All Change for Retail Payments The retail world is dealing with lower transaction levels, new challenges to interact with consumers and increased complexity in everything they do. It appears that the old reality won’t return but it is unclear where we will end up.
Change is the only answer, and that includes for payments. Cash remains, although with new options for working with it without contact and at lower costs. But the need to adopt digital payment in shops, online and for mobile payments is adding cost, complexity and risk. A major challenge for all, particularly the small retailer. Tracking and understanding the future of the retail sector is key to payments since transactions largely take place in shops. Change has been in the air for a while as online shopping has grown and payments have started to shift to electronic card or mobile based payments. The COVID-19 pandemic is accelerating these changes. By mid-April the pandemic had reduced spending in Western Europe by 50% yearon-year, with offline spending down 60% and online spending down 20% according to data from INSEE and GIE Cartes Bancaires. The consultancy Oliver Wyman forecasts that spending won’t recover to the July 2019 level until the fourth quarter of 2021. Although spending is down, the way we buy has changed significantly. The pandemic has driven an increase in online spending. In March 2020 in France it increased from 22% to 36%, in Spain from 13% to 22% and in Italy from 10% to 36%. It has also increased the use of contactless card payments. Pre-COVID, 92% of card payments in Western Europe involved a PIN number, with only 8% contactless. The rise in contactless payment limits meant that approximately 15% of payments that were previously below the old payment limits can now be made by contactless cards. Although card payments in total have fallen dramatically, the percentage made by contactless cards have reached about 50% of those transactions.
Successful online selling requires a significant investment in understanding data and how the consumer is navigating through websites and mobile phone apps to buy. Retailers have had to react fast, working out how to add telephone and online shopping to how they sell. In the US prior to the pandemic, only 2% of the $700 billion grocery market was online. Retailers assumed people wanted to shop in person for these products and, with low margins, the investment needed in warehousing technology and delivery networks could not be easily justified. It takes time to make those investments and some retailers have turned physical stores into warehouse/distribution centres and what are known as 'curb side pick ups’ have become popular to avoid the costs of delivering the extremely expensive ‘last mile’ deliveries. The big question is to what extent new habits are becoming embedded and what does it mean for payments? Analysts in the US say 50% of shopping malls will close by the end of 2021. In its quarter one report, Nike set itself the target of moving its digital sales from 30% to more than 50%. PepsiCo launched two ‘direct to consumer’ web sites in May 2020. Small examples of significant change. The LINK survey of UK consumers in April 2020 reported that 49% of respondents expected to use cards more, 44% will use contactless cards and mobile payments more and 33% will shop online more. These examples may be from Europe and the US, but the challenges for retailers are the same across the world. Given the way the pandemic is developing and the investments being made by retailers, we have to assume that the pandemic has significantly accelerated online and mobile transactions. Retailers need to be able to take payments with less contact. Some of the cash responses to enable this are covered elsewhere in this month’s edition. Compared with the decisions retailers need to make for digital payments, cash looks somewhat simpler. One of the challenges is the need to be able to accept both in store and mobile payments because of the growth in curb side payments at the point of delivery. In store the retailer needs to have point of sale (POS) terminals that are capable of handling Near Field Communication (NFC) signals, the underlying technology for contactless payments whether by card or mobile phone.
The proliferation of solutions, some of which are app based, has added to the complexity of the retailers’ IT requirements, although this is largely the responsibility of the payment processor they sign up with. In addition to the hardware and software licensing costs, the retailer is faced with increasing fees and charges. A recent Wall Street Journal article had the headline ‘Credit card fees merchants hate, bankers love, consumers pay’. Small merchants have relatively low transaction volumes and so have little leverage when it comes to negotiating with their banks, the card companies, the mobile companies, the payment processors or the hardware companies. We discuss card fees elsewhere this month, but in 2018 the British Retail Consortium estimated that third party fees in the UK cost retailers £1.3 billion. The range of mobile payment options is huge and those mentioned here are just a handful of the options since it doesn’t include all of the available apps. Google Pay, Apple Pay and Samsung Pay are the leading mobile products, although each is slightly different. They are free to retailers, although Google Pay, for example, requires the retailer to use a participating Google Pay processor to take part. PayPal has a division called Braintree and Fattmerchant have ‘Contactless by Omni’, both of which are designed specifically for both store and curb side mobile payments. Products such as Square and PaySafe are apps that act like a portable POS and also work with NFC enabled card readers. PaySafe can also still accept cash and cheques. The use of QR codes that connect with payment apps are widely used around the world. They are very low cost for the merchants since they don’t require them to invest in infrastructure, and they avoid the need for infrastructure in places where it can’t support complex POS systems. Pity the retailer, particularly the small retailer, as they move from a simpler world of cash and, perhaps, cards, to this full-on payment world. Whether purely online or a full spectrum omni-channel retailer, being a retailer and taking payments efficiently, without friction and without contact must feel daunting.
RETAIL PAYMENT | VOLUME 3 – NO 7 | JULY 2020
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