As the retailing landscape continues to grow more complex and consumer expectations are higher, multichannel retailers must adopt a quite a new approach to accepting and processing payments. In many markets, consumers have choices and preferences on which forms of payment they use to pay for retailer products and are adopting new methods to exchange value. New sales channels are coming up regularly; old channels are changing their requirements and processes, and technological innovation is changing the way consumers shop in-store and online. Further, markets differ around the world not only with preferred ways to pay (including localized payment methods), but also in their use of technology during the consumers shopping experience. With so many factors influencing sales and all with differing payments acceptance costs, it is challenging to know where you should focus your payments acceptance strategy, particularly if you are a retailer with multiple lines of business and/or with sales in multiple markets.
Multiple Payment Methods
Consumers have more choice now than ever on types of payment methods they own and prefer to use for purchases – between electronic versus cash payments, localized payment methods versus international brands, debit cards versus credit cards, and the like. Each payment type has different processing structures and costs, including prevalence of fraud.
The real challenge that retailers have all over the world is that it’s an industry that keeps inventing new payment methods and rarely abandons the old. Cash and plastic cards are unlikely to be replaced anytime soon, not even within the next 50 years. As more and more payment methods emerge, both online and at the physical point of sale, acceptance costs are rising due to new implementations and operating expenses. Although new payment methods are being on-boarded rapidly, “old” payment methods are rarely retired or replaced, which means that payment optimisation is more relevant today than ever before.
Multiple Channels and Unified Commerce
The heart of “unified commerce” is the tenet of placing the customer at the centre of an integrated multichannel strategy, enhancing the customer experience and providing greater speed and convenience. A content-rich experience has started to transcend beyond online-only retailers, creating truly omnichannel retailers of the future that unite m-commerce, e-Commerce and the in-store shopping experience. Some notable developments in the last five years in unified commerce have been:
- Deployment of in-store kiosks and self-service kiosks
- Use of mPOS and tablet devices with value-added services
- Smartphone mobile payments
- Click and Collect, or Buy online Pick-up in Store
The total cost of acceptance including operations, payment processing, and potential fraud losses differs significantly depending upon the channels, technologies, and approaches used. For example, The Nilson Report estimates that in 2017 more than 50% ($12.1B) of all credit card fraud losses worldwide were tied to card-not-present transactions. However, card-not-present transaction volume accounted for less than 15% of total transaction volume worldwide.
Over the next 10 years yet more change is expected to impact both the usage and processing of retail payments and as our ability to innovate continues to increase there will be many trends facilitating a change in the way we shop today. Each of these will have significant implications for how retailers will use payment methods, accept consumer payments, interact with financial institutions and process payments.
Not all markets are equal
EDC has worked with retailers globally over our 40-year history and it is clear there are differences in payment methods used and preferred across these markets, including some which are localized. Further, unified commerce has evolved at different speeds in different markets.
Consumers have their own payment preferences, they could be international or domestic payment cards, mobile wallets, credit or debit bank transfers, prepaid, cash on delivery, Direct Carrier Billing, and so on. All these must be incorporated into a payment acceptance strategy that takes into account different consumer preferences will vary by market.
Paying for things via mobile phones has become commonplace in Europe and China. Whether that’s through scanned QR codes or Near Field Communication (NFC) usually depends on the country the payment transaction is being made. All across Asia, there are examples of cashier-less, cashless stores, mobile kiosks, talking vending machines, and even card-less stores.
The United States which was on the forefront of retail consumer payments now lags other markets when it comes to unified commerce. Implementation of EMV is underway however card swiping is expected to be around for many years. Having said that, Amazon-Go is a cashier-less store with a unique customer experience.
True Cost of Payment Acceptance
By having local issuing, local acquiring, cross-border acquiring, a multi-layered array of technology solutions supported by multifaceted data-driven pricing regimes, each of which differ for each payment scheme and payment method, and which in turn has evolved over a period of 50 plus years, has meant the payments industry has created one gigantic payment acceptance landscape that is riddled with inefficiencies. This makes life for retailers extremely complicated. This is partly fuelled by the unpredictability of which payment method consumers will first pull out of their wallets.
