Perfecting payments in the new ecommerce landscape

The Covid cri­sis has changed the pay­ments indus­try irrev­o­ca­bly. A shift towards dig­i­tal bank­ing meth­ods was already hap­pen­ing before the pan­dem­ic, but this accel­er­at­ed in 2020 as the fear of viral trans­mis­sion through the han­dling of cash prompt­ed more con­sumers to use con­tact­less pay­ments. The num­ber of trans­ac­tions that used coins and notes fell by 35% in the UK last year, while con­tact­less meth­ods account­ed for more than a quar­ter of all pay­ments, accord­ing to research by UK Finance.

“Cash has all but van­ished. Instant, con­tact­less pay­ments have become the base­line for in-per­son trans­ac­tions,” says Josh Guthrie, UK coun­try man­ag­er at pay­ment ser­vice provider Mol­lie.

Over the past 18 months there has also been a sig­nif­i­cant increase in the num­ber of con­sumers using apps and oth­er dig­i­tal ser­vices offer­ing them more con­trol over their finances. Almost 90% of Euro­pean bank­ing exec­u­tives sur­veyed by Mar­qe­ta in August 2020 report­ed that their com­pa­nies had been over­whelmed by the growth in demand for online and mobile bank­ing. Three-quar­ters admit­ted that they hadn’t been pre­pared for the speed of the changes in con­sumer behav­iour trig­gered by the lock­downs in their coun­tries.

About the same pro­por­tion of respon­dents said that their banks had been forced to change their strate­gies to remain fit for pur­pose in the Covid era. Indeed, there have been sev­er­al recent inno­va­tions in areas such as embed­ded finance, instant pay­ments and open bank­ing.

The lat­est offer­ings have been designed to pro­vide a high-qual­i­ty cus­tomer expe­ri­ence, espe­cial­ly in terms of func­tion­al­i­ty and user-friend­li­ness. This is because dig­i­tal ser­vices have become a key part of our lives, so we expect a lot more from them than we did. Con­sumers will no longer stand for poor per­for­mance and incon­ve­nience in the shape of slow, clunky pay­ment sys­tems.

Embedded finance

Embed­ded pay­ments are noth­ing new – well-estab­lished dig­i­tal plat­forms such as Uber and the Star­bucks app have been using them for years. But the tech­nol­o­gy is becom­ing ubiq­ui­tous, part­ly because of the con­ve­nience it offers con­sumers. 

As Guthrie notes: “The dou­ble-click ease offered by embed­ded pay­ments, with meth­ods such as Apple Pay, is set­ting the new base­line.”

Online fash­ion retail­er Snag Tights says that more than three-quar­ters of its cus­tomers check out using an embed­ded pay­ment method such as Pay­Pal, rather than using a cred­it or deb­it card, which would require them to sub­mit more infor­ma­tion on the site.

“Embed­ded pay­ment meth­ods often come with high­er charges for the mer­chant, but it’s impor­tant to bal­ance this fac­tor against the customer’s pref­er­ence for the sim­plest check­out expe­ri­ence,” says Snag’s chief rev­enue offi­cer, Tom Mar­tin. “If we were to refuse to adopt a new pay­ment method because of high­er fees, that would only cause few­er cus­tomers to shop with us.”

Iana Dim­itro­va is CEO of Open­Payd, a provider of soft­ware that enables retail­ers to embed finan­cial ser­vices with­in their prod­ucts. She says that what was once a ser­vice exclu­sive­ly pro­vid­ed by banks and card issuers, and divorced from the shop­ping process, is now becom­ing an invis­i­ble but insep­a­ra­ble part of the cus­tomer expe­ri­ence offered by brands. 

Dim­itro­va points to research by her firm, which indi­cates that 95% of UK brands expect to offer embed­ded pay­ments in the next five years.

“By adopt­ing such a strat­e­gy – adding con­ve­nience, tai­lor­ing the user expe­ri­ence and using data to offer cus­tomised financ­ing solu­tions – retail­ers can max­imise brand loy­al­ty and ben­e­fit from cru­cial new rev­enue streams in return,” she says. “But make no mis­take: it’s brand con­sid­er­a­tions, rather than finan­cial ones, that are dri­ving the uptake of embed­ded pay­ments for most mer­chants in this coun­try.”

Instant payments

Frasers Group, which owns the depart­ment-store chain House of Fras­er and trades main­ly under the Sports Direct brand, has seen a huge growth in mobile pay­ments. 

Rolling out instant pay­ments would boost this growth fur­ther, says its head of IT, Tony West­wa­ter. “This is espe­cial­ly impor­tant with younger con­sumers, par­tic­u­lar­ly those aged 25 to 34. They want to try new pay­ment meth­ods and aren’t as attached as old­er cus­tomers are to deb­it and cred­it cards. Instant pay­ments offer them some­thing new to try from their mobile device, which is now becom­ing their pri­ma­ry pay­ment vehi­cle.”

West­wa­ter adds that the trans­paren­cy pro­vid­ed by instant pay­ments can ben­e­fit shop­pers who find it hard to keep track of their out­go­ings. “With their mon­ey being tak­en imme­di­ate­ly, cus­tomers can more eas­i­ly man­age their spend­ing and avoid expe­ri­enc­ing bill shock at the end of the month,” he says.

If we were to refuse to adopt new pay­ment meth­ods because of high­er fees, that would only cause few­er cus­tomers to shop with us

One of the main advan­tages for busi­ness­es of adopt­ing instant pay­ment is that it aids cash flow. Even before the pan­dem­ic, this was a big con­cern among retail­ers. Near­ly all (96%) of those respond­ing to a sur­vey by the Con­fed­er­a­tion of British Indus­try in April 2020 report­ed that they were expe­ri­enc­ing cash flow prob­lems. 

