The UK Payments Council has published its latest report, The Way We Pay, and brings together all the significant trends over the past decade. It shows how many cash payments are continuing to migrate to debit card, how the debit card has won the day for now, but also how it’s possible to see the end of the road for plastic as the mobile phone could take over our payments arsenal. 

Executive Summary

Getting Paid

  • The shift from cash is gathering pace as firms, the state, and pension funds increasingly eliminate cash and cheques from their payments to individuals
  • Now only 9% of adults do not have a current account, and only 4% have no sort of account at all. Use of branches has declined sharply but having an account is the key to accessing all the modern ways to pay

Spending it

  • Cash still makes up the largest proportion of our daily one-off transactions – three in five of our purchases – but they are very small in value
  • Just ten years ago, three quarters of our shop purchases used cash. Now just over half do
  • Debit cards are quickly taking over in the lower value transaction
  • Contactless payment is poised to become ever more popular, and will push even more transactions onto plastic
  • We use our credit cards for bigger purchases than debit cards, and we use them less than we used to
  • Cheques are very niche nowadays with usage halving every five years, but remain popular with some groups of people and some organisations. Effectively gone from the high street, we mainly use them for financial transactions
  • Supermarkets now account for over half of our retail spending, up from 46% in 2001 as they have added more and more products and opened stores rapidly
  • Entertainment spending is the big winner. The economy may be gloomy, but we are spending more having fun, and doing more of it on plastic
  • Spending abroad doubled in a decade

Regular Payments

  • Automatic payments (like Direct Debit) are now over three quarters of our regular commitments – up from half in 2001
  • Housing costs have escalated, whether you own or rent
  • Charities have shown great success in a decade of recruiting Direct Debit commitments
  • Flashing less cash, but plastic may quickly lose its place in the sun to more innovative forms of payment, like mobile payments
  • Number of cash machines doubles in decade, as people abandon the bank queue for the hole-in-the-wall
  • But cash is becoming less important to us, particularly by value
  • By value debit cards overtook cash in 2010, even before contactless took off
  • Debit card holding is now 90%, up from 84% in 2001
  • In 2001 debit card spending caught up with credit cards, but now far exceeds them
  • Credit cards matured in the 2000s, and card holding even declined

How businesses do it

  • 98% of businesses are small, with fewer than 20 employees, so the payment needs of firms vary enormously according to their size and complexity
  • Cheque usage is still popular with the smallest firms, but even so, cheque usage by business continues to fall sharply
  • The smallest firms bank more like consumers, and often even use personal accounts
  • Use of Direct Debit among businesses lags behind consumer use. Businesses prefer the flexibility on the timing of payments

The future

  • The use of contactless debit cards is set to increase. Many chains of stores already have point-of-sale devices to accept them, with more retailers planning to come on stream, this will continue to increase consumer awareness
  • The debit card may have had its day. New technology means payment chips are now being embedded in phones, with more innovation to come
  • New entrants may also appear. Smartphones are capable of scanning barcodes, a system which could easily be designed to take a payment from an account at a point-of-sale
  • Paying a friend or business on your mobile as easily as sending a text is set to become a mainstream option in spring 2014, when the Payments Council launches the new mobile payments service. The service will be the first to link up every bank account in the country with a mobile number
  • In future, the wallet may be obsolete altogether as more payments become electronic and our phones become the hub of our financial transactions

Summarised details from the report

Debit cards are currently making gains in sectors previously dominated by cash and are likely to take a greater share as contactless cards reach mass adoption.

  • 28% of our spontaneous transactions are made on a debit card (a rise of 59% over the last five years), with the average transaction size at £42 and falling
  • 56% debit card purchases are between £10 and £50
  • 91% of all our one-off cash transactions were under £25
  • the contactless payment limit of £20 would allow many cash payments to potentially migrate onto cards. Debit card holding is widespread across all ages and socio-economic groups.

The triumph of the debit card, but has it passed its peak?

The arrival of the debit card in the 1980s, which was billed as the consumers’ alternative to the cheque, also provided customers with an alternative to the credit card. 84% of adults had a debit card in 2001, but they were less widely accepted, and many people still preferred cheques and cash. Spending was still just higher on credit cards (£93 billion) than debit cards (£77 billion) at the turn of the century. The balance tipped in favour of debit cards in 2001. As businesses like pubs, dentists and hairdressers began to accept the cards, thanks partly to the introduction of chip and PIN and to the rapid roll out of hand held point-of-sale devices, usage and card holding took off and the dominance of the debit card was secured.

Credit cards, by contrast, are more commonly used by people drawing higher incomes or in higher social classes. This reflects the fact that they are more able to access credit and pass credit scoring criteria. They also have greater spending power and appetite to accumulate rewards such as Air Miles and cashback through their credit cards. Credit cards account for one in twelve of our spontaneous payments with an average value of £56 per transaction.

