The total transaction value of digital payments in the UK was estimated to be around $162 billion in 2018. The largest segment of the market, digital or e-commerce payment accounted almost 93% of the total market.

• Definition / Scope
• Market Overview
• Market Risks
• Top Market Opportunities
• Market Trends
• Technology Trends
• Regulatory Trends
• Other Key Market Trends
• Market Size and Forecast
• Market Outlook
• Distribution Chain Analysis
• Competitive landscape
• Competitive Factors
• Key Market Players
• Strategic Conclusion
• References

Definition / Scope

• Payments are made using different payment instruments. Lately, digital payment is becoming the catchall phrase where payments is made via digital means unlike regular payments where physical instruments such as cash, cheques or drafts are present. The instruments for the digital payment varies from country to country. Some countries have moved to advanced payment systems such as through human embedded chips, while others are exploring contactless technology and biometrics.
• Within the digital payment spectrum, the instruments can also be divided into two major categories that include:
  • Push digital instruments: This includes mechanisms such as RTGS, money transferred through mobile which are received in real time and other instruments such as wire transfers that may take some time to be received on the recipient end.
  • Pull digital instruments: These include card payments such as debit/credit card payments at the merchant stores which are again transacted in real time and other instruments such as direct debits which are not transferred in real-time.

Some of the technical terms used in digital payments are as follows:

• Authentication process: The method used to verify the origin of a message or to verify the identity of a participant connected to a system and confirm that message has not been modified or replaced during transit.
• Interoperability: A payment system of one company that may be used in other countries or is compatible with other systems of companies within the same country. To make systems interoperable, there needs to be technical compatibility between those systems.
• Digital Payment: Payment initiated in digital format
• E-Payment: Payment which is enabled via internet initiated via mobile application or online websites.
• Payment Grid: Types of payment models such as G2G (Government to Government), B2C (Business to Customer), B2B (Business to Business), P2P (Peer to Peer) among others.
• Payment Instrument: Any instrument enabling user to transfer funds (CPSS). For example, credit/debit cards, direct debit, e-cheques, online & mobile banking, mobile wallet, contactless cards etc.
• Payment (transaction) device: A device which uses information from payment instruments to complete a transaction. For example: ATM, POS machine, PC, Mobile Phone etc.

Market Overview

• New technology such as digital payments is creating less friction and making payments easier for people particularly in areas where cash still dominates. The areas where people in the UK use cash as means of payment is limited to charity, taxi fare and paying cleaners. Thus, keeping in track of the trend, experts believe that UK could become cashless economy by 2026.ref name=4thref />
• People that use cash for day to day payments in UK is limited to 2.2 million. Msot of the people use digital payment methods such as Direct debit for household bills, P2P transfers via mobile payment apps and contactless cards while buying goods at stores.

Some of the popular digital payment methods used in the UK are as follows:

• Debit cards: The payments volume via debit cards increased by 14% in 2018 reaching 15.1 billion. 98% of the UK population hold debit cards and use them to make day to day payments. By 2024, debit cards are supposed to account 50% of the payments in UK. By 2028, the payment volume via debit card in UK is expected to reach 22.3 billion.
• Credit cards: A total of 3.2 billion payments was made via credit cards in 2018, a 4% increase compared to 2017. By 2028, the credit card payment volume is expected to reach 4.1 billion respectively.
• Contactless payments: In 2018, the contactless payment volumes were estimated to be around 7.4 billion a 31% increase from 2017. There are approximately 124 million contactless cards circulation in 2018. Already 84% debit cards and 64% credit cards in the UK are equipped with contactless features. In 2018, the total penetration of the payment method was limited to 19% which is expected to increase to 37% by 2028.
• Direct Debits: In UK, 9 out of 10 people use direct debit to pay their regular bills. In 2018, there was 4.4 billion payments made via direct debit with overall value of 1327 euros billion. By 2028, the payment made through direct debit is forecasted to reach 4.7 billion in volume registering limited growth.
• Remote banking: The number of people using online banking, mobile banking via their smart devices increased by 72% and 48% in 2018. Similarly, use of Faster Payment Services by banks also increased to 2 billion. By 2018, the figure is expected to reach 3.2 billion with development of open banking product/services.
• Bacs Direct Credit: It is a cost-effective payment method for businesses making large payment. In UK,8 out of 10 employees are paid via Bacs Direct Credit and this method is also used to make payments for state benefits and pensions. The total payment volume was limited to 2.1 billion and is further expected to decrease to 2 billion by 2028.
• Mobile payment/Mobile Wallet: Finally, the payment methods via mobile and online through applications such as PayPal, Apple Pay, Google Pay and Samsung Pay is collectively growing in the UK. In 2018, there was a total of 708 million payment via these methods. However, in near future, this payment method is expected to triple to 2.4 billion payments by 2028. This method could also takeover Bacs Direct Credit.

