Power of Payments Ep. 10: Digital payments and overspending, Revolut Reader, mobile wallets vs physical wallets, and more
- This week, we discuss how digital payments make it easier for young consumers to overspend, and how the global microchip shortage is impacting the payments industry.
- We also talk about Revolut's first venture into in-store payments, as well as the growing level of consumer trust in mobile wallets.
Welcome back to the Power of Payments podcast. I’m your host Ismail Umar, and in today’s episode, we discuss how digital payments are making it easier for young consumers to overspend, and how the global microchip shortage is affecting the payments industry. We also talk about Revolut’s first venture into in-store payments with the Revolut Reader, as well as recent research from Marqeta that shows a growing level of consumer trust in mobile wallets.
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The following excerpts were edited for clarity.
Digital payments are making it “easier than ever” for young consumers to overspend
Every day, millions of Americans use digital payment methods to pay for everything from rent and utilities to ecommerce purchases and dining out. A recent Banking and Payments Intelligence report by J.D. Power finds that while credit and debit cards continue to lead in overall use, digital alternatives like BNPL, mobile wallets and P2P payments are quickly rising in popularity, especially among younger customers.
And yet, while this growth in digital transactions is undoubtedly making shopping more convenient, it’s also making it easier for consumers to spend beyond their means and make questionable financial decisions.
The report finds that overall, debit and credit cards are still the most frequently used payment methods by a long shot. Across all age groups, 32% of consumers used a debit card in the past three months, while 28% used a credit card. Digital payment options were used much less frequently: only 2% of consumers used a mobile wallet, and just 1% used a P2P app or BNPL during the three-month period.
While the overall use of digital payments is still relatively low, these methods tend to score high on customer satisfaction. In fact, overall satisfaction is highest for BNPL, alongside credit cards. Satisfaction scores for these digital alternatives are higher among customers aged 18-44 as compared to their older counterparts.
Although younger consumers tend to have higher levels of satisfaction, they generally have a weaker understanding of most payment types, and they’re more likely to make poor financial decisions when using them. For example, 38% of consumers aged 18-44 say they only partially understand payment methods, and 5% say they don’t understand them at all.
As a result, young consumers tend to struggle with their financial health. Only 41% say they pay off their credit card statement each month, while 28% say they sometimes overdraw their checking account with their debit card, as compared to only 6% of older customers.
Younger consumers have also been the most enthusiastic adopters of BNPL services, citing the ability to afford more expensive purchases, lack of interest charges, and promotions and rewards as their primary motivators. However, many are failing to take advantage of interest-free options and end up spending beyond their budgets, or not paying on time.
So, to sum up, the research finds that consumers under the age of 45 generally have a weaker understanding of alternative payment methods, are less likely to pay off their balances each month, are more likely to overdraw their account balances, and tend to struggle with overall financial health.
The report’s author – John Cabell, director, banking and payments intelligence at J.D. Power – believes that a major reason why young consumers are overspending is because digital payment providers have made it easier than ever to do so. He argues that the simplicity and convenience of the user experience offered by these digital payment solutions creates a situation where consumers get immediate gratification from making a purchase without having to worry about the high costs and potential debt associated with it.
I spoke with John on this topic, and he told me he thinks that digital payment methods like BNPL, P2P, and mobile wallets often make payment experiences so frictionless that it becomes easy to lose track of overall personal budgeting. He said younger consumers appear to be making riskier choices with these digital products and channels, which are disproportionately impacting their financial health.
John says this points to a longer-term need for consumer education and financial advice to accompany the growth of new payment options – something both consumers and firms should be aware of in order to avoid big problems down the road.
At the same time, John also notes that younger consumers often have more financial challenges anyway, given that they are in early stages of life and career, and they may not be as familiar with how to best use financial products to their advantage. For many people, age and experience naturally develop greater wisdom and stability in such matters.
How the global microchip shortage is impacting the payments industry
The global semiconductor supply chain took a major hit because of the pandemic. Buying microchips became more expensive as cycle times increased. This is something that will impact not just video game makers, smartphone and car manufacturers, but also a variety of players in the payments industry.
China, the world’s largest chip manufacturer, went into a series of lockdowns to limit the spread of Covid in the country. This resulted in the closure of factories and a drastic drop in output. China’s lockdowns decreased total chip output by over 5% in March this year. Additionally, the Russian invasion of Ukraine has stopped half of the world’s supply of neon, which is an essential ingredient used to manufacture chips.
Most payment cards now use an EMV chip, which stores the holder’s information and enables communication with other devices, like ATMs and POS terminals. So, the bottom line is, as chips are becoming harder to source, cards are becoming harder to produce. And of course, banks don’t like that. After years of getting in the habit of freely making and sending out cards, they’re being forced to carefully predict and budget their production.
Last year, contactless payment card manufacturers saw the prices of EMV-compliant chips increase by more than 50%, and their costs are set to increase further. A recent Nilson Report study forecasts that the cost of producing first-use plastic cards will increase by up to 20% this year and the next.
As the demand for microchips continues to outpace the supply, experts are expecting an industry-wide failure to deliver cards on time. According to ABI Research, up to 1 billion payment cards are at risk of not being issued over an 18-month timeframe, with nearly 350 million at risk in 2021, and up to 740 million at risk this year.
