COVID-19’s impact on U.K. commerce, one year later

March 9, 2021 10:36 AM

Twelve months after the World Health Organization declared COVID-19 to be a global pandemic, the ways U.K. consumers shop have been drastically altered. When Prime Minister Boris Johnson enacted a national lockdown on March 23 to curb the spread of the virus, it forced offices, merchants, restaurants and schools to pivot into online interaction.

However, as the lockdown subsided and stores began to re-open, the habits of the British shopper had changed, forcing banks and merchants to adjust.

By February 2021, half of U.K. consumers reported that more than 75% of their in-store transactions were made using a contactless payment method, according to a study from daVinci Payments.

The rapid closure of businesses and forced self-isolation for many U.K. consumers led to a surge in online commerce, fueled in part by the large number of merchants transacting online for the first time.

Data from the Office for National Statistics revealed that about one third (32.8%) of all U.K. retail sales had been made online during May, early in the pandemic. This figure fell slightly over the summer as stores and the country reopened, only for online shopping to rise again to 36.3% in November as virus cases escalated and holiday shopping had begun. By January 2021, internet sales volume reached a new high of 36.3% of total retail sales, compared to 20.2% a year earlier.

But how are they paying? PPRO’s Payments Almanac indicates that 56% of online sales are made using a payment card (debit or credit). The second most popular payment method, at 25%, is an e-wallet; followed by a bank transfer at 8%.

The rise in online commerce has had a direct negative impact on consumers’ need to use cash for everyday spending. Coupled with fewer people commuting, the opportunity to spend cash on impulse purchases has also lessened.

The U.K.’s national ATM network operator, LINK, found that during 2020 the demand for cash, measured by the number of ATM cash withdrawals, fell by 37% to 1.64 billion transactions in 2020 from 2.61 billion in 2019. The lowest point in 2020 was reached in April with just 91 million withdrawals compared to just over 220 million withdrawals for the same month in 2019.

In 2021, demand has continued to remain tepid, with just 98.5 million withdrawals in January and 97.5 million withdrawals in February. These low figures are roughly half of the volumes of the same months in 2020 (January was 185 million and February was 181 million) and just less than half of 2019’s figures (January was 209.3 million and February was 206.8 million).

One additional factor played against the usage of cash is the perceived possibility of virus transmission when using bank notes and coins. Reports of China and Korea burning or disinfecting cash during the early days of the pandemic fueled fears that the virus could be easily transmitted by paper money.

The pandemic-fueled aversion to cash also led to the single largest drop in ATMs in the field in over 22 years. The LINK data showed that the number of ATMs had been rising steadily since 1998 when there were roughly 25,000 ATMs, and peaked in 2015 at 70,588 ATMs.

Since 2015 there had been a trend of small, yet steady annual declines in the number of free and pay-to-use ATMs across the country. Over the years, most of the losses had been felt in the pay-to-use ATMs, with the exception in 2019 where they actually grew in numbers (although the market overall declined).

The number of ATMs fell from 60,662 in 2019 to 54,574 in 2020 — a loss of 6,088 ATMs over the course of the year.

The heightened consumer aversion to cash caused one ATM operator, NoteMachine, to launch a cash usage marketing campaign to assuage consumer fears about handling cash for fear of virus transmission. Peter McNamara, founder and chief executive of NoteMachine, told British media that cash being a dirtier payment method than contactless, debit cards or mobile phones was “the greatest piece of fake news floating around at the moment.”

Despite the pro-cash campaign, NoteMachine began 2020 with 10,506 ATMs in service and ended the year with just 9,440 remaining in operation, as reported by LINK.

Faster Payments data shows that COVID-19 had no impact on slowing down growth in immediate payments monthly volume.

One major change to the U.K.'s Faster Payments scheme during 2020 was the rollout of Confirmation of Payee (CoP), which is aimed to tackle the rapid rise in Authorized Push Payment fraud. CoP is designed to enable consumers to see whether the name of the person they think they are paying matches the actual name on the bank account, making it more difficult for fraudsters to pose as someone else.

Lloyds was the first major bank to roll out CoP in February, with Barclays, RBS, Santander, Nationwide and HSBC becoming compliant later in the year.

The buy now/pay later (BNPL) segment saw strong demand in the U.K. during the pandemic, as companies such as Afterpay and Klarna flocked to the market with installment payment options. Afterpay had entered the U.K. market in June 2019 through the purchase of a small startup operating under the name of ClearPay. By June 2020, Afterpay had grown its U.K. customer base to over 1 million active users.

PayPal joined the crowded market in October with a BNPL offering that allowed customers to pay for a purchase in three installments instead of the common practice of four payments.

The U.K.'s Financial Conduct Authority reported that in 2020, total payment volume of BNPL products reached £2.7 billion (about $3.75 billion), which was roughly four times the market's size in 2019. The FCA reported that approximately 11% of U.K. consumers had used a BNPL product during 2020 and that the usage rate among young and new to credit consumers was particularly high. Its December survey found that 25% of BNPL users were between 18 and 24, and 50% were between the ages of 25 and 36. It was against this usage backdrop that the FCA announced that it would begin regulating the BNPL market more closely to make sure that consumers were being well protected.

Perhaps the most iconic shift in consumer shopping behaviors in the U.K. has been the widening adoption of contactless payments for in-store transactions. While preference for contactless card usage had already reached the tipping point of 50% of transactions in 2018, the pandemic furthered the contactless trend.

One important element enabling contactless growth has been the increases in transaction size limits that enable a cardholder to use the card at a terminal before a PIN needs to be entered. When contactless cards were introduced in the U.K., the initial limit was set at £10 and then gradually rose to £30 in 2015. As the pandemic unfolded, Barclaycard and Mastercard were quick to raise the contactless limit to £45 in March 2020.

In January 2021, Barclaycard reported that 88.6% of its 2020 in-store card transactions were contactless, with contactless usage up by almost 65% at home improvement stores compared to 2019. Contactless payments also rose 29.4% at grocery stores and 24.7% at fuel stations.

Calls for another increase in the contactless limits began in early January, as the industry trade body U.K. Finance called on the U.K. Treasury to support a move to bring the limit up to £100, which it did later in February with the rollout occurring later in 2021.

U.K. Finance reported that the number of contactless credit cards issued had risen to 52 million by November 2020 (out of 64 million total), up from 49 million in February 2020. In terms of debit cards, 84 million were contactless in November (out of 93 million), down from 85 million as a result of 4 million accounts being closed during the pandemic.