world class payments a report on how consumers around the world make payments

World Class PaymentsA report on how consumers around the world make payments

Contents

Foreword 3

World Class Payments in the UK 4

Consumer protection in different countries 6

Cards 6

Cash 16

Automated payments 18

Cheques 24

Mobile payments 28

Foreword

Our latest report shows that you don’t need to look very far afield to realise that customers in the UK enjoy a degree of choice and protection in the way they pay that you’d be hard pressed to find anywhere else in the world.

Even countries like the USA, that you’d expect to be very similar to us, are years behind in some areas. For instance the USA is still looking to introduce something like Faster Payments, which has enabled almost instantaneous internet and mobile payments in the UK since 2008, and it is still in the early stages of introducing the global chip and PIN technology, which became the norm in the UK back in 2006. With the population of the USA almost five times as large as the UK, the size and complexity of its payments infrastructure can sometimes hinder innovation, although there is change afoot: Vocalink – the UK’s payment infrastructure provider has recently signed an agreement to deliver services for The Clearing House in the USA.

Closer to home Denmark has moved one step closer to becoming the world’s first cashless society, as its government proposes scrapping the obligation for retailers to accept cash. The Danish government has said that as of this year, retailers may no longer be legally bound to accept cash payments.

At present, it’s hard to imagine the UK taking any steps to move towards a cashless society, given that despite

the boom in the use of cards, digital and remote payments, even in ten years’ time cash payments are still expected to make up a third of all payments.

Without a doubt the UK can claim to be world class when it comes to the range of payments customers can choose to use. However ironically some of the most cutting edge innovations have happened in emerging markets where retail banking infrastructure is behind the UK’s, and customers without bank accounts in these areas have been quick to embrace technology, particularly mobiles. The growth of the middle class and expanded consumer activity in emerging markets represents vast untapped opportunities for payment service providers, particularly those providing mobile money applications, because mobile penetration in these regions tends to be high. For instance, Kenya has made the leap from being a predominately cash-based culture to one that makes extensive use of mobile payments thanks to M-Pesa. This service enables customers to transfer money using only a mobile number without either sender or recipient needing to have a bank account. In fact, a quarter of Kenya’s GNP flows through M-Pesa.

By comparison, the UK’s consumer appetite for a service like M-Pesa is lacking because consumers already enjoy a much wider choice of existing payment methods via their bank account.

Although the UK has a great track record of leading where others follow, with both contactless payments and Paym being recent highlights, to remain central on the global payments stage the UK payments industry needs to focus on the future and on what customers need next.

In our recently published World Class Payments Report we took an evidence-based approach to understand what different customers want from payments and what the UK needs to provide in order to stay world class.

As part of this work we track what’s going on in the world so we can ensure that UK customers benefit from the best possible payment services. This report provides an overview of how different payment methods are used (or not) in key countries in Europe and around the world highlighting some interesting differences in the way we pay in the UK.

Adrian Buckle Chief Economist, Payments UK

World Class Payments – a report on how consumers make payments around the world 32 World Class Payments – a report on how consumers make payments around the world

Whether you’re a fan of football, rugby or cricket, you will have probably had this sporting debate at some stage in your life – which players would make up your dream team? Normally heated, these debates very rarely end in a team consisting of players all from one place, with the best players in each position often spread across a number of countries and continents.

When Payments UK looked at how the UK payments infrastructure compares internationally we found ourselves in a very similar position. Our work to identify what customers need and want if payments in the UK are to remain world class led us to identify thirteen core capabilities, which will build on the UK’s existing strengths.

Although our focus is on the UK, it made sense to compare each core capability to global markets. In doing so we identified many countries that specialized in singular or specific capabilities – but very few could be considered world leading across the entire spectrum.

There are a variety of reasons that cause this specialisation to occur. Similar to many sporting teams, payments infrastructures develop over time, often combining new, emerging products and technologies with older legacy systems, tactics and approaches. Strategically, nations have to balance the desire for short-term, pragmatic improvements with the complex process of guiding all the moving parts in a way that optimizes long-term gains. Greenfield approaches are rare, and with a plethora of stakeholders including banks, regulators and schemes, the ability to achieve a consensus that benefits all parties is almost a capability

within itself. Once you add the nuances of each international market into this mix, you have a perfect cocktail for creating global diversification and variety when implementing each capability.

Payments UK has taken the lead to identify what exactly it means to be world class in each of 13 identified ‘payment capabilities’ that customers have told us they want. Looking at other countries across the globe and comparing the UK’s position has helped us reach this point. Yet, like any heated debate over creating a balanced team of the world’s best athletes whose skills and abilities would complement each other, only a deeper understanding of the nuances in payments will help us understand how best practice across the world can be applied to our domestic market. When researching these examples, we considered the unique attributes to each national market, ensuring we could understand if factors such as customer needs and experiences, industry competition, supporting infrastructure, political priorities and market size were similar enough for us to tailor and build upon these approaches in the UK market.

This work is ongoing, but as a first step, last summer we published our first World Class Payments (WCP)

World Class Payments in the UK

Payments UK’s World Class Payments project was set up to identify the key characteristics and capabilities required for the UK’s payments landscape to continue to be world class. We’ve taken an evidence based approach to get to grips with what customers want from their payments. Our goal is to support the industry and its regulators’ efforts to deliver the very best outcomes for consumers, businesses and the public sector.

report in which we set out the 13 core payments capabilities we believe are needed for a payments environment to be world class. We also identified four priorities we believe should be the initial focus to help the UK achieve its vision. We are progressing this work and plan to provide an update this year. This report provides an insight into how much variation exists in consumer payment behaviour around the world. Undoubtedly some of the variation is driven by the costs of using payments which this report doesn’t cover, but what it highlights is the high level of choice, convenience and protection UK consumers enjoy compared to many others around the world.

