Subscriptions, Online Services, PayPal, And Covid-19

The pandemic is changing payments, but it’s also reworking payments strategies. Here’s how the industry will have to react in the next few years.

Covid-19 has dramatically transformed daily life in many ways all too familiar by this point. While we know that the pandemic will end, the timing is uncertain, and some changes will be permanent.

I will focus here on two of these changes: the shift to contactless payments and the growth of digital wallets.

Contactless Will Stick

Public health authorities have advised everyone to minimize physical contact, and early on people began reducing their use of cash to the extent that there was a nationwide coin shortage this summer. (The shortage was worsened by supply-chain disruptions).

Major retail chains actively encouraged customers to use cards. Even cards, however, posed a risk when inserted in point-of-sale systems. Guidelines from the Centers for Disease Control (as of Sept. 11, 2020) urged consumers to “[i]f possible, use touchless payment (pay without touching money, a card, or a keypad). If you must handle money, a card, or use a keypad, use hand sanitizer right after paying.”

This accelerated what had been a sluggish move to contactless payments (QR code as well as NFC). American Express Co. found in a recent survey that 81% of merchants intend to make contactless a permanent payment method. Square Inc. is pushing QR codes for eateries. Also, PayPal Holdings Inc. has issued a Visa-branded Venmo card with built-in QR code as well as near-field communication capability.

NFC is a technology that allows communication between two microchips, at least one of which must be powered, over very short ranges. These chips can be embedded in plastic cards or posters, and the powered ones are found in mobile phones and payment terminals.

Contrast the current status of contactless with the situation almost a year ago, when Jordan McKee wrote for Forbes that “it’s still early for contactless cards in the US,” citing lots of commitments and support from major players but little in the way of action.

Personally, as someone who uses Apple Pay, I can testify that, before the pandemic, it was common to encounter merchants that technically could accept NFC but had not activated it. All too often, an attempt to tap would be met with confusion from the clerk, who would mumble something like “oh, that’s not working right now.” Now, NFC is common anywhere, and local businesses that were cash-only have changed their tune.

Habits, once formed, are hard to break, and we are forming a tap-and-go habit right now. Most important, merchant support is much better, so consumers are more comfortable using contactless technology.

Energized Wallets

Universal wallets like Apple Pay, Samsung Pay, and Google Pay that function via NFC have gotten a major shot in the arm by the increase in support for contactless payments from merchants responding to safety concerns. However, the use of digital wallets is also increasing as people shift from in-person to online events.

Trade shows and conventions in physical locations are temporarily impossible in the U.S., with events through next year being moved online or canceled altogether. The same is true of concerts, tours, and festivals. Many restaurants are likely to fail.

By contrast, subscription streaming, delivery, and gaming services are seeing an increase in usage as people seek entertainment and food in the safety of their homes.

Some of this will endure, not only because habits have formed, but because the technology of presenting performances over the Internet is improving. From primitive Zoom calls to the sophisticated multi-framed, edited performances that were done for the political conventions and for the Global Citizen fundraiser in May, the technology has evolved to the point that I expect in-person events will become less common.

Right now, most of these events are being released for free, but this is obviously not sustainable. That creates a new opportunity for paid streaming and purchased video, which will be done through payment cards and digital wallets.

There is a general shift from the point of sale to e-commerce that will also endure as consumers become more comfortable with shopping online. In terms of payments, this will increase the importance of digital-wallet placement and deals with wallet providers to improve positioning. Apple has already started to do this by giving extra rewards for certain merchants, and this is likely to grow.

Subscriptions also have appeal in a time of economic crisis, when consumers place value on predictable costs and lack the funds for large individual purchases, preferring to spread out payments.

A Missed Opportunity

When we look at some of the major streaming services, one thing becomes apparent: PayPal is universally accepted, in addition to payment cards.

This is a striking result, because PayPal is itself a universal wallet, capable of storing cards and bank accounts and able to support instant funding (for a fee).

Although Visa and Mastercard have combined forces under their Click to Pay branding, they have had more success with their real-time disbursement platforms, Mastercard Send and Visa Direct. Direct storage of card numbers (in tokenized form) is still the most popular method, but PayPal is becoming a universal default.

However, I found few store cards or incentives to use one form of payment over another. While Apple Card does have some merchant deals (for example, Panera), most of those are for one-time purchases, not subscriptions. This seems to be a missed opportunity.

As card issuers fight for pride of place in the PayPal wallet, they will need to provide some incentives, like those in the direct merchant realm.

American Express, Chase, Citi, and Discover do integrate with PayPal to allow cardholders to use their proprietary cash-back rewards in the PayPal wallet, but more issuers will need to do this. If I am right, and there is a permanent shift away from in-person events to online entertainment and services, this will become the next fight for market share.

Therefore, even after it has been eradicated, Covid-19 will still have a long-lasting effect on payment-industry competition.

—Aaron McPherson is founder of AFM Consulting LLC. Reach him at amcpherson@payments-101.com.