How COVID-19 is reshaping retail payments in Europe

Overall decrease of consumer spending

COVID-19 is affecting almost every aspect of our daily lives, including how we spend our money. Lockdowns have led to a sharp drop in consumer spending across Europe, and the economic impacts of the pandemic, including unemployment, liquidity shortages and an overall loss of confidence, are likely to see people continuing to save rather than spend. EY analysis suggests that total payment transaction volumes in Europe will fall by approximately 25% during the crisis. For verticals such as clothing, and goods and services, consumption is likely to be only postponed, with spending set to at least partly resume after lockdowns end. However, the losses facing companies in the restaurant, travel and entertainment sectors are more permanent, and may not be made up this year.

With consumer spending one of the biggest drivers of global economic growth, this dramatic fall will have significant consequences. The European Commission has suggested Europe’s GDP will fall by 7.5% in 2020.

Strong shift toward e-commerce expected

Even verticals such as food and household goods, which are seeing sales remain stable during the crisis, are feeling the effects of the shift from instore to online commerce. Quarterly reports from Europe’s major payments players reveal the impact. ACI Worldwide has posted a 74%+ increase in transaction volumes for most online retail sectors, while Adyen reported that it has processed 30% to 50% more retail payments during the crisis than before COVID-19. Worldline has reported a 19%+ increase in e-commerce transactions.

Even after lockdowns lift, we expect that many consumers will continue to favor online shopping rather than returning to physical stores. Once consumer behavior changes, it tends to stick. Getting daily basics delivered has become “the norm,” and people may opt to continue with this convenience even when it’s no longer required. This will have consequences for small, in-store retailers that may be challenged to easily switch to online sales, as well as for their merchant service providers who may struggle to survive the crisis.

The end of cash?

The move to a cashless society was in full swing before COVID-19, but it has been accelerated by the perceived risk of infection via hard currency. Before the pandemic, cash accounted for around 44% of instore payments in Europe, according to Worldpay’s Global Payments Report. Initial analysis suggests this figure fell by almost 10% within a few weeks of the pandemic’s outbreak, with the UK observing a much bigger drop of about 50%.

While it’s too early to tell how the impact of COVID-19 will affect particular online payments going forward, we do anticipate an expected rise in more flexible payment methods. Regardless of COVID-19’s longer-term impact, it’s those payment methods that offer the best user experience and greatest convenience – such as e-wallets – that are most likely to continue to grow their share of the online payments mix.

Contactless transactions are the most significant payments’ trend to emerge during COVID-19. A 2014 European mandate for all payments terminals to accept contactless payments had already seen a surge toward this method of payment in recent years – in 2019, the acceptance rate of contactless payments in-store had reached 70%, up from 42% in 2018. We expect this figure to be even higher now, partly because the decision by 29 European countries to lift the limit for contactless payments, just as the World Health Organization recommended the use of contactless payments to help slow the spread of COVID-19. Mastercard has reported that 75% of all transactions in Europe are now contactless. In March, one major German grocery chain experienced a 42%+ rise in contactless payments.

But, even after current hygiene concerns ease, we expect the ease and convenience of contactless payments to see them remain consumers’ first choice, especially for low-value purchases. Merchants are likely to encourage this trend, as they benefit from the faster throughput of contactless payments. Already some countries, including Poland and the UK, have committed to stick with the raised contactless limits over the longer term.

However, contactless cards are perceived to be more vulnerable to fraud attempts. As usage and limits increase, fraud measures must also evolve to ensure safety.

Adapting to changing payments behaviors

Payments players across all areas of the value chain are challenged by both the impact of the COVID-19 pandemic and the need to adapt quickly to vastly different conditions.

Card issuers are especially affected by the decline in commercial card transactions due to the travel ban and work-from-home initiatives, as well as the overall decline in transaction volumes and higher default rates on card balances. We see some companies moving to counteract the downward trend by offering extended payment terms, waiving interest and allowing customers to quickly increase lines of credit. In the long term, we expect companies to tap new transaction-independent revenue sources, such as those offered via loyalty programs.

Payments systems are also hit hard by the decline in consumption, with the degree of impact on schemes dependent on whether they are international or domestic and the segments they cover. Payment methods that mainly cover pure in-store retailers are clearly more affected than e-commerce-oriented methods.

Payment acceptance providers are also navigating the impact of changed consumer spending behaviors. While payments service providers will benefit from the shift toward e-commerce, acquirers will be negatively affected by decreasing volumes and increasing merchant defaults. The point-of-sale (POS) acceptance business is expected to be hit the hardest due to closed stores and crashing in-store transaction volumes. A few players are adapting by extending payout times to secure liquidity, while others are waiving fees to support merchants. As with other players, the impact on acceptance providers will depend on their size, vertical coverage and channels. Small shops that cannot easily switch their sales to online channels will suffer the most. Retaining customers may require these retailers to offer more flexible payment methods and develop multi-and omni-channel strategies.

Uncertainty set to continue

Even when the current crisis eases, the post-pandemic recovery period is likely to be long and unpredictable. For payments players, the impacts of COVID-19 crisis have already been brutal, and navigating prolonged uncertainty will be difficult for those without adequate cash reserves. Consumer spending is likely to recover over time, but the way people shop and pay for products and services will fundamentally change, in some cases, permanently. Those payments companies that can adapt quickly to this new environment stand the best chance of weathering the volatile period ahead.