Historically, in a retail landscape dominated by physical cash and card transactions, payments have been viewed mainly as a ‘cost of doing business’. In this context, the typical focus for retailers has been on minimising the cost of accepting and making payments - e.g. through reducing cash and cheque handling, or renegotiating merchant acquiring fees - without negatively disrupting the customer experience and purchasing journey.
However, as detailed in the first report of this series, the payments landscape is rapidly changing. There has been a shift in how consumers are choosing to pay for goods and services with a rise in digital payments, wallets, account-to-account and value added services. As a result, the potential payments “experiences” that retailers can offer customers and the potential “value” of payments to retailers is radically shifting as well.
Through our recent conversations, we have identified 3 main “payments value drivers” for retailers to consider as they face into the payment trends and make choices around their future payment propositions:
- Delivering direct financial value
- Driving sales conversion and deepening customer relationships
- Generating new data and insights.
The evolution of each is explored in this article.
1. Delivering direct financial value
Past:
Historically, the main priority for retailers has been minimising payments costs to maximise profit margins. Key levers to reduce costs have included:
- Reducing or eliminating cash and cheque acceptance to reduce physical handling fees and physical cashier costs
- Encouraging or incentivising Direct Debit and Standing Orders for recurring payments in place of higher cost card-on-file payments
- Switching or renegotiating merchant service charges for card payments; albeit switching rates remain low (43% of merchants report that they never search for new payment processors) and smaller organisations are typically price-takers with limited bargaining power (78% of SME merchants have never attempted to negotiate with their provider)
Future:
The ongoing delivery of Open Banking in the UK is now enabling a new set of more seamless account to account (“A2A”) payment flows for retailer transactions. Although adoption remains incipient, this is creating new opportunities for retailers to reduce payments costs by using non-card rails, such as:
- Payments initiator service providers (“PISP”) payments - Offering third-party enabled A2A payment options at checkout using providers such Mastercard PaybyBank, Barclays BankPay, Trustly etc. - note that the total costs to merchants is largely comparable with cards today, however this is expected to reduce over time as total volumes increase
- In-app account based payments - Adding an A2A-based payment option into mobile apps, often integrated alongside a digital loyalty card and QR enabled, to replace higher cost card payments
- Commercial Variable Recurring Payments (“cVRPs”) - cVRPs are a top priority for delivery in 2024/2025. These have the potential to replace card-on-file and direct debit payments as a lower cost, more flexible recurring payment option.
Some retailers are going further. Having invested significantly in their own payment propositions they have stopped thinking of payments as “cost centres” and instead positioned them as “profit centres” in their own right. As an example, having built a seamless AmazonPay experience for themselves, Amazon is now offering this as a payment option for third parties, charging a fee for each transaction. Coles in Australia have been providing acquiring services to other retailers for years, leveraging their own understanding of retailer needs to drive scale.
2. Driving conversion and deepening customer relationships
Past:
In physical transactions, the priority historically has been on minimising friction at checkout, prioritising speed and reliability particularly in fast transaction settings where convenience is critical (e.g. day to day travel or food purchases). In these settings, contactless cards have shifted from a “nice-to-have” to “essential” with 37% of consumer payments in the UK now made via contactless cards, which significantly reduces the time to complete any transaction.
In eCommerce, instant verification, pre-filled customer information, one-click checkout and Apple / Google Pay have become commonplace. These enhancements reduce friction and checkout time. In the past few years we have also seen a significant rise in BNPL with more than a quarter of UK adults using the payment method over a 6 month period in 2023, making access to credit seamless and increasing consumer spend; for instance, Klarna claims their BNPL solution can increase conversion by up to 44%.
Future:
New technologies and propositions are now enabling a further step-change in checkout experiences which can ultimately support basket conversion and deepen customer relationships.
We are already beginning to see the start of the next wave of innovation:
- UNIQLO has recently deployed scanless self-checkout systems (using radio frequency identification technology in tags) that reduces the time customers spend at checkout, labour costs and improves inventory controls.
- As a step further, checkout-free experiences popularised by Amazon, utilise QR codes, AI and video sensors enabling customers to grab items off the shelf and walkout without any checkout experience. We expect growth of checkout-free experiences in particular in retail, groceries and venues / events in the next 3 years.
The next wave of innovation will also be enabled by near field communication (NFC) based “Tap to Pay” payments. Apple enabled “Tap to Pay” payments in the UK in mid-2023. As a result major acquirers are rapidly launching iOS based “Tap to Pay” propositions. VivaWallet, Revolut, Tyl, Zettle and Dojo have all launched products in 2023, with Adyen, Stripe and Worldline due to launch products in 2024. These mobile-based offerings should enable a new wave of innovation in payment experiences with integrated features such as split bill, automated tax refunds, order tracking and digital invoicing becoming increasingly prevalent.
As we are already seeing that new enabling technology will lead to a proliferation of payment propositions and features, retailers need to cut through the noise and critically assess and design a payment experience that coherently fits with its customers’ expectation and invest in features that support their product set.
3. Generating new data and insights
Past:
Historically, it has been difficult for retailers to leverage the payment specifically to generate new data and insights without introducing an additional step for the customer to provide a unique identifier (e.g. a loyalty card). The rise of ECommerce transactions has partly reduced this barrier given retailers can mandate customers to set-up an account, but ECommerce remains <30% of total transactions in the UK.
The other challenge faced by retailers has been the breadth of customer data that they have been able to generate from transactions. Retailers can build rich perspectives on purchasing and channel perspectives, but have limited insight into a customer’s broader data - e.g. their demographic profile, their wealth, risk level, broader consumption patterns etc. This therefore limits the ability of retailers to build real-time views of consumption patterns across specific customer segments.
Future:
Open Banking is enabling a step change in the art of the possible for retailers in generating and using customer data. With the customer’s permission, Open Banking enables retailers to collect and combine everyday banking information from a customer with its proprietary purchasing and channel preference data, enabling retailers to build more comprehensive profiles and understand shopping behaviour outside of their ecosystem.
This combination of data can be used to generate value in three ways, where both big data and individual transaction data can be used to enhance loyalty programmes, tailor customer experiences and reduce customer acquisition costs by contributing to a recurring customer base.
- Internal ecosystem - enhancing the customer experience and reducing costs, e.g. personalising offers and ads, pushing notifications triggered by store proximity etc.
- Partner ecosystem - creating new models of value exchange with partners, marketers and other organisations
- External monetisation - collecting, distributing, analysing and selling data and analytics information to third party customers in adjacent markets
Conclusion
Retailers introducing payments into their businesses are tapping into a new universe of opportunities beyond cost reduction. Payments is a key differentiation lever that sets the basis to optimise retailers’ businesses by adding financial value through new functionality, or boosting revenue and supporting conversion by enhancing customer journeys. Furthermore, payments can help retailers build a recurrent and be-known customer base and obtain meaningful data insights to shape their offerings and payments.
As mentioned, payments can drive material value for retailers and as the pace of change in payments picks up, now is the time to act.
A few key questions for retailers to consider are:
- How do you drive value from payments today?
- What potential do the payment trends create for new sources of value from payments?
- What payment customer-facing features should you prioritise to support your business, given your ambition, customer needs and product set?
- What operational and technical investments will you need to make to deliver this value?