Market Risks

Some of the risks that could be brought forth by the digital payment methods are:

• Risk to rural communities: As the rural community is laggard in moving towards digital, mostly due to lack of infrastructure. The rural communities are also comprised of older, lower income and vulnerable users that still prefer cash. However, due to high digital payment means being popular, bank branches and ATM’s are becoming less viable options and is disappearing from the market, creating difficulty for rural people to access cash.
• Risk to financial abuse: Digital payment methods can lead consumers to lose control of their finances. Keeping cash and allocating budget gives people track of their money however, payment through cards or other digital payment methods doesn’t provide limits. For instance, credit cards may continue to extend limits only increasing the debt burden for the users. The recent open banking initiative allows a third party to access consumer accounts, such actions can have shocking consequences where a malicious user can empty the users account with few clicks.
• Risk of cyber-attacks: If UK is moving towards a cashless ecosystem, then significant risk is likely to result from system failure or cyber-attack. Some of the recent IT catastrophes in the UK have made consumers that predominantly use digital payments unable to pay for goods. As cash doesn’t require internet or power to work, there is no risk of being exposed to breaches.

Top Market Opportunities

Digital payments are gaining traction: In UK, in 2018 already 8.5 million people or 16% of the X & Y generation population had registered for mobile payment methods. 79% of the 8.5 million people had at least one transaction via mobile payment methods.

Nearly 46% of the users made payments more frequently. In UK, younger people were found to be more enthusiastic about using these payment methods where 30% of the people aged between 16-24 and 28% of the people between 25-34 registered for mobile payments. Similarly, even in contactless payment, people aged 25-24 were the most interested group with 83% of the age group making contactless payments in 2018.

People aged above 65 were also identified making payments with 61% of the age group making contactless payments. In the UK, no age group galls below 60% of the usage which is likely to increase its penetration in near future.

As more number of population are preferring digital payment methods, payment firms have opportunities to leverage on features and loyalty perks to further drive the usage and increase penetration of such methods.

Reduction of usage of physical payment means: In 2018, the cash payments in UK declined by 16% to 11 billion payments. In 2018, there were 5.4 million consumers that never made transaction with cash during the year. The addition of such people was 3.4 million customers than in 2017 which shows that these consumers were almost living a cashless life.

Only 1.9 million customers used cash fully. Consumers tend to be switching to alternative methods such as debit cards. By 2028, the cash payments is likely to further decline to 3.8 billion accounting only 9% of the payments in UK.

Other method such as cheques are also encountering continuous decline; in 2018, the payment volume via cheques was limited to 401 million falling by 15% since 2017. Despite of the recent introduction of cheques imaging, customers and businesses in the market have been identified moving away from cheques to alternative payment methods.

Thus, reduction in these physical means of payment suggests, there is huge potential for the digital payment methods to grow in the UK.

