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Comment: Why we must re-think payments in retail

For decades there has been little innovation as far as payments in retail are concerned. The choice has mostly been limited by the way in which retailers and consumers have traditionally interacted.

Fundamentally, this has been a face-to-face engagement, contained in a physical location, where the closing of a transaction involved the consumer handing over a payment 'token' in exchange for goods or services. The dominant instrument of exchange was cash, with the only real challenge coming from debit and credit cards; mere 'upstarts in the grand scheme of things!

Banks and international card schemes have sought to displace cash with cards wherever possible; following a linear development in products that either addressed a specific issue with card payments (usually fraud) or exploited an available technology to speed up the transaction process.

We have seen cards morph from the clunky days of 'zip-zap' machines with signature verification and voice authorisations, through to magnetic stripe with electronic authorisation to the current EMV based contact and contactless smartcards.

This progression has been instigated as a product-push from the payment industry on the basis of saying that 'if you want cards to match the ease and convenience of cash, you have to do it this way'.

For retailers this has meant that at each stage in this evolution, they have had to invest in the required acceptance technology, and integrate their point-of-sale systems and procedures to match these developments.

This approach may have been acceptable when a card payment could be treated as a separate cash-like transaction distinct from the rest of the shopping experience, but now there is a need to integrate payment into an overarching digital process, to which the traditional payment industry has increasingly found itself wanting.

Ecommerce transactions are not cash-based, but instead require the payment to be an integral part of the shopping experience. The industry response was to develop processes that, whilst secure, required additional effort from the customer, inconveniently diverting them to a separate payment page.

As a result, these pinch-points have led to increasing levels of cart abandonment by the customer. A problem that some of the more successful e-merchants and payment service providers, such as PayPal, have addressed with a more integrated and shorter check-out process.

Arguably, little thought was given to the changing needs of consumers and retailers, especially as shopping habits have changed to embrace the digital age. What is now required is a fundamental re-think to re-design the payment process that better suits the needs of the internet based retail experience.

In tandem, we must find ways that connect both the online and in-store operations to provide a single seamless payment experience that becomes wholly integrated.

For traditional payment industry players this change could not come at a worse time. As banks seek to recover from the global banking crisis of 2007-08 they find their revenue streams being increasingly squeezed with the added complication of burdensome regulations, and the arrival of new players into the market, with new technologies and disrupting business  models that challenge the old order way of doing things.

To defend themselves banks and payments schemes have looked to embrace new technologies for an answer, but so far solutions are looking for a problem to solve rather than addressing the underlying issue at hand: to provide secure, fast, real-time payments in a way that is frictionless and convenient to the retailer and customer.

There are signs that the international payment schemes have embraced this; with the promotion of contactless cards and mobile phones for proximity payments and with digital wallets like V.me and MasterPass offering a shortened shopping process for digital payments but there is more to be done.

Despite the obvious changes at the front end, card payment systems remain stubbornly old fashioned in their clearing and settlement between parties, based on complex batch and overnight cycles that have changed little in their 40-year existence. It seems certain that something will need to be done to bring about change where real-time or near real-time processing can compete with the ACH payments platforms that are already being positioned to offer payment in retail environments.

There is still a need to standardise approaches at the point of sale or at checkout, it seems obvious but even subtle differences cause issues for consumers and retailers alike. The UK has done well to keep tight control over the customer experience and has avoided divergence but is becoming more difficult as schemes and service providers seek to differentiate their service offerings in an increasingly competitive market.

For established players, there is increasing competition from more agile providers who seem used to working in the digital space and have the added advantage of being able to design payment products from scratch that fit with the 21st-century age.

They are offering merchants new ways of processing payments, through open APIs, that take away the burden of payment processing. Organisations such as Stripe are a real threat to existing processors who need to react fast if they are to protect their market share and remain relevant.

Could the payments industry see an 'over-the-top' provider do what Skype/WhatsApp is doing to telephony, or what Netflix and Spotify have done to the respective entertainment and music industries? 

The clear digital trend is that retail payments is fast becoming a platform game where the intrinsic value is in the flexibility and sophistication of the payment hubs being built as part of an infrastructure that connects payments through the internet, which the likes of Stripe and others are fast-exploiting.     

The winners will be those that can address these issues without sacrificing on security and integrity; established and inherent features of any credible payments process.

It seems that the battle to be won is to provide a platform for payment processing that is easily integrated into all of the retailers' systems and procedures, whether they be offline (in store) or online to provide the consumer with the ease and convenience they demand and remove the complexity faced by retailers. By providing the individual merchant with a set of user interfaces that can accept any currency type or payment mechanic as initiated by the customer. 

The losers will simply become etched as part of a lengthening epitaph, read alongside the likes of Borders, Blockbuster, Woolworths, HMV & Blackberry once behemoths in their respective industries, yet all casualties of the digital age.   

David Baker is head of the payment innovations unit for The UK Cards Association. He will be writing a regular column for Essential Retail on the evolving payments landscape and its impact on the retail industry.

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The UK Cards Association