No stranger to payments innovation, the UK
gave the world the cheque and the ATM, and in 2008 added the Faster
Payments Service to its list of achievements. Next on the change
agenda are mobile banking and contactless payments, both of which
face the big challenge of gaining broad consumer acceptance.
Undoubtedly the most
significant development in the UK payments market in some two
decades was the launch of the much-awaited Faster Payments Service
(FPS) on 27 May 2008. The product of a development process
initiated by 13 major UK financial institutions in May 2005, FPS
has slashed the clearing period on low-value funds transfers from
three working days to virtually real-time.
Running on UK payments processor VocaLink’s
Faster Payments Central Infrastructure platform, FPS was first
introduced for internet and phone payments followed in June by
standing order payments. FPS has been enthusiastically embraced by
the public with volumes by the end of 2008 running at five to six
times levels originally envisaged by that stage, Paul Taylor, MD of
VocaLink Europe told EPI.
According to payment industry body APACS, FPS
volumes stood at 19.74 million payments in December 2008 while the
value of transactions processed was £6.51 billion ($9.3
In value terms single immediate payments made
up the bulk of usage of FPS in December, accounting for £3.97
billion (61 percent) of total FPS transactions followed by
forward-dated payments £1.39 billion (21 percent) and standing
order payments at £1.15 billion (18 percent).
The maximum value for internet and phone
payments is set at £10,000 and for standing orders at £100,000.
In volume terms standing order payments were
the most significant, accounting for 10.92 million transactions (55
percent) followed by single immediate payments at 6.91 million (35
percent) and forward-dated payments at 1.88 million (10 percent).
FPS, which now accounts for some two-thirds of all internet and
phone payments, is far from stretched in terms of capacity – having
already processed some 1.5 million transactions per day at peak
But despite the success achieved by FPS there
are still a number of flaws requiring attention, stressed
consultancy MPI Europe in a recent study of the new system. Among
MPI’s concerns is that while existing banks and building societies
linked to the FPS account for some 97 percent of transactions, 35
percent of non-clearing banks are unable to receive faster
Of more significance MPI warned that the speed
of FPS presents security and fraud challenges which are yet to be
fully addressed by some banks.
“Some banks have had to put in place temporary
measures to address these issues, said MPI’s managing director,
John Cant. “Addressing them on a more universal and permanent basis
is one of the main tasks in this area for 2009.”
Economy hits tough times
Unfortunately, in tandem with
countries worldwide, the UK began feeling the impact of the growing
global financial crisis in 2008. Worse it seems is yet to come with
the European Commission predicting that the UK’s economy will
contract by 2.8 percent in 2009.
The impact of the sharp reversal in the UK
economy’s fortunes is already evident in consumer transaction data
released by APACS which reveals that card transaction growth
stalled in the closing months of 2008. In December the total value
of card transactions of £32.3 billion represented a mere 0.3
percent year-on-year growth rate while the average transaction
value of £44.95 was the lowest in six years.
Also indicative of the sharp deceleration in
the UK economy in the closing stages of 2008, total spending on
cards in the year as a whole increased by a healthy 6.8 percent to
Hardest hit in December 2008 was spending on
credit cards with the total value of transactions down by 4.8
percent to £10.8 billion and the volume of transactions down 2.2
percent to 498 million. Total spending on credit cards in 2008 came
in at £126.3 billion, up 1.9 percent compared with 2007.
Continuing a trend evident for four years,
consumers relied increasingly on debit cards in 2008. Even in
December 2008 spending on debit cards lifted 3.1 percent compared
with the year-ago period to £21.6 billion, while the volume of
transactions increased by 6.7 percent to 532 million. For the year
as a whole the value of debit card transactions increased by 9.5
percent to £245.4 billion.
Last year was also one in which UK consumers
looked for value – to find it they went shopping online in record
Indicatively, research firm Nielsen Online
reported that the top 10 UK online retail websites recorded on
average a 37 percent increase in unique visitors in the fourth
quarter of 2008 compared with the fourth quarter of 2007. In sharp
contrast with this credit information, specialist Experian
estimated that the number of people visiting shopping centres and
city centre stores fell 2.3 percent in December 2008 compared with
Putting a figure on the UK online
business-to-consumer market, research firm eMarketer reports that
online spending in 2008 totalled £59.8 billion, up 28.3 percent
compared with 2007. Online retail spending in 2008 represented
about 17 percent of total retail purchases in the UK.
Though credit and debit cards still account
for the lion’s share of the online shopping market, alternative
payment service PayPal has made substantial inroads, accounting for
about 20 percent of online spending. Running a somewhat distant
second in the alternate payments space is Google Checkout with a
market share of about 9 percent.