Market Trends

Some of the factors driving use of digital payment means in the UK are as follows:

• Changing consumer expectations: Consumers across UK believe that there are several benefits to making digital payments. For instance, 72% feel safer because they don’t have to carry more cash, 73% find digital payment methods more convenient and quick, 68% believe they have more sophisticated protection against fraud. In addition, digital payment are more immediate and this has altered consumer expectations, as a result consumers are inclining more towards time-saving and digital led payment services that has increased demand for digital payment tools & methods in the country.
• New technologies: Upgradation of traditional technology and rise of other advanced technologies in the market is supporting the digital payment adaptation among people. As consumers are excited about newer payment options, loyalty perks, convenience factor which is supporting innovation in product/solutions offering. For instance, digital payment horizon is expanding further with technologies such as biometrics and IoT. Even for consumers preferring to use physical payment mechanisms are provided with new innovation such as electronic cheques imaging which allows consumers to pay cheques into their accounts without having to present it physically. Even Bank of England has introduced polymer notes which means they are cleaner, durable and secure than paper banknotes. As a result technology has improved the status of digital payment and overall payment in UK.
• Supportive regulations: The government of UK is continuously defining framework for payment provider firms. Lately, the government has introduced number of policies for increasing usage of digital payments methods and also for their secure management. For instance, PSD2, Open Banking and PSR are some of the notable initiatives. Besides these policies, the government is also facilitating innovation with initiatives such as ‘sandboxes’ and ‘test beds’ and bolstering the Fintech scene in the country. As the regulatory environment becomes friendlier and the funding scene increases, more number of firms are likely to enter into the digital payment landscape and introduce their products/solutions.

• Attitude of people towards cash: According to a survey taken, some of the major public concerns of UK individuals regarding the advent of cashless society are as follows:
  • 79% of the population believes that people who don’t have good internet connection or digital infrastructure may not be able to fully utilize the technology.
  • 72% people believe that using a digital payment method would expose them to cyber-attack risks
  • 60% people believe that making cashless transaction would lead to less privacy on how the individual manages their cash.
  • 74% of the people believe that vulnerable people will be more likely to be scammed or defrauded.
• Despite of rise in digital payment methods and decline in cash usage, 97% of the individuals in the UK still carry some cash in their wallet while 85% keep cash at their homes. As a result, cash is used for payment across several sectors such as newspapers (media), to pay for tradespeople, movie tickets, shopping, airline ticketing, donation and even grocery shopping. In addition, although 80% convenience stores accept contactless payments and 94% accept debit cards, 76% of the consumers of such stores ay via cash.
• 47% of the individuals in UK believe that living without cash would present real challenge, 17% of which believe that it would be near to impossible to live in a cashless society. The biggest indicator of cash dependence in the country is income where poor people are more likely to rely on cash as they have less access to digital infrastructure. Thus, the need to rely on cash among people is restricting the full-fledged use of digital payment methods.

Technology Trends

Contactless cards: At present, in digital payments landscape of UK this is the most popular method of payment where consumers don’t require any gadgets and can simply use cards which are reliable and handy. The contactless cards operate with contactless PoS machines via scanning technology.

Mobile Payments: Payments are made through smart devices such as smartphones, smartwatches and even rings & jewelry which hold card details. The UK population is mostly familiar with two mobile wallets namely, Apple pay and Google pay. People use it in buses to travel and even while buying goods at the stores.

Peer-to-Peer: In UK peer-to-peer micropayments are getting huge traction. Although, it is sub-segment of mobile payment, the category itself is most popular i.e. significant transaction though mobile payments is accounted by peer-to-peer transfers. Some of the P2P mobile payment applications in UK include, Zopa and Funding Circle among others.

Invisible payments: The payments is enabled by connecting the digital payment means to IoT. For instance, in the UK, cars can make payment details to automatically pay tolls when entering cities or toll roads.

Similarly, by connecting Alexa or Voice Recognition tool to home systems, these tools can be instructed to order groceries automatically when the pantry runs out of it.

Thus, payment is directly made via e-commerce platform to which card or bank account details are connected and the delivery will be made instantaneously without the intervention of owner/customer themselves.

