2023 recession is set to look different

By Natasha Teja

With decreased payment volumes and increased risks of market consolidation, The Payments Association examines how a recession could reshape the industry.

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, payment 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 lockdown,” 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,” explains Otto Benz, director of payments at Nationwide Building Society. He also notes 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 went on to add 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 says: “We are seeing a bit more usage, because people find it easier to budget on physical cash.”

Real impact of recession hard to predict

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 the Payments Systems Regulator (PSR).

“Where households have less disposable cash and where prices for essential items increase, we could see spontaneous payments decreasing. This would likely impact credit and debit cards that have the majority share of those types of payments,” adds the 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 sure 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 crypto 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 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 during a 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 “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 pres- an environment for takeovers. He says: “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. 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.

Barclays to replace branches with pods

Barclays is looking to open semi-permanent banking pods in local areas where there is the high footfall.

The move comes as the number of customers using its branches declines.

The pods will provide a dedicated, private space in locations such as retail parks and shopping centres for customers.

Barclays plans to launch at least 10 pods in the UK by summer 2023, plus six electric vehicle banking vans will be added to its existing fleet of 10.

Jo Mayer, head of everyday banking at Barclays, said: “Our new banking pods and community pop-ups help us to tailor our in-person support for each location, including support with digital skills.

“In areas where we close a branch, we will maintain our presence in that community offering an alternative faceto-face solution.”

Brits using credit cards to feed families

Almost three in 10 people in the UK are using credit cards to buy groceries and essential food items, according to research by Forbes Advisor.

A quarter of Brits – around 13 million – are relying on credit to fund everyday costs such as commuting; while a fifth are borrowing money to pay their household bills.

The study comes as inflation reaches record levels and food prices rise at the fastest rate in 45 years.

Laura Howard, financial expert at Forbes Advisor, urges people to exhaust all other options before running a balance on an “interest-bearing credit card” such as contacting banks, energy suppliers and mortgage lenders.