Online shoppers’ quest for value is also
highlighted by security specialist CyberSource’s 2009 UK online
fraud report. In a survey of online shoppers CyberSource found that
potential for saving by shopping online was a compelling reason for
67 percent of respondents. Even more notable was convenience and
saving of time, which was a major motivating factor in shopping
online for 81 percent of respondents, and instant access to the
widest range of goods, cited by 84 percent of respondents.
However, even the convenience of online
shopping is not enough to convince all UK consumers of its
attractiveness. According to CyberSource, by the end of 2008 51
percent of consumers had never shopped online, though this was down
from 53 percent a year earlier.
Based on data from European Union (EU)
statistical body Eurostat, the UK now ranks joint third in the EU
behind Denmark and the Netherlands where some 55 percent of
consumers shop online.
For UK consumers who do not purchase goods
online, CyberSource found that lack of access and understanding are
clear barriers: 47 percent said that they have no access to the
internet; 36 percent said that they do not know how to use a
computer and 62 percent just prefer shopping in a store.
Significantly, however, for 41 percent of
those who do not buy online – 21 percent of UK consumers – it is
concerns about security that dissuades them from doing so. Across
all survey respondents including those that do shop online
CyberSource found that two-thirds are concerned about the safety of
Considering that there is no evidence to
suggest there is any greater fraud or theft risk to shopping online
when compared against shopping in a store, this should be of great
concern to the online industry, commented CyberSource’s head of
client and technical services, Akif Khan.
But despite reservations about online security
UK consumers are anticipated to continue flocking to online
retailers’ websites. However, while likely to outpace their high
street counterparts there is realism among online retailers – 51
percent of respondents to CyberSource’s survey forecasted sales
growth in 2009, down from almost 80 percent that anticipated growth
at the start of 2008. Of those retailers forecasting growth in
2009, one-fifth anticipate that their sales will increase by more
than 20 percent.
Somewhat more optimistic than CyberSource’s
findings would indicate is eMarketer’s forecast of a 22.7 percent
increase in UK online retail sales in 2009 to £68.4 billion.
Looking further ahead, eMarketer forecasts that online sales will
achieve a CAGR of 12 percent between 2008 and 2012.
Curiously British consumers’ adoption of online shopping has not
been matched by their adoption of online banking. According to a
survey undertaken by Eurostat in the second quarter of 2008 of
individuals aged 16 to 74, 38 percent of respondents in the UK
banked online. Out of 27 EU countries this ranked the UK tenth,
well behind the top-three countries: Norway (75 percent), Finland
(72 percent), and the Netherlands (69 percent). The EU average for
EU internet banking use was 29 percent.
However, despite what may seem to be consumer
resistance to online banking, UK mobile banking and payments
technology developer Montise strongly believes that widespread
adoption of the mobile phone for online banking and payments in the
UK is inevitable. Monitise’s view is based on an in-depth study
undertaken for it by Experian unit Future Foundation.
Future Foundation’s reasoning is simple.
Telephone banking was the first service to enable consumers to
manage their financial affairs remotely. In turn the more versatile
internet banking came into play with a consequent steady decline in
the use of telephone banking. The next logical step is the adoption
of the ubiquitous mobile phone to provide access to banking and
payments services anywhere and at any time.
“Consumers crave ease, speed and convenience
and when new technologies provide those benefits there is a ready
and substantial market for it,” noted Future Foundation.
Optimistically, Future Foundation highlighted
that “mobile banking is already showing the highest rate of growth
of any channel.” Underscoring this, the research firm quoted Will
Jones, head of innovation delivery at The Royal Bank of
“We’ve seen a dramatic ramp up in the past six
to nine months in the appetite of our core 12 million customers to
want to use the mobile device as a mechanism for managing their
money and there will be other things in the future that will be
equally helpful,” said Jones.
But despite this mobile phone banking can
hardly be said to have taken-off in the UK with, according to
Future Foundation, only 4 percent of UK consumers currently using
Optimism on the future of mobile banking in
the UK was also dealt a blow by a survey undertaken by research
firm International Communications Research (ICR) for US technology
developer Unisys in May 2008.
The key finding of the survey was that 80
percent of respondents do not intend to use their mobile phone for
online transactions such as payments and shopping. The primary
reason cited was uncertainty relating to security. According to
ICR, 32 percent of respondents feel that mobile online transactions
are not very secure, 24 percent feel they are not secure at all and
23 percent feel they are somewhat secure. Only 5 percent of
respondents believe mobile online transactions are very secure.
Future Foundation concedes that security is
central to mass-market adoption of mobile banking. “Clearly some of
the concern stems from the fact that most people are unfamiliar
with how mobile banking could work, they aren’t aware of the
security that’s there,” noted Future Foundation.
The research firm continued that few consumers
appreciate that, in some ways, the mobile phone is an inherently
more secure device than a personal computer, that nobody has yet
broken the GSM or 3G mobile telephony encryption algorithms and
that security systems are in place to obliterate information if an
incorrect password is entered more than three times.