The World Class Payments project identified thirteen ‘payment capabilities’ that customers want and need

from their payments

Common Access to the Payments

Infrastructure

E�cientGovernance

Foundation Capabilities

Common Standards

Enhanced

Data relatin

g

to payments

Visi

bilit

y of

pa

ymen

t jo

urne

y

Request to

Pay

Confirmation

of Payee

Real-time Payments24x7

Real-time

Balances

Flex

ible

Settl

emen

t

Paym

ent

Serv

ices

C

o-ex

iste

nce

Cross-industry

sharing of

identity and

fraud information

Switching Accounts

Common, open andtransparent standards

that enable interoperability, whilst simplifying initial

access and providing a base for innovative payments products to

be built on.

Ensure that the industry

switching service keeps

pace with customer

expectations in terms of

timing and the breadth

of features included in the

switch process.

Realise the potential

benefits in greater

sharing of identity and

fraud data to improve

customer experiences and

prevent fraud.

Relevant additio

nal

informatio

n to be added

and made available via

direct o

r indire

ct link to

the

payment messa

ge. This w

ill

enable more in

tegration in

to

respectiv

e business

processes.

Trac

eabi

lity

and

posi

tive

confi

rmat

ion

of w

here

a

paym

ent

is o

n its

jour

ney

from

sen

der

to r

ecei

ver.

For

exam

ple,

to

enab

le

cust

omer

s to

kno

w it

has

bee

n

sent

and

if it

has

arr

ived

.

Mo

re contro

l over outg

oing

paym

ents

for custo

mers – enab

ling flexib

ility

over the timing

of reg

ular paym

ents

to fit w

ith increased m

oney

manag

ement. M

ore reference

inform

ation w

ill also b

e

provid

ed to

help b

usinesses

reconcile p

ayments.

Enabling customers to confirm

the

name of the intended recipient

matches the paym

ent routing

data (sort code & account

number and/or proxy)

before comm

itting to send

an electronic payment.

All PSPs (Payment Service

Providers) to support

payments in real-time, 24x7.

Real-time balance

information available to

customers by improving

how transactions are

applied to accounts.

Sepa

rate

out

cle

arin

g an

d

settl

emen

t, to

allo

w fl

exib

le

optio

ns fo

r PSP

s (Pa

ymen

t

Serv

ice

Prov

ider

s). T

his

will

enab

le th

em to

sele

ct

the

best

fit f

or th

eir

paym

ents

mod

els.

Ens

ure

exis

ting

pay

men

t se

rvic

es a

re a

cces

sib

le v

ia

any

new

sta

ndar

d, a

llow

ing

ch

ang

es t

o b

e m

ade

at t

he

PS

Ps’

(P

aym

ent

Ser

vice

P

rovi

der

) p

ace.

Standard interface enabling interaction with PSPs

(Payment Service Providers) and customers who require

direct access to the payments infrastructure.

Simplified model and rules for access to clearing and

settlement services for PSPs (Payment Service

Providers)


Cards

At the end of 2014 there were 12 billion cards in circulation worldwide, a rise of 11% on 2013. The number of cards continued to grow highlighting the important role cards play globally for consumers, businesses and governments, providing convenience, safety and familiarity in payment choices. The type of card used within each country varies greatly from debit, credit and charge cards to prepaid cards and multi-functional cards.

The figures opposite show that the holding of debit and credit cards differs significantly between countries. The reasons behind this are often culturally-specific. For example, the Netherlands and Germany tend to have little appetite for taking on credit card

debt, preferring instead to make more extensive use of debit cards. In contrast, the United States tends to exhibit a relatively high level of credit card holding, reflecting that country’s far higher tolerance for taking on unsecured debt. In the UK, debit cards are widely available to consumers, and 93% of adults held at least one debit card in 2014. Alongside this, 60% of UK adults held credit cards, with the average number of cards per adult suggesting that UK consumers have more of an appetite for credit cards that their European contemporaries in France, Germany and the Netherlands, but far less of an appetite compared to consumers in the USA and Canada.

The UK was the first country in the world to implement the new global technology for chip and PIN, with roll out completing in 2006. Some countries, notably the USA, are still to complete introduction of the technology.

Cards per capita around the world, 2014

Debit cards per head Credit cards per head

China3.28

Japan3.30

China0.33

Australia1.75

Netherlands1.52

Netherlands0.19

United Kingdom1.48

Russia1.35

Russia0.22

Germany1.25

Germany0.06

Switzerland1.19

Switzerland0.73

Sweden 0.98

Sweden1.04

Australia1.00

United Kingdom0.88

Ireland0.95USA0.94

USA2.90

Canada2.16

Canada0.70France 0.64

France 0.10

Ireland0.35

The fastest rate of growth of non-cash transactions is Asia and in particular China

Note: Data for USA is for 2013 (latest data available) Source: ECB Blue Book, BIS Red Book

Consumer protection in different countries

UK consumers enjoy an excellent level of protection when it comes to their payments and bank accounts. Some of this is provided by European-wide legislation, some is domestic, (such as Section 75 of the Consumer Credit Act on credit card payments) and other protection is provided thanks to payment scheme rule protection, e.g. Direct Debit Guarantee. UK consumers also have recourse to a robust and well resourced Financial Ombudsman Service if things go wrong.

The UK’s strong position was evidenced by a World Bank report published in 2014. It placed the

UK in the top group of economies surveyed, in that it has:

• general consumer protection law

• consumer protection law with explicit reference to financial services, and separate financial consumer protection law

Of the 114 economies surveyed by the World Bank, only 35 provided all of these (31%). The report also noted that the UK is one of the top tier of economies that have an agency responsible for implementing and/or overseeing any aspect of financial education/literacy.


