Cashless Payments and E-Commerce
Weekly updates on the innovation economy.
Drawing Capital Newsletter
December 18, 2020
In this week’s newsletter, we explore cashless payments and digital commerce.
The Fintech Landscape
The “consumerization” of finance promotes financial inclusion, democratizes access, increases efficiency, delivers superior consumer experiences, and makes more user-friendly financial applications.
Positive Trend towards Cashless Payments
According to McKinsey & Company, there has been an increase in the percentage usage of cashless transactions in both emerging countries and mature countries. Among the cohort of emerging market countries, China has been the biggest adopter of digital and cashless payments over the past decade. Possible reasons for China’s significant adoption of digital payments include the following:
The rise of AliPay and WeChat Pay
High popularity in the use of QR codes in China
Chinese governmental push into digital transactions and fintech innovation
Significant advancement in technological and financial infrastructure by both Chinese governmental agencies and large Chinese fintech firms
Chinese consumer willingness to adopt digital payments and enjoy their benefits
Significant Chinese e-commerce economy that is measured in the trillions of dollars
The following 2 charts below showcase the advancement of cashless transactions over the past decade across emerging market countries and Westernized developed countries.
For the past 20 years, e-commerce retail sales have experienced a steady upward climb, both in numeric terms and as a percentage of total retail sales. According to the Federal Reserve Economic Database, US e-commerce retail sales have grown at an approximate annualized compounded rate of 19% per year over the past 20 years. It is also true that the coronavirus crisis and the subsequent lockdown orders in America caused a spike in e-commerce retail sales.
Summary from JPMorgan’s 2019 Global Payments Report
In aggregate, travel and consumer electronics are the leading merchant segments in terms of e-commerce usage and adoption. Interestingly, although grocery commerce as a segment has low e-commerce adoption by consumers, there are a number of food delivery and grocery delivery companies that are expanding the usage of e-commerce for groceries and restaurants, such as Instacart, DoorDash, Postmates, Uber Eats, and Grubhub.
The totality of consumer expenditure is measured in the trillions of dollars annually and represents the majority of America’s GDP.
When e-commerce provides a cheaper, faster, better, and more convenient experience, consumers will increasingly choose e-commerce options in lieu of in-person shopping experiences.
E-commerce as a percentage of total retail sales has been steadily increasing from less than 1% in 2000 to 16.1% in Q2 2020. E-commerce sales also had a noticeable upward spike in 2020 during the COVID-19 crisis, which is an obvious trend because the governmental orders regarding self-quarantines, shelter-in-place, and lockdowns shifted more consumer expenditure from in-person shopping to online shopping.
Consumer spending has increased with mobile-friendly shopping apps, subscription service business models, social media algorithms that amplify and recommend products and services to consumers, and the concept of the “buy now, pay later” phenomenon.
There are several industries that have low adoption of cashless payments. From the merchant perspective, some merchants prefer cash payments to avoid the credit card processing fees. From a consumer perspective, many consumers prefer to make certain types of purchases via an in-person experience.
The e-commerce tailwind for numerous companies will continue because e-commerce can increase price uniformity, provide more transparency and information to consumers in a decentralized method, make online prices more sensitive to change due to competitive forces, and alter the price level of certain goods and services for the benefit of consumers.
Across major countries, there are repeated trends towards cashless payments, which can be measured as a decreasing percentage of cash used in payment transactions by volume.
E-commerce purchases are increasingly being made on mobile devices. In fact, mobile-based e-commerce transaction dollars were more than twice the amount of desktop-computer-based e-commerce transaction dollars. As a result, it has now become necessary for retailers to have a comprehensive and competitive e-commerce strategy with an excellent user experience on mobile devices.
Companies that are combining a social element to e-commerce with the “influencer economy” or “attention economy” are seeking faster sales growth and higher user engagement.
For businesses, technology is no longer just a sector. Technology already has or will proliferate across all economic sectors. In times of crisis, there is high demand for innovation that solves real problems, and e-commerce is no exception to this trend.
Online travel was the first wave in the proliferation of e-commerce. Online purchasing of consumer electronics, groceries, clothing, common household goods, and more are increasing over time.
As people’s comfort level with technology increases, online spending and cashless transaction volume will both increase in intensity for existing goods and expand the variety of goods and services being purchased on e-commerce platforms.
Get in touch to learn more about Drawing Capital’s strategy:
(1) "Accelerating winds of change in global payments - McKinsey." 1 Oct. 2020, https://www.mckinsey.com/industries/financial-services/our-insights/accelerating-winds-of-change-in-global-payments. Accessed 10 Dec. 2020.
(2) "E-commerce payments trends: United States - JP Morgan."
(3) "E-Commerce Retail Sales as a Percent of Total Sales ... - FRED." https://fred.stlouisfed.org/series/ECOMPCTSA. Accessed 10 Dec. 2020.
(4) "E-Commerce Retail Sales (ECOMSA) | FRED | St. Louis Fed." https://fred.stlouisfed.org/series/ECOMSA. Accessed 10 Dec. 2020.
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