Digital Payments: Building Your Business Case in 2021

The year 2020 was deterministic for cash: consumers drew back from it. According to Accenture, over $48 trillion worth of transactions, will be re-routed from cash and digital payments during this decade. 

Such a change in payment preferences strengthens the need for banks and merchants to constantly innovate their payment infrastructure. This shift creates a demand for contactless payment systems, mobile wallets, and QR payments, among others.

So how do you build a staunch business case for re-aligning your payment experience with the new consumer requirements? And more importantly, why acting on the surged adoption of contactless payment methods in 2021 is crucial to securing your future position on the market? Let’s take a look at the data first. 

“This is the first post in our new Payment Series, exploring the dramatic changes in the sector and providing commentary on the new payments solution development.”

Digital Payments Outlook for 2021 

In 2020 the global payments revenue declined by $140 billion (roughly 7%), effectively diminishing market gains in 2019. In the financial sector, this factor prompted many leaders to make cash-preserving initiatives the main focus rather than actively investing in new digital pilots.

However, maintaining the ‘status quo’ isn’t viable for the long-term. Because businesses risk losing the battle to more agile competition across several strategic vectors:

  • Point of sale finance (buy now, pay later): Similarly to P2P payments, this revenue stream is dominated by Fintech and Techfin companies, rather than traditional FIs. In the US, the POS finance lending market is expected to reach $2 trillion in revenues by 2025. 
  • Digital wallets: By 2024, 4 billion people will be using digital wallets, which represents half of the world’s population. Such breakneck growth puts more pressure on merchants to start accepting a wider range of digital wallets. Banks, on the other hand, can tap into another pocket of growth, generated by the so-called ‘invisible payments’ — a streamlined payment experience, deeply embedded into a non-financial application. Amazon Go stores and Uber in-app payments are prime examples of such. 
  • Contactless payments: During the pandemic contactless payments became the most preferred payment method globally. Per Capgemini, 64% of consumers used this option regularly. Yet, not all merchants have the infrastructure to accept contactless payments, especially outside of the retail sector. 

What’s more important is that digital payment technologies are here to stay for the long run, making it imperative for leaders to start acting and innovating. 

The Shift in Consumer Payment Preferences 

Modern customers demand a more streamlined day-to-day experience for executing payments. 

What does “streamlined” stand for when it comes to payments? Several things:

  • Portability: The customer’s wallet is no longer fat with notes; it’s full of cards, used interchangeably to access different services, and purchase products. A single card (or mobile solution) would be preferred by most people. 
  • Convenience: Online merchants have set a high bar for digital payment convenience — ‘invisible’, one-click check-out, embedded in the application. In the physical world, people interact with other mediums to complete a transaction (payment terminals, points of sale systems, vending machine interfaces).
  • Security: Per FICO, only 41% of digital banking consumers are happy to use username/password for security purposes. Over a half, like the concept of OTP passwords. Yet, 71% are eager to provide biometrics to their bank in exchange for a more secure and convenient payment experience. 

What this data is telling us is this: consumers across the board demand a more consolidated payment experience, embedded in the services they are accessing. This, in turn, opens new pockets of growth for merchants and city managers. 

Growth-Positioned Contactless Cards Use Cases 

In the ideal “smart” city, users would be able to use one smart card for accessing gyms, locker rooms, offices, storage rooms, parking lots, and so forth, as well as to purchase goods from vending machines, buy bus tickets, or pay for groceries.

A contactless smart card is a digital credential with embedded integrated circuits that can securely store and exchange data via NFC or RFID. 

The newer breed of solutions can mesh together several capabilities:

  • Serve as a standard payment debit/credit card
  • Store personal credentials (such as passport data, driver’s license, or membership information)
  • Act as an authentication key for accessing connected services
  • Replace separate transport cards for public transit

In essence, a contactless smart card is a portable ‘digital wallet’ in the physical shape of a card, featuring a tamper-resistant microprocessor (chip). 

Two security standards govern smart contactless cards:

  • ISO/IEC 7810 ID-1: defines physical characteristics of smart cards. 
  • ISO/IEC 7816: defines security and data management standards for contactless cards.

By 2025, the global smart card market is expected to reach $11.5 billion. The following use cases will drive such a surge in adoption. 

1. Contactless Card as a Key 

The average person’s wallet contains a lot of different membership and access cards, atop of payment cards. Such merchant cards are often white label NFC cards, containing your personal information for membership, servicing conditions, some top-up value, and/or a prepaid product/services.

If the card is lost the service/product, associated with it, will probably be lost too. In some cases, it may be re-registered or blocked, but it’s still a very tedious process.

What if instead of using a separate card, we could associate our digital ID with a certain product or service?

The consumer would be protected from the risk of losing their cards (and accesses). Plus benefit from the convenience of having just one card for accessing multiple services. 

The merchants, on the other hand, can reduce the cost of producing and servicing extra cards, running extra KYC (know-your-customer) procedures, and benefit from increased interoperability. For instance, they could attach multiple services to a single card — from loyalty programs to POS financing, and more. 

For example, a hotel venue can pre-program a single smart card to double as a:

  • Premium amenities access card (conference rooms, spa facilities, etc). 
  • Room service and restaurant ordering
  • Museums and attractions pass, plus discount partner deals.
  • Public transportation card. 

Such solutions can be particularly attractive to foreign visitors, whose payment cards are not issued by the global digital payment systems (e.g. Visa, Amex, Mastercard). So that they too, could, conveniently access all the destinations amenities. 

Mastercard recently did an interesting pilot in Sweden where they tested how different asset sharing scenarios could work with smart contactless cards. They’ve set up a test infrastructure that allows visitors and locals alike to register their payment method with one merchant (a hotel) and get several services ‘tied’ to your card and ID such as access to the city’s bike-sharing system, the hotel’s conference hall, and public swimming pool.