Cheques account for just 1% of spontaneous transactions, but have an average value of £375, as they are more likely to be used for high value payments such as financial transfers (see section on cheques for more detail). There is now a quite narrow demographic profile for cheque usage which reflects its diminishing status as a mass payment method. Cheques tend to be favoured by older people who are used to paying that way, the self-employed and families with children who have to pay for childcare and children’s activities.

Between 2005 and 2011 the total value of plastic card spending increased by £179 billion. 91% of this growth was attributable to debit cards. In 2011, debit card spending in the UK amounted to £334 billion from 7.3 billion transactions. This was approximately two and half times the amount spent on credit cards of £140 billion from 2.1 billion transactions. This represented an increase of 252% on the corresponding amount spent in the year 2001, making this rate of growth three times higher than that recorded for consumer spending over the decade to 2011. In the next decade debit card spending in the UK could close to double – as we forecast £664 billion from 14 billion transactions, with credit card spending projected to be £204 billion from 3.1 billion transactions.

Debit card holding is much more widely spread across the social spectrum than credit cards, with 90% ownership across the adult population in 2011. 98% of AB adults held a debit card compared to 57% of E adults in 2011. For credit cards the figure is 77% v 26% respectively. The wide issuance of debit cards has positive social consequences as it means lower income consumers are able to access the world of e-commerce.

Without the mass adoption of cards the e-commerce industry could never have developed, and self-service in shops and filling stations would be non-existent.

In 2001 online purchases took just 3.3p in every £1 spent on a card. By 2011, that had risen almost quadrupling to 12.8p in every £1, and the total continues to grow.

Contactless functionality means debit cards can continue to take a greater share of our spending, but in the longer term, the future of the piece of plastic could be impacted by the arrival of mobile payments. The huge success of the debit card has opened the door to new technologies that could even lead to its own demise, or at least heavily impact its use. In the next few years, if card technology gets incorporated into mobile payments, it could become possible to use the physical phone to make a debit card type payment instead of the physical card in a shop and if this happens the debit card as we know it today could become a thing of the past. reach maturity

The demise of the debit cards is still some way off, as despite having saturated the market, the use of debit cards will continue to grow for the time being. By contrast, the credit card market has already matured and usage has been subdued since 2009. Credit card issuance grew very strongly in the 1990s and 2000s as credit was more easily available.

Credit cards are a very useful tool in our payments arsenal, but they are not the payments of choice for a lot of our day-to-day purchases. They are most useful where a large expense needs to be spread over a longer period, or for the protection offered under section 75 of the Consumer Credit Act 1974, or indeed because a credit card is ring-fenced away from a current account.

Rapid growth in consumer borrowing and the increase in credit card usage in the early 2000s meant that 69.9 million credit cards were in issue by 2005, along with 4.7 million charge cards. Two thirds of adults held a credit card. During the recession a greater focus on the need to borrow and lend responsibly saw consumer attitudes to credit card use change. By 2011, there were 15.4 million fewer credit cards in our wallets, compared to 2005.

Spending on credit cards has increased by just 7.7%, which was well below the cumulative rate of inflation over the period. Last year we spent £140 billion and made 2.1 billion purchases in the UK. During the recession, repayments increased and in 2011 around 60% of cardholders paid off their balance in full each month, up from 54% in 2003.

In terms of business-to-business payments, the trends stay true. Last year, spending on credit cards fell and cardholding was also down by 2.7% compared to 2010, resulting in a total of 1.9 million cards. Interestingly it is larger businesses that are most likely to use credit or charge cards, whereas smaller businesses use debit cards.

The final piece of the cards puzzle is the continued expansion in the usage of prepaid cards. They are already ubiquitous in replacing gift vouchers, but more sophisticated versions are available for example for business-to person disbursements such as payments under reward, loyalty and incentive schemes. The insurance sector is also starting to issue prepaid cards to claimants, for use in a specific retail sector to cover a claim. Another area where these cards are starting to forge ahead is in the travel industry. They seem to have become a more attractive proposition compared with traveller’s cheques as they can be used directly in shops or to withdraw cash, as well as offering competitive rates for fees and charges when used abroad. However, though this market continues to expand, it is still at a slower rate than in 2009. Ultimately it is hard to imagine prepaid cards developing beyond a small niche.

How will we pay for it in the future?

Contactless payment technology began in the UK in 2007, but those living in and around London would have been familiar with the principle, having had the contactless Oyster card since 2003 for using public transport. The London Olympics used its venues as a testing ground for contactless cards. In 2011, all the major UK card schemes (American Express, MasterCard and Visa) began processing contactless payments. By December 2011, six major UK issuers were issuing cards with contactless functionality and the number of these cards reached 23 million, an increase of 75% from the end of 2010. Adoption is still slow however, as retailers and consumers are yet to embrace the changes in a big way. This will change, but first requires more retailers to roll-out more terminals, and for banks to issue more cards.