Biometrics: In UK, NatWest has become the first bank to introduce payments via biometrics for the businesses. It has introduced the feature through its mobile banking application where users can make payments through Touch or Facial ID recognition. Besides Natwest, biometric authentication in payments is also available for UK government services which is available in both Apple and Google Pay.

Cheap and simple card acceptance devices: Some of the popular card acceptance devices used by small businesses in the UK are iZettle, Square, SumUp Air, PayPal Here and Worldpay Reader. The minimum cost of such devices is only $60 while some such as iZettle can be acquired at less as $20.

As a result, the card payments locations are being expanded all across the country from market stalls to hairdressers a decorators. This trends is increasing and encouraging usage of cards.

Regulatory Trends

• In the UK, the government is making a number of initiatives to support the digital payment initiatives in the country. Until present there was lack of competition in the market that had resulted in payment services to remain poorer in quality and higher cost. However, to address this issue, the government has created a governance for payments called- the Payment Systems Regulator (PSR) which is first of a kind of policy worldwide. In 2015, the UK government introduced PSR for businesses, to promote competition, innovation and the interests of end-users. Since PSR has been implemented, payment firms in the market have been able to acquire participants more easily and quickly. In 2017, the government further built PSR’s model by enabling non-bank payment firms to access payment systems directly.
• Besides the PSR policy, the government has also been able to introduce alternative methods of digital payment which can compete against dominant payment methods such as cards. In January 2018, the UK also introduced second Payment Services Directive (PSD2) which introduced a new law for third-party firms to directly make payments from the customer’s bank account. To bolster the effect of PSD2, the government has also introduced open banking initiative, a model by which the newly registered firms under the systems can exercise access to customers account via a standardized technology called API.
• The government is not only supporting fully digital payment methods but also partial digital payment means such as credit/debit cards. The consumers and merchants in UK saved around $500 million due to reduced cap on credit and debit card interchange fees. After the introduction of PSD2, the government can no longer charge on debit/credit cards or other digital payment methods such as PayPal. As of 2017, the government has also introduced cheques imaging, a digital system which decreases the turnaround time for cheques to clear from maximum 6 days to 1, and ensuring customers funds will be deposited to their accounts more quickly. Further, multiple opportunities are being researched with this new technology where in near future customers will be able to pay a cheques by taking a photo of it rather than having to go to a branch.

Other Key Market Trends

• In the UK, four out of five adults use smartphones i.e. 37 million adults, as smartphones become more ingrained, one additional use of smartphones that is rising in the country is mobile payments. As of 2018, 21.3% of the UK vendors had a planned future focus to accept mobile payments after online and contactless payments. Particularly, Micro & SME merchants are placing particular emphasis on the emerging digital payment product.
• In UK, debit cards still lead in the market where UK merchants receive payment from debit card based transactions. Initially, Paypal, Amazon, Samsung and Apple Pay were providing the service. However, more recently, the government introduced Payment Initiation Service Providers (PISP’s) such as Sofort and Turustly that are able to initiate payments on behalf of end user without any need for existing account or ‘wallet’.
• After the implementation of open banking the third party companies will have access to transaction data in form of invoice and remittance records of retail & corporate merchants, this will lead to greater insight into optimizing payables and receivables management. At present, only one fifth of the Micro merchants in the UK are integrating their account and payment systems. Thus, open banking has huge opportunity to change the market scenario.

Market Size and Forecast

• The total transaction value of digital payments in the UK was estimated to be around $162 billion in 2018. The largest segment of the market, digital or e-commerce payment accounted almost 93% of the total market.
• As of 2018, there were a total of 65.3 million digital payment users in the UK. The average transaction value per user in Mobile POS payment amounted to $2467.9 in 2018. . At present, the Mobile POS payment instrument is the fastest growing segment after contactless payments. Additionally, in Mobile POS payment the number of users is expected to amount to 6.2 million by 2023.

