Who Will Win Out?

So, let’s start with the most reliable of all sources: According to statistics from the Swiss National Bank, August 2022 marked the first month ever in which more payments were made with cards than cash in Switzerland. That’s only logical considering that almost everybody has grown accustomed to making contactless payments at the store checkout. A few years ago, this practice was less common and mainly took place where walk-in customers in a hurry wanted to pay: in major train stations. By now, we have all become acclimated to using cards instead of cash because it is faster and more convenient. The (unwarranted) fear of viruses lurking on banknotes and coins accelerated this process.

Then purchases from e-tailers experienced a boom. The number of transactions increased 9% per year on average from 2016 to 2021, while sales volume rose by 12%, resulting in a doubling within around eight years for the former figure and five years for the latter. Approximately 14% of all purchases in Switzerland, or one in seven, take place online today. Likewise, it would be incorrect to attribute the rapid growth in e-commerce payments mainly to the pandemic. It strongly accelerated an e-commerce trend that was already underway long before then. There has been an ample supply of online shopping possibilities for years now, and it’s simply more convenient to shop on a computer or a mobile device and have the purchased items delivered to your home.

Payments made from mobile devices are growing even faster. The number of payments made with TWINT in Switzerland has exploded by a factor of 20 within just four years. We have gotten used to scanning a QR code with TWINT instead of fishing a card out of our wallet or purse. And if we include payments made with cards stored in digital wallets, the number of payments made using mobile devices increased by a factor of 8.5 from 2019 to 2022. Why? Because we constantly have our smartphones in our hands and it’s simply more convenient to pay that way!

As you’ll have noticed, technological innovations are driving these developments. New technological possibilities give rise to new business models and digital services, which, in turn, enable us to adopt new practices. In the realm of payments, the seminal technological innovations are nearfield communication (NFC) at the interfaces between buyers and vendors and the possibility to tokenize cards and store them in digital wallets.

Contrary to what is often claimed, such innovations do not necessarily have to solve a problem facing us. It’s enough if they simply make life more convenient. “Convenience is the artful mother of technology,” German philosopher Manfred Hinrich said some time ago. It usually takes three successful tries with a new mode of payment before we integrate it into our active behavior, provided that we perceive it to be easier than modes of payment used up to that point. Concerns about the security of the money or personal data then quickly become less important.

So, if you really put some thought into how everyday payments will be made in the future, it becomes clear even without a crystal ball that we will pay using devices that we already carry around with us. These devices could be smartphones, but maybe even eyeglasses will someday be capable of executing payments, or microchips implanted in our forearms. This sounds a little creepy, but microchip implants already exist. But the most important thing here is that making payments will demand less and less attention because future modes of paying will make everyday life more convenient. We don’t take any pleasure in the payment procedure itself, so more convenient solutions will displace all other options in the long run. We users want it that way.

“Embedded” payments are also intended to deliver increased convenience. Presumably by now you use TWINT instead of coins to pay for parking. It’s understandable if you do because it’s more convenient to register your license plate number once in TWINT, to scan the QR code on the parking meter and then to turn the colored dial on your smartphone display than it is to fish around for coins in your pants pocket. But now let’s also suppose that a camera mounted at the entrance to the parking garage scans your license plate number on your way in, matches it with the one saved in TWINT, opens the barrier, and then activates the payment. Voilà – that’s all you have to do; it’s enough just to have your smartphone in your car with you. Rubbish, you say? No, this already exists, and it will become prevalent because it’s even more convenient than turning a dial on a smartphone screen. The payment is virtually invisible because it is embedded in the parking process.

The prerequisites for embedded payments are relatively simple. You identify yourself at the start of a purchase via an ID token stored on your mobile device. Then you enter the services or products you wish to buy by scanning their QR codes, for example, and confirm your intent to purchase – for instance through a nod of your head that your eyeglasses recognize – and the payment is made immediately without you having to do anything else. The receipt gets sent to your mobile device, and at the end of the year you receive an analysis of your personal payment behavior, a feature that financial services provider Klarna has recently introduced.

