August 28, 2020
As the pandemic continues to change entire industries, major shifts in consumer demand and comfort are causing payment providers to rethink their strategy. Due to the increasing spread of COVID-19 and reduced use of cash globally (as it may increase the exposure of COVID-19), many central banks have resorted to quarantining physical bills and recommending adoption of contactless payments. Even before the pandemic changed consumer purchasing habits, the global contactless payments market (valued at approximately $9.3 billion in 2019) was expected to grow annually at 11.70%.
Contactless payment systems are credit cards and debit cards, or other devices such as smartphones, that use radio-frequency identification (RFID) or near field communication (NFC) for making secure payments. Since contactless payments do not require a signature or a PIN, the transaction amount is limited. In Canada and the US, the tap limit moved from $100 to $250 in light of COVID-19. This allowed customers to tap for larger retail payments in order to reduce the spread of the virus. At its core, digital wallets are a collection of payment card information stored on a smartphone. This has allowed consumers to store multiple credit and loyalty cards on their mobile devices for convenience. Until now, the most popular mobile wallets in North America (Apple Pay, Android Pay, Samsung Pay) didn’t use any payment technology more advanced than a traditional credit card. They did offer convenience and secure storage of their confidential payment information on their mobile device. Now that Apple Pay is incorporating more functionality like QR codes, consumers will be eager to further transition to mobile and contactless payments. In terms of size, Apple Pay was the third-most common global payment option in 2019, with over 440 million users (Q3 2019). PayPal was close behind at just over 300 million active users (Q4 2019). Both of these platforms are still dwarfed by Alipay and WeChat, which both have over a billion active users. Today, Alipay and WeChat are the first global payment options to reach ubiquity with over 90% of people in China using them as their primary payment method, with cash and card a distant third and fourth. China’s payment ecosystem is largely, if not completely, based on QR code payments. Alipay Is now the world’s biggest mobile payment platform, with over 1.2 billion users.
Invented in Japan in the 1990s, QR codes were initially used in the automotive industry for production, tracking, and shipping. QR codes are similar to bar codes except for the fact that they can store a larger amount of information per unit area. Scanning of the QR code can then trigger a wide variety of actions, from navigating to a website, opening an app, or making a payment.
Despite slower adoption in North America, QR codes have played a crucial role in China’s mobile payments industry. Specifically, QR codes have enabled the development and integration of WeChat, the most popular app and platform in China. Ant Financial, through its QR code-enabled Alipay, showed the world that digital payments are a key component in financial inclusion by improving the lives of hundreds of millions inside and outside China. With a 93% adoption in Chinese cities, WeChat is the number one app in the workplace (above email) as well as in everyday life. Chinese businesses, from street vendors to large corporations, have their own dynamic QR code, which enables them to collect payments from customers. These wallets have zero transaction fees on either side and can be topped up from customers' bank accounts. Despite this seamless contactless adoption by China, many European and North American countries still believed QR codes and fully digital or contactless payments to be a fad.
Recent developments, however, lend to the idea that QR codes may become more widespread in North America. Specifically, PayPal just launched QR Code Touch-Free Payments in 28 countries and is waiving transaction fees until September 30, 2020, to allow business owners an advantage during this difficult time. PayPal’s first partnership is with CVS Pharmacy stores as they have partnered with InComm and Venmo to provide QR code checkout experiences in all 8,200 stores across the US. Furthermore, Apple recently revealed IOS 14 beta testing, which looks to include QR code functionality for various tasks, including payments, downloading movies and even virtual reality! One of the reasons QR codes became so widespread in China was due to their lack of existing payment infrastructure and legacy banking systems. As North America starts offering similar services on smartphones, it will likely integrate with, rather than replacing, existing infrastructure and systems.
North American consumers are finally showing a shift to higher adoption of digital, contactless, and mobile payments. As the economy continues to open up, there is an opportunity to rethink North American payment habits and capitalize on this shift in comfort and habits. Companies are starting to adapt, as PayPal Executive Vice President notes that "In the midst of COVID-19, we have seen an incredible acceleration of digital payments and touch-free payments.” According to US-based DaVinci Payments’ study of consumer payment behavior since COVID-19, while traditional payment methods (credit and debit cards) are as popular as ever, consumers are utilizing tap EMV chip payments as well as favoring new forms such as mobile wallets, smartphone apps and other contactless methods. The findings showed that 95% of respondents are using connected devices, and 85% have smartphone apps for making payments. Further, in the US, 71% expect to do more than half of their holiday shopping online. Statistics Canada says e-commerce sales hit a record of $3.9 billion in May, a 2.3% increase over April, and 99.3% increase over February. Global companies are now trying to adapt to this shift in consumer needs.
Payments modernization for retailers and businesses can have a dramatic impact on their ability and demand to service customers during the pandemic. North American payments providers will need to work closely with their clients (retailers, restaurants, and SMEs) to enable contactless options and align with consumer trends. Some companies, such as PayPal, Shopify, Global Payment, and many others, have contactless payment products available.