(Published in the Times report on the Future of Payments on December 7, 2011. Read the original here.)

business guide

A technological revolution is sweeping through the payments industry as businesses realise that cash is no longer king.

In 2010, UK shoppers spent £26bn more on debit cards than using cash — the first time cash spending has been surpassed according to the Payments Council.

Some businesses, particularly smaller independent retailers, resist the cashless trend, arguing card fees are expensive.

“But when retailers complain about merchant fees they forget about the cost of handling cash,” says Zilvinas Bareisis, senior analyst at market research firm Celent.

Particularly in a depressed economy, retailers can no longer afford to alienate customers who prefer to pay with something other than cash.

They also know that consumers who can use a card or other cashless alternative are likely to spend more than if their spending is limited to the cash in their pocket or purse.

This is the big attraction of the credit card, of course. In the past decade, this mature technology has found a new lease of life thanks to the e-commerce boom.

In the UK, credit cards account for around 60% of online purchases, although P2P payments technologies such as PayPal have also built a strong following in cyberspace.

The credit card pioneered the concept of cashless shopping, but it lost its crown some years ago. Today, the value of transactions handled by debit cards outstrips those charged to credit cards by two to one.

But traditional plastic cards have a couple of weaknesses. First, you need a bank account to get one. That excludes customers who like the convenience of plastic but do not qualify for a credit or debit card — in the developing world that could be many millions.

Even in the US, Wal-Mart calculates there are 80m ‘unbanked’ consumers and so it developed its own prepaid card — an idea that could potentially appeal to other large retailers. .
The other weakness of plastic cards is, ironically, their high security. Chip and Pin technology has cut down card fraud. But it slows down queues as some people struggle to use a keypad or remember their Pin. In addition, Chip and Pin cards shift much of the liability for fraudulent transactions to retailers.

These considerations have led the card companies to develop contactless cards for low-value transactions, where fraud is less of an issue but speed is. Over 50,000 retailers now have NFC-capable Pos terminals that enable them to accept contactless cards and also payments by a new generation of smartphones equipped with a NFC chip.

Mobile payments is the next frontier for retailing and the past year has seen a raft of initiatives and the entry of new players such as Google and PayPal keen to stake a claim..

The number of NFC-equipped mobile phones today is limited but will grow rapidly as consumer replace their phones, experts predict. The Payments Council says almost a quarter of shoppers are likely to want to use a mobile payments service, which promises benefits to the retailer that go far beyond simply offering another way to pay.

“Many people are betting that with the smartphone you can change the whole shopping experience,” says Mr Bareisis.