Debit cards Debit cards are the most common type of card held across the world, with some countries using them for identification purposes. In many countries, the use of debit cards has become so widespread that they have overtaken or entirely replaced cheques and, in some instances, cash transactions. European countries tend to be more mature debit card markets with both the number of debit cards in issue and the extent of card acceptance by businesses at very high levels. This said, debit card holding still increased across Europe between 2009 and 2014. The majority of the increase in the number of debit card transactions in Europe was a result of customers choosing to use debit cards over cheques and cash. The increasing proliferation of bank accounts that automatically issue a debit card to account holders as opposed to ATM-only cash cards may also have been a factor. The global financial recession has led to many consumers preferring to use debit cards to make payments, in order to avoid increasing their level of debt by spending excessively on credit cards.

On average, each UK adult held 1.5 debit cards by the end of 2014. This compares with the EU average of just above 1 debit card per adult.

The Netherlands has been the long term leader in terms of debit card holding in Europe. There are several reasons behind this trend

including the migration from euro cheques to debit cards; bank and retailer campaigns to encourage consumers to choose a card over cash; and the roll out of a new debit card payment system in 2012. These initiatives have led to a substantial decrease in cash payments.

Cardholding in countries outside Europe is approaching, or in some cases exceeding that seen in Europe. In China the number of debit cards per adult (3.3) is more than double the number of debit cards per adult in the UK. China had the largest single card market in the world in 2014 in terms of number of cards issued, with almost 4.5 billion debit cards in circulation. The number of debit cards in China more than doubled between 2010 and 2014. Japan is another world leader in terms of total debit card holdings: on average each person held 3.3 debit cards in 2014.

The Australian card market is similar to the UK’s in many ways. In Australia debit cards accounted for 64% of the total card market in 2014 and on average each Australian held 1.8 debit cards by the end of the year. Evolving technology, new card products and the expansion of online shopping gave the Australian card market a significant boost in the five year period between 2010 and 2014.

Looking at the extent to which consumers use the cards that they hold, the UK is somewhere around the middle of the range of payment behaviour. In 2014, UK consumers made an average of just over 200 card payments a year (including debit, credit and charge card payments). This is considerably less than countries such as the USA, Australia and Canada, where the number of payments is around 250 per year or greater. Having said this, the number of payments in the UK has been growing considerably over time, with growth of over 11% in 2014 alone. The Netherlands is the European country with the most similar number of payments to the UK, although as mentioned above these are predominantly debit card payments, reflecting the unpopularity of credit cards in the Netherlands. Germany exhibits a far lower use of cards to make payments, with less than a quarter the number of transactions per person as seen in the UK.

Average transaction values in most countries follow a similar pattern, in that the average value of a credit card payment tends to be higher than the average value of a debit card payment. This perhaps reflects the fact that consumers are more likely to make use of a credit facility in order to purchase expensive items, and suggests that this tendency is the same amongst consumers in all countries.

Spending on cards in the Netherlands provides an interesting contrast to the UK. Whilst the total number of debit cards per adult is similar in the two countries, and the number of payments made using those debit cards is also

similar (although slightly higher in the UK), the total amount spent on those debit cards is significantly lower in the Netherlands. One possible factor behind this may be the popularity of the iDEAL system in the Netherlands – the e-commerce payment system that allows customers to pay for online shopping using direct transfers from their bank accounts. By contrast, in the UK the majority of online payments are made using cards. More generally, card spending in the Netherlands is concentrated on debit cards, whereas UK consumers also make extensive use of credit cards to make payments.

93%

60%

of UK adults have a debit card

have a credit card


Credit cards There are many different types of credit and charge card products issued in European countries and the popularity of these products mostly depends on consumer preferences and tradition. For example, Spain, Germany, France and Italy have the largest charge card markets in the region (charge cards require the balance to be paid off in full each month and so avoid revolving credit). By contrast in the UK, Ireland, Turkey and Sweden credit cards are much more popular – enabling consumers to decide how to manage repayments. Credit card use may be incentivised by the availability of rewards and cash back offers.

The total value of outstanding balances on credit cards in the UK is far greater than in other countries (note that this is total balances, NOT balances per person and so in part reflects population). However, the UK has one of the lowest revolve rates in western Europe (that is, the proportion of consumers not paying off a substantial proportion of their outstanding balance each month).

Consumers in countries such as the Netherlands and Germany are culturally more averse to credit, and as such the number of cards in issue and outstanding credit balances are far below those in the UK.

Over the past few years the credit and charge card sector has remained subdued in many western European countries as cardholders have turned away from pay-later products in favour of debit cards. The UK credit card market is the

91 20 17 6 5 2 1

Rev

olv

e ra

te (

%)

50

40

30

20

10

0

UK Spain

Balances outstanding ($US billions)

Italy

Note that the revolve rate here di�ers from the most recent figures for December 2015 published by the BBA.This is as a result of di�erent time periods and also adoption of a di�erent methodology that is consistent across all countries.

Germany Sweden France Netherlands

Proportion of credit card holders not paying o a substantial proportion of their outstanding balance

each month, 2013

largest in Europe with approximately one credit card per person, double the EU average of 0.5 credit cards. UK credit card holders account for almost three-quarters of all EU credit card spending. The higher holding and usage of credit cards in the UK when compared to other European countries may be driven by the fact that credit cards historically were the first payment cards launched into the UK market and over time have become established as a payment method as well as a borrowing tool. Consumers in the UK also benefit from additional legal protection when they use their credit card which does not exist elsewhere in the world (under section 75 of the Consumer Credit Act card issuers are jointly liable with the retailer in the event of any breach of contract e.g. if the goods or service fail to be delivered or are faulty). In most other European countries the first cards were debit cards which evolved from ATM-only cards.

