Riding the COVID storm How digital payments won consumer trust amidst shifting spending patterns

Reading Time: 4 minutes

In Focus: Global trends

‘’The convenience factor associated with digital payments coupled with instant credit purchase models are increasingly influencing consumer sentiments and the buying dynamics. Going forward, with e-commerce transactions gaining traction in the retail consumer landscape, one can expect a higher correlation between online consumer spending and use of digital payments modes in the global scenario.’’

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Overview

COVID-19 has led to a wave of disruption and change across sectors and economies, accelerating the movement away from cash towards digital payments and distinct customer preference for spending via digital modes. A Standard Chartered global study reveals that 64% of consumers held a positive opinion of online shopping since the pandemic, with almost 48% of consumers opting for digital payment modes instead of cash. Clearly, the digital payments industry, a sub-sect of the fintech space has ‘cashed in’ on this huge business opportunity. 

A recent Accenture report reveals these trends with many incumbents expected to jump onto the digital bandwagon and embrace modern payments formats as key to business survival and long-term growth.

1.  Globally, modernizing payments presents a US$7 trillion opportunity, with 420 billion transactions expected to shift from cash to cards and e-payments by 2023

2. The market size by value is estimated to touch a whopping US$ 48 trillion by 2030

3. 7 out of 10 management executives believe that transforming the payments industry is an essential element of their larger digital strategy

4. 13% of decision-makers opined that their organisations have grown payments revenue in the last three years in excess of the average market growth of 6 percent.

Key payments geographies

Source: Accenture

We shall look at the key factors that are shaping the correlation between digital payments and consumer spending patterns, with a focus on the reasons that have moved the needle in favour of consumer perception about digital payments.

 

(i) Understanding consumer needs

At the core of the success driving the adoption of digital payments is a deep understanding of the unique needs of diverse consumer subsets. For example, while the younger demographic population comprising digital-natives like millennials might prefer a ‘near no-payment experience’ with speedy transaction completion time, others would prefer to opt for a deferred payment model like Buy Now Pay Later as a flexible option to pay a single consolidated bill. Customers in the older age groups, on the other hand, might be inclined towards payment products with simple functionality. With the pandemic straining income flows and exacerbating economic uncertainty, most consumers have experimented with new brands and channels with convenience and value predominating consumer purchase decisions. A Capgemini study reveals that over one-third of consumers (36%) consider changing providers based on those meeting their needs during the pandemic. Globally, consumers have placed their faith in brands and channels that cater to their specific needs. 

 

(ii) Prioritizing customer experience:

A recent McKinsey report reveals that the digital shift has pushed merchants’ payments-acceptance costs, by an estimated additional  $8 billion to $15 billion (a hike of 6 to 10 per cent) globally. This has been accentuated by the need to ensure secure transactions and continuously improve the consumer experience. Alternative payments modes like point of sale (PoS) credit options are using detailed data analytics, cutting-edge technology tools, minute segmentation and stringent underwriting models to deliver superior experiences at the digital checkout windows. This is also reaffirmed by statistics revealing that, on average, the growth rate of digital payments has outpaced the trajectory of banks and traditional financial services in value terms. This may be largely attributable to the customized consumer experience delivery offered by payment companies. 

 

Source: McKinsey

 

(iii) Rewarding customer loyalty: 

With intense competition characterizing the fintech domain, mere superior service delivery and competitive pricing alone might not suffice. Consumer stickiness is increasingly difficult to retain. A study indicates that 3 out of 4 American consumers have explored different brands and shopping behaviour and intend to continue even beyond the pandemic. Loyalty and rewards have become a differentiation factor for several organizations globally, with the potential to enhance spend amounts and transaction volumes.

However, loyalty programs often suffer from being poorly designed with inadequate consumer incentives, low redemption rates, restricted application to certain merchants or product categories and exorbitant operating costs. Studies indicate that millennials are turned away from loyalty programs that require possessing physical member cards. 

Aligned to evolving consumer expectations, merchants and payments providers are experimenting with innovative models to win consumer mind share including improvising the payment experience. For example, digital payment options like BNPL offer an opportunity to build a loyal community of creditworthy consumers and offer rewards as instant credit on the purchases itself. This eliminates the hassles of accumulating points and its subsequent reimbursement upon achieving a certain threshold. 

 

(iv) Evolving shopping habits

A survey by Paysafe uncovers the huge jump in online shopping with 42% opting for digital channels and 18% first-time buyers experimenting with online formats, since the outbreak of the pandemic. As a result, this has also influenced the payment modes, with 75% of business enterprises reporting a shift in consumer behaviour at the time of transaction checkout. The below table summarizes the shift in payment patterns.

 

Source: Paysafe

 

The business responses highlight the key reasons for the changed consumer attitudes and larger acceptance of digital payment modes:

1. Consumers opting for secure e-payment channels in the wake of higher fraud incidents and cybersecurity concerns

2. Higher value being placed upon a seamless and near-invisible payment experience

3. Digital payment methods aid in improved expense tracking as against cash payouts

4. Consumers are doing online transactions with unexplored merchants or first-time online shoppers do not prefer to disclose their financial data

5. Consumers are keen to integrate a higher share of technology in their daily lives in the post-COVID era

Source: Paysafe

 

Concluding thoughts: Consumer choice continues to prevail

In business scenarios, adaptability to changing consumer expectations is key to sustainable growth.  COVID-19 has forced many business enterprises to pause and hit the reset button with respect to delivering connected, digital omnichannel experiences for customers. The proliferation of online consumer spending has boosted digital payment adoption and simultaneously reinforced the importance for consumers to monitor expenses and spend with caution. Certain digital payment modes offer itemized purchases with a pre-determined limit towards spending control and budgeting. 

 

An outcome of the constant evolution of consumer expectations, market dynamics, a digital-first approach and payments innovation is the emergence of alternative payment models like BNPL. Retailers, merchants and e-commerce players that offer varied checkout payment options would derive higher success in winning new customer profiles and retaining existing ones, compared to their peers.