Ironically contactless technology may eventually contribute to us becoming less reliant on a physical piece of plastic, as it can be incorporated into a mobile phone or any other popular item, rendering it a payment tool. Only ten years ago paying for items on your mobile was unthinkable, but now one wonders why it’s not here in a bigger way already. The increasing demand for convenience and accessibility, along with the rising penetration of smartphones has driven the growth in mobile payment. The bold prediction made by PayPal that by 2016 people will no longer need to take a wallet with them shopping may be premature but nevertheless at some point we may be leaving the house just asking ourselves ‘keys, phone?’ KPMG expect mobile payments to be mainstream within the next 2-4 years, while Visa, which recently released its digital wallet V.me in November 2012, expects half of all payments to be made through mobile devices by 2020.

New entrants are muscling in to help us pay in shops. Google Wallet which launched in the US last year has already agreed deals with 25 national retailers to support the system through MasterCard’s PayPass programme. Google’s rival, Apple has yet to launch a competing system, but with such a huge, loyal customer base, well used to making many small transactions through iTunes all the time, it will surely not be far off. Microsoft has already announced that there will be a wallet feature on the Windows Mobile 8 operating system. Three of the big telecoms operators, Verizon, T-Mobile and AT&T are developing a service known as Iris.

For tradesmen on the move, new hardware is also on the market. Payment method Square, a mobile app and phone attachment which serves as its own cash register, has been created by one of the founders of Twitter and is in use in the US. This sort of kit will reduce the reliance among mobile tradesmen on cash and cheques. O2 UK also launched a new service that enables retailers to accept card payments on a smartphone or tablet by using a special keypad that connects via Bluetooth. A free app then manages the card transaction and sends a receipt.

For moving our money around, Barclays already offers a mobile payment service (Pingit). Anyone with a mobile phone can sign up with Barclays to receive payments though Pingit, but only Barclay’s customers can send payments. A similar service has also been launched by phone provider O2, with customers able to transfer up to £500 via text message. Similarly, PayPal has also recently launched an app in the UK that allows users to pay for items with their mobile phones across a number.

In addition to all these competitive offerings in the collaborative space, the Payments Council is developing the industry-wide, central service that will make it possible to send or receive a payment using just a mobile number, no matter who you bank with. The new service could be a handy way to split a bill for dinner or pay a tradesman without needing to know their account details. Payments made using the service will be protected by a passcode or similar security feature, and arrive almost instantly.

Internationally, consumers have been quicker to take it up mobile payments in Asia than in the West. In France McDonalds is currently testing mobile payments method arranged with PayPal. With over 30,000 restaurants worldwide, a McDonald’s deal would represent a larger business and cultural footprint for PayPal than perhaps any other mobile payment system in operation. In Africa payments technology is leapfrogging the developed world. Starting with few branch networks, fixed line telecoms and low card or bank account holding, banking is going straight to consumers’ mobiles. Since 2007, Kenya has been using a system called M-Pesa which allows mobile money transfer through a text message, with over 50% of the population already using this service. The Payments Council’s mobile payments database will make payment by mobile a possibility for the UK too, but it will be developed using existing payment systems, such as the Faster Payments Service or the Link network.

Worldwide the UK presents a key growth area in the uptake of mobile payment. Businesses should be planning now or risk falling behind consumer demand. From a consumer perspective in terms of making purchases using our phones, the amount of devices and potential new options, on offer at the moment can be confusing as people still grapple with all the commercial developments. Whilst the future may be unclear, it is exciting, and it will bring convenience and choice far greater than we have known until now. Ultimately only a handful of providers and products will create the winning proposition. Undeniably these new technologies will transform the way we manage our finances and the way we pay over the next decade.

Adrian Kamellard, chief executive of the Payments Council, says: “We scarcely notice the steady changes in the way we pay, yet someone in their thirties today will see more change in their lifetime than in the entire history of money. Even recent innovations such as payment via a mobile phone, which ten years ago some felt to be science fiction, will soon be commonplace. The 2000s were the decade of the debit card. The 2010s are likely to be the decade of the mobile phone. Just as we can’t imagine how we ever did without the internet, many people will soon wonder how we used to be so dependent on cash and cheque. Twenty years from now even cards may seem archaic.”

He adds: “The quiet revolution in payments has enabled the creation of whole new industries such as e-shopping, it has changed our behaviour, and it has reduced transaction costs, and increased the speed and efficiency with which we can all pay each other. The next ten years will see even faster change. It’s easy to imagine a future where we merely pat our pockets for our keys and phone. The wallet could become a historical curiosity.”

View the Payments Council Press Release here.

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