There was a considerable fall in credit card holding in the UK around the end of the last decade, when the number of credit cards in circulation decreased by almost a quarter. Having said this, the proportion of people in the UK with at least one credit card remained relatively constant; people just tended to reduce the number of credit cards they hold. The USA remains the world leading credit card market with nearly three credit cards per person. Interestingly debit card holding in the USA is relatively low, and lies below the EU average. Similar to the UK, credit cards were the first card type introduced in the USA. However, unlike in the

UK, where debit card circulation overtook credit cards over time, in the USA credit cards still remain the most prominent card type.

In India, where the culture does not promote the use of credit, the debit card is the most predominantly held card. The lack of a wide-reaching and reliable telecommunications infrastructure has also restrained the development of a strong card market and India still remains primarily a cash-based economy. Although debit card holding is gradually rising, credit card holding has not changed for over a decade, with one credit card per 100 inhabitants. However, considering that India represents approximately one-sixth of the world’s population, this diverse and emerging market will likely present significant growth opportunities for their payments industry.

Source: Datamonitor Financial’s Global Payment Card Analytics


Contactless technology on cardsThe UK’s use of contactless cards is ahead of many other countries. Latest data on contactless usage from The UK Cards Association suggests that around 10% of card transactions are now contactless. Datamonitor publishes data on contactless cards in 26 countries, showing the proportion of cards in issue that have contactless functionality. Looking at data for 2014, the UK was in 4th place (behind only Poland, Italy and Singapore). The UK was ahead of Australia, the USA, Canada, New Zealand, France, Germany, the Netherlands and many others.

In the UK, contactless payment cards have the same level of protection as chip and PIN payments, and contain multiple layers of security. Despite this,

consumers are sometimes hesitant when first using the technology.

Different countries have different security measures in place to minimise issuers’ exposure to fraudulent charges. For instance, in the UK there is no daily limit on the number of contactless payments a consumer can make, but there is a limit of £30 per transaction. Also, parameters are set by the card issuer such that, after a specified number or value of transactions, the card software will refuse further contactless transactions until a standard chip and PIN transaction has been completed and the counter resets. This is similar to the procedure in Ireland.

Source: Datamonitor

Proportion of cards in issue withcontactless functionality, 2014

Poland

Italy Singapore United Kingdom Australia

France Spain Netherlands Germany

Canada Japan New Zealand Sweden

United States India South Africa Brazil

67%

62% 47% 41% 39%

39% 28% 28% 26%

26% 26% 25% 25%

23% 18% 14% 14%


Prepaid cardsDatamonitor suggests: ‘Given that a high level of unbanked consumers is often a key indicator of a market’s prepaid card potential, prepaid’s prospects as a bank account replacement in the UK are minimal’.

Also, it is worth remembering that the number of cards per inhabitant can sometimes be an insufficient measure of the size and nature of the market because of possible variations in the use of cards and the prominence of traditional card products. For example, Italy continues to be the largest prepaid card market in Europe, partly driven by the recession, as many Italians use prepaid cards as a way to manage their budgets and to pay for goods and services.

Card acceptance terminalsThe UK has one of the most developed card acceptance networks in Western Europe. In 2014, there were 1.7 million point of sale (POS) terminals in the UK, a figure which is still growing, with the number of POS terminals increasing by 3% between 2013 and 2014. This growth suggests that card acceptance is becoming ever-more widespread, reflecting the fact that consumers are now more than ever expecting to be able to use non-cash payment methods when making purchases, even when the payment amount is relatively small. The increase in POS terminals also suggests that retailers of all sizes are increasingly willing to accept card payments, regardless of the value of the payment. The falling average transaction value of debit card payments in the UK suggests that these cards are increasingly being used to make low-value transactions that previously may have been more likely to be made using cash.

Contactless payment thresholds in US$ equivalents, 2013

92.4

78.7

64.5

50.0

48.3

43.7

33.2

33.2

33.2

33.2

33.2

31.7

20.1

15.8

Australia

Singapore

Hong Kong

United States

Canada

Brazil

France

Germany

Italy

Netherlands

Spain

United Kingdom

South Africa

Poland

China Limit n/a

Japan Limit set by merchant

Sweden Limit n/a

A$100

S$100

HK$500

US$50

C$50

BRL100

€25

€25

€25

€25

€25

£20 (increased to £30in September 2014)

ZAR200

PLN50

Source: Visa, Mastercard (2013)


Cash

Free-to-use cash machinesIn the UK, 98% of cash withdrawals were made at free-to-use ATMs in 2014.

Experience is mixed in other countries. Typically, withdrawals are free at machines operated by the customer’s own bank, but fees are often incurred when using ATMs provided by other companies. In some countries, financial institutions group together to provide fee-free access to one another’s customers.

Number of cash machinesThe availability of cash machines varies widely throughout Western Europe. In 2014 Portugal had the highest provision of cash machines with 1,540 machines per million inhabitants, followed by Spain (1,086) and the UK (1,074). Sweden has the lowest provision in Europe, with 333 cash machines per million inhabitants. The EU average is 960 machines per million inhabitants.

Cash machines continue to evolve, offering services beyond dispensing cash as consumer expectations

shift in the digital age. Due to the cash machine network in Portugal being a fully integrated cross-bank network, a number of innovations have been possible. As well as the basic cash dispensing function, many offer a range of other bank related functions and services, such as cash and cheque deposits, as well as other services like cinema and concert ticket purchases, tax payments, bill payments, and mobile phone top-ups. Cash machines with similar functions are also found in Spain, although there has been a slightly greater decline in cash machine provision than in Portugal as electronic banking increases.

Countries such as France, Germany, Italy and the UK have relatively similar patterns of cash machine provision per million inhabitants. The number of cash machines in all four countries has been stable over the past five years ranging from 800 to 1,100 cash machines per million inhabitants.

