All Change for Retail Payments

The retail world is dealing with lower transaction levels, new challenges to interact with consumers and increased complexity in everything they do. It appears that the old reality won’t return but it is unclear where we will end up.

Change is the only answer, and that includes for payments. Cash remains, although with new options for working with it without contact and at lower costs, but the need to adopt digital payments means in shop, online and for mobile payments is adding cost, complexity and risk. A major challenge for all, particularly the small retailer. Tracking and understanding the future of the retail sector is key to payments since transactions largely take place in shops. Change has been in the air for a while as online shopping has grown and payments have started to shift to electronic card or mobile based payments. The COVID-19 pandemic is accelerating these changes. By mid-April the pandemic had reduced spending in Western Europe by 50% yearon-year, with offline spending down 60% and online spending down 20% according to data from INSEE and GIE Cartes Bancaires. The consultancy Oliver Wyman forecasts that spending won’t recover to the July 2019 level until the fourth quarter of 2021. Although spending is down, the way we buy has changed significantly. The pandemic has driven an increase in online spending. In March 2020 in France it increased from 22% to 36%, in Spain from 13% to 22% and in Italy from 10% to 36%. It has also increased the use of contactless card payments. Pre-COVID, 92% of card payments in Western Europe involved a PIN number, with only 8% contactless. The rise in contactless payment limits meant that approximately 15% of payments that were previously below the old payment limits can now be made by contactless cards. Although card payments in total have fallen dramatically, the percentage made by contactless cards reached about 50% of those transactions. Successful online selling requires a significant investment in understanding data and how the consumer is navigating through websites and mobile phone apps to buy and retailers have had to react fast, working out how to add telephone and online shopping to how they sell. In the US prior to the pandemic, only 2% of the $700 billion grocery market was online. Retailers assumed people wanted to shop in person for these products and, with low margins, the investment needed in warehousing technology and delivery networks could not be easily justified. It takes time to make those investments and some retailers have turned physical stores into warehouse/distribution centres and what is known as 'curb side pick ups’ have become popular to avoid the costs of delivering the extremely expensive ‘last mile’ deliveries. The big question is to what extent new habits are becoming embedded and what does it mean for payments? Analysts in the US say 50% of shopping malls will close by the end of 2021. In its quarter one report, Nike set itself the target of moving its digital sales from 30% to more than 50%. PepsiCo launched two ‘direct to consumer’ web sites in May 2020. Small examples of significant change. The LINK survey of UK consumers in April 2020 reported that 49% of respondents expected to use cards more, 44% will use contactless cards and mobile payments more and 33% will shop online more. These examples may be from Europe and the US, but the challenges this is creating for the retailers is the same across the world. Given the way the pandemic is developing and the investments being made by retailers, we have to assume that the pandemic has accelerated significantly online and mobile transactions. Retailers need to be able to take payments with less contact. Some of the cash responses to enable this are covered elsewhere in this month’s edition. Compared with the decisions retailers need to make for digital payments, cash looks somewhat simpler. One of the challenges is the need to be able to accept both in store and mobile payments because of the growth in curb side payments at the point of delivery. In store the retailer needs to have point of sale (POS) terminals that are capable of handling Near Field Communication (NFC) signals, the underlying technology for contactless payments whether by card or mobile phone. The proliferation of solutions, some of which are app based, has added to the complexity of the retailers’ IT requirements, although this is largely the responsibility of the payment processor they sign up with. In addition to the hardware and software licensing costs, the retailer is faced with increasing fees and charges. A recent Wall Street Journal article had the headline ‘Credit card fees merchants hate, bankers love, consumers pay’. Small merchants have relatively low transaction volumes and so have little leverage when it comes to negotiating with their banks, the card companies, the mobile companies, the payment processors or the hardware companies. We discuss card fees elsewhere this month, but in 2018 the British Retail Consortium estimated that third party fees in the UK cost retailers £1.3 billion. The range of mobile payment options is huge and those mentioned here are just a handful of the options since it doesn’t include all of the available apps. Google Pay, Apple Pay and Samsung Pay are the leading mobile products, although each is slightly different. They are free to retailers, although Google Pay, for example, requires the retailer to use a participating Google Pay processor to take part. PayPal has a division called Baintree and Fattmerchant have ‘Contactless by Omni’, both of which are designed specifically for both store and curb side mobile payments. Products such as Square and PaySafe are apps that act like a portable POS and also work with NFC enabled card readers. PaySafe can also still accept cash and cheques. The use of QR codes that connect with payment apps are widely used around the world. They are very low cost for the merchants since they don’t require them to invest in infrastructure and avoid the need for infrastructure in places where it can’t support complex POS systems. Pity the retailer, particularly the small retailer, as they move from a simpler world of cash and, perhaps, cards, to this full-on payment world. Whether purely online or a full spectrum omni-channel retailer, being a retailer and taking payments efficiently, without friction and without contact must feel daunting.

