Introduction

The digital payments landscape is evolving rapidly as consumers and merchants adopt more innovative modes of payments. Cash is declining worldwide, while credit and debit cards have gained popularity. Mobile payment and wallet services are also gaining traction, supported by growing smartphone use, faster data rates and greater Internet penetration.

So, What Is a Digital Payment?

Simply put, a payment is digital when no cash or other paper-based instrument is used. Credit and debit cards count as digital, in addition to newer methods such as Internet or mobile banking, mobile wallets, bank prepaid cards, smartphone point of sale (POS), digital currencies, mobile payment apps and social media payment apps. Digital payments are proliferating, and can include consumer to business (C2B), business to consumer, business to business, consumer to government and peer to peer (P2P). In this report, we focus on consumer to business (C2B), i.e., customers paying merchants for products and services.   

The US Digital Payments Landscape

The U.S. digital payment industry has shown robust growth in the past decade as consumers have increasingly adopted non-cash payment methods such as credit and debit cards, mobile wallets, contactless cards, and cryptocurrencies. According to a survey conducted in 2017 by Datamonitor, about 29.5% of U.S. consumers said they prefer personal credit cards, while 14.8% prefer paying through PayPal, 9.2% prefer personal debit cards and 6.2% were comfortable with bank transfers. Only 8% preferred paying with cash or check. Popular Digital Payment Methods As technology advances, several types of payment methods have evolved, including frictionless payment. 1) Contact Credit and Debit Cards Credit and debit cards remain the most popular payment methods in the U.S. Credit Cards  Growth in the number of purchases made by credit cards in the U.S. has outpaced the growth in the number of credit card accounts. Between 2010 and 2016, credit card purchase volume grew 62% (a CAGR of 8.4%), while the number of credit card accounts increased only 16%, according to estimates by the New York Federal Reserve Bank and Equifax. Traditional “contact” credit cards continue to dominate while “contactless” credit cards have not gained much traction.  [caption id="attachment_65372" align="aligncenter" width="532"] Credit card purchases include online and in-store purchases.
Source: New York Fed/Equifax[/caption] Debit Cards Debit cards have grown almost as quickly as credit cards in recent years. A Federal Reserve payment study shows that between 2012 and 2015, debit card payments grew at a CAGR of 7.5% by volume and at a CAGR of 6.8% by value. Year-over-year growth by volume accelerated to 10.4% in 2017. [caption id="attachment_65375" align="aligncenter" width="784"] Debit card purchases include online in-store purchases.
Source: Federal Reserve Payment Study Report[/caption] 2) Mobile Payment App and E-Wallet Services Consumers can use mobile payment apps and e-wallet services for instore payments using smartphones at near-field communication (NFC)-enabled POS terminals; these in-store/face-to-face payments are often referred to as proximity mobile payments. NFC is a short-range technology that allows phones and POS-terminals to communicate wirelessly when they are close to one another.  Mobile wallets use NFC to access bank accounts, payment cards, coupons, loyalty and discount cards, and other relevant information stored on a smartphone. Another way smartphones can be used to make instore payments is by scanning QR codes using the company app, which is what the Walmart Pay and Starbucks’ payment apps use. Mobile payments initially gained traction when, in early 2011, Google introduced an NFC wallet in partnership with a number of merchants, including Macy’s and Walgreens. Google Wallet was one of the first to support a contactless payment system, but soon others joined in such as Starbucks and Dunkin’ Donuts. In 2014, Apple introduced the much-awaited Apple Pay, so iPhone users can add credit and debit card information to the app and use it to shop any place Apple Pay is accepted. In 2015, Google launched Android Pay, and at the same time restricted the existing Google Wallet for peer-to-peer payments. In January 2018, Google launched the Google Pay app, integrating Android Pay and Google wallet into one platform. Seeking to get in on the growing popularity of mobile payments, a number of banks launched e-wallets, including Chase, Capital One and Wells Fargo.  [caption id="attachment_65376" align="aligncenter" width="780"] Source: US Payments Forum[/caption] Despite aggressive marketing campaigns by some of these new entrants, Apple Pay remains the most popular mobile wallet U.S. consumers use in-store, According to a survey from Worldpay, followed by PayPal, Starbucks and Google Pay. [caption id="attachment_65377" align="aligncenter" width="780"] Base: 111 US consumers surveyed in December 2017
Source: Worldpay/Socratic Technologies[/caption] Some of the most popular and preferred e-wallets in the U.S. are: Apple Pay Apple Pay is the most popular mobile payment service in the U.S.: iPhone 6 or later users can use their phones to pay at over four million locations in the U.S. Apple Pay also supports payment and receipt of money through iMessages.  With Apple Pay Cash, users can send money to each other free using their Apple Pay cash balance, debit and prepaid cards. PayPal PayPal is the second-most-used in-store mobile payment method. PayPal has been in business since 1990 and has over 250 million active users. The company processed 2.5 billion transactions worth $143 billion in the last quarter of 2018, according to Statista.  Venmo was launched by PayPal mainly as a P2P money transferring app. With Venmo, people can send or receive money using  their Venmo balance, a debit card or prepaid cards, free of charge. Venmo is growing in popularity among millennials mainly because of its social networking features such as adding memos and sharing emojis. Starbucks Starbucks is the third-most-preferred mobile app used in-store by U.S. consumers, according to the survey. It is also the most popular loyalty reward app among the major restaurant chains. With the app’s geo-location feature, customers can locate nearby Starbucks stores, see menus and place an order.  Google Pay   Google integrated its Android Pay and Google Wallet services when it launched the Google Pay app in January 2018, through which users can make P2P transfers and purchases. What is unique about Google Pay is its ability to work across platforms: It’s available on both Android and iOS.  The app is secured with features such as:

