Consumer spending changes likely to stick

Increased consumer spending online and more digital payments in the wake of the COVID-19 pandemic have also meant an adverse impact on small and mid-sized retailers and more internet fraud, according to spending tracked by card network behemoth Visa.

Following the “massive shift to e-commerce” during the coronavirus outbreak, more than half of spending on Visa cards now occurs online or in situations where the card-user isn’t present for a purchase, compared to more than half being in-person prior to the pandemic, Visa Canada President Stacey Madge said at a global payments conference this week. The company witnessed a year-over-year doubling, or even tripling, of ‘card-not-present’ spending in certain types of transactions such as for groceries.

While that stands to reason during a pandemic in which consumers stay home to avoid the spread of a deadly virus, Madge said glimpses of post-pandemic behavior in countries where the disease is now under better control, including Singapore and Australia, indicate that those behavioral changes in spending and payments may persist after the pandemic recedes.

The credit card network giant has had a unique global view of how consumer spending was upended by the pandemic and by related government restrictions. It’s also seeing how consumers adapt now to a new environment.

The company estimates the pandemic accelerated consumer shifts by three to five years. “This shift to digital purchasing will continue as consumers have entrenched these behaviors during this drawn-out COVID period, and as we adapt to more flexible work models post-COVID,” Madge said June 1 at the virtual Payments Canada Summit.

Crooks followed the money to new online and mobile spending venues. On those channels where the user isn’t present with a card, Visa charted an increase in fraud to 12 times the level for transactions when a consumer is present with a card, Madge said.

Research firm Juniper documented that same phenomenon. E-commerce retailers are at risk of losing more than $20 billion in 2021 due to online fraud, according a recent Juniper report. That would amount to an 18% increase over the $17.5 billion in losses last year. Identity theft, chargeback fraud, and account takeovers are among the threats online for shoppers and merchants, the report said.

Visa has also observed how small and mid-sized businesses (SMBs) were disproportionately negatively impacted by the shifts in consumer spending. “Mega merchants” with better digital infrastructures, more access to inventory, and an ability to provide faster delivery grabbed more online business than their smaller rivals, Madge said.

The share of small and mid-sized retailers, which are more likely to have brick-and-mortar operations, remains below 2019 levels, she said. Whereas one in three large businesses pivoted to add more online purchasing options, only one in four of their smaller peers did. Nonetheless, “the pandemic served to accelerate SMB transformation to digital,” Madge said. In the U.S. about half of small businesses are selling their goods online, mainly at the big online marketplaces, she said. Think Amazon.

Madge also acknowledged the expansion of digital pay button and digital wallet usage as a result of the pandemic, and the increase in those tools available to consumers. Use of some of the channels grew at double and triple percentage-point rates, she said.

Before the pandemic, people were “largely using their phones to pay a (quick-service restaurant) for their morning coffee, and lunch,” she said. “Now, they’re becoming commonly used for everyday purchases, such as groceries and gas, and home nesting categories, such as retail goods and restaurant food delivery.

Visa also observed an outsized COVID impact on travel and entertainment spending for affluent consumers, who typically account for more than twice as much of that discretionary spending as non-affluent consumers. The wealthier individuals, as a whole, cut such spending to between 3% and 15% of 2019 levels, but U.S. travel is beginning to pick up with higher budgets than before, Madge said.

Another trend the company noticed during the pandemic was a rise in consumer use of debit cards, which debit bank accounts for payments, and a decrease in the use of credit cards. Visa attributed that shift to the economic uncertainty caused by COVID and its impact, but the company this week shared statistics for May that show that trend reversing.

Visa also documented the rise of buy now-pay later (BNPL) options during the pandemic, noting that 40% of U.S. “online-centric merchants” offer it as a payment option now. There has been a BNPL “explosion of interest in more mature markets,” Madge said. She noted a report from online marketplace company Shopify that said merchants offering the BNPL installment payment option have increased 60% since the start of the pandemic.

Madge also recognized the rise of cryptocurrency as well as central bank digital currencies and said Visa is adding tools and services to allow payments using some of those new forms of payment. In March, the company said it would initiate a pilot program to settle transactions with a digital stablecoin via the cryptocurrency Ethereum.