The subsequent discussions and arguments evolved around two key questions, which, based on the ECJ’s ruling to be made on 29 September, could set significant precedents for the future of cash. Firstly, what is the legal meaning of the term ‘legal tender’ and does it impose a binding obligation on public authorities in the euro member states to accept cash? Secondly, does the authorisation to issue euro cash constitute a part of ECB’s monetary policy? Legal tender Let’s tackle the first question. Divergences of opinion as to what is meant by ‘legal tender’ in large part stem from differences in how European and German national law define euro currency banknotes. The Hessischer Rundfunk, the German and the French governments argue that the term legal tender, as defined by the Treaty on the Functioning of the European Union (TFEU), simply stipulates that the euro is the only accepted currency within the Eurozone, without specifying its implication on cash acceptance. Art. 128 Paragraph 1 of the Treaty: ‘The European Central Bank shall have the exclusive right to authorise the issue of banknotes within the Union. […] The banknotes issued by the European Central Bank and the national central banks shall be the only such notes to have the status of legal tender within the Union.’ The defendant argues that because the TFEU does not refer to the euro in the form of physical money, it is therefore not the only legal means of payment. In contrast, German law on legal tender explicitly defines euro banknotes as a method of payment: ‘Euro banknotes are the sole unrestricted legal means of payment’ and hence the need of the BVewG to refer for judgment to the ECJ. The European Commission representative in the case has argued that legal tender implies an obligation to accept cash for debt payments, adding that the ability to pay cash is a fundamental right and economic freedom of citizens to have the ability to pay cash. Citizens can choose to opt out via private contracted agreements. The Hessischer Rundfunk, as a public authority, however, cannot refuse mandatory payments in cash. The ECB also struck a defiant tone on the integrity of cash as legal tender. In a 2018 speech, Yves Mersch, Member of the Executive Board of the ECB, likewise stressed that ‘the ECB is also responsible in particular for protecting the status of euro cash as the sole legal tender. This includes guaranteeing the existence of euro cash and its usability as legal tender. In fulfilling these tasks, the ECB ultimately ensures that people can go about their lives, with their fundamental rights protected, using euro banknotes and coins.’ In their oral arguments, both representatives of the European Commission and the ECB explained that restrictions and limits on cash usage can be imposed, for instance to protect against money laundering. These must however have a legitimate purpose and, to that end, be proportionate, suitable, necessary and adequate in regards to achieving public objectives. Eurozone member states are expected to request the ECB’s opinion on any legislative proposals on limits to cash. There is currently legal uncertainty at the euro area level with regards to a common interpretation and definition of legal tender, what it means and if and how it must be protected. What is clear is that past definitions of legal tender – written at a time when the potential demise of cash and the all-encompassing rise of electronic payments made for a good sci-fi script – have not adapted to the present set of challenges. In this vein, Sveriges Riksbank, Sweden’s central bank, has seen a decline of cash usage for transactions, as well as the overall demand for currency, since 2007 (although this trend has been reversed since 2018). The central bank is also calling on Swedish legislators to amend the term legal tender, requesting that it ‘be strengthened further, also under normal circumstances, and mandatory requirements to be placed on at least some business operators.’ Cash as part of monetary policy In regards to monetary policy, the German and the French governments have argued that euro issuance was not part of the ECB’s monetary policy mandate, as it is not necessary to achieve price stability and is not a listed monetary policy instrument as such. France tried to reason that euro cash has no impact on liquidity in the Eurozone and hence no effect on monetary policy given it makes up a marginal proportion of the overall money supply. The ECB corrected the French representative that euro cash in circulation is in fact part of money aggregates and is, therefore, far from irrelevant for monetary policy. Furthermore, citizens’ trust in the euro is crucial for monetary policy and the ECB’s ability to deliver its price stability mandate. Trust in the euro is an ECB goal in itself and the euro banknotes are ‘the printed trust in the euro.’ It is the only payment means settled instantaneously, at face value and the only central bank money available to all citizens. The ECB goes to great lengths and logistical efforts to secure cash provisions and to make euro cash available for citizens ‘in all circumstances.’ The trust achieved in the euro by Eurozone citizens is clearly shown in the ‘record high demand rise’ during the Covid-19 crisis, despite the rise of contactless payments. The ‘practical usability’ of the euro, its acceptance and availability, ‘underpins and embodies’ this trust. Why would citizens hoard cash as a store of value if they didn’t trust that they can also use it? The ECB is here to guarantee this. In his remarks on cash restrictions for public interest purposes, the European Commission representative jokingly called the threat of transmission of Covid-19 via banknotes ‘fake news’, much to the amusement of those sat in the Grand Chamber. The cost of cash In their rebuttal, the Hessischer Rundfunk argued that the decision not to accept cash payments is based on practical administrative and economically costeffective considerations. Both the European Commission and the ECB stressed, however, that a public authority cannot limit the use of cash on the basis of cost efficiency. Furthermore, the ECB added that, according to its studies and statistics, euro cash is in fact a highly cost-efficient payment method. Indeed, it would be an interesting exercise should the ECJ judges request the Hessischer Rundfunk to present their cost calculations of various means of payments. The European Commission representative argued that legal tender implies that no additional cost can be incurred by the payee. However, for those who do not own a bank account, Rundfunk’s insistence on non-cash payments makes bank transfers very costly. In fact, this represents an imposed tax for those who do not own a bank account and are forced by the public authority to incur the cost. Future of cash One of the judges asked the ECB what impact the term ‘legal tender’, as defined by the Treaty, would have on the ‘development’ of the ECB’s central bank digital currency (CBDC). The ECB representative clarified that the central bank is currently only ‘brainstorming’ the ‘possibility’ of introducing a digital currency and no decision has been made. The research is looking at various technical solutions and it isn’t even clear, at this stage, whether the ECB would even issue a retail CBDC.