• Tokenization: A process which replaces an account number with substitute values.
• Biometrics: Scanning the user’s finger prints or face to authenticate payments.
• Host card emulation (HCE) technology: HCE allows the smartphone to emulate a payment card and carry out transactions in a similar manner.
• PIN: A personal identification number.

Uber Cash In September 2018, Uber launched “Uber Cash,” a mobile wallet through which customers can pay for services such as Uber rides and UberEats deliveries. Users can add funds to Uber Cash balance using a credit card, debit card, Venmo or PayPal. The service was launched to iOS users with plans to roll out an Android version. 3) Contactless Cards Contactless card adoption in the U.S. lags Canada, Spain, Germany and the U.K. Contactless cards are a more advanced form of EMV (“chip”) card that is embedded with chips and antennae so users just wave the card over a POS terminal, which generates a unique cryptographic code to authorize a payment. Contactless cards take just 15 seconds, compared to EMV chip cards that take at least 30 seconds – or longer. According to Visa, more than 2.7 million U.S. merchant locations accept chip cards and a majority of these terminals are NFC-enabled, supporting contactless communication. Visa predicts that about 95% of future POS terminals will be NFC enabled. But will people use these new terminals? So far, U.S. consumers have been slow to adopt contactless cards, but that could change as the infrastructure to support them is built out.  4) Cryptocurrencies Cryptocurrencies have grabbed a lot of attention lately. But what is a cryptocurrency? A cryptocurrency is a digital currency which employs cryptography, or writing and solving computer codes, to secure, process and verify transactions as well as to create a new unit of cryptocurrency. Some of the most popular cryptocurrencies are Bitcoin, Ethereum, Ripple, Bitcoin Cash and Litecoin, among others. With the advent of digital currency, there was talk of turning the transaction payment paradigm on its head: Minimal regulatory intervention, the absence of an agent acting as a middleman to authorize the transaction and minimal transaction fees seemed to make cryptocurrency a preferred mode of payment.  But, despite all the media hype and dizzying valuations for some of the more popular cryptocurrencies, actual volumes remain low: Several hundred thousand transactions per day, versus over 30 billion Visa transactions in a single quarter. That said, some merchants will now accept bitcoin for purchases, including KFC Canada, Subway, Microsoft and Reddit.

Mobile Payments or Contactless Cards, Which Payment Method the Consumers will Choose?

