A multi-channel strategy for a retailer includes sales through online, in-store, telephone and mail order. Every customer touch point needs to be assessed from in-store point of sale (POS), customer services, online through to the mobile app, the customer care centre and the telephone order service. Alignment of the marketing, brand promise and service must be included within the multi-channel strategy.
High street retail sales remain challenging, but the need for a multi-channel payments strategy, which integrates both the acceptance of payments and issuance of payment methods, is greater than ever. A multi-channel payments strategy is unique in that it has the ability to reduce a retailer’s operating costs and maximise revenues.
Relevant Consumer Payment Types
It is an extremely important component in the overall customer experience to be able to process the relevant payment instrument for your customers in a frictionless manner. What is key for a multi-channel retailer is accepting the appropriate payment types that are relevant to the consumer and relevant for the sales channel. The payment type that the prospective customer uses will be a consequence of a number of different behavioural dynamics. These include the customer’s personal payment preferences, their attitude toward credit, perceived risk, access to a bank account, trust, brand awareness and familiarity with the transaction process. Additionally, the payment type has the ability to reward the customer for being loyal to a particular product stock keeping unit (SKU) or brand based on the payment type or the sales channel used.
Although retailers may not be able to influence customers from one payment instrument to another in store, but in a virtual environment, anything goes. Whether online or via the mobile app, customers can be guided toward preferred methods of payment or alternative forms of payment. A form of payment that encourages customer loyalty may be another approach to influence customer payment choices. Payment card surcharging is another example where the retailer will attempt to influence consumer behaviour. However, as a result of the explosion of alternative forms of payments, predominantly on the web, it is expected to have a significant impact on the multi-channel retailer’s payment acceptance strategy. Multi-channel retailers want to engage with customers fully through all channels and to make them relevant, inspiring and convenient. Payments are key in a multi-channel strategy.
In Europe, the Payment Services Directive (PSD) and the E-money Directive (EMD, now EMD2) are currently going through transformation. This is expected to have some influence as to how multi-channel retailers will look at their payments strategy. The PSD provides the legal foundation for the creation of a European-wide single market for payments. It aims at establishing a modern and comprehensive set of rules applicable to all payment services in the EU. The target is to make cross-border payments as easy, efficient and secure as domestic payments within a member state. The PSD also seeks to improve competition by opening up payment markets to new entrants, thus fostering greater efficiency and cost-reduction. It is this specific objective that is prompting multi-channel retailers to reconsider their role in the payments value chain. From issuing payment methods (loyalty cards and gift cards is an obvious example) through to the acceptance and processing of payments, all payment functions are under review.
The Relationship Between Payment Issuance and Payment Acceptance
In adopting a holistic approach to the payments strategy a multi-channel retailer needs to be able to establish the relationship between payment issuance and payment acceptance. This can be challenging for many retailers because the responsibility of accepting payments and issuing payment products is often located in differently parts of the organisation. By conducting a 360-degree payment diagnostic, it is possible to make sense of these two distinct functions and marry the business strategy of the multi-channel retailer to define the payments strategy. A valuable objective of the 360-degree payment diagnostic is to be able to assess the payment issuance and payment acceptance as a whole or in isolation, depending on the retailer’s business and multi-channel strategy.
Payment acceptance has to consider the implications in a multi-channel environment and describe in detail the case of an online sale and its subsequent interrelation between the internet sales channel, the customer service centre and a physical in-store experience. Paying online with PayPal, for example, will have repercussions for returns or refunds that may take place via the customer care centre or in-store. Accepting payments on the web, in store and another sales channel, such as the mobile app, has meant there is a need to focus on the acceptance of payments from different sources, different locations using different payment methods.
The Challenge of Preventing Fraudulent Activity
EDC has found that traditional payment cards have presented the retailers the biggest opportunity to sell directly to consumers online but at the same time they have presented a challenge of preventing fraudulent activity. Some of the alternative forms of payment methods, such as bank transfers, reduce or eliminate the risk of fraud, but these forms of payment are not always available to consumers or they have been implemented to only support a consumer base in a certain market.
The 3D Security implementation (Verified by Visa and MasterCard SecureCode) has been an obvious step in the right direction for shifting the liability of fraud for online sales. This is only one mechanism of a series fraud prevention tools that can be built in-house or purchased from specialist operators.
A further complication, which is equally related to the retailer’s fraud prevention strategy, is the need to be fully Payment Card Industry Data Security Standard (PCI DSS) compliant across all the entities of the business that touches card payment data. Many multi-channel retailers will also have this on its list of payment compliance requirements and working with certain payment service providers can help to fast track PCI DSS compliance.
The payment issuance strategy is the other side of the coin of the payments strategy in a multi-channel retailer. A customer reward programme is usually bundled into the loyalty marketing and customer communication functions of the retailer. Customer profitability and lifetime value analysis, customer relationship management and payment behavioural data analysis are all fundamental pillars of the payment issuance strategy. Whether it is loyalty programme or a co-branded payment card that is linked with a customer reward programme the key objective is to maximise revenue and influence customer’s behaviour to use the most cost efficient payment type.
Customer Loyalty Programmes
It is widely recognised that the average consumer will only carry five plastic cards in their wallet. Since debit and credit cards will account on average for a least two of the available five spaces in the wallet, the battle among retailers has been to ensure that their reward programme is filling one of the remaining wallet spaces. The current concern is that consumers have too much choice, they are suffering from loyalty scheme fatigue and the contest for a space in the wallet can be very expensive. Retailers must be able to leverage sales promotion techniques based on payment related data to enhance revenue opportunities. The mobile app is expected to be the next battleground for the multi-channel retailer’s need to be in front of screen, rather than being top of wallet.
EDC believes that any one cost reduction activity should not be pursued alone but where the greatest benefits are gained is through an integrated payments strategy. This must be implemented in conjunction with revenue enhancement opportunities. For the individual multi-channel retailer a payment strategy needs to consider both the payment acceptance strategy, as well as the payment issuance. The goal of the 360-degree payment diagnostic is to focus on the payment issuance and payment acceptance as a whole. Sometimes it is necessary to treat them in isolation depending on the retailer’s business strategy. What is imperative is that a multi-channel payments strategy will be able to be robust, yet flexible and supportive of the business strategy.
The Payment Services Directive in Today’s Environment
Now that the PSD is expected to improve competition by opening up the payment markets to new entrants it is time for the retailers to reconsider the relationship with their financial institutions. Today the PSD provides the environment for a multi-channel retailer to challenge and overhaul the role of the traditional service providers of the acceptance, issuance and processing of payments. The large supermarkets have already demonstrated this, which is extending their role into financial services but payment processing is likely to part of the solution. Multi-channel retailers are starting to consider the feasibility to own a greater share of the payments value chain and effectively compete with the payment processors and the banks.
Non-banks can now issue alternative forms of payments and process payments just as much as they can accept payments today. The PSD, along with the changes in the E-money Directive, is designed to provide a framework for non-banks to compete on an almost level playing field. This will mean that even more alternative forms of payments will be available for consumers. These will compete with the mainstream Visa, MasterCard and American Express branded products. As a result of this evolution in payments it is expected that there will be a greater challenge for the handling of payments by the big multi-channel retailers.
It is not likely to be a disruptive evolution but there will be a constructive shift of influence and strength from the bank to the retailer and ultimately, over time, to the consumer. This requires multi-channel retailers to make payments strategic, from the way the retailer is organisationally structured, resourced and managed, to the decisions it makes for the issuance, acceptance and processing of payments, all within an integrated approach. Consequently, reducing costs and maximising revenues and can be achieved with a strategic approach to payments.
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