With the direct trans­fer of funds from a customer’s account into the retailer’s account that’s enabled under an instant pay­ment sys­tem, the mon­ey is made avail­able imme­di­ate­ly, rather than in the three work­ing days it could take for the funds to clear. This would alle­vi­ate much of the pres­sure of cash flow man­age­ment, says David Maisey, CEO of Mul­ti­Pay Glob­al Solu­tions. 

He adds: “If the gov­ern­ment is seri­ous about help­ing busi­ness­es to recov­er from the pan­dem­ic, then actions that offer long-term ben­e­fits and a sol­id foun­da­tion for growth – for instance, enabling instant pay­ments – need to be looked at as a pri­or­i­ty.”

Open banking

The num­ber of peo­ple in the UK choos­ing to share their data through open bank­ing has tripled since the start of the pan­dem­ic, accord­ing to research pub­lished by Exper­ian in May 2021. More than half (54%) now reg­u­lar­ly apps pow­ered by open-bank­ing tech­nol­o­gy.

Marie Walk­er, co-founder of the Open Future World forum, expects to see fast growth in the use of open-bank­ing appli­ca­tions over the com­ing years.

“They’re easy for con­sumers to use and very cost-effec­tive for mer­chants,” she says. “Open bank­ing can be used to make life eas­i­er in oth­er ways – for exam­ple, with apps that let peo­ple eas­i­ly split the bill at a restau­rant, say.”

There are oth­er ben­e­fits on the hori­zon, Walk­er says. The task of chas­ing pay­ments is a huge bur­den for small busi­ness­es, for instance, but open bank­ing will enable them to “auto­mat­i­cal­ly request pay­ments when they issue invoic­es, and both invoic­es and pay­ments can be auto­mat­i­cal­ly linked to the company’s account­ing sys­tem”.

She con­tin­ues: “Mov­ing beyond pay­ments, open bank­ing and the broad­er world of open finance is very excit­ing. The tech­nol­o­gy will pro­vide ben­e­fits rang­ing from help­ing indi­vid­u­als and busi­ness­es man­age their finances bet­ter to mak­ing it eas­i­er for peo­ple to see what impact their spend­ing is hav­ing on the plan­et.”

Barriers to adoption

Much of the suc­cess of tech­nolo­gies such as open bank­ing hinges on the process of user authen­ti­ca­tion, which can affect the cus­tomer expe­ri­ence. Those providers that can stream­line pay­ment autho­ri­sa­tion are like­ly to gain a cru­cial com­pet­i­tive edge over their rivals.

But some experts believe that reg­u­la­to­ry con­straints may affect devel­op­ments in this field. One exam­ple is the sec­ond EU pay­ment ser­vices direc­tive (PSD2), which is both an enabler of com­pe­ti­tion and a restric­tor of inno­va­tion.

“Put sim­ply, PSD2 doesn’t allow open bank­ing and embed­ded finance to be as inno­v­a­tive as they could be,” says Daniel Homo­ki-Farkas, MD of dig­i­tal inno­va­tion agency Super­charge UK. “Don’t get me wrong: PSD2 is a great ini­tia­tive that deserves everyone’s sup­port. But it’s too con­vo­lut­ed in its cur­rent form. The effort involved ver­sus the poten­tial returns doesn’t make it worth­while for many play­ers to think about launch­ing a prod­uct or ser­vice.”

He cites the require­ments for re-authen­ti­ca­tion every 60 to 90 days as a case in point. These are “well inten­tioned as a pro­tec­tion against fraud. But it’s a tedious, frus­trat­ing process that dis­rupts the user expe­ri­ence and turns off cus­tomers.”

The chal­lenge for banks and oth­er finan­cial ser­vice providers is to strike a bal­ance and come up with inno­v­a­tive prod­ucts that don’t com­pro­mise on secu­ri­ty.

“PSD2 needs updat­ing again to enable more effec­tive and excit­ing use cas­es than we’ve seen so far,” Homo­ki-Farkas says. “We need cas­es that prop­er­ly add val­ue to cus­tomers’ expe­ri­ence of per­son­al finance prod­ucts and ser­vices.”

Future advances

While cus­tomer expe­ri­ence has long been a bat­tle­ground among brands, the demand for secure, user-friend­ly pay­ment ser­vices is inspir­ing a new gen­er­a­tion of inno­v­a­tive solu­tions.

For exam­ple, with con­sumers already get­ting used to one-click pay­ments, we’re now enter­ing a world of no-click pay­ment. Ama­zon Fresh gro­cery stores are using a sys­tem known as Just Walk Out to allow cus­tomers to buy goods using their Ama­zon accounts sim­ply by tak­ing them from the shelves.

Else­where, look out for the arrival of one-tap direct pay­ments via a bank-to-bank trans­fer that allows funds to move straight from the cus­tomer to the mer­chant, cir­cum­vent­ing a pay­ment proces­sor such as Visa or Mas­ter­card.

There is still room for improve­ment, though. There will be increas­ing pres­sure for banks to make bet­ter use of PSD2 and open bank­ing to opti­mise pay­ment process­es for their cus­tomers. The pan­dem­ic has accel­er­at­ed inno­va­tion in pay­ments – and these promise to meet ever-increas­ing cus­tomer expec­ta­tions long after the lock­down restric­tions are lift­ed.

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