“There’s an education task here and it’s a
substantial one,” stressed Future Foundation.
While adoption of mobile banking and
payments can be viewed as still very much a technology-push
exercise in the UK, adoption of contactless payments appears to
have the very significant advantage of meeting the consumers’
perceived desire for convenience. This is particularly true where
consumers have had an exposure to contactless payments in
applications such as London’s Oyster transport payment card.
The convenience factor came through strongly
in a consumer survey conducted in December 2008 by consultancy
Loudhouse Research for French electronic payment terminal developer
Particularly detailed, the Ingenico PayPoll
Survey confirmed that consumers still view cash as a dominant
payment mechanism. Indeed, on average, survey respondents had
£29.30 in their wallet/purse on any typical day. Taken across the
entire UK population this equates to almost £1.3 billion.
However, only 31 percent of respondents stated
that cash was their preferred payment mechanism while 33 percent
said they would rather use cards than dig out change from their
pocket. Overall 76 percent of respondents stated that they would be
most likely to use a debit card to pay for purchases.
Clearly this leaves the path open for the
adoption of contactless payments in card or mobile phone-based
format. Significantly, the survey found that consumer readiness and
intentions in relation to the adoption of contactless cards and
mobile phones equipped with contactless payment technology is
Overall, 62 percent of respondents view
convenience as the primary benefit of contactless payments. Among
those with direct experience of contactless payments or who said
that they would definitively use contactless payments, 84 percent
stated that convenience was the primary motivator. Queue avoidance
and reduced reliance on cash were cited as other major
Warnings of potential fraudulent loss
expressed by opponents of contactless payments also appear to be
largely without significant merit given attitudes towards the loss
of cash. In this regard the survey revealed that consumer tolerance
in relation to cash loss is high. On average, respondents would
need to lose £71.30 cash before reporting it to the police, while
58 percent of respondents aged 44 years or under stated that the
amount would need to be in excess of £100.
How contactless payments are facilitated also
appears to have little impact on consumer attitudes towards risk,
with the survey respondents having a marked parity of comfort in
relation to the average spend they felt confident undertaking when
using contactless cards or mobile phone payment technologies.
Specifically, the average spend value via a contactless-enabled
mobile phone is £30.10, contactless pre-paid cards £27.80 and
contactless debit/credit cards £35.10.
Significantly, the Ingenico survey found that
more respondents (20 percent) were aware of mobile handset payments
compared to contactless prepaid cards (16 percent) and contactless
debit/credit cards (12 percent).
However, the survey also revealed that
consumer acceptance of mobile handset payment technology appears
hampered by limited familiarity with the concept due to lack of
exposure. Just 4 percent of survey respondents had used mobile
handset payments compared with 13 percent who had used a
contactless prepaid card and 8 percent who had used a contactless
As a result of respondents who said they would
definitely use or consider contactless payments only 41 percent
said they would use mobile handsets compared with 52 percent who
would use a contactless prepaid card and 49 percent who would use a
contactless debit/credit card.
However, Ingenico stressed that once consumers
have had direct experience of using mobile handset-based
contactless payments they become “clear converts.” Indeed, noted
Ingenico, one-third of respondents with mobile handset-based
payments experience expressed a preference for carrying one phone
containing multiple card details.
Ingenico added that acceptance of the benefits
of using mobile phone payment technology are high among early
adopters, suggesting that the mechanism is “proven by use.” In
addition, stressed Ingenico, parity between the average value of
cash respondents carry in their wallet/purse and the average amount
they felt comfortable spending using contactless credit/debit cards
and mobile handset technology suggests that both these payment
methods could provide a viable alternative to what it termed
Ingenico also believes that an increase in the
current £10 contactless payments limit would have strong consumer
support. This, in turn, suggests that adopting organisations such
as major retailers should not base their contactless payment
implementation decisions too closely on the existing £10 limit,
The cheque turns 350
Morris and Clayton Bank has long
disappeared but it holds the honour of being the first British bank
to have had a cheque drawn against it.
Dated 16 February 1659 the cheque
was for the then substantial sum of £400, ($570)according to
industry body the Cheque and Credit Clearing Company (CCCC).
For most of the next three and a half
centuries the cheque reigned supreme reaching its peak in 1990 when
11 million cheques were being written daily in the UK.
However, the advent of electronic payments has
steadily eroded cheque use and by 2007 volume had fallen to 4.4
million cheques per day, noted the CCCC.
Cheques are now primarily used by businesses
with only 2.8 percent of retail spending by value still paid by
cheque, while only one in 11 regular bill is paid by cheque –
compared with one in five as recently as 2000.
Cheque use is set to continue falling with the
CCCC predicting that by 2017 only some 2 million cheques will be
Notably, all cheques in the UK are still
UK PAYMENTS MARKET
Online buyers m*
Average annual online spend (£)
* over 14 years old Source: eMarketer