The shift toward digital payments

Is your payments strategy keeping up?

Mobile technology adoption “innovation is moving at a scarily fast pace.” So said Bill Gates several years ago. Never have those words been truer than today when used to describe this new economic era of on-demand and convenience-driven commerce. Chase Merchant Services notes there is currently a tectonic shift in how distributors distribute goods, how merchants sell those goods and how consumers consume them.

Today the point of sale is no longer just a checkout counter. The spread of digital payment methods means the new POS can be a smart phone, TV, watch, retail kiosk or even an embedded sensor in a refrigerator or thermostat. As they experience instant gratification from one merchant, consumers begin to expect the same from all providers.

Across industries and geography, businesses are struggling to adapt. Innovations in digital commerce, including web- and mobile app-based technology and electronic payment methods, are fueling a dizzying array of capabilities to match supply and demand and enabling alternative payment methods.

By necessity, payment acceptance strategies are moving to the forefront of business model considerations, affecting operating issues that go beyond cash flow and working capital forecasting. In this new economy, payments systems inform and influence IT capability requirements, website design, marketing strategies and more.

Ready or not

Tech writer Michael Malone has crafted several “Rules of Technology.” His third law is: “Every technology breakthrough takes twice as long as we expected and half as long as we are prepared for.”

With respect to the adoption of mobile payment technologies, many merchants are waiting for adoption to happen before they take it seriously. Their mindset is, “I’ll believe it when I see it.”

Malone’s theorem suggests that if you don’t start preparing soon enough, you won’t be ready when the technology does become pervasive. In the case of mobile payment technologies, merchants should understand that they’ll see it when they believe it – and make the investments necessary to fuel adoption.

At the heart of the on-demand movement: mobile devices

The number of mobile device users globally has reached five billion in just a few short decades, a remarkable growth trajectory. With a screen tap or swipe, connected customers can experience expertly curated offerings and finely tailored transactions on a “right now” basis.

Sales statistics prove the importance of convenience as a competitive advantage. In Canada, mobile sales reached $28.1 billion in 2019 and currently account for 33 per cent of all e-commerce sales. Canada’s mobile commerce market is expected to reach $49.7 billion for the year in 2023, growing at a compound annual growth rate of 15.3 per cent from 2019 to 2023.

Further proof: Google reports that searches for “open now” have tripled in two years, but searches for “store hours” have dropped. Similarly, searches for “tonight” and “today” (such as “flights today” or “hotels tonight”) have grown 150 per cent on mobile over the past two years.

For these consumers, paying the premiums charged by on-demand apps and services is an easy trade off for saving the time it takes to travel to a brick-and-mortar location and wait in line or spend time on the phone talking to a live CSR.

Regardless of industry category, whether established business or start up, companies are examining their current or planned operating model and, consequently, payments model, from on-demand points of view. Build, buy or partner strategies must all be considered for their various pros and cons.

Seamless payment systems should be at the top of the list

Plastic and cash have dominated commerce for decades. On-demand commerce is changing that quickly. The value of global digital payment transactions is projected to reach US$4.6 trillion by 2021. “Frictionless” payments are destined to become backbones of the new economy.

In 2019, digital wallets were used in 18 per cent of payments across Canada. This figure is projected to reach 21 per cent by the end of 2023.  But, in China, Alipay already has a million merchants accepting QR code payments. Parent Alibaba facilitates Alipay transactions by its 520 million users who first store their credit card and/or bank account details in their Alipay wallet. Readers will recognize the model as similar to PayPal’s.

A key reason that digitized payments fuel the on-demand movement is that they enable merchants to store purchase preference and frequency information then offer personalized product suggestions, discounts or reward points or other offers, all building brand loyalty and revenue potential. This practice of “dynamic” or “contextual” pricing is becoming a key monetization strategy.

With appropriate data collection and analysis, price elasticity can be based on peak online periods or other criteria. In the case of subscription-based services for example, monthly or annual commitments can morph into micro-transactions, charged on a unit basis.

The importance and power of personal data collection is just beginning to be understood in Canada. Data privacy laws should remain top of mind when considering consumer data use, including in the payments space.

The battle for detailed transaction data

Captured data from third-party payment processors (total transaction amount plus the date, time and place of purchase) is, of course, extremely valuable in and of itself. It is item-level data, however, that presents the next battleground. Item-level purchase data are essential to tracking the consumer preferences that drive behaviour and consequently enable merchants to design and target effective loyalty programs and incentive promotions.

Amazon and Google have both introduced proprietary methods of payment so that they would have access to this level of data. In another example, Daimler AG’s acquisition of Luxembourg-based electronic payment services provider PayCash in early 2017 was a key milestone in the car-maker’s launch of a dedicated electronic payment services provider under the “Mercedes Pay” brand name. We may anticipate more movement toward such proprietary payment systems because few merchants have been willing to let the proverbial fox into their hen house.

All industries are vulnerable to disruption

We’ve all heard the term. “Disruption” in business is defined as the set of risks established firms face. In this fast-growing on-demand economy, it looks increasingly as if no business is immune. As noted in PwC Canada’s ‘Digital disruption is shaking the foundations of all businesses’ report, ““Digital” is no longer synonymous with “IT”, and it’s no longer limited to a single division or department. It’s a way of conducting business that affects everyone across the company, and the sooner you embrace its impact, the better.” But “evolution” might be a better, more positive, descriptor to apply to the transformation we are experiencing. After all, what is wrong with making consumer products and services more efficient and convenient?

How to navigate the complexity of establishing and maintaining seamless connection with your customers is critical. A caution to businesses, including start ups, wanting to capitalize on the new era of consumer purchase habits is to find advisors who intimately understand customer purchase behaviour and have the experience and the data to back it up. Such partners are key to helping you build out your model, with seamless payment acceptance across all available channels and geographic boundaries.