Market Outlook

• Total transaction value of digital payments in the UK is expected to reach $220 billion by 2023 registering CAGR or 8% during 2019-2023 period.
• Among different types of digital payments, the contactless payments are going to increase in penetration the most. As of 2020, the UK government has ensured that every bank terminal will be able to accept contactless cards. In addition, penetration rate of the payment method is rising at 37% annually.
• Similarly, debit card usage is also on rise contributed by number of factors such as migration of payments away from cash and rise of contactless technology. By 2024, debit cards are expected to account 50% of all the digital payments in the UK.
• Remote banking payment methods such as online and mobile banking are growing the most after contactless cards and debit cards. By 2024, the volume of such digital payment methods is forecasted to reach 3.2 billion.
• Finally, payments via cheques and cash is expected to fall. By 2028, the number of cheques payments is expected to fall to mere 135 million followed by cash payments that are going to account only 9% of the total payments by 2028. This trend suggests that digital payments is being highly preferred by the consumers in UK and is gaining good traction.

Distribution Chain Analysis

• In 2018, the total payment volumes made in the UK was 39.3 billion payments. Excluding all physical methods of payment, the total payment volume (digital payment) was estimated to be around 27.5 billion. Out of that nearly 85% of the payments was accounted by the consumers.
• On consumer side, a total of 23.3 billion digital payment volume where approximately 75% of the total volume (17.4 billion) was made spontaneously whereas 5.9 billion was regular.
• On business side, a total of 4.2 billion digital payment was made with 2.2. Billion volume belonged to business to individual transactions while 2 billion was accounted by business to business transactions respectively.

Competitive Landscape

• In the UK, Payment service provider firms are constantly catering their end-consumers with new products and services. Some of the industry driven collaborative initiatives include contactless technology, Faster Payments or Paym. In addition, UK’s growing Fintech sector is also adding value in the product/services portfolio. In comparison to other global counterparts such as Singapore, Australia and HongKong combined, UK employs more people into this sector alone.
• AS of 2018, there are 2500 payment service providers in the UK many of these are offering payment product and services. As UK has become one of the largest Fintech market in the world, more such companies are in pipeline to be opened up.5
• The ecosystem of payment services provider is huge in the UK where there are number of government and private institutions supporting the industry to foster innovation and grow. For instance, the Payment Systems Regulator (PSR) which was launched in 2015 to regulate the payments industry, promote the interests of end users and encourage innovation and competition. Similarly, PSR established another forum called PSF (Payments Strategy Forum) to create future direction for the growth of digital payments industry in the UK.
• The European Banking Authority (EBA) also has established Regulatory Technical Standards (RTS) which is taking important steps towards a European Digital Single Market. In addition European Commission’s EU Data Protection Reform is also likely to strengthen citizen’s basic rights for digital age through all-encompassing obligations and by bringing changes to way personal data is protected, also simplifying rules for companies in Digital Single Market.
• Finally, UK is taking a major proactive step towards making its payment industry more competent in future. UK is adopting the World Class Payments approach whereby, it is set to take an evidence based approach to understand the requirements of payment systems of tomorrow. The World Class Payments framework is composed of 13 core capabilities or payment functionalities which the UK government is set to build in its payment systems and details of that is available in www.paymentsuk.org.uk. With this framework, UK intends to strengthen its digital payment industry by grouping Confirmation of Payee, Real-time Balances and Visibility of Payment Journey. 

Competitive Factors

• In the UK, rising consumers’ preference for online banking is driving the trend of digital-only banks. One of such bank was Atom Bank and at present number of such banks are identified evolving in the landscape such as Starling Bank, Monzo, Fidor Bank among others. In September 2018, digital bank of Goldman Sachs called Marcus was launched in UK trailed by German based digital bank N26. Both of these banks allow customers to make payments and carry out all other banking transactions 24/7 via remote location.
• At present, contactless payments are becoming the most popular digital payment method in UK. The rise of contactless POS in-store around multiple location is also increasing the demand for usage. The contactless payment method in the UK has increased 97% y-o-y since 2017. Most importantly in transportation system in UK, the method is being deployed. In December 2018, Stagecoach- UK’s biggest bus operator launched contactless payments on all of its vehicles. The technology covers 7,400 vehicles operating in England, Scotland and Wales. In addition, the passengers can pay via their contactless debit/credit cards or by scanning through their mobile wallets.
• Further, to enhance competition in the payments landscape of UK, the open banking service has been rolled out by the Open Banking Implementation Entity (OBIE) in January 2018. The service encompasses business accounts, credit accounts and online e-money accounts. In addition, customers registered with the system can also have access to number of other financial and investment opportunities from different type of companies. OBIE has been created by UK’s nine largest personal & small business current account providers: Barclays, LBG, Santander, Danske Bank among others. At present 25 banks are offering open banking service and consumers across UK are registering to their service continually.