Surprisingly, the Cost of Payment Acceptance (CoPA) is a metric that many merchants do not measure. The relationship between electronic payments and cash payments, or between debit cards and credit cards or the split between internationally issued cards compared with domestic cards are a few of the key performance indicators that every merchant ought to understand and track regularly. However, it is recognised capturing the full spectrum of all electronic and non-electronic payment arrangements is a complex and time-consuming task for any merchant. With so many components to consider – card processing relationships, acquiring banks, foreign exchange and treasury management, cash management, network fees, PIN and PIN-less debit routing solutions, payment gateways, PSPs, dispute management and fraud management – it is difficult for merchants to know where to spend their internal resources and in some cases where to start.
As businesses grow rapidly, particularly for the online channel, they have typically expanded back-office operations, even acquired similar businesses internationally and inherited their acquirer and gateway payment providers. This rapid growth has resulted in a number of legacy processes and inefficiencies within the operational infrastructure which have gone largely unnoticed.
Proven Approaches to Reduce Payment Acceptance Costs
EDC uses a proprietary methodology called the 360° Payments Diagnostic that assesses the payments strategy of retailers to identify and prioritise cost reduction and revenue enhancement opportunities. The 360° Payments Diagnostic encourages the smart use of payment information as a valuable tool and is a proven process to reduce operational costs, improve revenues and engage customers across all channels, regardless of their preferred payment method.
Our results include:
- An online travel agent: The merchant has over 2 million customers logging in on a weekly basis, operating localised websites in 10 leading European markets in addition to several markets in Asia Pacific. The merchant had eight PSP and 12 acquiring bank contracts across the global business, and future plans to accept more methods of payment across the business units. EDC calculated the Cost of Payment Acceptance and defined the strategic direction in the acceptance of alternative payment methods across different countries based on analysis of its customers and payment preferences. Result: identified a total cost of acceptance savings in excess of €6.6 million over a 5-year period. This represented a 12% saving in the total CoPA that went straight to the bottom line.
- Luxury retailer: The merchant sells luxury goods across Europe in 17 different markets through standalone boutiques, high-end department stores and through its own e-commerce website. The merchant held 12 acquiring relationships across its 17 markets with a sales turnover close to €1bn at the time for the electronic card payments alone. EDC conducted a 360° Payments Diagnostic on the acceptance of payments, both card and alternative payment methods, across the client’s acquiring contracts and invoices 17 operating markets. EDC modelled distinctive payment acceptance scenarios using the data collected to categorise the electronic payments traffic more efficiently based on experience and knowledge of the markets where the client operated. EDC created business requirements and conducted an RFP to best optimise the acquirers more effectively based on the payment scenario analysis. Result: Savings of around €9m over a 3-year period were achieved, representing an 11% CoPA savings.
Edgar, Dunn & Company is partnering with AQN Strategies, where our combined skills and proprietary data and methodologies help clients realize payments cost savings. AQN Strategies’ decades of issuing side experience and operator-led structure give it a unique and valuable perspective into all aspects of card acceptance. By leveraging these insights and proprietary models to analyse transaction-level data, AQN Strategies help clients extract additional value at all points of the complex value chain. By finding, analysing, and using data in each step of defining the payments acceptance strategy, AQN Strategies include observations of existing performance, modelling the impact of potential changes to inform decisions. By monitoring the ongoing performance and impact of those decisions through unique KPI-rich dashboards AQN Strategies and EDC provide merchants with a desirable return on investment.
Through this holistic approach to payments, the combination of EDC and AQN Strategies empowers our clients with tangible cost-saving opportunities for both domestic and cross-border payment acceptance strategies—regardless of the type of payment combination, electronic or cash.
Different Verticals Same Result
With over 40 years’ experience, EDC has built up a unique knowledge pool of payment optimisation scenarios which has been applied to different retail verticals – including, hotels, online travel agents, rail operators, airlines, gaming operators, grocery stores, general merchandise, department stores, luxury goods retailers and so on. The list continues to grow as do the results.
Although verticals differ in what they sell and what they provide as a service, by applying proven methodologies such as the 360° Payments Diagnostic and AQN Strategies proprietary data analytics, the complexity of payment acceptance can be demystified, and significant cost savings can be achieved. While true for many merchants, the collective expertise from EDC and AQN Strategies is particularly compelling to merchants that accept different payment methods and operate with multiple customer sales channels in different markets across the world.
The content of this article does not reflect the official opinion of Edgar, Dunn & Company. The information and views expressed in this publication belong solely to the author(s).