The Scandinavian countries of Denmark, Finland and Sweden along with the Netherlands had the lowest number of cash machines per million inhabitants in 2014 ranging from 333 to 448. The most significant fall in these countries since 2008 was in Finland where the number of cash machines per million inhabitants has fallen by a third. The limited provision and general decline in the number of cash machines in these countries can be attributed to a change in customer behaviour, and a growing emphasis on a cashless society in these countries. The increasing burden of regulation along with reduced demand for bricks and mortar banking resulting from the

increasing popularity of online and mobile banking has also kept cash machine provision in these countries low.

Post-soviet countries and countries with rapidly expanding fledgling banking sectors have seen some of the greatest gains in cash machine estates. The main examples of this are Brazil, Russia, India and China (the ‘BRIC countries’). These four countries offer a less uniform provision of cash machines to their inhabitants than the countries of Western Europe. In recent years India has shown a significant increase in cash machine provision, with the number of machines per million people more than doubling between 2010 and 2014. Growing use of banking services by India’s population is expected to increase the demand for more convenient methods of accessing cash. Brazil has seen less change during this period than other BRIC countries, due to its more mature banking industry, which means that cash machines have been common for many years. In 2014 Brazil had 892 cash machines per million inhabitants, broadly similar to the EU average.

In Thailand, there is no fee for domestic same-bank same-province transaction. However, customers usually pay a fee for withdrawal or balance inquiry at other banks’ ATMs or in a province other than the province where the account is opened.

In India, you can make religious donations through ATMs that large banks have installed in many temples.

Use of cash machines – volume of withdrawalsThe number of cash withdrawals per adult depends more on the population’s spending and budgeting habits than the number of cash machines provided. The UK population makes heavy use of cash machines despite having only slightly more cash machines than the EU average.

Cash machines in Belgium and Portugal are also well used, with these two countries showing relatively high numbers of withdrawals per adult. Italian adults make on average a third of the number of withdrawals made by UK adults – visiting cash machines less than once a fortnight. Despite extensive provision of cash machines in Italy, many Italian adults still do not hold a plastic card for withdrawing cash from a machine, although this number is increasing.

Few transactions per head are seen in the Scandinavian countries. While these cash machines are relatively well-used by customers, individuals make only around thirty transactions per year.

Whilst Germany has just over half the number of withdrawals as the UK, the average transaction value is approximately double that of the UK. Italy had the lowest number of withdrawals in 2014, however they also had the highest average transaction value. The higher average transaction values in these countries may be attributed to lower debit card penetration and card accepting businesses in these countries compared to other western European countries.

The number of ATMs in the UK reached 70,180 in July 2015, surpassing 70,000 for the first time – of which over 50,000 are free-to-use.


Automated payments

Direct Debits Direct Debits are mainly used to pay regular bills. The average number of Direct Debits per inhabitant in the UK is above the EU average. The highest number of Direct Debits per inhabitant of any of the European countries is seen in Germany, with the number of Direct Debits per inhabitant being twice as high as the number in the UK. A significant proportion of these payments in Germany are made by businesses, with Direct Debits the most widely used payment instrument. This is in contrast to the UK where businesses do not use Direct Debits to make

payments as frequently, with Direct Debits being predominantly a way for consumers to make payments. German retailers are also able to use the account details on a debit card to initiate a Direct Debit at the point of sale, which the customer authorises by signature. This is a popular method for retailers to receive payment as it is cheaper than a card transaction authorised by a PIN.

The Netherlands also have a high level of Direct Debit use, just slightly above the level in the UK. Banks in the Netherlands offer several types of Direct Debit providing for

Germany Netherlands UnitedKingdom

France Belgium UnitedStates

Australia Sweden Brazil Canada SouthAfrica

Singapore Italy Switzerland Russia India

Number of Direct Debit payments per inhabitant, 2014120

69

57 5447 45 38

3328

2115

10 10 70.6 0.2

specific needs (for example, there is a debit used for purchasing lottery tickets, which unlike the UK has no payback guarantee). In France, it is mandatory to pay utility bills by Direct Debit. This perhaps explains the wide use of this payment method; however, large corporates do not have to pay this way, and tend to avoid using Direct Debits in a similar way to their UK counterparts.

In the EU, growth of Direct Debits per capita in recent years has been greatest in countries such as Germany and Belgium.

Some of the differences in usage between countries could arise as a result of differences in how easy

it is to set up a Direct Debit, legal rules surrounding their use, or costs to billers of using this method of payment collection.

Whilst the ‘BRIC countries’ (Brazil, Russia, India and China) have all experienced significant economic growth over the past decade, their use of Direct Debits varies.

In Brazil, Direct Debits are a well-established payment method and are normally used for recurring payments such as utility bills. The number of Direct Debits per capita in Brazil has grown considerably in recent years, with growth of 11% in 2014 alone. This growth may be attributed in part to the introduction

of the so-called ‘Authorised Direct Debit’ which allows creditors to present electronic bills to debtors, which can then be paid either by Direct Debit or by an individual credit transfer.

Direct Debit use is far more limited in the other BRIC countries. In India for example use is very limited, but starting to grow – Direct Debits in India have the advantage for the payer that they can set a ceiling on the amount that can be debited from their account for any particular type of payment. In Russia Direct Debit use per capita appears to have actually declined in recent years, standing at only 0.6 payments per capita in 2014.

Source: BIS Red Book 2015Note: Data for Germany relate to 2013. Data reflect all payments (consumers and businesses), not just those made by consumers


Electronic creditsWhilst use of credit transfers is widespread throughout Europe, there are differences in the level of use of electronic credits, in spite of the maturity of this payment method.

Due to different payment preferences there is variation of one method over another, whereby a country with a low level of Direct Debits has high volumes of credit transfers. An example of this is Sweden where wider use of electronic credits than of Direct Debits arises as a result of the popularity of two retail payment systems, Bankgirot and PlusGirot. These systems are jointly responsible for over 90% of non-cash payments made by Swedish companies and households. The majority of Swedish companies hold accounts with both systems, and in recent years have increasingly adopted the use of electronic invoices. Businesses submit their payment orders almost exclusively by electronic media, whilst households are increasingly using internet banking to initiate payments.