Speaking of eyeglasses, let’s alter our perspective now and cast a look at the providers of these various modes of payment. Disregarding post office counters for now, banks are the first thing that come to mind. I can transfer money and pay bills on my bank’s e-banking portal, but the payment procedure is temporally and spatially detached from my purchases, which means it is not embedded and is therefore inconvenient. “Honey, I have to do the bills first” rarely puts us in a good mood. I can scan the Swiss QR Code on bills using a mobile banking app, but to do that I first have to log in and maybe enter some additional information. So, mobile banking is not so suitable for payments at the store checkout or on the go because it requires too many clicks and is too inconvenient.

But the TWINT QR code is different. It is present today at store checkouts and in most other places where we make everyday payments, and it can also be used to pay very conveniently when shopping online. TWINT payments do not require any additional payment methods. All I need is a smartphone linked to my TWINT account. That’s it. This is called an account-to-account (A2A) payment solution because it does not employ any additional accessories such as cards issued by banks that enable access to the payer’s bank account. That makes such payments really convenient and, you guessed it, experts expect them to boom in the years ahead.

Finally, payments with digital wallets from technology giants like Apple, Samsung, and Google are also sharply on the rise. The payment procedure with digital wallets is very simple, but it (thus far) requires a card to be stored in the wallet. The card secures access to the bank account through which the payment is to be made. Apple and these other large companies benefit from an enormous customer base in a mass market, but, above all, they possess ample know-how and resources to thoroughly optimize customer experiences with the goal of creating maximum convenience.

For the moment, it is unlikely that individual banks’ mobile banking apps will break into the everyday payments space, especially at points of sale and in e-commerce. Compared to the tech giants, Swiss banks do not have enough users, know-how, and resources to compete in the contest to deliver the best customer experience. Conversely, it is safer to assume that invoices that still get paid today with the help of banking tools (via the eBill portal or QR scanner) will eventually migrate in a digital form to other payment service providers. Banks will therefore concentrate even more on other advisory-intensive business areas in the future. They will still operate bank accounts for their clients for the time being, but it is already becoming apparent that Banking as a Service (BaaS) – i.e., accounts and banking services that banks provide for non-banks – will call that business activity into question as well. Consequently, the role of banks in payment transactions will diminish significantly in the long run.

We can also expect the volume of card payments to wane at some point because smartphone numbers, e-mail addresses, and electronic IDs can establish a connection to an account just as well and are already available on most mobile terminal devices. This also alters the role played by card schemes like Mastercard and Visa, which are already making major investments to position themselves in markets for A2A payment transactions and utilize payment transaction data in new business areas.

So, at the moment, it looks like a neck-and-neck race between TWINT and digital wallets in the everyday payments space. TWINT has thus far been very successful in gradually enhancing convenience – five million regular users in Switzerland are a testament to that. In the future, it's clear that a lot will depend on whether TWINT will be fast enough to maintain or even strengthen its position by embedding payments in users’ daily routines. The integration of invoicing and invoice-paying would significantly increase TWINT’s attractiveness for the public because it’s more convenient to perform all payment operations with a single app.

The deciding factor will be the banks, some of which are co-owners of TWINT. They might try to invest further in proprietary solutions and compete against TWINT, but at present such solutions appear to have slim chances of succeeding. Alternatively, banks could opt to bet on the success of digital wallets. But as soon as other ways besides cards issued by banks emerge to activate payments, banks will find it difficult to hold their ground, even more so because Banking as a Service jeopardizes their role as providers of bank accounts. So, from today’s perspective, the rational choice seems to be to bet on TWINT and do everything necessary to strengthen this banking subsidiary.

We can therefore speculate about how the future of everyday payments may look even without a crystal ball. But we haven’t asked the really tough questions yet: How will instant payments or a central bank digital currency (CBDC) affect our payment practices? I hope that my crystal ball is back in proper working order soon!