Merging contactless payment technology with service accesses also boosts security. The merchant has more control over how different assets are used and can impose more flexible pay-per-use billing models and charge for any extra costs incurred on top of the initial service fee should the need arise. 

2. Smart Public Transit Solutions 

The most exciting and booming sector that we see at the moment is how ticketing is adapting to the new contactless payment cards. Since April 2020, touchless transit payments increased by 187% according to Visa. 

Cities around the world are rapidly adopting the new “Tap and Go” systems to support fare purchases directly at the gate. Ticketing based on contactless payments enables visitors and non-frequent commuters to use public transport without purchasing a specific travel card or trying to figure out the right fare at the vending machine. The fare capping, implemented at the system backend, also helps calculate the best rate for you depending on the number of journeys you took during the day/week.

But if you already have a working transport card system, does it really make sense to support contactless payments on top of it? A case study from London proves that it does. 

The local authorities partnered with Mastercard to add an open-loop EMV payment system on-top of the existing closed-loop smart card system (Oyster) to service some 20 million commuters. 

As of 2018:

  • Contactless payments accounted for 50% of all pay-as-you-go journeys due to convenience. 
  • The cost of fare collection reduced from 14% to around 9%. 
  • The public transport authorities achieved over £100 million in annual savings. 

Future Solutions

Further combining the ticketing with MaaS (Mobility as a Service) solutions, cities can offer a door-to-door experience in public transport by adding additional elements as taxis, bike-sharing, and in the future — self-driving transportation. 

Recently, I worked on an interesting project in Stockholm. Our company helped supply the ticketing solutions for self-driving buses. The current application offers a seamless contactless payment experience for all journeys. In the future, the solution could be extended to make the journeys even more convenient by allowing users to link their card to a pre-programmed destination e.g. a preferred stop. When you enter the bus and tap your contactless card, the bus will auto-calculate the best route to stop as close to the address as possible and bill a respective fare.

3. Connected Car Sharing

As we transition to a new generation of car ownership where the industry replaces fossil fuels with rechargeable alternatives, we also see a change in car ownership models. Emerging climate regulations, high parking fees, and improved public transit make car ownership less attractive for city dwellers. However, car sharing and car rentals rise in appeal. Between 2020-2024, the global car sharing market will grow at an annual CAGR of 16% and reach $7.6 bn total. 

However, for car sharing to go mainstream, the renting and payment experience needs to be streamlined. Renting a car should be as easy as jumping on a public bus or lending a book at a library. 

A car sharing subscription should be managed through an app with a registered card, containing both payment details, driving license, and insurance information. The registered card could also serve as a means to open/lock the car and commission extra services (e.g. parking or valet service).

Such a combination of payment and accessibility will promote higher adoption of car sharing among consumers,. Additionally, it will make the operations more secure for fleet owners since they’ll have complete access to customers’ full information. 

4. Smart Parking 

Parking solutions vary widely from country to country. In Europe, we see an adoption of application-based payments rather than cash payments. However, the adoption is still in a nascent stage. Oftentimes, parking machines and apps charge an extra service fee, on top of the one set by the local authorities. 

In some municipalities, city managers are purchasing white label smart parking applications from vendors to offer parking rates without any extra charges. A gradual transition to digital parking payments reduces the costs of maintaining and servicing physical parking machines. And increases the conveniences for drivers. 

Covered parking spaces are also experimenting with video-based payment systems with automatic number plate recognition.Such systems read the license plate of every entering car and automatically present the bill at the gate. Payment can be made via an unattended payment terminal using a contactless credit card.

The newer breed of systems can also:

  • In connected cars, interact with the onboard infotainment system and auto-bill the payment card stored in the digital wallet.
  • Auto-bill the vehicle owner via a connected app or through a direct debit or digital invoicing. 

5. Electric Car Charging

Charging an electric car today could be a challenge because every manufacturer has its own charging procedure and system. This makes the entire experience time-consuming and complicated for e-vehicle owners. 

Since there is no standard on how electric car charging payments should be handled, contactless payment methods could be adopted as such.

Contactless smart cards can be used to identify the vehicle owner, start the charging process, tap into membership/loyalty data, and charge the correct rate afterward. Such a standardization among e-vehicle charging station owners could accelerate the growth of the e-car market and increase the profitability of maintaining charging stations for partners. For example, e-car sharing companies can exchange consumer data with partners who host their e-charging points to run cross-advertising campaigns and special promo deals. 

6. Toll Payments

Toll payments are a given in most major cities, on highways, and for tunnels. However, toll payment systems differ from country-to-country, even within the European Union. This poses a challenge for travelers. Whenever you want to go o a new destination, you need to pre-research all the terms for passage. Then purchase special passes for paid roads, and jump through other hoops. 

To improve payment collection, a shared payment standard is needed across the board. Again, smart contactless cards can be of value here. Infrastructure managers can create a centralized platform that allows travelers to register their cars and provide payment information. At every checkpoint, camera-equipped boom gates could read the car registration plate, automatically apply the correct fare, and grant passage. Such a setup can drastically increase cross-countries mobility while reducing the overheads around toll payment collection. 

From Many to One: The Trend Towards Card Consolidation is Here to Stay 

With the fast pace of innovations happening throughout the payment sector, there are many opportunities to create a tailor-made solution to tap into new value streams. As technologies allow us to combine standard payment applications with custom ones, both the terminals and cards could be configured to support a wider-range of use cases. So that every consumer payment interaction becomes more agile and efficient. By investing in unique digital payment solutions, you can strengthen your brand and get a step ahead in the digital payment transformation.

Learn about Edvantis payment expertise, software development services, and our past record track of delivered solutions. Contact us

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