The fast-changing world of payments: What every SME should ask itself
8 min read
21 March 2015
With £2.32bn spent using contactless payments cards in the UK during 2014, the need to factor in new payment methods has never been greater.
Nearly every day, small and medium-sized businesses are faced with a dizzying array of headline statistics about consumer payment trends and preferences. Is cash dead? Will this be the year that contactless becomes the most popular way to pay? Is a mobile wallet the ultimate in consumer convenience?
Add to this the ever shifting regulation around card interchange fees, and it’s a full-time job keeping up with the payments landscape. For the majority of small business owners – already putting in overtime to run and grow their business – this is an extra, and often confusing burden to cope with.
Recently, the Payments Council predicted that 2015 would be the first year that non-cash payments outstrip cash. The Council forecasted that contactless card payments will pass the £2bn. There will be 400m fewer cash payments this year than in 2014, it said, but 700m more non-cash transactions. It also estimates that cash payments will reach 19bn transactions this year, while transactions such as direct debits, standing orders and card and mobile payments will hit £19.9bn.
A key factor, according to the UK Cards Association, has been the uptake in contactless card payments, which allow shoppers to spend up to £20 (soon to be £30) by simply tapping their card on a compatible terminal. The payment method received a particular boost in September last year, when it was introduced at Transport for London’s Oyster terminals. As such, £2.32bn was spent using contactless payment cards in 2014 – more than three times the 2013 total.
“The uptake in contactless payments does not necessarily mean that contactless is the only way forward,” said Raj Sond, general manager at payments systems provider First Data Merchant Solutions. “The popularity of each payment type depends on a number of factors including the cost of the transaction, type of purchase and specific demographic of the client base. It is important that small businesses take each of these into consideration when deciding on the best payment solution for their business.”
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Choosing the right type of payment to accept, be it credit or debit card, cash only, contactless, mobile, is not only important when it comes to improving customer experience, but it has other implications, added Sond. “Each payment method brings with it different security considerations, cash flow implications and fees. Before deciding which methods best suit their customers and will be most cost-effective, SMEs need to look under the bonnet of their business.”
He advises them to ask three questions:
(1) What is the average transaction value of your products?
Contactless payments are currently restricted to transactions below £20, so for cafes, newsagents and bars, where speedy service is crucial and items are generally low value, this can be a great payment option for customers. It’s worth noting that the limit is set to be extended to £30 this year, so other retailers may now also benefit from accepting contactless payments.
“Conversely, if a store holds particularly high-value items, cash is also unlikely to be a popular payment choice for clientele,” commented Sond. “For high-value items such as jewellery, furniture purchases or technology items, many elect to pay using their debit or credit cards, so it is important that such retailers have the ability to accept these payments.”
It’s also important to note that on 1 March 2015, the fees charged for accepting UK domestic Visa Debit cards changed from a fixed pence rate per transaction to a percentage based rate. This means that all UK retailers are now seeing their debit fees change going forward and those with a high average transaction value will likely see an increase in costs.
(2) Is your primary customer base domestic or from overseas?
The fees quoted above are known as “interchange fees.” These are fees are charged by a cardholder’s issuing bank to a retailer’s payment processor to recover the various costs of providing the payment facility. “If your customers are mainly from overseas then your costs for accepting these types of card transactions will be higher than those for UK domestic issued cards,” explained Sond.
Dynamic Currency Conversion is also a useful option for overseas customers. “When an international card is presented, you can offer your customer the option to instantly convert the sale amount to their local currency,” he said. “This gives your customer the peace of mind that comes with knowing exactly how much they will be billed on their statement before it arrives.”
(3) What is the typical demographic of your customers?
Recently, Visa announced the launch of new security technology for mobile payments, which many believe could contribute to increased mobile payments usage. Uptake in mobile payments has so far proved particularly popular amongst generation “x”. Experian estimates that thanks to this interest from millennials, smartphone payments could outpace credit and debit card transactions by 2020. If your customers are largely in the 18-30 demographic, it may be worth considering accepting payments via mobile sooner than other retailers.
“After getting customers through the door and securing their interest in your products or services, payment acceptance can feel like the very last hurdle in a transaction,” added Sond. “However, if small businesses do not offer payments options that appeal to their target customers, this can be the difference between a sale and a lost opportunity.”
Small business owners need to consider what type of transactions they generally accept and their clients’ payment preferences, he advised. “SMEs should avoid the temptation to be side-tracked by the latest innovation in the payments space if this is likely to prove irrelevant to their business,” suggested Sond. “With so many options available – and the list continuing to expand – navigating the payments landscape can be confusing. Taking a flexible approach to embracing new technology and analysing where this fits into your business is key to opening up the purchasing potential of both existing and new customers.”