Payments Views


The Payments Industry Impact of COVID-19

Series Introduction

COVID-19’s impact on the U.S. payments industry and domestic economy is profound. Multiple reports from the U.S. Department of Commerce, merchant acquirers and PSPs indicate the extent of the pain even at this early stage of this pandemic-induced recession. For the over thirty million U.S. citizens suddenly without jobs and income, with many already living paycheck to paycheck, the word “pain” is inadequate to the current situation.  

The impact, implications, and responses by the stakeholders in the U.S. payments industry are many and the subject of this series. Glenbrook examines the pandemic’s effects on the payments industry through Glenbrook’s domains of payment and stakeholder frameworks. This framework categorizes payments flows by transaction context and the parties most affected. 

We will look at the short and longer-term impact of the pandemic on those stakeholders using or providing services within each domain. We assess the implications for major stakeholders and offer recommendations. 

This report focuses on the U.S. market with reference to international domestic markets for illustrative and comparison purposes.

Macro Economic Impacts on the Payments Industry

The pandemic will have multiple ways to shape the economy over the next 12-24 months. Each will affect the payments industry in a direct or indirect manner. The following are among the economy-wide factors that will affect payments and business activity:

A Long Path to Recovery. The extent to which our lives return to what we have enjoyed as “normal” is unknown but economists are now projecting the eventual recovery will resemble the “swoosh” in form – a sharp drop followed by a painfully slow and gradual rise up and to the right that could take, according to Fed Chairman Powell, until the end of 2021. Behavioral changes by consumers and businesses will also impact the path to a new modus vivendi

Digital Transformation Will Reshape Segments of the Economy. While the carnage in the retail, restaurant, travel, and hospitality industries is plain to see, the tech industry is enjoying strong growth because of society’s surge in reliance on its offerings. Tech giants will emerge as big winners. “We have seen two years’ worth of digital transformation in two months,” noted Microsoft CEO Satya Nadella in a call with Wall Street analysts after reporting earnings that were just shy of astounding.

An obvious example is the success of video collaboration tools. They have individuals and business leaders concluding that commuting and business travel is less important than previously assumed. The ripple effect of these shifts in personal and business decision making will be national in scope. 

Again, for most businesses, even single digit drops in demand threaten stability. Airlines are down 90% and the complex infrastructure required to keep airplanes flying and travelers safe is stressed. Airline usage, and payments, drives multiple segments: hotel, car rental, taxi, Uber, restaurant, and more.  

The Retail Apocalypse is Here. Large, primarily brick-and-mortar retail merchants, especially those with extensive mall-based operations, have been under pressure for years as many consumers have grown to prefer shopping in the Remote Commerce domain. The pandemic has accelerated that shift and worsened the already weak financial position of many firms. COVID-19 has accelerated retail stalwarts Neiman Marcus, J. Crew, J.C. Penney, and Pier 1 Imports into bankruptcy. While reorganization protections can extend life, familiar brands may disappear. COVID-19 will permanently shift an even greater proportion of sales to online channels. 

Employment Restoration Will Take Time. The slow recovery means consumers and business will respond with new levels of caution that will extend to the pace of re-hiring employees. Employment in some segments will take years to recover. With aircraft orders way down, General Electric has cut 25% of its jet engine workforce. Restarting complex supply chains requires a careful balance of demand forecasting and capacity planning. Again, the impact on payments is profound.

The Bankruptcy Avalanche Is Yet to Begin. A tidal wave of personal and small business bankruptcies is ahead. Banks will take a hit and, in order to limit further exposure, will lower credit lines and increase standards of creditworthiness. This directly impacts consumer spending power.

Short-term Political Uncertainty, Long Term Management Challenges. Regardless of the outcome of the presidential election, the administration taking the country forward will be occupied and constrained by the economic impact of COVID-19. There will be no one clear solution. Multiple initiatives, and inevitable missteps, will be required and many will confront political pushback. If just 30% of jobs are restored by year end, that will leave over 21 million job seekers looking to a politically divided Washington for real help. 

