates. Here is my take:
The non-prepaid debit card market has been enjoying nice steady growth rate in the mid to high single digits for the last few years. In the days leading up to the restrictive measures that curtailed consumers’ movements, frenzied shopping for essentials took place, with debit cards used to purchase groceries, gasoline, cleaning products, hand sanitizer, and of course, toilet paper. Everyday purchases like these often take place on debit cards, so I anticipate that there will be a spike in debit card transaction volume in the U.S. for the month of March. However, that increase will be short lived. As consumers hunker down, transaction volumes will decline. Even though online and mobile purchases will fill in for some transactions typically carried out in person, the online and mobile channel is dominated by credit not debit, as evidenced by consumer survey data from Mercator’s North American PaymentsInsights:
Source: Mercator Advisory Group North AmericanPaymentsInsights, Payments Survey, 2018, Question 31
Debit will also be affected because it is favored by consumers of modest income, the same population that is expected to be hardest hit by layoffs as plants, shops, and other merchants close their doors during the novel coronavirus quarantine.
Once the worst of the pandemic has passed, commerce returns, and people return to their workplaces, I expect that debit volumes will quickly pick up again given debit’s role as the go-to payment type for daily essentials. I predict the impact on the full year will result in overall growth in debit value of 2–3% over last year, down from the early prediction of 5–6%.
An expectation has emerged that consumers will want to increase their use of contactless payments at the point of sale in the belief that contactless is a safer transaction with less opportunity for interacting with potentially virus-infected surfaces. In the United Kingdom, the limit for contactless payments was increased from £30 ($35) to £45 ($52). Remember, however, that electronic payments at the point of sale in the U.K. uses the chip and PIN protocol, meaning that even though the chip in the card or phone may not physically interact with the terminal, the cardholder will need to enter a personal identification number on the PIN pad if the transaction is above the specified limit.
Here in the U.S., many debit card transactions do not require a PIN or any cardholder verification method. This means a debit card can be inserted into the terminal by a cardholder for a contact chip transaction without ever touching anything beyond the card itself, so this may be considered a virus-safe transaction in the eyes of consumers.
There will be a temporary increase in contactless payments due to a change in shopping patterns. Grocery stores, warehouse clubs, and pharmacies where consumers are flocking have been early supporters of contactless technology. As an example, Costco rolled out contactless terminals, its co-branded credit card is contactless, and its cashiers encourage the use of the contactless capability at checkout to Costco’s over 60 million U.S. customers. Costco and similar stores have seen a 60% spike in sales in March 2020 in comparison to last year’s sales.iii But this may be due to temporary shift in shopping habits, not necessarily an enduring change in consumer payment habits.
ATMs and Cash
Two opposing trends are taking place that make the use of cash and ATMs difficult to predict. Cash has often been cited as a carrier of bacteria including flu viruses, even without the dread of a worldwide pandemic.iv Countries such as Chinav are taking this opportunity to disinfect their currency (insert your favorite money laundering joke here). Similarly, consumers will be concerned about the cleanliness of ATM key pads. Those consumers who get their cash at retail ATM locations or machines inside financial institution branches may find these locations are closed, so getting cash may be much less convenient than it was before. This will have many consumers using alternatives to cash, even for small transactions.
The counterpoint to these concerns is consumers’ fear regarding the safety and stability of the payment infrastructure. They react by increasing the amount of cash on hand, with the feeling that cash can be trusted in uncertain times. Many checklists created to help consumers to prepare for a pandemic or similar event recommend keeping cash at homevi along with other essentials. The run on cash has become so prevalent in some locations that the FDIC made a public appeal to U.S. consumers urging them not to stuff cash under their mattresses.vii
In consideration of both these trends, we predict that overall the use of cash and also the use of ATMs to get cash will undergo a decline given the significant decline of in-person commerce overall.
Mobile Remote Deposit Capture
Mercator predicts there will be an increase in the use of mobile remote deposit capture (mRDC) by the relatively small number of U.S. consumers who receive checks. They will be less likely to go to a branch to deposit a check or even prohibited from doing so or venturing outside to find an ATM.
Check use has been in rapid decline, so the impact will be slight:
- The vast majority of payroll is delivered through ACH direct deposit.viii
- People who will receive benefits such as state unemployment payments receive them through direct deposit or on a prepaid card.
- The federal government relief “checks” sent to support citizens and shore up the economy will in most cases be sent through ACH direct deposit, and prepaid cards are also a consideration, so only some are expected to receive actual paper checks.ix
Cross-Border Consumer Remittances
There are indicators that consumer remittances outgoing from the United States will increase during the pandemic. The U.S. has the greatest number of outbound remittances and while senders may have less available cash to send back home to other countries, there will be an increased need in areas that are facing severe consequences such as China and Italy. The rise of digital apps to send and receive remittances will help combat the fact that agency locations have been closed around the world. Many of the remittance providers are currently discounting fees, particularly to locations that have been hard hit by COVID-19.
Person-to-Person (P2P) Payments
Volumes of digital person-to-person (P2P) payments will not undergo much of a swing and are predicted to have another high-growth year. As consumers limit their direct interaction with others, there will likely be an increase in the use of digital P2P apps instead of cash and checks. Other traditional uses of P2P apps such as splitting critical payments such as rent and utilities will continue. Some individuals facing a personal financial crisis may receive gifts of support from friends and family. However, friends won’t be splitting the restaurant bill or the cost of concert tickets.
If you are cooped up in your home office and are looking for an excuse to “talk payments,” send me your thoughts on these topics: firstname.lastname@example.org