Some like it Cashless

The digital and technological revolution started in the last few years has involved also the payments sector: the alternative payments are in fact taking on an increasingly central role. The payment world is experiencing a real "cashless rush".

Looking at the European framework - data at 2017 - the countries closest to a cashless society are Belgium, Denmark, Sweden, Finland and Estonia. Italy is in the fourth from last place for the use of digital payments: cash remains the most widespread payment method with 86% of transactions, far from the European average of 74%.

There is room for growth in the Italian market also in terms of diffusion and use of payment cards. The average number of payment cards per person in Italy is 1.3, against countries such as Russia and the UK with respectively 2 and 2.7 cards per person. Similar situation in terms of cashless annual transactions per person: an average of 37 transactions in Italy compared to the European average of 104 (Denmark outlier with 300 transactions per person).

Signals however are encouraging: in Italy cashless payments are expanding, with the number of transactions made with other than cash payment instruments increasing of + 5.1% in 2017, reaching the 54% of total volumes transacted. Year on year there is also a decrease in the average cashless ticket: an important message of the progressive adoption of electronic payment instruments also for medium-low value daily purchases. Cash reduction entails multiple benefits for the country system: direct cash cost reduction (as of today in Italy amounting around € 10 billion per year), shadow economy surfacing, greater transaction security and a broad incentive to innovation and to develop of the digital economy in Italy.

The Italian payment card market (data at 2017) is driven by debit cards, increasing both in number of cards in circulation (+ 3.4%), by total amounts (+ 1.9%) and by number of transactions (+ 5.7%). Prepaid cards follow, constantly increasing in the number of cards (+ 7.3%) and in terms of number of transactions and total amounts (+ 21%). Concerning credit cards, option / installment component is highly increasing (+ 4.2%) because of their flexibility and adaptability to the needs of the cardholder (however, the main use of option cards is full refund, with 80% of transactions).

Thanks to the high growth potential, the electronic payment market is becoming increasingly appealing and competitive. Banks are facing the entrance in the market of new competitors with a stand out digital profile, allowed by the evolution of the regulations (PSD2, January 2018).

Non-financial players with strong competitive factors are facing the payment market entrance: TELCO are developing stand-alone payment products bundled with advanced technological solutions (e.g. NFC technology), the American Tech Giants companies, also known as GAFA (Google, Amazon, Facebook, Apple), are leveraging the wide interconnection among users to enable payments through proprietary wallets (today still linked to payment cards), large-scale retailers can exploit their widespread sales network in order to distribute and promote the use of new payment methods.

In this scenario of e-money business growth but with markup decrease, Banks can remain profitable only redefining their organizational model through:

product offering rationalization and service levels improvement (identifying value-added services customized for retail and corporate customers)
product innovation (mobile and remote payment, contactless, payment systems dematerialization)
high transaction security guarantee
strong efficiency and cost control
risk control (credit, fraud, operational)

Banking players are considering redefining their model focusing more on business. The main trend concerns the externalization to all those lower added value activities ("processing end-to-end"), such as issuing and acquiring transaction processing, operations activities like frauds and disputes management, contact center, cards issuing, POS and ATM terminals management.

The operational development mentioned above is enabled by a progressive concentration of those operators able to provide an “end-to-end” processing service.

Wide margins penetration and relevant growth factors such as increase in e-commerce volumes, POS payments mandatory acceptance threshold lowering or reduction of the interchange fee, together with the new market dynamics of the providers, represent a great opportunity for Banks to define their new long term sustainable and successful positioning in the business of electronic payments.