The Netherlands has a high usage of both electronic credits and Direct Debits. This can be attributed in part to Dutch domestic debit cards not being able to be used online. Rather, online payments use a specialised method called iDeal. This enables payments to be made directly from the customer’s bank account to the bank account of the online retailer. As well as the use of electronic credits by households, almost all remote payments between Dutch businesses are made in the form of credit transfers.

The Netherlands and Sweden both have relatively mature markets for electronic credits. In other countries

the level of electronic credits per capita are lower; however, most countries have seen recent growth in electronic credit use. In the USA growth has been driven by consumers moving away from using cheques to pay regular bills and towards internet-based bill payments. Even where cheques are still used to make payments, the introduction of image-based cheque processing in the USA has resulted in many of these cheque payments being converted into automated credit payments by merchants and billers following receipt of the cheque.

The UK makes extensive use of direct credit payments which are often salary payments, with the number of payments per capita being double the number seen in the USA or Canada. The UK also benefits from having a near real-time payments system – Faster Payments. When Faster Payments was introduced in the UK in 2008 it was the first new domestic payment scheme to be launched in 20 years. It is a near real time system enabling internet and phone payments to be made 24 hours a day, seven days a week. The table overleaf shows when real-time payment systems were launched in different countries around the world. It also shows operating hours for those services that do not operate 24-7 – notably many only operate during business hours. The UK was the fourth country in Europe to launch such a real time service, although services in Turkey and Iceland are not 24 hours – which means the UK is the second European country with a full 24-7 service. Several countries (notably the USA) are developing and introducing similar immediate payment systems.

Number of credit transfer payments per inhabitant, 2014

122

121

117

99

77

76

61

53

52

30

29

22

20

Belgium

Netherlands

Switzerland

Sweden

Germany*

Australia

United Kingdom

Brazil

France

United States

Canada

Italy

Russia

South Africa 13

Japan 12

Singapore 7

China 2

India 1

*Note: Data for Germany relate to 2013. Data reflect all payments (consumers and businesses), not just those made by consumers. Source: BIS Red Book 2015


Timeline of real-time payment systems across the world

Asia, Australia and Africa

North America, South America and Europe

1973

1987

1995

2000

2001

SICSwitzerland was the first country in the European region to implement real-time payments

Greisöluveitan(operates 09.00–16.30)

Iceland was the third country in the European

region to implement real-time payments

Zengin (operates 08.30–16.40)Japan was the first country in the world to implement real-time payments

CIFSTaiwan was the second

country in Asia to implement real-time

payments

HOFINETSouth Korea was the

third country in Asia to implement real-time

payments

2006

RTCSouth Africa was the first African country to implement real-time payments

2011

NIP(operates 08.00–17.00)Nigeria introduced real-time payments in 2011

2010

20001990 2010 2020

IBPSChina introduced real-time payments in 2010

2014

FASTSingapore introduced real-time payments in March 2014

2017

Australia

IMPSIndia introduced real-time payments in 2010

2002

SITRAF(operates 07.30–17.00)

Brazil was the first country in South

America and among BRIC nations to

implement real-time payments

2012

Express ElixirPoland implemented real-time paymentsin 2012

NetsDenmark implemented real-time paymentsin 2014

BIRSweden implemented real-time paymentsin 2012

2014

SEPA

2018

USATCH real time payments service to go into production in 2017, with a launch date to be confirmed. Bank participants may run pilots before launch.

TBC

TIC-RTGS(operates 08.30–17.30)Turkey was the second country in the European region to implement real-time payments

1992 2004

SPEIMexico was the first country from North America to implement real-time payments

TEFChile was the second country in South America to implement real-time payments

Faster PaymentsThe UK was the fourth country in the European region to implement real-time payments

2008


Cheques

Cheques and paper credits are used in many major economies around the world. Data for a range of EU countries as well as Canada, Australia and the USA are presented opposite. Standalone paper credits (also called paper giros) are included, having long been used in various northern European countries to pay invoices and bills in place of cheques.

The general trend in all markets is for a shift away from cheques to electronic payment methods. However, there is still considerable variation in cheque use across the countries examined with the rate of decline varying from around 10% per annum in the UK, Australia and Sweden to around 5% in France, Italy, Canada and the USA. This decline can mainly be attributed to more people using other payment methods such as Direct Debits, automated credits or card payments to pay regular bills such as rent, insurance premiums and utility bills. There are also a declining number of retailers and businesses across all countries (including the UK) who are still willing to accept cheques from consumers for everyday transactions.

Over the past few years cheque use in the UK has been consistently declining and this trend continues. As a result the UK is in the middle of the group of countries surveyed in terms of the volume of cheques written per capita. Whilst cheques mostly remain free of charge to personal customers in the UK, more people are choosing to use electronic bank-to-bank transfers,

particularly initiated through online banking. Online payments are popular due to their perceived convenience such as the ability to set up standing orders and to make immediate or forward-dated payments at any time. Many utility companies in the UK offer discounts to customers who pay by Direct Debit (which offers the payment recipient certainty of payment date and lower processing costs) as opposed to other methods such as cheques.

Since 2001, there have been more electronic payments than cheque payments made by UK businesses. Despite this, there remain a small number of businesses who are unwilling to provide their bank details to enable customers to make electronic payments to them: either because they do not wish to be burdened with checking their bank accounts to reconcile payments to them; or because they are unable/unwilling to become accredited receivers of Direct Debits. These businesses tend to be smaller service-providers such as sole traders, as well as small shops and schools. They continue to receive cheques and value them for the flexibility they offer.

