“Going outside is highly overrated” declares Ernest Cline’s novel Ready Player One. In this dystopian future, the real world is grim, and people spend most of their time at home in a parallel online world. This situation sounds familiar to many of us at the moment.
Naturally, the media has drawn many comparisons between the GFC in 2008 and the outbreak of the COVID-19 pandemic.
For the payments industry, the biggest difference is the fact that we have a virtual world to replace aspects of the real world in ways we did not at the height of the GFC in 2008.
Same, same, but different
The collapse of Lehman Brothers on 15 September 2008 triggered an implosion in global credit markets; aggregate spending fell, and unemployment and foreclosures rocketed which further intensified the credit crunch.
Governments around the world tried desperately to drive spending in the economy through fiscal stimulus and quantitative easing. Despite their efforts, transaction volumes declined and revenue in the payments industry contracted by 10 per cent from 2008 to 2009. While the supply of goods and services was maintained, demand was supressed as consumers postponed or cancelled purchases.
Fast forward more than a decade: on 16 March 2020, the World Health Organisation (WHO) declares COVID-19 a global pandemic. That very same day, Victoria and Western Australia entered a state of emergency and thousands of Australians began hoarding toilet paper. There was plenty of demand, but people feared a dearth in supply as companies and factories went into hibernation. The inverted demand-supply dynamic is one fundamental difference between the two crises.
For the payments industry, however, the effect could have been much the same. Both diminished supply and diminished demand results in a decline in transaction volumes. In fact, in an early analysis, McKinsey forecast that the payments industry would experience a decline in revenue during the COVID-19 crisis similar to the decline during the GFC.
However, there is a second fundamental difference, one that holds more promise for the economy and the payments industry: digitisation. Today’s virtual economy offers a parallel pool of supply. In 2008, there was no equivalent parallel pool of demand.
When Lehman declared bankruptcy, about 22 per cent of the world population had access to the internet, and that access was almost entirely computer-based. It is hard to believe now but the first iPhone was only one-year-old. Compare this to today, when close to 60 per cent of the world population has access to the internet and about half of this access is via a mobile device. Globally, the digital economy has grown by 3 billion people between the two crises.
The changes signified by these statistics are impressive. Even so, they understate the true expansion of digitisation over the period. Not only are more of us spending more time online, we are also more likely to consider digital first and physical second. Consider the success of streaming services over DVDs, for example, or the fact that the use of cash in Australia has nearly halved to 37 per cent since the GFC.
In 2008, Skype was a new concept to us all, and WhatsApp, Microsoft Teams and Zoom had yet to see the light of day. Now, these services are critical to our ability to communicate and work.
Weathering the storm
Amid the economic collapse caused by physical restrictions, this sprawling virtual economy has reached even further. Chinese e-commerce grew by 20 per cent during the lockdown. In the early days of lockdown in Italy, the number was even higher at 81 per cent.
With high-street shops closed and people quarantined in their homes, the virtual economy ensures an alternative channel for supply of everything from books and movies to education and medical advice. In many parts of the world, it has also been the only place for social gatherings and parties. Even lavish weddings in India have reportedly moved online. These virtual interactions keep industries alive that otherwise would be unable to supply their goods and services.
Naturally, this does not vaccinate the payments industry against the very real impact of the crisis. Huge swathes of the global economy are in free fall and the initial supply shock has caused a terrifying demand shock. Industries unable to move online are laying off staff who therefore have less to spend, which translates into less demand both offline and online. As a result of this, the payments industry might well contract in the short-term.
In the medium to long-term, however, the new online habits are likely to serve the payments industry very well for three reasons:
First, we expect an even faster decline in physical cash – a payment method almost always outside the remit of the payment industry.
Second, consumers’ online expectations are more demanding than offline. While we accept queueing to pay in shops, virtual consumer conversions rely on microsecond optimisation. This is fertile ground for payment companies adding value with real-time payments capabilities, digital identification of transacting parties, and offering preset checkout preferences. This, in turn, drives demand for payment services.
Third, as the portion of online purchases increases, the dominance of credit cards is likely to be weakened. While convenient when shopping in-store, credit cards do not have the same competitive advantage online compared to, say, virtual wallets. Besides, credit cards are often more expensive than competing methods such as the New Payments Platform (NPP) in Australia. This opens opportunities for smaller payments companies, creating a more vibrant industry than before the crisis.
Without the virtual economy, the payments industry would have had to wait for demand and supply to pick up again – just like it did in 2008. As it stands, however, the established virtual economy offers an arena in which payments companies generally are better equipped to service consumers.
Many of us cannot wait to go outside – it’s hardly overrated. But even when we do, payments will continue to migrate online. Not only is this a good outcome for most of the payments industry, it’s a good outcome for consumers and merchants too.
Monoova CEO Christian Westerlind Wigstrom