The UK payments space is undergoing something of a transformation!
For many years nothing changed. Most face-to-face payments were in cash and remote payments were largely made by cheque. People would occasionally pay for something by credit card if they couldn’t afford it all in one go. We didn’t make anywhere near the volume of transactions that we do today. This is changing:
- Bill payments and salaries are paid by Bacs and Direct Debit.
- Debit Cards and digital wallets are increasingly used for remote retail payments
- Face to face purchases are contactless.
- Person to person payments are made through banking apps.
- Credit is now available through Buy Now Pay Later providers rather than just credit cards.
Factors Influencing the Changes in the Payments Market
The changes have certainly been made possible by technology. The other driver has ironically been regulation. The role of a bank was originally as either somewhere safe to store your money or somewhere safe from which to borrow money. They became more and more dominant and controlled nearly all the flow of funds. Changes in regulation have increased competition and we now have “Challenger Banks” and other Payment Service Providers” who aren’t banks. They don’t get involved in lending but facilitate money transfers. We have digital wallets where we can keep our card details. As a result, spending money has gotten a whole lot easier.
The total number of payments made in the UK increased to 48.1 billion payments in 2023 from 45.7 billion payments in 2022 and 40.4 billion payments in 2021.
Another reason that this volume of payments keeps increasing relates to our spending habits post pandemic. Rather than buy season tickets, many of us travel on a more ad-hoc basis and pay per journey. Buy now pay later has allowed people to split payments into 3 or 4 transactions rather than one. In addition, it is also now increasingly common to keep money in more, different, places – we move money between personal accounts, joint accounts and savings accounts much more frequently.
What choices should we offer. Why does it matter?
Well, all the evidence points to payment methods having a major influence over our purchasing decisions. The payment methods are as importantly how we offer people the chance to make payments. Purchases can have a major effect on people’s behaviour. The journey matters.
“Each payment method provides specific benefits to the participants in the transaction. Payers generally choose the method that best meets their needs in any given situation, albeit sometimes influenced by the preferences of the payee” – UK Finance UK Payments Market Summary Report 2024
Cash is still the second most used payment method after cards so in a retail environment it makes sense to still accept it. If nothing else it’s a good back-up for if I.T. fails. For remote payments, cash is not really an option.
So, what options should you be offering for Membership Payments?
There are lots of new payment options emerging at the moment such as Buy Now Pay Later and Digital wallets. There is much talk of variable recurring payments being the next big thing to replace Direct Debit. I would probably wait until these get a bit more established before diving in. Some of these may well take off in future but caution should be learned from the experience of PayM. “PayM” (Pay by Mobile) was launched by the 15 of the UKs largest banks 9 years ago. There was a lot of time and money invested in it, yet it was shut down 18 months ago as the number of users was dwindling. So, to avoid backing the wrong horse I would suggest first looking at the dominant payment methods. Cards have more than 50% of all payment volume by transaction numbers. Direct Debit is our preferred method of payment for subscriptions, bills and things that we pay for on a regular basis.
“In 2023 there were 4.8 billion payments made by Direct Debit, with an overall value of £1,268 billion. Direct Debit is a familiar, long established and widely trusted method for paying regular bills and is used by consumers to make around 7 out of 10 of all regular bill payments.”
If you were just going to offer people at least some choice, then those are the obvious ones to offer.
2 payment methods have now moved from emerging to commonplace. These are digital wallets and buy now pay later (or BNPL as it is often referred to).
Digital Wallets
Digital Wallets are becoming more popular amongst payers who find them more convenient and secure. Convenience and security in that order are the driving factors in our choice of how we pay. They are convenient as we don’t have to type in all of our details each time. They are also more secure as we only store our secure information with the trusted provider rather than typing our card details into everybody’s websites. Over a third of the population are using digital wallets.
Buy Now Pay Later
Buy now pay later has seen huge growth and that seems to have accelerated with the cost-of-living crisis to the point where even takeaways are offering BNPL as an option. If you aren’t familiar with them yet they typically offer 3 interest free instalments. Whilst there are some concerns over their use for impulse purchases, I think there can be a positive use case in the membership sector simply allowing a 3 stage payment to spread the cost.
“Around one in seven people in the UK (14% of adults) used Buy Now Pay Later services to purchase something during 2023, compared with 12% the previous year.”
We are also seeing some signs that BNPL will combine more frequently with digital wallets. Apple have announced that they will allow users in the US to spread the cost of a purchase into 4 payments over six weeks without interest or fees.
And there is certainly a different level of uptake with these newer payment options amongst age groups. Buy now pay later has been used by well over 50% of people under the age of 40.
Take Action
I would encourage membership organisations to look at your offering again. I think it would make sense to offer card and direct debit payment for almost all organisations in this sector and certainly would be thinking about how you could also offer payment via a digital wallet. Direct Debit has the best retention and is the preferred method for regular payments. Whatever you do paperless, online and mobile are massively important and can’t be ignored anymore.
Questions?
If you still have questions about the best approach for Membership Payments, contact us today. We are here to help.