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With decreased payment volumes and increased risks of market consolidation, The Payment Association examines how a recession could reshape the industry.
What is this article about? How a recession could lead to a decrease in payment volumes, more mergers and acquisitions as well as what the long-lasting effects on the industry will be.
Why is this important? As many Western economies brace for a recession in 2023, examining the potential effects can help companies prepare for what is to come.
What’s next? Experts believe that payment volumes are unlikely to dramatically fall; however, the industry will still see shifts in consumer behaviours.
The British Chambers of Commerce predicts that the UK’s GDP will fall by 1.3% in 2023 with a recession lasting until 2024.
In a typical recession, payments providers expect lower volumes leading to less profitability as customers scramble to save more. However, there is a debate among industry experts on how much a recession would really affect customer behaviour.
“We are not expecting the recession in itself to have a major impact on consumer payment behaviour or the payments industry,” says Jon Causier, partner at global consultancy Simon-Kucher & Partners.
“The only time in the last 10 years there has been a decline in payments volume and value was during the pandemic lock-down,” he adds. “Relatively small swings in economic growth are less important than the strong underlying behavioural trends as consumers move away from cash to digital means of payments.”
Otto Benz, director of payments at Nationwide Building Society also noted the stickiness of customer behaviour in the current inflationary environment. Nationwide conducts a spending survey each month examining the spending patterns of its members on debit cards, credit cards and direct debit on non-essentials such as holidays, clothes and eating and drinking out; and on essentials such as utilities, fuel and supermarkets.
“We have been tracking spending habits for the last few months and seen that certain items in what you might call luxuries or non-essentials are holding up,” says Benz. “It is interesting that some spending patterns indicate that people still want to have some luxuries in life.”
Benz further noted that while the increased cost of living hasn’t stopped the acceleration of cashless payments, the usage of physical cash “has not continued to drop through the floor”. He adds: “We are seeing a bit more usage, because people find it easier to budget on physical cash.”
While payment volumes may not fluctuate as dramatically as initially expected, experts predict that customers will be more cautious in their spending habits leading to less spontaneous payments.
“Typically, payments processing firms charge based on volumes, not values and it is not clear whether payment volumes will decrease,” says a spokesperson at Payments Systems Regulator (PSR).
“Where households have less disposable cash and where prices for essential items increase, we could see spontaneous payment decreasing. This would likely impact credit and debit cards that have the majority share of those types of payments,” adds PSR’s spokesperson.
Consensus among most industry experts is that a 2023 recession will not see pandemic-like plummeting payments volumes; however, this prediction is based on patterns over recent months. The real impact on consumers and industry is hard to predict and will likely be felt only in 2024 or even 2025.
“Have we seen any big impact in terms of reduced consumer spending as a result of increased interest rates over the past couple of months?” asks Callum Godwin, chief economist at CMSPI, a payments optimisation consultancy. “Personally, I’ve not seen that. But one thing we do know is that there’s generally a lag of as much as even 12 or 18 months on that when interest rates go up.”
He adds: “The effect on consumer spending in the numbers that you analyse doesn’t happen overnight. It takes a while so the extent to which it’s affecting payment volumes, we don’t quite know yet.
“If interest rates do hit customer spending, this could lead to a fall in average transaction values, meaning merchants paying per-item fees for payments acceptance may see their relative costs go up.”
Goodwin further explains that if the economy goes the other way and inflation takes hold, the percentage-based rates automatically increase, so it may be a lose-lose depending on what current agreements are in place.
Takeovers in tough times
While payment volumes are not expected to decrease, there are increasing pressures on the margins from competition and merchants seeking to reduce costs in recession. This could lead to an environment ripe for mergers and acquisitions (M&A).
Experts believe that if M&A were to occur, it will be largely due to decreased profitability from wider macroeconomic pressures, rather than decreased “significant decreases in [payment] volumes”, says Peter Harmston, partner and UK head of payments at KPMG UK.
“Any impact in profitability will be through pressures on interchange and payment fees either through the regulator or by the general business community,” adds Harmston. “It could also come through macroeconomic pressure on the fintech or paytech community such as the cost of debt and the rising cost of running a business.”
Harmston further explains that there has already been both downward pressure on fintech and paytech valuations and a reduction in the volume of deals during 2022.
He says: “This together with the ongoing headlines in the crytpo sector, the second biggest fintech sector for deals, it is clear that investors are looking for strong fintechs and paytechs with revenue growth, reliable customer bases and underlying profitability.
“This mixed environment will create opportunities for consolidation as those in a strong position have the opportunity to take market share.”
Benz from Nationwide agrees with Harmston that a recession could create an environment for takeovers.
“We will find that some of these organisations will have cashflow issues, and the ones that are good will get taken over because the product is good and the ones that are less good will not survive.
“That’s a typical feature of a recessionary environment,” says Benz. “And that is not necessarily a bad thing because I think it means that there’ll be a better focus on payment capabilities that are genuinely helpful.”
Based on current economic predictions, the UK and other major Western economies will likely enter a recession in 2023. Nevertheless, fears of plummeting payment volumes, lower profitability and swathes of firms going under may not materialise. What experts have predicted in changing payment behaviour effecting more what consumers spend on and when, rather than how much is being spent.
Payment volumes are stickier than initially predicted. Rather than a recession causing significant changes in the payment volumes, the industry is likely to see a shift in what goods and services those volumes will be spent on.
These shifts in consumer behaviour will create profitability for some firms and losses for others, creating an environment ripe for mergers and acquisitions.