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COVID-19 and the impact on digital payments

According to data released by Canadian interbank network Interac Corp., payment transaction records show that today, more than ever, Canadian businesses and consumers are adopting digital methods to spend, send and receive money. A record-setting 61.3 million Interac e-Transfer transactions took place in April.

Interac data shows that since COVID-19 was declared a pandemic, Canadians have increasingly opted for digital solutions over cash and cheques - and many for the first time. Since mid-March, first-time Interac e-Transfer users increased by 43% and the average number of transactions increased by 9% per cent compared to the same time last year.  While Canadians were using these methods regularly pre-pandemic, a surge in growth of new users on the Interac e-Transfer platform suggests that the shift to digital will last beyond pandemic measures.

The shift away from cash and cheques is also reflected in the double-digit growth of Interac Debit for in-app and in-browser payments since mid-March and the 5% increase in contactless Interac Flash transactions since the initial spending dip in mid-March.

“This digital shift isn’t unexpected, but crisis situations compress timelines and Canadians are quickly seeking out secure and convenient digital payment options adhering to physical distancing recommendations,” said William Keliehor, chief commercial officer at Interac Corp. “COVID-19 is accelerating a new era in payments driven by the changing needs of Canadians and Canadian businesses, and for many, these convenient ways to pay will have a stickiness factor that will influence a long-term shift in behaviour.”

Canadian businesses are also adapting to pandemic restrictions using digital payment solutions. Since mid-March, businesses have been receiving 35% more Interac e-Transfer transactions than expected. Canadian businesses are shifting to digital payment solutions for everyday transactions like paying suppliers, or small businesses using the platform to accept payments in place of cash or cheques. Offering Interac Flash, Interac Debit and Interac e-Transfer as payment methods allows some businesses with physical distancing restrictions to continue to serve customers.

“Businesses and consumers are discovering new ways to transact and manage their finances: from sending money to a neighbour for grocery sharing, to the small food establishments accepting Interac e-Transfer transactions and selling baked goods from the kitchen," added Keliehor. "When it comes to small businesses, these behaviour changes are helping those that, now more than ever, need efficiencies and cost-savings to power operations, serve customers, and compete in a digital economy.

The European picture

Meanwhile, in Europe, a Deutsche Bank research report 'Paying in times of crisis: Coronavirus, cards and cash' written by Heike Mai, shows how cash demand spiked at the start of the pandemic, but that contactless has also gained ground as a method of payment.

The rapid spread of the coronavirus led many European countries to impose significant restrictions on the social and economic lives of citizens in order to contain the pandemic. A direct reaction was widespread panic buying of food, but many people also hoarded cash in the wake of the uncertainty.

In March 2020, euro currency in circulation skyrocketed by €36bn to €1,344bn, the sharpest monthly rise in the euro’s history apart from the financial crisis in October 2008 (+€44bn). Year on year, euro circulation increased by 8% - the highest rate since 2015. Between then and now, the annual growth rate had averaged just under 5%. Leaving out the typical seasonal increase of around €8bn, the unusually high demand for cash was probably due to the coronavirus crisis, as it coincided with the adoption of restrictions on public life. The uptrend peaked in the week of 16 March, when many businesses in Spain, France and Germany had to close. In early April, cash demand returned to normal levels in the euro area. Several countries are now seeing cash 

As with the financial crisis, the coronavirus pandemic is likely to have triggered a desire for financial flexibility and security. However, a look at the denominations in demand reveals a significant difference to October 2008, when 75% of the increase in cash was attributable to larger banknotes that make it possible to hoard larger amounts. In the recent month of crisis, these banknotes accounted for a mere 55%. The number of €500 notes decreased slightly, as the Eurosystem’s central banks stopped putting them into circulation on 27 April 2019. Smaller banknotes with a nominal value of €5, 10, 20 and 50, which are mainly used to pay for purchases, accounted for 45% of the increase. Unlike during the financial crisis, when the store-of-value function for concerned savers was the main factor fuelling cash demand, much of the current uptick was probably earmarked directly for buying food or for use as cash reserves in order to remain able to pay for everyday purchases in uncertain times.

Not all of the increase in cash was actually used by non-banks. Private individuals and other non-banks withdrew merely two-thirds at ATMs and bank counters. One-third remained with banks. As a result, cash reserves at banks increased by €12.2bn to €91.7bn. Normally, banks keep such a large amount on hand only in December. Banks in the euro area stocked up on cash significantly in March in order to avoid bottlenecks in the cash supply chain, as it is difficult to predict how much cash customers will withdraw during a phase of uncertainty.

Paying in times of corona

The short-term impact of the coronavirus crisis on payments at the point-of-sale is not clear. On the one hand, some payment service providers have said that their customers used girocards (former EC cards, German debit card scheme) more often in March than before. On the other hand, initial information from retailers indicates that store closures in March led to a decrease in the number and value of card payments. In fact, the share of cashless payments by turnover fell substantially in March, as non-food businesses were closed where card payments usually account for a high share. In the food retail sector, 55% of sales may have been paid for using debit cards, Visa or Mastercard - a marked increase from a share of 45% in March last year. More than half of card payments were contactless, with 84% of retail businesses asking their customers to use cashless or contactless methods of payment.

Various surveys since the end of March suggest that between one-quarter and just under half of Germans are currently using cards far more often than cash to pay for their purchases, with contactless cards being particularly popular. This shift is apparent in all age groups, but especially for middle-aged people. Customers are forgoing cash payments to avoid contact and protect themselves from infection - and because businesses are asking them to do so. Roughly one-third of Germans appear not to have changed cash use, and another one- third were already making most of their payments by card even before the pandemic.

Contactless payment gains ground

Thanks to its speed and ease, contactless payment was already attracting more and more customers last year. To avoid touching objects during the pandemic, an ever larger number of consumers are trying this option and using it more often. In a contactless payment transaction (also known as mobile payment), a payment card equipped with a contactless payment function, or a smartphone on which a corresponding app has been installed, is held up to a card reader at the till. The required data is transferred using NFC technology, thereby triggering payment. Contactless payments are capped by law at €50. Afterno more than five contactless payment transactions, or a total amount of €150, the cardholder has to authorise the next payment, even if it is below €50. For payments made by card, this requires entering a PIN into the card terminal. For payments made by smartphone, the user has to enter a PIN on his or her phone or to confirm the transaction by way of biometric authentication (such as a fingerprint or facial recognition). By using their smartphones, customers can indeed pay for purchases without ever having to touch a single foreign object.

Despite being virtually unknown in 2017, 15% of customers already reported using their debit card to make contactless payments in a survey in the second quarter of 2019, even though only half had debit cards equipped with this function. 

In light of the marked shift in preferences, girocard announced in late March that it would raise the limit for contactless payments to €50. However, converting point-of-sale terminals and the IT systems at the card- issuing banks will take a few weeks to complete. Credit card providers such as Visa, Mastercard and American Express also offer contactless payments for purchases up to €50, provided the appropriate technical infrastructure is available.

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