Number of cheques per inhabitant, 2014

45

38

18

13

10

7

6

4

United States

France

Canada

Singapore

United Kingdom

Australia

Brazil

Italy

India 1

Japan 0.5

South Africa 0.4

China 0.4

Germany 0.4

Belgium 0.3

Sweden 0.002

*Note: Data for Germany relate to 2013. Data reflect all payments (consumers and businesses), not just those made by consumers.Source: BIS Red Book 2015


Cheque imaging across the worldIn the UK the Cheque & Credit Clearing Company is currently developing plans to increase convenience and cheque clearing speed for customers and deliver efficiency in cheque processing by moving to a system based on images of cheques (rather than transport of the physical cheques as at present). However, image-based processing systems have existed in other countries for a number of years. The USA, Germany and much of the rest of Europe, India, China and some other Asian countries have image-based processes in place. A selection of these are summarised here.

USA: The USA enacted the ‘Check 21 Act’ in 2003, allowing an electronic ‘substitute cheque’ to be created from the cheque’s image for the purposes of processing, eliminating the need for further handling of the physical document. Since then, processing has gradually transitioned from paper cheques to electronic images, with almost 70% of all institutions receiving images as of January 2013. The FED states that ‘by shifting to electronic collection and presentment, the Federal Reserve reduced its per item cheque processing cost by over 70%’.

Germany: An image-based cheque collection procedure was introduced in Germany on 3 September 2007, with the process being managed by the Bundesbank. This has significantly reduced the costs and also the time required for cheque clearing.

India: Under the Negotiable Instrument Act, 1881, cheques had to be presented physically to the bank branch on which they are drawn. The Act was amended in 2001 to allow scanned cheque images, paving the way for the cheque truncation initiative that went live in February 2008 in the New Delhi region. Another cheque truncation project is planned for Chennai in south India.

Singapore: Banks in Singapore use the Cheque Truncation System (CTS), an online image-based cheque clearing system introduced in 2003. Cheques are scanned into CTS when deposited at the bank, and their electronic images, rather than the physical cheques, are then transmitted through the clearing cycle. Cheque format is standardised in this system.

Sweden: The use of cheques in Sweden is very limited. All cheques are truncated, that is, the presenting bank retains the physical document and the information is transmitted by electronic media to the drawer’s bank.

China: Launched in June 2007, CIS is a cheque truncation system supporting the use of cheques nationwide. It converts physical cheques into images, and then transmits the cheque image and related information to the drawer’s bank.

At the top end of the spectrum the USA still makes extensive use of cheques. Nevertheless, the total number of cheques written in the USA has been declining over the past few years, with a decline of almost 40% in the number of cheques per inhabitant between 2010 and 2014. This trend has been supported by the long-term migration of state benefits from cheques to other methods of payment. More cheques are also being converted into electronic payments processed through the Automated Clearing House (ACH) system. The US payments industry has made considerable investment into automation in recent years, focusing on improving efficiency through cheque imaging rather than the clearing of paper cheques. Due to this the number of cheques being physically paid into banks is falling more rapidly than the number of cheques being written. ACH rules prevent high-value cheques being converted into electronic payments using image-based processing, which means that the average value of cheques paid in as electronic images is significantly lower than the average value of physical cheques deposited. A high percentage of business-to-business invoices are still settled using cheques. Migration to electronic payments is perhaps hampered by the lack of a real-time electronic payments system in the US.

Cheque use is lower in Canada than the US and continues to decline rapidly, with payments instead being made as Direct Debits or direct credits processed as Automated Funds Transfers (AFTs). Previous government

cheque payments, such as benefit payments, are now paid directly into the payee’s bank account. There is also a strong drive to encourage businesses to switch from cheques to direct deposit. Cheque transactions have dropped by a third between 2010 and 2014.

In Australia, cheque volumes have fallen by around 46% over the last five years and are forecast to decline further. However measures have been put in place to ensure that cheque users can still benefit from and participate in the emerging digital economy.

Similar to many other European countries, cheques are rarely used in Germany. The role of cheques in Germany has decreased as debit cards have become more popular. As a result there were just 0.4 cheques written per capita in 2014. This can partly be attributed to corporate cheques being banned since 2002, with only a very small number of personal cheques being used. A number of regular payments, such as rent and wages, traditionally use direct transfers rather than cheques. Invoices are often accompanied by pre-printed paper credits, or Überweisungen, which show the payee’s account details and the amount payable. These are submitted by the payer in a bank branch, after which the bank will transfer the required amount. It is also common to allow the payee to automatically withdraw the requested amount from the payer’s account, known as Lastschrifteinzug.

The history of the cheque dates back to the 13th century in Venice when the bill of exchange was developed as a legal device to allow international trade without the need to carry around large amounts of gold and silver.


Mobile payments

The creation and expansion of the internet has opened up opportunities for payments innovation, as has the growth of mobile networks. Across the world, the recent proliferation of smartphones has also been a significant driver of innovation in payments.

Smartphones support more advanced applications and in so doing, have encouraged the development of both mobile banking and mobile payment services. Research shows that smartphone users, including those in the UK, lead the way in adopting and using mobile payment technologies.

The term ‘mobile payments’ is used to refer to various services that take advantage of the new and emerging mobile technology that has become ubiquitous in recent years. These services include:

• Person-to-person (P2P) payments made using a mobile device (typically using an app or a text-message based system)

• Contactless payments, using the mobile device as a conduit to initiate a contactless card transaction

• m-commerce, using the mobile device as a method to conduct online shopping, paying for goods with whatever payment method the customer prefers (typically cards, possibly hosted in a mobile wallet). This can also be used to make an in-app payment to pay for something in a physical store, using the consumer’s device as a ‘mobile checkout’

There are also many other types of services that can be delivered using mobile technology, but we will limit our discussion to these three key categories.

