Digital Payments — Their role and how they impact everyday life
The financial industry is undergoing an important transformation, it is enlarging and expanding on account of the inherent interconnected nature of finance with the everyday lives of its customers. The rise of innovative technology and regulation have introduced significant changes to the key functions of modern finance. Moreover, the recent pandemic Covid-19 has catalysed the spread of digital payments and the integration of finance and tech.
Impact of Covid-19 on the digital payments industry and on people’s habits
The impact of COVID-19 is becoming clearer. Innovative payments continue to grow in Italy at a rapid pace. This is told by the report of the Innovative Payments Observatory of the Polytechnic University of Milan, which shows that they have come to account for a third of the total digital payments. Proximity transactions with contactless card and mobile payments are the driving force. Particularly interesting is the analysis of the latter sector: in 2019 the volume of transit has tripled compared to 2018, approaching 1.83 million euros.
Under the conditions imposed by the pandemic, a significantly smaller proportion of payments are being made in-person, as isolation keeps customers at home. Many proximity stores accelerated the shift to digital payments to provide continuity of service, often adapting their business to the product delivery, ensuring respect for distances, and avoiding having to handle paper money for hygienic reasons.
Therefore, the lockdown has tripled the number of online consumers in Italy, including also a portion of population considered as non-digital native: compared to the organic growth of 700 thousand units in the first four months of the year, in 2020 an additional 1.3 million customers were added, for a growth of 2 million new customers. The sector growing the most in 2020 globally is e-commerce (up 55%), followed by modern food retail (up 23%) wholesale sale of pharmaceuticals (15%).
A major boost to digital payments comes mainly from NFC (No Physical Contact) transactions, which are useful both in store payments and with home deliveries. The positive data on Mobile Payment in 2019 finds Satispay, a service based on an alternative network to credit and debit cards, in the leading role. With a transacted volume in-store, through non-NFC systems, of 380 million euros, about half went to Satispay, through 12.5 million payments, standing for 74% of the total payments of the non-NFC segment. This trend is also confirmed in the first quarter of 2020: Satispay exceeded one million users and 100 thousand participating exercises, with an increase in the use of services by 30 percent between before and after lockdown.
“For many merchants, this crisis has proved to be an accelerator towards digitization, imposing a transformation that would otherwise have taken maybe five or six years, and while there will be those who will pay heavy consequences, on the other hand it has saved many activities from a slow death” Alberto Dalmasso, co-founder and CEO of Satispay
Hopefully, this new condition will also serve to forge stronger, more trusted bonds between customers and everyone in the payments’ ecosystem.
Analysis of pros and cons of digital payments
The role of digital payments in the context of the recent pandemic clearly emphasizes one of their greatest advantages: the expendability in the e-commerce industry, being the solution for non-physical transactions.
But, the benefits of going cashless are numerous and valid even under normal socio-economic conditions. As a matter of fact, the use of these tools improves the functionality of the whole transactions system by providing quicker transactions, by offering better marketing opportunities thank to the huge amount of customer data that they can collect, and by facilitating the purchases abroad.
Those services are better for both the retailer and the customer: from the user perspective, their implementation made possible having shorter queues and the reduction of the amount of time needed to conclude a purchase; from the seller perspective, the average spend tends to increase when cards or contactless methods are used.
By collecting extensive data through digital transactions, users can use behavioural insights to manage their spending habits and preferences and providers are able to tailor solutions for their clients, having a better perception of what their interests and needs are, considering their expenditure preferences.
A cashless society fosters lower crime rates as there is no tangible money for criminals to steal: since there is no cash held on the premise, digital payments significantly reduce the chances of fraud and robbery.
Looking at a bigger picture, money laundering and tax evasion are also reduced because of the paper trails and cashless transactions hinder the generation of black money and therefore curb corruption.
Digital payments encourage transactions as well while travelling abroad, providing technologies and services to assist the user and to keep track of the currency exchange rates.
Although the complete integration and implementation of digital payments in the daily lives of users seems to be the most functional alternative to our financial system, there are significative drawbacks of banning cash. From the consumers’ perspective: some potential users could be excluded, people from the lower economic strata, especially those who are without bank accounts, could face difficulties paying or receiving money. The same holds true for the older generation who may not be comfortable with digital modes of payment. People used to cash transactions might find it harder to manage their finances since handing over cash is a tangible thing but with digital payments, it may be a challenge to keep a check on how much you spend.
Moreover, the clients would experience a reduced privacy condition, as proved by the spread of cyber risk: payment information are accessible to all the businesses that the client transacts with and personal data can be vulnerable to data breaches.
Based on these basic assumptions, it is clear not only that digital payments have a significant impact on the financial system and on the society, but also that they are in turn heavily dependent on user preferences and on exogenous events that can change their propensity. Therefore, they exist in an ecosystem logic where intermediaries, clients and financial institutions coexist and are always looking for new efficient balances.
In such a landscape, the question is: what role will digital payments play compared to other payment systems in the coming years? And how will other players in the ecosystem influence or react to the changing conditions?
Bocconi Students Fintech Society
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Sources:
Retail Times (2018), “Digital payments and the retailer: the pros and cons of using digital payments-only”. Retrieved from https://www.retailtimes.co.uk/digital-payments-and-the-retailer-the-pros-and-cons-of-using-digital-payments-only/;
Rapporto ABI (2019), “Retail banking e multicanalità digitale”. Downloadable at: https://www.abi.it/Pagine/Mercati/Analisi/Innovazione-ricerca/BancheClientiDigitalizzazione.aspx;
Accenture (2020), “10 ways COVID-19 is impacting payments”. Available at https://www.accenture.com/us- en/insights/banking/coronavirus-ten-impacts-payments ;
BIS Bulletin (2020), “Covid-19, cash, and the future of payments”. Downloadable at: https://www.bis.org/publ/bisbull03.htm.