Mobile payments such as Apple Pay, Google Pay and Samsung Pay were already prevalent when contactless card payments were introduced, so mobile payments gained traction in the U.S. that contactless cards are now finding difficult to overcome.  Mobile wallets were more popular as a means of contactless payments in the U.S. than contactless card payments in 2016, according to Juniper Research. [caption id="attachment_65379" align="aligncenter" width="534"] Mobile wallets represent payments made for online purchases using mobile wallets as well as proximity mobile payments, and exclude P2P transfers.
Source: Juniper Research[/caption] In the U.S., contactless cards and mobile payments are competing for consumer use in the frictionless proximity payments space. Relative to some other countries, contactless cards are playing catch up. The threat to mobile payment providers is the prospect of contactless cards achieving as high a penetration rates in the U.S. as they have in countries such as the U.K. and Canada. 

Factors Driving Digital Transactions: Young Consumers and Online Shopping

The momentum in digital payments is supported by several factors.  Demographics Play A Vital Role in Digital Payments Millennials (born between 1980 and 2000), and Gen Zers (born after 2000) are playing a leading role in the ongoing digital transformation, which spans commerce to payments to communications.  According to the Statista survey, 30% of respondents between 18-29 said they use digital wallets for online purchases; 26% reported they would probably use one in the future. Over 70% of respondents 60 and older said they were not interested in a digital wallet. As millennials enter peak spending years and Gen Zers enter the workforce, they are likely to bring their digital familiarity and preference for digital payments with them.  [caption id="attachment_65381" align="aligncenter" width="534"] Survey question: Do you personally use a digital wallet?
Survey conducted in May 2017 on 1,027 internet users aged 18+
Source: Statista[/caption] Booming Digital Commerce to Drive the Digital Payments The growth of e-commerce is driving the expansion in digital payments. According to data published by the U.S. Census Bureau, e-commerce retail sales grew 14.5% year over year in the third quarter of 2018, compared to 5.3% growth for total retail sales. E-commerce accounted for 9.8% of total U.S. retail sales in the third quarter. Digitalized Stores Omnichannel efforts are digitalizing physical stores.  As omnichannel commerce evolves, new payment use-cases will emerge to speed payment processing.  For example, in January 2018, Amazon launched its first convenience store, called Amazon Go. To use the store, shoppers install an app on their mobile phones, check in when they arrive at the store, pick up products and walk out without having to checkout. The account linked to the app is charged and shoppers receive a receipt on their phones. Innovation from Fintech firms The payment industry was once dominated by banks and large financial institutions. Now, fintech companies are disrupting the payment landscape by providing niche services. While regulations are more relaxed in Europe with the introduction of open application program interface (API), the U.S. has yet to embrace such changes. Only a few banks, such as Capital One, Citi, BBVA Compass and Silicon Valley Bank, offer open APIs to third parties. Here are a few fintech startups that have created niche services:

• Square Inc is one of the largest payment processing companies in the U.S. Square launched a P2P payment service in 2013 called Square Cash. The major difference between Square Cash and its competitors is that Square Cash moves money into and out of customer’s debit card account directly, rather than keeping cash in a digital wallet. The app had 33.5 million downloads as of August, 2018.
• Forter, based in New York, develops fraud prevention technology using machine learning to understand buyer behaviour and will decline purchases when fraud is detected by unusual buying behaviour. The company processes over 1 billion transactions every year.
• Stripe, based in San Francisco, provides payment processing and allows businesses to receive payments from all major credit and debit cards from countries across the globe in their respective currencies.
• Plaid, based in San Francisco, supports other fintech firms, connecting to customers’ bank accounts, enabling fund transfers and detecting fraud.
• Remitly, a Seattle-based company, provides P2P money transfer services for residents of the U.S., the UK, Canada and Australia. Users can pick up cash from certain locations if they do not have bank accounts.

Emerging Technologies and Trends Digital payments are getting more secure as new technologies such as block chain and cloud e-wallets enhance security.  Cloud e-wallets are more secure than mobile e-wallets as consumer data is stored in servers instead of on a smartphone (which can be easily lost). E-wallet providers are looking to implement block chain technology to enhance security for online, in-app and proximity mobile payments.  E-wallets use a secure element (SE), a chip embedded in the smartphone that stores confidential user data and runs secure payment apps. Blockchain based e-wallets use smart cards which act as an embedded SE, making it more difficult for hackers. Network e-wallet players such as Mastercard, Visa and American Express, have adopted blockchain technology. E-commerce companies have also started launching their own credit cards, most notably the Amazon Prime card.