Consumers and Businesses Re-Evaluate Assumptions. The sudden economic deceleration is forcing individuals and enterprises of all sizes to reconsider how they conduct their lives and operate their businesses. 

For many, getting back to the pre-virus status quo as soon as possible is the top priority and answer to today’s uncertainties. For others, however, the success of work-from-home operation will shift demand, to a yet unknown extent. (WeWork finds itself in a new world as does much commercial real estate.)   

What We Believe Matters. The Great Depression of the 1930s was deepened by the belief among most that there was no end in sight. Therefore, parting with money was unwise. With few spending, money no longer flowed from hand to hand and the economy slowed to a crawl.

That’s one of today’s risks. Governments around the world are pouring monies into their economies to maintain some confidence in the future. So long as we have trust in the ability of society to manage our way through this pandemic, payments will continue to flow, if at a reduced level, over the coming months. With thirty three million newly unemployed transactors largely taken out of the economy, policymakers and politicians face an epic challenge.

Direct Payments Industry Impacts

Payment flows are a barometer of economic activity and today’s barometer indicates storms and turbulence. When the economy slows, payment flows decline and, as payment volumes decline, the payments industry hurts, too. 

Early impacts on the payments industry itself include:

Price Sensitivity Returns. With so many unemployed and uncertainty rife, consumers will look for value, become more price sensitive, and spend more cautiously. At the grocery store, consumers are returning to familiar national brands like Hershey, Kellogg, and FritoLay. Premium-priced, upstart providers are feeling the pressure. Luxury goods providers will have to make a stronger case to increasingly discerning customers. This means higher margin products will, at least for a time, make up a smaller proportion of overall purchases and, therefore, depress the average ticket price.

As the recession deepens and lengthens, cautious consumers will further depress spend volume and increase pressure on retailer margins. In the short term, some retailers, especially in apparel, will be forced to flush stale inventory at very low prices to raise cash. Once these bargains are out of the system, expect cash-strapped retailers to reduce customer incentive programs.

Segment-focused Providers Suffer. Acquirers and processors of hard hit segments like restaurants and airlines are feeling outsize pain. Layoffs and furloughs at providers like these are already taking place. Weaker players could be acquisition targets.

A Forcing Function for Non-Contact Retail Payments. The pandemic will only increase the pace of transition from paper to digital. Banks around the world have doubled the allowable contactless transaction size so that PIN entry on a publicly shared terminal can be eliminated for more transactions. Contactless cards and mobile wallets, in particular, will see increased usage.

Card on File Authorization Challenges. As consumer bank accounts drift toward zero and credit lines are maxed out, subscription and card on file (COF) based businesses will encounter a growing decline rate. Authorization optimization for merchants and their payment providers will become more challenging.

Payments Industry Consolidation Continues. The payments industry’s M&A musical chairs of the past decade will continue but to a different tune. In those pre-pandemic years, payments industry M&A activity has been a constant with blockbuster deals a regular feature. Think WorldPay and FIS, First Data and Fiserv. Glenbrook has regularly worked with buy side private equity firms asking us to validate the target’s bona fides, all with the expectation of profit growth and a subsequent sale in a few years time. 

Looking ahead, we expect M&A activity to continue but of the bargain hunter kind. Some providers will suffer (see below). Others will need cash to fuel their growth while weaker players hunker down. Buyers are already on the lookout for best of breed companies that can be purchased at lower prices to complement existing portfolios. 

Unfortunately, this is not an exhaustive list. As this piece has illustrated, the number of economic interdependencies is simply too great to anticipate all impacts. Changing conditions will affect the path ahead. Individuals and markets are hungry for good news (just a hint that a vaccine may be available sooner than later was enough to move markets up). And there will be more reasons to be concerned.

This series examines these impacts, and others, in more detail through Glenbrook’s Domains of Payments framework. In the next chapter, we examine the Point of Sale Commerce Domain and what the pandemic means for the future of face-to-face commerce.

Please return to the series landing page, to the Payments Views website, or sign up here to be alerted when the next installment is published.


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