Banks face three specific risks that need immediate attention. First, they need to figure out how to continuously provide customers with new and replacement cards as the chip shortage gets worse. Second, if people start moving back to cash payments, there’s a risk of missing out on revenue. And third, there’s a reputational risk, and the threat of losing customers to competitors.
While there’s no absolute solution to these issues, there are some immediate steps the industry can start taking to address the situation. Issuers have started taking actions to prolong the life of existing cards and reduce the number of new cards issued by extending the expiration date of cards, encouraging mobile wallet use, charging fees for replacement cards, and making the physical card optional. They’re also starting new card orders earlier, which helps card manufacturers better plan for new orders.
Unless there’s a sudden and drastic decline in the demand for chips, the supply disruption is unlikely to be resolved. Chip manufacturers have already started amping up production, increasing prices, and working out their order lists. According to industry experts, the shortage is expected to extend into late 2022, with some even saying that the production of chip-based goods will continue to be delayed until well into next year. A complete solution is far off, and immediate remedies are definitely needed.
Revolut’s first venture into in-store payments with Revolut Reader
Revolut Reader is a pocket-sized card reader for shops and restaurants, which is designed to let merchants accept payments in-person and on the go.
The device comes with a rechargeable battery and accepts transactions made with debit and credit cards, and contactless payment methods including Google Pay and Apple Pay.
Revolut claims that with its card reader, a payment transaction takes less than five seconds, as opposed to the industry standard of two to three business days, and it lets users accept, settle and store payments within a single Revolut Business account. The firm says its reader can also be adapted to other point-of-sale systems that are already in place within businesses.
Launching a merchant account with Revolut Business gives customers access to tools such as local and international payments, foreign exchange at interbank rate, subscriptions, payroll, and company card management.
The mobile card reader market is growing fast as retailers continue to favor digital payments over cash. Experts today believe that launching a card reader is key to penetrating the brick-and-mortar retail segment. This new offering from Revolut will bring it head-to-head with established players in the space, such as Square.
Revolut was initially launched to facilitate foreign exchange transactions back in 2015, but since then, the app has expanded to offer a wide range of products from daily budget management to stock and crypto trading. And recently, the firm has been taking leaps into other areas as well.
Last year, Revolut acquired Nobly, a London-based business that provides point-of-sale software. A few months back, the firm also launched new spend management features for its business customers. And just last month, Revolut shared plans to roll out a BNPL service in Europe, which will bring it in direct competition with firms like Klarna and Afterpay.
Revolut now caters to a global customer base of over 18 million consumers and more than half a million businesses, making over 5 million transactions every day. The firm has a current valuation of around $33 billion, which makes it the highest-valued fintech in Europe, after recent reports that Klarna’s valuation has now plummeted to under $7 billion.
Revolut has yet to be granted a UK banking license, even though it submitted an application for that at the beginning of last year. But the firm’s founder and CEO Nik Storonsky recently said he’s optimistic that UK regulators would green light the full banking license as soon as possible.
Could mobile wallets wipe out physical wallets?
A couple of years ago, shifts in consumer payment behavior that were considered radical are now increasingly being considered table stakes. Following a major surge in adoption caused by the pandemic, contactless payments and mobile wallets have continued to gain market share even as the pandemic’s effects subside globally.
According to Marqeta’s recent State of Consumer Money Movement Report, 75% of people surveyed across the US, UK, and Australia used a mobile wallet in the last 12 months. While the US is slightly behind the overall average at 71%, adoption among Americans is up considerably from 64% in late 2020.
The vast majority of respondents – including 85% of Americans – also rated mobile wallets as a convenient option for making purchases.
As consumers grow trust in mobile wallets, 61% now say they feel confident enough to leave their physical wallet at home and simply carry their smartphone with them.
This confidence is twofold: it stems from a growing sense of trust in the technology, but also the assurance that comes with increased accessibility and greater merchant adoption. 81% of respondents are now convinced that whatever place they shop from will accept mobile wallet payments – and even if one place doesn’t, another one nearby likely will.
There’s a large discrepancy in confidence levels between younger and older consumers. In the US, 59% of people aged 18-24 expressed confidence in leaving their wallet at home, while only 36% of those aged 51-65 did the same. The difference is even more pronounced in the UK and Australia. The report suggests that this is because the younger consumers are digitally native, while older generations have been forced to adopt digital payments out of necessity in recent years.
The pandemic brought a global shift in behavior where even consumers who had previously been slow to adopt contactless payments were forced to do so by external events. And while this shift may have been initiated by hygiene and health-related concerns, what will ultimately make it stick is the growing expectation among consumers for a quick and convenient payment experience.
Marqeta’s chief operating officer, Vidya Peters, says that as digital payment use exploded during the pandemic, one of the most common questions she got asked was whether this was just a passing fad or a permanent shift in consumer behavior. She says Marqeta’s report suggests that the demand for digital payments has become entrenched over the last couple of years, and any companies that fail to adapt to this shift in consumer preferences are likely to fall behind and will find it really hard to catch up.