The shift to digital commerce is creating profound changes for merchants as they develop ways to meet the rapidly evolving demands and preferences of consumers. Electronic payment providers can help merchants deal with the complexity of digital payments — and ultimately increase customer loyalty and engagement — but only if the two entities collaborate effectively, particularly regarding the use of data.
The Strategy& 2015 Consumer Payments Survey, conducted with the Electronic Transactions Association, looks at the implications of the shift to digital commerce for both merchants and payment providers. Among other findings, the results indicate that merchants seek more value-added services from payment providers, which are still largely focused on payment facilitation, even as that business becomes commoditized. Merchants are witnessing the transformation of the point of sale. Formerly a simple transaction utility, it is now just one step in a process of engaging customers digitally, leveraging data to improve customer engagement before, during, and after the transaction. There is a clear opportunity for payment providers that can expand beyond their traditional scope of service and collaborate more effectively with merchants to use data in order to create richer and more personalized shopping experiences.
To capture this opportunity, merchants and payment providers will need to focus on four priorities: (1) improve customer engagement and loyalty; (2) develop a better understanding of customer data; (3) integrate data among channels more effectively; and (4) ensure high levels of security.
The most fundamental shift facing retailers is the digitization of commerce. Over the past 30 years, consumers have shifted their payment method from cash and checks to credit and debit cards. It is estimated that cash and checks will be used for just 15 percent of total personal spending in the U.S. in 2018, down from 30 percent in 2013, with credit cards, debit cards, and other electronic payment methods making up the remaining 85 percent.1 Though this shift to electronic payments was evolutionary, the expansion from digital payments to digital commerce — in which a consumer engages digitally before, during, and after a retail transaction — has been revolutionary.
The rapid and broad adoption of digital commerce is forcing merchants to adapt and adjust. Merchants are well aware of the opportunities they can derive from digital shopping technology, but the shift to digital commerce also brings new challenges that they may not yet be equipped to handle. These challenges include more consumer touch points in an increasingly omnichannel shopping environment; more data-generated insight on consumer shopping behavior; more communication options to engage with the consumer; and more privacy and security concerns. Similarly, payment providers have been caught flat-footed by the shift to digital commerce — they still focus too much on payment facilitation, which has become a commodity.
The Strategy& 2015 Consumer Payments Survey, conducted with the Electronic Transactions Association (a consortium of payment providers, technology vendors, and others in the payments ecosystem), analyzes the impact of this shift on both merchants and payment providers. To conduct the survey, we contacted consumers, merchants, and payments executives to assess their attitudes on payment trends. The results indicate a clear shift in consumer behavior thanks to the digitization of commerce — that is, the ability for consumers to shop anywhere, anytime, whether using a home computer or a mobile device.
The most fundamental shift facing retailers is the digitization of commerce.
With an awareness of both the challenges and the potential payoffs highlighted in the survey results, we believe that the next step for merchants and payment providers alike should be to focus on four priorities:
Improve customer engagement and loyalty. Merchants and their payment providers must view payments as an opportunity to engage with customers, not just an area of cost or additional complexity. Payments are no longer a discrete act, but rather one part of a process that begins with marketing and continues with personalized efforts to cement customer loyalty after a purchase.
Develop a deeper and broader understanding of customer data. Capturing, synthesizing, and packaging data will be essential to improving customer loyalty. Merchants and payment providers can use this data on both an individual and an aggregate level, in order to develop more detailed insights into specific consumers and larger demographic groups.
Integrate data among channels more effectively. Merchants and payment providers must build systems that can easily share data, both internally among departments and externally among partners. By building systems with flexible architectures, merchants can improve their ability to integrate data from different sources.
Ensure high levels of security. Merchants and payment providers will have to work together on data security, given its status as a top concern among customers. That means ensuring they’re ready to accommodate new security mandates, such as the EMV chip-and-pin technology, and deploying end-to-end encryption to protect consumer data and financial information. The stakes are too high — merchants that don’t get security right will lose customers.
These recommendations are interrelated. To be truly successful, and to create a foundation for success long into the future, merchants and payment providers need to collaborate on all four, and build the right foundation to capitalize on the looming growth in digital payments. The digital payment journey may be arduous, but the payoff, in terms of enhanced customer engagement and loyalty, will be worth it.
1“Consumer Payment Systems in the U.S. 2013 vs. 2018,” The Nilson Report, Issue #1054, Dec. 2014.
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