Outlook for Digital Payments 

Even though contact credit and debit cards have grown significantly, U.S. consumers have been slow to adopt contactless card payments and mobile payments. This is what we think will happen. US Consumers Will Increasingly Adopt Digital Payments  Growth in digital transactions in the U.S. will be mainly driven by proximity mobile payments. More consumers are expected to use e-wallets, such as Apple Pay, Android Pay and Samsung Pay, as merchants offer integrated loyalty programs, driving mobile proximity payments. Statista estimates suggest that in 2018, payments related to digital commerce are projected to be $805 billion and proximity mobile payments will be $122 billion. Digital commerce includes all consumer transactions made on the Internet related to online shopping for products and services using payment methods such as credit cards, direct debit, invoice, or online payment providers, such as PayPal and Alipay. Digital commerce payments are expected to grow at CAGR of 14.8% through 2022 to be worth over $1 trillion, and proximity mobile payments by 31.6% to $365.5 billion. [caption id="attachment_65383" align="aligncenter" width="780"] Digital commerce covers all consumer transactions made on the Internet related to online shopping for products and services using payment methods such as credit cards, direct debit, invoice, or online payment providers, such as PayPal and Alipay.
Source: Statista[/caption] Huge Growth Potential for Mobile Payment Providers in the US The U.S. has the third-highest number of Internet users, just behind China and India, but the percentage of U.S. Internet users who use mobile payment services is far lower. Only 27% of U.S. Internet users used mobile payment services in 2017, compared to 45% and 41% in China and India, respectively, according to Global WebIndex. Mobile payments include payments for online purchases using mobile wallets as well as proximity mobile payments, they exclude P2P transfers. [caption id="attachment_65385" align="aligncenter" width="532"] Mobile payments include payments for online purchases using mobile wallets as well as proximity mobile payments, and exclude P2P transfers.
Source: GlobalWebIndex/Statista[/caption] Contactless Card Payments to Thrive  Security has been a major reason users choose cash and contact cards over mobile payments. A 2016 Federal Reserve study found 67% of respondents stated security as a major reason for not using mobile payments. A lack of necessary infrastructure has also led to slower adoption of contactless card payments in the U.S. compared to other nations, such as China and Canada, countries in which they built the basic infrastructure first, then launched the contactless payment cards. Except for a few big players, not many U.S. merchants have upgraded to NFC-enabled POS terminals. However, as merchants upgrade POS terminals to support chip and contactless cards,  contactless card payments will grow at a faster pace, replacing traditional contact cards. ABI research estimates that contactless card shipments stood at 25.7 million in 2016, and are projected to reach 229.6 million in 2021, growing at CAGR of 55%. As more contactless cards land in the wallets of U.S. consumers and more terminals are installed to accept them, we expect a rapid rise in use. [caption id="attachment_65387" align="aligncenter" width="540"] Source: ABI Research[/caption] Juniper Research estimates that in 2016, 92.8% of contactless payments in the U.S. were made from mobile wallets while only 7.2% of payments were made through contactless cards, pointing to growth opportunity for contactless cards. 

Key Takeaways 

Even though the U.S. has a large number of smartphone and Internet users, it has been slower in adopting non-cash payment methods. Slower adoption of digital payments can also be attributed to the fact that contactless payments did not boom in the U.S. as they did elsewhere, primarily because of lack of infrastructure and consumer concern over security. We expect digital payments in the U.S. to witness robust growth ahead, driven by increasing adoption of NFC-enabled POS terminals by merchants, growing trust of digital wallets and new emerging technologies such as blockchain and cloud wallets that are seamless and more reliable. We expect the mobile payment landscape to change as more security measures are introduced, making consumers more confident in using mobile payments. All players stand to benefit: From merchants, credit-providing entities such as banks and smaller financial institutions, payment processors, merchant acquirers and fintech companies. We expect to see more joint ventures and other collaborative efforts between these entities to encourage more consumers to go digital.