Improving customer experience and satisfaction

How to build an effective payment strategy

Payments represent a small portion of the shopping journey for most customers but can play a disproportionately large role in the way customers judge the overall experience. As described by Daniel Kahneman’s ‘peak-end rule' people tend to judge experiences based on two major points: its peak (point of highest emotional intensity) and its end, retailers that optimise the shopping experience for these two points will likely have a better chance of increasing customer satisfaction, Net Promoter Score and loyalty.

Optimising the point of payment is crucial. But, formulating an effective retail payments strategy to achieve this successfully, is becoming more complex as new payment methods and technologies are deployed. Payment trends detailed previously in this series are shifting customer expectations and in turn the dimensions that retailers need to build to remain competitive. New dimensions like digital wallets, account-to-account payments and innovation in provision of credit, present exciting opportunities. But, the utility of these differ by retailer type.

Types of retailers and differences in transaction types / volume

Grouping retailers into ‘archetypes’ can help to evaluate customer and business payment needs. These are largely driven by a retailer’s scale/size, channels, transaction frequencies and transaction sizes;

Small online retailers: transactions occur primarily online with a focus on small direct-to-consumer business that offer unique or niche goods such as Etsy
Large online retailers: transactions occur primarily online offering a broad range of products ‘marketplaces’ such as Amazon
Supermarkets / discount retailers: both brick and mortar and online shops with high transaction volumes and repeat customers. These retailers typically operate with large scale and small margins such as Tesco and Costco
Small businesses / convenience stores: small-scale brick and mortar shops with high frequency transactions and a small basket such as. local corner shops and newsagents
Specialty stores: both brick and mortar and online (high eCommerce penetration), with large volume of returns and varying scale from local footprints to international businesses such as Uniqlo

Payment needs differ across these retailer archetypes and their unique models demand thoughtful consideration particularly as it relates to strategy formulation.

Payment needs

There are seven payment needs which retailers should consider when defining their strategy:

Speed and convenience: Offering a variety of payment options including debit card, contactless, cash, credit card, digital wallets and one-click online checkout to offer customers convenient and fast transactions
Security: It’s imperative to keep customer payment data safe, particularly with online transactions which are more susceptible to fraud
Cost: Financial transactions (including refunds) carry a variable and fixed processing fee that has the ability to significantly impact the profitability of most retailers
Chargebacks/refunds: Both are forms of repayment to the customers; chargebacks are created by the customers bank when the customer raises a dispute, while refunds are created by the business upon request by the customer
Integration with other software: Integration with the retailer’s inventory, eCommerce and accounting software is an important consideration to ease business operations and improve customer experience
Flexible payment options: Over the past few years, there has been an increase in credit provision for retail transactions through solutions like Buy Now Pay Later, which can increase conversion at checkout
Loyalty: Loyalty programs are frequently used as a means to retain customers and increase spend, integrating payments with your loyalty offering can increase use of the program

Retailers must prioritise payment needs that align with their business model and invest in them accordingly to deliver their strategy.

Key payment needs by categories of retailers

Nuances between the retail archetypes outlined above create a different set of payment needs that should be prioritised for each, with some needs being more important to retailers than others.

These payment needs can then be mapped to the retailer archetypes in order to deliver an effective payment strategy:

	Speed/ Convenience	Security	Cost	Chargeback/ refund	Integration with other software	Flexible repayment options	Loyalty
Small online only retailer	x	x	x
Large online only retailer	x	x		x	x	x
Supermarkets / discount retailers	x		x		x		x
Small business / convenience store	x		x		x
Specialty store	x	x		x	x	x	x

While all the needs mapped are important we’ve narrowed down on the two most important needs for each type of retailer to illustrate why the need is important and how it can be addressed therefore the rest of this section is not exhaustive.

Small and large online only retailers
Supermarkets / discount retailers
Small businesses / convenience store
Specialty stores

Small and large online only retailers

(speed / convenience and security)

Speed / convenience

Innovations in checkout like Apple / Google Pay and one-click checkout have substantially reduced the friction associated with online checkout (customers using one-click checkout increased their spend by 28.5%) and have increased customer expectations
These same technologies have democratised one-click checkout, allowing small companies to compete more effectively (on this point at least) with the online giants. But this does mean that seamless checkout is becoming an offering that online retailers need to invest in to remain competitive
Responding to this need by using external partners is likely the best option - companies like Stripe and Shopify have invested heavily in the space and can provide out-of-the-box solutions that are challenging to replicate internally

Security

Fraud in eCommerce is rising rapidly, with the global cost of online payment fraud projected to increase from $130 Billion USD in 2020 to $206 Billion USD in 2025 and will result in more chargebacks to retailers
Most businesses are best to rely on their payment provider or acquirer to defend against online fraud as they will take advantage of large data models and AI.
That said, larger retailers can leverage their own data to support this, and need to be very clear as to the security implications of changing payment provider or payment type.

Supermarkets / discount retailers

(cost and loyalty)

Cost

High transaction volumes and low gross margin require tighter management of processing fees in comparison to other categories of retailers, plus there is greater opportunity to leverage scale in the negotiation
This can be achieved externally or internally:
- Internally: retailers can explore driving transactions through alternative payment flows like account-to-account payments or participating in the payments value chain by building the ability to accept or facilitate payments (see part 2 of this series)
- Externally: the large scale of supermarkets and discount retailers can be leveraged in negotiation to reduce the fees associated with customer transactions

Loyalty

High frequency of repeat customer visits presents an opportunity to build loyalty and leverage payments as a tool to increase utilisation of the program
Building internal capabilities like an integrated payment / loyalty solution in a native app (e.g. Starbucks, TescoPay) can drive revenues and margins, as well as retain customers, due to the access to data it provides.

Small businesses / convenience store

(speed and cost)

Speed

A key attribute of convenience stores is convenience - customers expect to makes purchases with limited friction and waiting times hence the importance of ensuring a quick checkout process
Implementing Apple/Google pay payment methods at the checkout point allows for a smoother customer experience and greater volume of transactions in a given period

Cost

Smaller scale nature of convenience stores limits the benefit of building internal payments capabilities and reduces negotiating leverage with large payment providers
Exploring partnerships with smaller new entrants in the payments space that offer slick payment experiences at a reduced cost is a strong option.

Specialty stores

(chargeback / refunds and flexible repayment options)

Chargeback / refunds:

Higher return rates on items like clothing (online apparel sees close to 1.5x high return rate than average online returns) require a strong return management strategy
This includes operational elements, but also the ability to effectively refund customers in a timely manner that is secure and cost effective, so the choice of payment partner becomes key here

Flexible repayment options:

Discretionary purchases with higher ticket prices are good candidates for solutions like Buy Now Pay Later which can help drive conversion by up to 30%
There are examples of this being built internally through white labelling (e.g. B&Q Flexiplan) or being outsourced entirely via third-party providers like Klarna and AfterPay
The costs associated with the external provider need to be weighed against the potential opportunity and investment size of building internally

As noted in the ‘peak-end rule’, payments have a disproportionately large impact on the overall shopping experience. Establishing a payment strategy that is prioritised for customer journeys is therefore critical in improving customer satisfaction, NPS and loyalty. If you would like to discuss any of the topics explored here, please get in touch with one of our team below.