This article was first published by IMRG, the UK's Online Retail Association. To see the original, please click here.
The way we pay is changing. It’s been a continental drift rather than any kind of volcanic adoption, but things have nonetheless been gradually shifting. So slight has been the movement, in fact, that you may not have noticed yourself yielding to these new methods of paying.
But ask yourself for a moment: when did you last pay with cash? For that matter, when did you last carry cash? You may not even carry a physical card anymore, relying on your phone for all your payments. And if you don’t pay via your phone yet, perhaps 2019 will be the year that people to start to do so in greater volumes.
There are various new payment trends gaining ground this year, not the least of which being PSD2 (The Second Payment Services Directive) which arrives in full force in September and could well cause a migration to phone payments (we’ll cover this a little further below). To get a rounded perspective on how payments will change this year, we approached experts in the community for their insight. Here’s what they had to say.
Buying things is no longer a simple case of handing over money to receive an item. Convenience is a prized concept among customers, and in the payments realm, this can take the form of allowing customers to try products before they buy them and even allowing them to pay in instalments so that previously unaffordable items are made more readily available.
Leading the vanguard in flexible purchases is Klarna, whose research has shown that these payment methods are likely to find a firmer foothold this year.
Luke Griffiths, General Manager, Klarna UK: ‘It’s an extremely exciting time for the payments industry, with new experience-enhancing checkout innovations becoming more common. The importance of offering an array of convenient payment options that allow customers to better manage their finances, shouldn’t be underestimated. In fact, our latest consumer research revealed that 66% would spend more with a retailer if they offered more payment options, with 63% saying that being able to buy now and pay later would make them more likely to keep more items.’
Capgemini have noted how such schemes can positively affect retailers’ reach.
Chris Long, Managing Consultant, Capgemini Invent: ‘The introduction of Klarna by ASOS in 2018 has appealed widely to their customer base, allowing multiple sizes to be tried on at home without having to pay up front. This type of credit payment method is attractive for both parties, giving the consumer flexibility of purchase and the retailer the assurance of a sale they wouldn’t normally receive. Throughout 2019, the “buy now, pay later” model will be set to grow, with retailers introducing their own schemes or partnering with providers.’
However, there’s more to convenient payments than staggering the purchase. Capgemini also note how the subscription model eases the purchase by only requiring details on the initial sign-up (a factor which could cohere beneficially with the upcoming need for strong authentication under PSD2).
Long: ‘Another payment trend set to make waves this year is the rise of the subscription model, with grocery retailers adopting this format for the purchases people know they will make and don’t want to think about. Amazon is already ahead of the game with its “Subscribe & Save” service, using the guarantee of payments to pass savings onto their customers.
‘To meet growing consumer demand for convenience and ease of purchase, subscription model offerings will increase in 2019, unleashing the potential for retailers to gain customer loyalty and unlocking a whole new wealth of customer data with which to personalise the experience.’
In both these examples, flexibility equates to payment working out of view of the customer: a single approval required at the beginning of the payment process, and then direct debits from then on out. As Omnia Retail have identified, this potentially equates to a further diminishing of cash payments, with ‘the best examples of cash being phased out are Asia, or – closer to home – Sweden.’
But, as has been mentioned already in this article, and as Sander Roose, Founder and CEO of Omnia, pinpoints, the greatest change for payments in 2019 will come in September: ‘the biggest thing by far in 2019 is indeed opening the access to payments data through PSD2. This opens up opportunities for fintechs and big tech.’
And so, without further ado, let’s discuss what the Second Payment Services Directive will mean when it fully launches towards the end of this year.
The Second Payment Services Directive (PSD2)
PSD2 is an EU legislation which has been implemented to prevent fraud and protect payments, and it fully rolls out this September. A significant aspect of the legislation (and the aspect which will likely have the most effect on customers) is strong authentication, which will require more than just a written password for payments to be processed.
Suzie Miles, Senior Associate at Ashfords, explains: ‘Two factor authentication has been introduced by the Payment Services Directive, requiring customers to provide two forms of authentication utilising a combination of knowledge (something only the user knows), possession (something only the user possesses), and inherence (something the user is). This could be an added hurdle for customers, albeit a much needed one to reduce fraud.
‘But smart devices such as mobile phones and watches offer access to a number of quick and secure methods of authentication without the need for a card at all, whereas paying by card may still require a consumer to authenticate with another method and may still therefore require them to have a phone with them to make a card payment.
‘Our smart devices carry so much biometric data which, as consumers, we are already used to using. We use fingerprints to unlock phones, facial recognition at passport control, voice recognition for telephone banking...It seems inevitable that a move to using that biometric data to make payments will be far more secure and much quicker than having to remember complex passwords and use a plastic card that’s at risk of being stolen or cloned. And if we can save plastic by cutting out the need for cards then there is no doubt that an increasingly environmentally-conscious society will be quick to adopt cardless payments.’
However, while PSD2 will go a long way to preventing fraudulent payments, Ralf Gladis, CEO at Computop, notes it also has the potential to cause something of a bottleneck at the point of purchase, which is something retailers should look to streamline.
Gladis: ‘When it comes to Two-factor Authentication and PSD2, retailers need to be looking at how they can avoid 2FA friction. In countries like Germany, Austria, Switzerland, the Netherlands and the Nordics invoice and direct debit payments are a 2FA-free alternative. In other EU geographies merchants should make sure to use 3D 2.0 and transmit additional data to help the bank with its risk assessment which is an option to avoid 2FA. Or retailers can convince their customers to put them on the 2FA whitelists in order to avoid repeated authentication every time an order needs paying for.
Given the friction involved with 2FA we will see a huge take-up of biometrics by consumers, banks and merchants not only for payments but also for all other use cases where biometrics can replace passwords.’
There is one final trend set in store for 2019, also noted by Gladis, which harkens back to the concept of convenience and flexibility for the customer: Near-Field Communication (NFC).
Near-Field Communication is the term given to the protocols that allow interaction between two electronic devices. What this means in a commerce setting is, essentially, contactless payment by phone. It’s this technology that will facilitate the existence of cashier-less shops, and, owing to the need for biometric verification on a phone, it’s this technology which will continue to thrive after the full implementation of PSD2.
As noted by Gladis: ‘Mobile payments are on such a steep growth curve and the main driver for this is the Internet of Things. As it gains momentum, Near-Field Communication will allow things to be transactional and run payments. AN NFC signal will be good enough to process mobile payments with Google Pay, Apple Pay and other mobile banking apps. Adoption will be slow because of security concerns, and caution around the adoption of a new payment method, but we will gradually see more payments being made on mobiles and becoming more invisible.’
We’ll see payments truly change in September of this year, and it’s at that time that phone payments may come into their own.
While payments have been shifting and expanding for a number of years now, with contactless methods having subtly overtaken cash as the payment method of choice last year, 2019 is the year likely to see a more monumental shift.
PSD2 rolls out in September, and at that time, strong authentication will lean on biometric affirmation during payments, which could mean that more people are paying with their phones by the close of this year.
Alongside PSD2, 2019 could also see the wider adoption of more flexible ways to pay, particularly with schemes such as try-before-you-buy and pay-by-instalment already having a strong presence in the UK. For retailers looking to connect with their customers this year, having an awareness of these upcoming features and taking advantage of the opportunities they present is highly recommended.