Key Market Players

Top 9 payment service providers offering differentiated and innovative products/solutions in the UK market are as follows:

• PayVector: The Company provides highest quality security protocols for website and mobile application payment channels. PayVector has been successful in developing one of the most competent payment security interfaces for businesses. The major advantage of using their service is that they can process payments in multiple currencies and can also configure the payment processes into multiple languages.
• Braintree: The payment application allows micropayments that are processed in GBP. The application is micro type of payment gateway which is generally used for making small ticket items or low priced services.
• HSBC: They offer customized payment services to their clients and high security protocols apply when using the application. The payment is directly linked to the bank accounts and to process the funds there will be no additional delays.
• Mondido Payments: The company is differentiating their identity amidst the payment landscape in the UK by charging lower fee compared to their counterparts, offering variety of payment features, detailed audit trail and rapid payment services.
• Alipay Global: A number of UK based businesses are signing up for the service where the company is providing them with robust solid interface and allowing them maximum flexibility in payment methods. The service is 100% reliable and doesn’t charge substantial fees to their users.
• SagePay: It is the leading payment processor in the UK catering to mobile and online facing companies and businesses. The company has very reliable payment gateway interface which is going to be flexible enough for it to be installed in mobile app or website.
• Cardstream: The payment gateway allows users one click checkout from the website or application. For e-commerce businesses, Cardstream has become the go-to point to ensure customers a seamless type of shopping experience. It is also easy to install and configure in the website and settings can be customized according to the product and services being offered by the vendor.
• BitPay: Businesses based in UK are providing payment services in form of crypto currency to stay ahead in competition. Bitpay is allowing such companies to seamlessly process crypto currencies with all payments being virtually transacted. To understand the range of services, the company has their own dedicated website called Bitpay website where the users can sign up to access Bitpay payment gateway as well.
• Quickpay: The final payment gateway service provider is QuickPay where the company is the only payment service provider that offers much tailored service to their customers.

Strategic Conclusion

In the UK, the digital payment services industry is rapidly growing which is further bolstered by the reduction is usage and demand for cash.

In line with that, the government of UK is exploring creativity in digital payments which will encourage the UK citizens and businesses to opt for paying through digital means.

A part of supporting digital payments movement is also the introduction of open banking which has come into operation recently in the UK and the government itself is exploring G2G payments as an alternative payment option for VAT collection.

References

1. https://www.betterthancash.org/tools-research/toolkits/payments-measurement/general-resources/digital-payments
2. https://www.accesstocash.org.uk/media/1083/interim-report-final-web.pdf
3. https://www.ukfinance.org.uk/sites/default/files/uploads/pdf/UK-Finance-UK-Payment-Markets-Report-2019-SUMMARY.pdf
4. https://ctmfile.com/assets/ugc/documents/PMK_Payme_UK_changing-payments-landscape.pdf
5. shorturl.at/jxMP1
6. https://ctmfile.com/assets/ugc/documents/PMK_Payme_UK_changing-payments-landscape.pdf
7. https://www.statista.com/outlook/296/156/digital-payments/united-kingdom
8. https://www.businesswire.com/news/home/20190322005153/en/Payments-Landscape-United-Kingdom-Opportunities-Risks-2022
9.  https://www.top10money.com/payment-gateways/top-10-payment-gateways-in-united-kingdom-uk