P2P paymentsThe latest and potentially most revolutionary innovation in mobile payments, is in the form of P2P payments via a mobile device. For a number of years, individual banks have enabled their customers to initiate payments from their mobile banking apps. However, Swish in Sweden and Paym in the UK have now been developed to provide cross-industry services in their respective countries that provide a common service to customers of all participating banks. In particular, Paym has the advantage that payments can be directed using just the mobile phone number of the payment recipient, rather than the payer having to know the recipient’s account number and sort code. At the end of 2015, more than 3.2 million customers had registered to receive payments via Paym (although anyone using mobile banking services via a participating financial institution can send payments via Paym).

Both of the services in Sweden and the UK are underpinned by payments infrastructure, which not only allows for the easy transfer of money, but settles the payment made between accounts almost instantaneously. In both cases it is cross-industry collaboration that has resulted in delivery of this infrastructure and the subsequent development of other cross-industry initiatives that benefit the customer.

for emerging markets where there are a significant number of unbanked individuals. M-Pesa, unlike Paym, does not require you to have, or is not linked to, a bank account and is run by a mobile phone company and not through a payment clearing scheme.

Beyond these examples, mobile P2P payment services also exist in countries including the USA, India

and Japan. However, the UK’s Paym service has a number of benefits over the services offered in these other countries:

• For P2P mobile payment services, the UK and Japan operate the only free-to-use systems (Swish in Sweden is free for the first year but charges thereafter)

• The UK provides one of the fastest services (for example, the P2P service in the USA takes 1–3 business days to complete the payment)

• Paym in the UK is the only service surveyed that enables payments from consumers to businesses (SMEs are allowed to use Paym)

The Faster Payments Service and LINK payment schemes in the UK and BiR in Sweden provide the infrastructural foundation to enable customers to make mobile payments almost instantaneously and to exercise control of their bank balances, as they are able to see what has gone in and out of their accounts in real time without having to deal with the uncertainty of knowing when outgoing payments will be deducted. Also, despite being delivered on a cross-industry basis, mobile payment services such as Paym and Swish allow the participating institutions to differentiate their services in other ways, stimulating competition in the market.

Mobile payment options naturally reflect market need, but also the range of existing payments infrastructure including for example limited bank branches in rural areas, as well as customer appetite for, and increasing use of, smartphones. In Kenya where 40 per cent of the population are unbanked, M-Pesa, which offers customers an SMS based, person-to-person mobile payment service, has taken off and been adopted by more than two-thirds of the adult population; a rate that far surpassed initial predictions. The first year user target was met after just four months; helping the service to both fuel economic development and contribute to improving financial inclusion in the country.

The success of M-Pesa underlines the importance of mobile payment services being designed with the needs of customers in mind. M-Pesa’s success is undoubtedly influenced by the fact that the service was specifically developed

Two thirds of people in the UK now own a smartphone, using it for nearly two hours every day to browse the internet, access social media, shop online and do their banking.


Contactless paymentsThe development of Near Field Communications (NFC) technology has been another key driver of payments innovation in a number of markets. Japan’s mobile payments market is largely based on contactless technology and there are plans by companies already active and successful in Japan such as NTT Docomo to expand to other countries. Companies beyond traditional payment service providers have found themselves ideally placed to develop innovative services; these include telecommunications operators (including NTT Docomo) and the manufacturers of mobile devices and software, such as Apple, Samsung and Google.

The UK’s rapidly-developing market for mobile payments has made it a key location for the launch and development of services that allow mobile devices to be used to initiate card payments. In particular, the

transport sector has been fertile ground for contactless technology around the world, as transport operators seek to cut queues and enable flexible pricing. The launch of contactless payments on Transport for London services is one example of how the introduction of contactless payments on a major transport network can lead to increased uptake and use of mobile payments in the wider economy, as consumers become more familiar with the technology and start to use contactless payments in other environments (such as retail stores).

The UK was the first country outside the USA in which Apple Pay services were launched. This service operates with the most recent mobile devices sold by Apple, and facilitates contactless card transactions at the point of sale (as well as in-app purchases made using the device). Apple Pay is accepted on Transport for London and at many retailers who already have technology in place to accept contactless card payments.

Samsung Pay, a similar service to Apple Pay offered via Samsung’s mobile devices, is also expected to launch in the UK soon, following its initial launch in South Korea in August 2015 and its expansion to the USA in September 2015. It is to be expected that Google’s Android Pay service will not be far behind.

m-commerceUK consumers are showing great willingness to use their mobile devices to conduct banking and shopping activities. In 2014, 29% of UK consumers used mobile banking services at least once a month. UK consumers spent £175 billion online in 2014, and approximately 37% of these online card transactions were completed via a smartphone or tablet. As technology becomes more

widespread and consumers become ever more comfortable with using it, it is to be expected that the number of payments initiated via mobile devices will continue to increase. At present, the majority of these payments in the UK are underpinned by the card payment schemes. This is in contrast to countries such as the Netherlands, where online services allow consumers to pay at the online checkout by initiating an electronic transfer directly from their bank account to the retailer’s bank account. Similar services could be expected in the UK as the European Payment Services Directive 2 comes into force, permitting third party providers to develop and offer these services online.


Payments UK is the trade association launched in June 2015 to support the rapidly evolving payments

industry. Payments UK brings its members and wider stakeholders together to make the UK’s payment

services better for customers and to ensure UK payment services remain world class.

Payments UK 2 Thomas More Square London E1W 1YN

T: 020 3217 8200 E: [email protected] paymentsuk.org.uk

Once a quiet corner of the financial world, the payments industry is transforming like never before. Technological advances, new players to the market, fresh regulation coupled with UK customers’ appetite for more convenient and improved services mean that change is inevitable and there is enormous potential for the UK payment markets to continue to lead the way.

world class payments a report on how consumers around the world make payments

Economy & Finance