Challenges of COVID-19 on the banking and payments sectors

By Oussama GHAZI

COVID-19 pandemic has led to an economic shock analogous to the global financial crisis of 2008-2009, resulting in a period of economic paralysis and has left a massive hole in people and institutions balance sheet.

Many economic actors have deployed short-term changes to adjust. However, more long-term structural changes must be operated to live on long after COVID-19 has passed.

The banking sector has been massively impacted by this issue, which is evolving in an unpredictable way and causing higher costs than in 2008-2009.

However, - as Sir Winston Churchill said "a pessimist sees the difficulty in every opportunity, an optimist sees the opportunity in every difficulty", - this doesn't exclude the fact that some 'innovative' and digital banks, tech companies, payments institutions and telcos grasped the opportunity to right-size branch networks, optimize the digital experience, and establish sustainability credentials, thus emerging in a stronger position and grabbing market share.

What are the alternative solutions that 'innovative' payments actors have launched amid this pandemic? Discover how banks and payments companies responded to the challenges of COVID-19.

The rise of Omnichannel

During epidemic crisis and social distancing, digital payments have been keeping big economies and small businesses running, revenue flowing and have been helping people reduce contact with the virus while accessing goods and services. History showed that in 2003, the SARS epidemic expedited China's path in launching digital payments and e-commerce in the country. Currently, during COVID-19 crisis, many merchants around the world have considered opting for other payment acceptance solutions and implementation of new purchasing routes due to the closure of their physical stores.

In Morocco, according to the Centre Monétique Interbancaire (CMI) figures, the merchant and billing sites affiliated to CMI recorded an increase of 31.3% in number and 23.6% in amount for online payment transactions via bank cards, (6 million transactions, ~300 million dollars) compared to the first half of 2019.

Many digital and alternative payments at the point of sale, such as Facial Recognition, Quick Response (QR) codes or Near-Field Communications (NFC), can reduce the spread of the virus by avoiding cash exchanges. Thus, they are limiting in-person transactions and ensuring that consumers buy essentials from the comfort of their homes.

Online payments are even helping to put stimulus funds into consumers’ hands more rapidly. For example, local governments in China have distributed vouchers through WeChat Pay to encourage immediate spending. In Morocco, the government with the help of financial and payments' institutions has opted for the creation of mass payment accounts (m-wallets) to distribute State aid for the benefit of the disadvantaged people.

Here again, it is necessary for each merchant to speed up and generalize on a larger scale the definition of payment acceptance strategies and to set up the right organizations to adapt to these new trade standards. Moreover, a robust identification system, widespread, consistent internet access, and trustworthy ways to get money into digital formats could be important for digital payments to thrive.

 Contactless payments for proximity payments

Contactless card and smartphone payment are now widely established in the landscape. With the COVID-19, the fear of contamination using cash (coins and banknotes) reinforced the attractiveness of people for the use of contactless transactions. FMCG and other industries (Uber / Careem Apps for transportation services, Glovo App for delivery services) have adopted new acceptance systems in collaboration with banks, acquirors and payment institutions. Many consumers paid Instantly their purchases and even tips by m-wallets adopting the Quick-Response (QR) code technology. In France, the number of contactless transactions had already multiplied by 1000 since 2012. In the Middle East and Africa, more than 70% of people now use contactless payment, reveals a global survey conducted by Mastercard at the end of April 2020.

'' the fear of contamination using cash (coins and banknotes) reinforced the attractiveness of contactless transactions ''

The increase in the ceiling of mobile payment in some countries (France, Morocco) from € 20 to € 40-50 completed a generalized and harmonized deployment of contactless payment.

In France, mobile payment as evidenced by this figure published by Orange Bank, after the start of containment, the unit amounts of mobile payment purchases jumped by 60%.

According to the Moroccan central bank 'Bank Al-Maghrib' (BAM) and the Manager of The Mobile Switch (HPSSwitch), at the end of June 2020, 922,575 m-wallets were issued against 539,984 m-wallets at the end of March 2020. The trend is mainly due to the COVID-19 health crisis, the simplification of remote subscription processes and free operations by m-wallet.

For the merchant side, the new 2020 Moroccan finance law exempted the turnover made by mobile payment from corporation tax for five consecutive years.

Although contactless payment via smartphone in some countries is still lagging behind other ones, the efforts made by banks and new players for several years have not proved sufficient. They will have to step up their actions to offer user experiences at the best market standards as well as more efficient distribution of these products.

'' it is necessary for each merchant to speed up and generalize the definition of payment acceptance strategies and to set up the right organizations to adapt to these new trade standards ''

Competitive dynamics between payment players

As of April 2020, some payment solution providers posted reductions in their commissions during the lockdown period, or even eliminated their collection fees from certain professional categories.

Others have put forward their financing or individualized support service to encourage their customers and retain them. These examples illustrate the strong competition that exists between players in the payment market, who must work on two aspects to differentiate themselves and preserve their profitability: the reduction of costs per transaction and the development of additional value-added services.

Many initiatives have been launched during this crisis period. On the 15th of June 2020, Vivo Energy Morocco (Shell) has first launched in partnership with the Centre Monétique Interbancaire (CMI), the interoperable and real time acceptance of m-wallet payments in its Gas and Oil points of sales in Casablanca. It has been made possible via a new generation of POS that allows also, besides cards, the acceptance of other global m-wallets like Ali Pay, Google Pay, Apple & Samsung Pay.

At the same date, Mark Zuckerberg, CEO of Facebook, announced the launch of WhatsApp Pay in Brazil for money transfer using the messaging app "as easy as sharing photos". Unfortunately, a week later, to avoid competition concerns, Brazil's central bank and antitrust regulator (Cade) suspended Facebook Inc's WhatsApp messenger payment features in the country.

Retailers also across the globe have adapted their delivery and return propositions to ensure customer and staff safety during the COVID-19 crisis. The main impacts of COVID-19 have the potential to increase the popularity of "click & collect" beyond the outbreak as more people are expected to work from home in the long term and accept home deliveries. Additionally, when stores re-open many consumers will be reluctant to visit busy locations due to lingering concerns around their health. Consumers may switch to third-party pickup options instead, especially lockers as this fulfilment method has no contact with others, if shoppers are reassured about the cleanliness of the facilities.

These changes will transform consumer expectations of online delivery and returns. In consequence, the payments' system has been urged to adapt its practices and open new high-value digital channels.

Main conclusions

COVID-19 is a unique opportunity to turn off physical channels and force holdouts to conduct more high-value, high-risk banking activities through digital.

Digital teams will need to work quickly to address service gaps across channels and offer contextual onboarding as new features are dropped.

Call center volumes are skyrocketing given that it is the most human channel available amid deduced branch access. Also, we must all think of a secure management system for personal and transactional data related to the various stakeholders and push towards robust solutions for exchange, storage, and process supervision.

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