The days of fumbling around at the counter for handfuls of change to pay at the shop counter are for the most part behind us. Apps and taps have made the payments process frictionless for consumers and changed the way that retailers and their customers interact.
As digitally savvy shoppers in the world’s most populous countries turn away from cash, innovation has not stopped there. Emerging technologies like ‘Buy Now, Pay Later’ and Open Banking are seeking to further empower consumers.
The payments landscape has long been due for disruption, and now that disruption is coming at pace, fuelled by technology, but also changing regulation. For example, whilst technology is ultimately driving innovation, it is legislation like the Payment Services Directive 2 (PSD2) which is providing the canvas for it.
As with all technological innovation, there are both opportunities and challenges for retailers who are looking to stay ahead of the curve and provide the best customer experience possible.
Here we set out what the shifting payments landscape means for retailers and the opportunities that are there for the taking.
A shifting payments landscape
It is no secret that the pandemic accelerated the shift to digital services, accelerating the transition of many economies towards a cashless society. For instance, the contactless limit of £100 in the UK now covers most daily purchases. This has coincided with the emergence of technology-enabled payments products like Google Pay and Apple Pay which mean that whether it’s in the physical or digital world, consumers expect a frictionless payment experience.
According to the UK Finance Payment Market, the use of cash as a payment method, by volume, had dropped by almost 75% in the period 2010 – 2020, whilst in the US Worldpay are predicting that by the end of 2022, around 83% of US transactions will be cashless.
Innovation in payments is also advancing at pace, e-wallets are by far the fastest-growing market segment, as the physical use of credit and debit cards shift to this more convenient form. E-wallets are currently sitting at around 28.6% of Point of Sale (POS) transactions and are forecast to rise to a little under 40% globally by 2025, and more for e-commerce. What’s important about this? Customers have several options at their disposal but are actively choosing to migrate to e-wallets.
Away from POS, banking and retail financing solutions have a place in the market, but with relatively low volumes they are currently a part of a broader customer experience rather than a core pillar of payment. They look to be in relative decline with volumes perhaps shifting towards the emergence of Buy-Now-Payer-Later (BNPL) options for example.
BNPL has catapulted companies like Klarna to the top of the agenda. Whilst the global picture suggests that BNPL is not going to take a significant share of the market in the mid-term, regionally the picture is rather different. In Europe and the US for example, e-wallets and BNPL are predicted to be the fastest-growth areas, with BNLP adoption outpacing the rest of the world by 4X in the US and 6X in Europe (predominantly led by the UK, Germany, and Nordics).
What does BNPL offer to consumers? In a sector like fast fashion, it offers an exciting twist on the digital customer experience, giving the digital consumer the ability to try before they buy, with their bedroom becoming the changing room. This appeals particularly to younger customers who want more flexibility, but could the application be applied elsewhere?
And what of Open Banking?
There is also a new frontier for payments due to the emergence of open banking technology. Open banking is enabled by PSD2, with the aim being to provide a safe and dynamic architecture to share consumer data (on opt-in). With that data shared, businesses can have instant access to allow them to create better and more tailored services, a bit like targeted media in payments.
Open banking might be one of retail’s best-kept secrets, but it is starting to get notable traction. The initial benefits to retailers are that they can utilize the technology to handle payments directly with consumers with instant settlements, providing customers with more control whilst also reducing the volume of abandoned payments, and significantly reducing costs.
Opportunities and challenges
Customer experience is king for retailers who want to ensure that they are innovating with the customer in mind. Payments, particularly with the shift to e-commerce, is an area that now sits at the heart of, as opposed to the end of the experience. Adopting the right innovation, before the competition, can be an advantage, and continuing to innovate an imperative in the face of digitally savvy and innovation-hungry consumers.
Open banking is a perfect example of a ‘win-win’. There are immediate benefits to retailers in so far as profits (higher conversion rates and lower fees), but also benefits to customers through product and service innovation and useful features such as instant refunds.
However, there are barriers for payments providers and retailers. It is important to track how these payment options are being seen in the public consciousness – this is particularly important when considering BNPL which has come under significant scrutiny by politicians for encouraging consumers to get into debt.
The challenge with open banking is that it remains a nascent area and its success hinges on people’s willingness to share data. Retailers should be looking to open a dialogue with customers about data and trust which would build loyalty and help realize the potential of this technology.
Considerations for retailers in a digital world
Retailers who are looking to capitalize on payments innovation are often faced with jargon-heavy information which makes it difficult to know where to start. There are a whole host of TPPs (Third Party Providers) offering innovative payments options like open banking so it’s important to take a considered approach.
Taking a “Supplier Enabled innovation’ (SEI) approach has been successfully deployed in financial services, for instance, perhaps retailers could learn from organizations such as Danske Bank which have pioneered enterprise SEI in the finance sector to advance the bank’s own services in addition to those provided via partners.
Innovating with different partners allows retailers to hypothesize, recognize use cases, prove concepts, and ultimately understand the value created. This process should be the first step before any significant investment is made, it is important to move fast but always move smart.
Looking to the future, retailers must pay more attention to how their customers are looking to pay for goods and services. Those who don’t keep up with innovation risk being left behind by both their customers and the competition. Now is the time to take a considered view on who to partner with to ensure you are able to react quickly to new solutions as this dynamic marketplace continues to evolve over the next few years.
Our recent report outlining how retailers can seize post-pandemic opportunities dives into detail about the challenges that retailers face in 2022 and the strategies they should put in place. Our retail experts are ready to explore these challenges with you so please get in touch.